from Brussels

The proposal to revise the existing Shareholder Rights Directive would tackle corporate governance shortcomings relating to listed companies and their boards, shareholders (institutional investors and asset managers), intermediaries and proxy advisors (i.e. firms providing services to shareholders, notably voting advice). The issue was being discussed by the Committee on Legal Affairs.

These revisions come in the wake of the end to the economic crisis, where, as the crisis showed, the EU believes that shareholders supported managers' excessive short-term risk taking and did not monitor closely the companies they invested in.

Arguments in favour of the proposal would essentially make it easier for shareholders to use existing rights over companies and enhance those rights where necessary. This would help ensure shareholders were more engaged and better hold the management of the company to account and act in the long-term interests of the company, the Committee heard.

Mr Hoyer from the EU Commission explained that the EU report on corporate governance framework found that insufficient long-term ownership and shareholder engagement, or rather the lack of engagement, was mainly to blame for the last economic downturn.

"Institutional investors did not look far enough into the long-term values of companies they had invested in, did not establish long-lasting relationships and did not focus on improving companies through engagement (dialogue and voting). In addition, institutional investors and asset managers did not sufficiently handle bank managers, or even supported excessive risk-taking," Mr Hoyer said.

Mr Hoyer identified the remuneration for directors as another issue, identifying an insufficient link between pay and performance.

The EC representative argued the problems companies face in identifying their shareholders while the same problem is faced by shareholders intending to vote. "For example, if I hold a small number of shares in a company in France, I must go to my bank who will then send a fax over should I need to vote, then somewhere along the way the information gets lost".

What Mr Hoyer proposed surrounds further transparency and as he put it "no red tape". The idea would require showing investors long term equity and liability plans, while also showing interaction between investors and asset managers in order to act in the long term interest of investors. Lastly Asset managers would be required to disclose how they manage the money they are given.

Mr Moyer also proposed that companies be forced to hold a general assembly of shareholders to vote on remuneration policy, including the amount of money paid to managers over a period of three years, including criteria. Following the first year, a report updating the situation would be issued.

Key elements of the proposal include stronger transparency requirements for institutional investors and asset managers on their investment and engagement policies regarding the companies in which they invest as well as a framework to make it easier to identify shareholders so they can more easily exercise their rights (e.g. voting rights), in particular in cross-border situations (44% of shareholders are from another EU Member State or foreign).

Proxy advisors would also need to become more transparent on the methodologies they use in order to prepare their voting recommendations and on how they manage conflicts of interests.