SRD 2: a key opportunity for promoting long-term engagement from investors and vivifying corporate governance

Facts show that most shareholders do not prevent managers’ excessive short-term risk taking. More specifically, Asset Managers and Institutional Investors do not track closely enough on companies held and do not commit themselves sufficiently. They are mainly focused on short term returns which may not lead to optimal governance and performance.

In that context, European bodies decided to revise the Shareholder Rights Directive (SRD) with a local implementation awaited by June 2019.

SRD 2 regulation aims at:

  • Encouraging a long-term shareholders engagement;
  • Allowing direct communication between shareholders and listed companies to improve their relationship;
  • Enhancing the transparency between companies and investors;
  • Giving shareholders more information to oversight the remuneration of the management and properly assess the conflicts of interests; and
  • Promoting investments in equity throughout the European Union

Quick overview of SRD 2 new regulatory framework

To satisfy these ambitious objectives, the European Parliament and the Council of the European Union, put in place a set of requirements [see Directive 2007/36/EC] around:

  • 4 main topics: Information sharing & data management, voting practices, transparency and remuneration policy
  • 5 types of actors: issuing companies, intermediaries, Asset Managers, Institutional investors, proxy advisors

We believe the most impacted players are first intermediaries (investor services providers, custodians), then proxy advisors followed by Asset Managers and Institutional investors. Headlink synthesized the key stakes of the regulation as following:

SRD 2 business impacts:

Those proposed measures promote a fair access to vote and information to all shareholders by improving transmission of information along the chain of intermediaries. Thus, major business impacts on issuers, institutional investors and intermediaries are expected:

 Zoom on Asset Managers’ checklist to fully comply with SRD 2

      1. Review the rules of engagement

  • Assess the current decision making process leading to a vote
  • Review the engagement policy and identify gaps vs. SRD 2
  • Perform an assessment of past year vote: decisions taken, rate of participation during General Meetings…

      2. Reinforce proxy voting oversight

  • Assess and map the current voting process
  • Map proxy advisors and identify why they were chosen

      3. Improve investment monitoring

  • Identify key holdings (higher than the 0.5% detention threshold) that should be scrutinized by issuers and intermediaries
  • Review and assess the investment monitoring process

      4. Improve information to Institutional clients

  • Define the scope of Institutional clients that have to comply with SRD 2 regulation
  • Assess investment strategies disclosed to mandates and identify gaps compared to regulatory requirements

One more thing: why SRD 2 and ESG* are highly linked

SRD 2 is a great opportunity to extend ESG approach within existing strategies and make a difference with competitors.Indeed, Asset Managers can leverage on SRD 2 to:

  • Extend the integration of ESG criteria to all portfolios and have a 5Y strategy: as ESG tends to over-perform vs. traditional strategies, this would help clients to create long-term financial value thanks to ESG principles. For instance, some players already decided to be 100% ISR [see AGEFI: LBPAM sera le premier grand gérant français 100% ISR]
  • Improve communication about ESG criteria integration: institutional investors adopt a more responsible investment philosophy and some players are quite vocal on good practices on Corporate Governance. For instance BlackRock share on a yearly basis its recommendation to companies in which the asset manager invests. [see Larry Fink’s Letter to CEOs] 

Some Asset Managers have already started work on SRD 2 including BNPP AM that we support in the implementation of this regulation.

*Environmental, Social and Governance