The European Union changed the way that proxy voting is conducted when they updated the Shareholder Rights Directive (SRD), now known as SRD II. This overhaul was intended to enhance voting processes and the flow of information across the institutional investment community. It was also intended to promote common stewardship objectives between institutional investors and asset managers, while improving transparency between issuers, investors, and intermediaries.
How Was SRD II Implemented?
SRD II includes two parts: (i) an EU Regulation for technical data transmission standards which took effect in all EU member states in September 2020, and (ii) an EU Directive that each member state had to implement into its own national law separately. The EU Directive provides guidance on minimum standards on the most substantial issues covered by SRD II for each country, but the final regulations may vary from country to country.
Key Requirements of SRD II
Voting Chain
- Shareholders may request immediate electronic confirmation that their votes have been received, and further confirmation of how they were recorded and counted
- Voting rights can be exercised remotely, and voting-related information must be standardized and available electronically
- Enhanced duties of care and disclosure apply to intermediaries across the voting chain (including proxy advisors)
Transparency & Related Party Transactions (RPTs)
- Institutional investors and asset managers must disclose an engagement policy, and report annually on how they have implemented their engagement policy, including a discussion of voting activity
- Member states determine an ownership threshold (minimum 1 share, maximum 0.5% issued shares) above which public companies may require shareholder identification to be provided upon request
- To reduce conflicts, material RPTs must be publicly disclosed and approved by either the board or shareholders, excluding any interested parties
Remuneration
- Most companies must offer two shareholder votes on remuneration, covering a forward-looking policy and a report on how the policy has been implemented
- Minimum standards were set for detailed disclosure of executive remuneration, including performance conditions, which should include non-financial criteria
- Standardized reporting of total pay, along with a breakdown of each component and how it was calculated
Summary
Expanded voting agenda
Investors have more to consider with say on pay now standard across Europe and revised materiality thresholds for related party transactions. Companies need to familiarise themselves with shareholder expectations on the structure and quantum of remuneration, along with how the details are disclosed, to avoid the risk of a pay revolt.
Improved Proxy Voting and Stewardship Infrastructure
SRD II implements a modernized, standardized regime for proxy voting, disclosure, and record keeping across the continent, including vote confirmation and electronic communications – enhancing obligations for intermediaries throughout the voting chain, who must also bear the cost of compliance.
Transparency Enhancements Translate to Additional Reporting
Once the results are in, investors are subject to new reporting requirements on their voting, engagement and strategy, which may force an internal review of existing stewardship workflows and tools. Companies have greater access to information about who holds their shares.
To discover more about SRD II requirements, talk to our experts today.