During last months, some European supervisory authorities have applied sanctions to institutional investors (and some of their managers) for not voting during general meetings of shareholders for portfolio companies.
How this story started?
In 2007, the European Parliament and the European Council adopted the Shareholder Rights Directive (SRD) with the aim to ensure a better protection of the exercise of rights of shareholders in listed companies. In 2017, the revised Shareholder Rights Directive (SRD II), amended SRD encouraging long-term engagement of EU listed companies’ shareholders. To achieve this long-term investment objective, the SRD II introduced new obligations for EU Listed companies, intermediaries, institutional investors, asset managers, and proxy advisors.
Even though the changes introduced by SRD II entered into force years ago, there are discussions on how legislation aimed to protect shareholders actually brings new obligations for investors.
According to SRD II institutional investors (for instance life assurance institutions and institutions for occupational retirement) and asset managers (investment firms, alternative investment fund managers, management companies) must be more transparent regarding their engagement policies and investment strategy by making public their voting policies. Also, SRD II indicates asset managers must report annually on their shareholder engagement and investment strategy, making these details available on the websites. Voting behavior must also be disclosed in addition to their use of proxy advisor services.
So, does SRD II create an obligation to vote or to engage for institutional investors and asset managers?
We observe that there is no obligation to vote or to engage. However, institutional investors and asset managers are required to disclose an engagement policy and how it has been implemented, including how they have voted.
The requirement applies on a 'comply or explain' basis. This means that investors may choose not to disclose an engagement policy or its implementation, provided that they give an explanation why this is the case. The main benefits are that the approach offers flexibility to investors, lowers their compliance burden, and stimulates discussions. The main drawbacks are that material compliance is difficult to enforce and many times the process is only a ‘tick-the-box’ compliance process without offering clear and detailed explanations.
What’s next?
Even is based on 'comply or explain' basis, the examples of corporate governance statement show that transparency is good. At the beginning there will be many explanations on why institutional investors and asset managers had not voted for general meetings of portfolio companies, but in time the vote for each general meeting of portfolio companies will be the new normal, even without being mandatory.