Paige Morrow / Sep 2016
European Commissioner Věra Jourová. Photo: European Commission
The European Parliament has approved a directive designed to promote long-termism and transparency in large and public companies, including measures that would give shareholders across the EU a ‘say-on-pay’ as well as provisions on increased tax transparency and related transactions. Negotiations between the European institutions to finalise the text are expected to start this autumn.
The revision of the Shareholder Rights Directive is the latest EU attempt to connect directors’ pay to long-term company performance and to tackle the corporate bonus culture. The new rules require companies to ensure that bonuses are not more than half of executive salary packages - but there will be no pay cap, unlike the EU's bonus cap rules for the banking sector. Companies must also ensure that their executive pay policies do not rely on financial performance as the main criteria for bonuses - and explain how their pay policies contribute to the long-term interest and sustainability of the company.
Additionally, shareholders will have the power to vote on remuneration policy at least once every three years and potentially veto a remuneration policy that they oppose. The policy must explain how it contributes to the long-term interests and sustainability of the company, and give full details of fixed and variable pay.
Currently, it is envisaged that institutional investors will be required to develop and publicly share an engagement policy for investee companies. The policy must address monitoring (including of investee companies’ non financial performance and reduction of social and environmental risks) and voting. In the case of the intervention of an asset manager, the institutional investor will be required to publicly disclose the terms of its contract with the investment manager.
By making the engagement policy mandatory, the aim is to foster the involvement of shareholders in the long term. The publication of the investment strategy and the improved dialogue between shareholders and the public are aimed at increasing transparency and accountability.
Certainly the most polarising provisions of the Shareholder Rights Directive relate to tax transparency. The issue of disclosing corporate tax payments has been at the top of the legislative agenda since the financial crisis. Furthermore, the issue of tax avoidance was brought back into the limelight by the LuxLeaks scandal in 2014, which revealed that many multinational corporations were benefiting from secret tax rulings from the Luxembourgish authorities. The Panama Papers leaks this year has similarly put European corporate governance in the spotlight.
In the Parliament’s position on the Directive, large companies would be required to separately report on their business in each country. This mandatory company report should cover the gains or losses, taxation and public subsidiaries of large multinationals. The requirement is particularly ambitious because it caters to a wide variety of private companies, as well as public interest companies. These reports could bring more transparency regarding taxation in order to avoid abuses of advance tax rulings.
The negotiations between the European institutions in order to find a compromise are ongoing. However, the outcome of trialogue negotiations remain unclear and adoption of the Directive has been delayed, primarily owing to the debate about tax transparency.
EU Commissioner for Justice Vera Jourová has previously said: “Structural weaknesses in corporate governance have become more evident and a broad consensus emerged that short-termism has played an important role in causing and deepening the financial crisis. This Directive is one of the contributions to address these shortcomings at EU level."
Sergio Cofferati, the European Parliament Rapporteur, maintains that Parliament will “keep fighting for an ambitious text” and that it will furthermore push in order to “ensure that institutional investors and asset managers are more transparent [regarding] their engagement towards investee companies and on whether they take adequately into consideration their long-term performances.”
European corporate governance tends to rely on shareholders to drive the shift to a longer term perspective - while ignoring that shareholders have very different time horizons. The danger is that the Directive will further empower shareholders with a short-term orientation, such as hedge funds.
Additionally, as recognised in the Directive, shareholders do not own corporations, which are ‘separate legal entities beyond their full control’. This accurately captures the state of the law in Europe, and indeed globally. The focus on shareholders neglects potentially valuable input from other stakeholder groups, such as employees. Future measures may look at the responsibilities of shareholders, as well as the obligations of directors to ensure the long-term viability of their companies.
Excerpted from Shareholder Rights Directive: Policy Brief: http://www.purposeofcorporation.org/documents/briefing-shareholder-rights-directive.pdf.