Asset Managers are currently dealing with the Shareholders Rights Directive II, whose implementation in local law in Europe is due to take place as of June 2019. Find the text of the SRD II here.
In this post we will discuss the aims underpinning this European initiative and highlight the main obligations recently imposed on Asset Managers by the Shareholders Rights Directive II.
The background to the Shareholders Rights Directive
The first version of the Shareholders Rights directive dates back to 2007. We can consider it in its own right as a product of the regulatory response at European level to the financial crisis of those years. The focus of the directive is on corporate governance and the need to ensure that shareholders can exercise the rights attached to their voting shares in such companies that either have a registered office, or are traded on a regulated market, in Europe.
The revised directive is based on the same understanding that shareholders play a very relevant role in the governance of those companies, coupled to the acknowledgment that the financial crisis has demonstrated how often times shareholders have sustained a short-term approach when dealing with companies they are invested in rather than a long term one. The short-termism adopted – both on risk taking and returns – has been accompanied by a general lack of involvement in the activities and the governance of those companies by their investors.
Why Asset Managers should be concerned about the Shareholders Rights Directive II
The same very experience of the over ten years from first implementation of the directive has demonstrated that asset managers and institutional investors are most often majority shareholders of companies that are both domiciled and listed in Europe. They play a very important role both in the corporate governance as well as the implementation of the long-term vision and objectives of those companies. The proper engagement of these types of investors is of paramount importance to promote the long-term view in the activities and results of these companies, including the adoption of environmental and social factors in their overall plan and vision. However, the pressure on performance exerted by capital markets and the timing of periodical revision of portfolios of investments has sustained the disengagement of those type of investors and jeopardised accordingly the long term financial and non-financial performance of those companies.
One other sign of the said disengagement is also a lack of sufficient transparency by both asset managers and institutional investors about both their strategies and overall engagement policies and results thereof. Disclosure of such information would benefit investor awareness and strengthen the accountability of those companies towards their investors.
What Asset Managers should do to be in line with the Shareholders Rights Directive II
Compliance for Asset Managers with the requirements imposed by the Shareholders Rights Directive II will take place at their operational level and the actions and measures required will be in some respects and to a certain extent similar to the ones imposed on institutional investors. Of course, the directive will be implemented with some room for difference in the various EU Member States, however generally Asset Managers will have to develop their own policies for shareholder engagement.
Those policies should establish and explain how the specific investment strategies are reflective and integrate shareholder engagement and how investee companies are monitored, including their implementation of broader social and environmental factors and risks in their overall plans. The policies should also tackle the issue of conflicts of interests, especially for what concerns the provision of financial services, for instance, by the asset manager to the investee companies. The policy will have to be disclosed and also provided on an ongoing basis to investors.
It is noteworthy to mention that the revised directive allows for asset managers to explain the reasons why they will not develop a policy under the Shareholders Rights Directive II or disclose the implementation or results of any such developed policy.
Considerations for non-EU Asset Managers
European Asset Managers should already be in compliance with the Shareholders Rights Directive II. But what about non-European Asset Managers? Are they required to comply with the requirements of the Shareholders Rights Directive II?
In this case the legal considerations related to the nature of European directive of the initiative are intertwined with the actual investment strategies of non-EU asset managers, as well as their client base and their demands. Often times when assessing the risks inherent to non-compliance with European regulation by non-EU managers there are also commercial elements that tend to be prevailing.
Realistically, not only Asset Managers are affected by the Shareholders Rights Directive II but also institutional investors. The same institutional investors whose investments are very much sought after by non-EU managers. Accordingly, we may expect that these investors will embed going forward, if not already, the shareholder engagement policies and other reports in the list of items for which they will have to be able to tick the box accordingly before they can make an investment. Strategies will be a defining factor for compliance, given that the directive applies only to companies that are domiciled or traded in Europe.
For sure we will hear more about the practice developed by Asset Managers on the Shareholders Rights Directive II in the near future, however we all have a feeling that this will be one more item to consider for non-EU managers interested in offering their strategies to institutional investors based in Europe.