On April 9th 2014, the European Commission published a proposal for the revision of Directive 2007/36/EC (the “Shareholder Rights Directive”) with a view to tackling 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 proposed revisions to the Shareholder Rights Directive are aimed at enhancing long-term sustainability of listed companies in the EU and creating an attractive environment for shareholders. Key elements of the proposal include stronger transparency requirements for institutional investors and asset managers on their investment and engagement policies in addition to a framework to make it easier to identify shareholders. The proposals would make it easier for shareholders to use their existing rights over companies and enhance those rights where necessary.
One of the main revisions includes a proposal for a European “say on pay” policy that would require each listed company in the EU to put its remuneration policy to a binding shareholder vote every three years. This proposal aims to address what is seen as currently an insufficient link between management pay and performance which can encourage harmful short term tendencies.
Once the remuneration policy has been approved by shareholders, a company would not be permitted to pay remuneration to directors other than in accordance with that approved policy. Shareholders would also have the right to vote on a company's remuneration report, which would describe how the remuneration policy had been applied in the last year. The vote on the remuneration report would be an advisory-only vote and not binding.
While no binding cap on executive remuneration at an EU level is proposed, the remuneration policy would nonetheless need to set a maximum level for executive pay.
Companies would also have to outline how their remuneration policy contributes to their long-term interests and sustainability, and how the pay and employment conditions of employees were taken into account when setting the policy including explaining the ratio between average pay of full-time employees and that of executives. The policy could in exceptional circumstances refrain from referring to such a ratio but in such a case would have to explain why no such ratio had been included and what equivalent measures have been implemented.
Other proposals include:
- That certain related party transactions would obligatorily have to be put to a shareholders’ vote;
- That proxy advisors adopt and implement adequate measures to guarantee that their voting recommendations are accurate and reliable;
- That intermediaries offer to listed companies the possibility to have their shareholders identified.