European Commission announces proposals to encourage shareholder engagement

The European Commission has announced proposals to strengthen shareholder engagement and introduce a ‘say on pay’ for Europe’s largest companies. The changes aim to improve sustainability and long-term thinking.

The proposals would affect around 10,000 companies listed on European stock exchanges. The package includes revisions to the Shareholders Rights Directive and increased reporting requirement for corporate governance.

The changes will place additional responsibilities on investors and it is hoped that it will encourage them to think about the long-term issues and promote sustainability.

If accepted a ‘say on pay’ could be introduced for the first time in Europe. The commission argues that there is an “insufficient link” between management pay and performance, which encourages “harmful short-term tendencies”. The proposals mean that companies will have to disclose clear, comparable and comprehensive information on remuneration polices and put these to a binding shareholder vote.

Michel Barnier, internal market and services commissioner, said, “The last years have show time and time again how short-termism damages European companies and the economy. Sound corporate governance can help to change that.

“[The] proposals will encourage shareholders to engage more with the companies they invest in, and to take a longer-term perspective of their investment.”

The Financial Reporting Council (FRC)) commented that effective corporate governance framework plays a key role on the contribution to “growth, stability and long-term investment”.

The European Sustainable and Responsible Investment Forum (Eurosif) said it welcomes the proposed amendments. The organisation added it addressed a number of “corporate governance shortcomings” and sustainability factors.

François Passant, executive director of Eurosif, said, “In many ways, this proposal is a bold and ambitious move by the commission to address some issues pertaining to excessive short-termism in financial markets and absentee share-ownership.

“Whilst some aspects of the proposal need to be looked at more closely, we are happy to see that the commission is bringing the responsibility of asset owners and intermediaries into the equation, as these are two critical, but often forgotten, participants in the over all investment chain.”

The proposals will now been taken up by the European Parliament and the Council later this year.

Photo: Sebastien Bertrand via Flickr

Further reading:

Active ownership: investing as ‘responsible stewards, not absentee landlords’

Ownership Day: age of ‘invisible investors’ passing

National Express shareholders seek to address employment issues

Investors increasingly using shareholder power to create change, says McKinsey

‘Investor Forum’ to give shareholders greater say in corporate governance