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 companies where they are invested in and do not commit sufficiently in the Corporate Governance. 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 governance;
- 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
- Review the engagement policy and report and identify gaps vs. SRD2
- Perform an assessment of past year engagements: voting rate, rate of participation during General Meetings, initiated engagements etc…
2. Reinforce proxy voting oversight
- Assess and map the current voting process
- Assess the current decision making process leading to a vote
- Map proxy advisors and identify why they were chosen
- Map votes against proxy advisors’ recommendation
3. Improve investment monitoring
- Review and assess the investment process and monitoring process
- Identify non-financial criteria and assess how they are integrated in the investment process
4. Improve information to Institutional clients
- Define the scope of Institutional clients that have to comply with SRD2 regulation
- Assess reporting to institutional investors and check gaps with SRD2 requirements
- Assess investment strategies disclosed to mandates and identify gaps compared to regulatory requirements
One more thing: SRD2 is a great opportunity to extend ESG* approach within existing strategies
As SRD 2 and ESG criteria are deeply related, this new directive is a top opportunity for Asset Managers to further develop their ESG business. Indeed, Asset Managers can leverage on SRD 2 to:
- Extend the integration of ESG criteria to all portfoliosE 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]
Headlink has already assisted an international Asset Manager to comply with SRD2
Some Asset Managers have already started work on SRD 2 including one leading international Asset Manager that we have supported in the implementation of this regulation: we analyzed the regulatory framework to identify impacts on asset managers, performed a gap analysis and set-up an implementation plan.
We have followed-up the implementation of an engagement policy and ensured compliance to SRD2; reviewed the engagement report and recommended amendments that take into account SRD2 requirements; performed a benchmark on the voting activity of several competitors and recommended our client on how to be aligned to his competitors while being compliant to SRD2; and finally we have created a new page on the website dedicated to communicating the required information to institutional clients.
