17 March 2021
- OP-ED by José María Marinas Aramendía, Head of Securities Custody and Settlement, Cecabank. Comment sponsored by Cecabank
On 3 September, European regulation SRD2 entered into force (Shareholder Rights Directive 2 (Directive (EU) 2017/828 of the European Parliament and of the Council), generally referred to as the shareholder regulations or long-term shareholder engagement regulations. Although its transposition into Spanish law is not yet complete, its implications for investors and custodians call for a detailed analysis.
This regulation represents significant progress with respect to the previous regulation (SRD1-Directiva 2007/36/EC, of 11 July 2007), not just in terms of the broadening of shareholder rights, but also in terms of their impact on the different participants throughout the value chain between the issuer and its shareholders.
To understand the meaning and scope of this new regulation, a good starting point is to analyse the causes justifying it and that have, in some way, been the driving force behind it. We can identify three reasons.
Firstly, the financial crisis of 2008 highlighted the lack of effective shareholder engagement in the management of listed companies. The lack of engagement stemmed from the development of speculative and short-term strategies by senior management, often contrary to the general corporate interest and the specific interest of shareholders. It was not unusual to take on high risks seeking to maximize immediate gains, but compromising the long-term viability of businesses.
Secondly, the reality also showed the difficulty listed companies had around communicating with their shareholders, for two main types of reasons. On the one hand, the issuer does not know, in most cases, who its final shareholders are. On the other hand, shares are often held through complex chains of intermediaries, which makes communication between issuer and shareholder difficult. Under these conditions, exercising shareholder voting rights presented itself as an almost impossible mission.
And thirdly, the absence of real engagement in the management of companies, which was particularly evident in the case of institutional investors. Many of these institutional investors have already defined a corporate social responsibility policy that guides their selection of the companies in which they invest on the basis of very strict criteria. However, these same investors barely exercise their voting rights at the general meetings of these companies.
Built on this breeding ground, the SRD2 was devised with the essential aim of restructuring relationships between shareholders and listed companies in Europe, rendering them more fluid, transparent and effective. To this end, it has been established that listed companies have the right to know the identity of their shareholders; the transfer of information between businesses and shareholders is regulated; controls governing the figure of the voting adviser are strengthened; and institutional investors and asset managers are required to develop and make public an engagement policy with which they must be consistent in the exercising of these voting rights, among other measures.
Hence, SRD2 not only impacts shareholders, but also has significant repercussions for issuers, intermediaries, institutional investors and asset managers. And the focus of this article is on the latter of these.
Institutional clients and asset managers must define an engagement policy. This engagement policy must be made public and be effective and consistent in exercising of the voting rights. Furthermore, they must publish how they have applied the aforementioned policy each year, even stating how they voted at the general meetings, except in cases of negligible significance due to purpose or size of interest (vote traceability). They must also include mention of whether the services of voting advisers are used.
The opportunity is very clear. SRD2 establishes the suitable regulatory framework for a prolific and truthful relationship between issuers of large listed securities and their shareholders. It fosters effective and sustainable engagement of institutional investors and asset managers, establishing the foundations for creating a healthy and efficient corporate governance model in listed companies.
The extent to which the standard is embraced and the decisive and clear willingness of all the parties involved to ensure it is implemented effectively, will determine how successful it is at accomplishing its aims. The big challenge is not the Spanish market, where there were already standardized procedures in place for exercising voting rights thanks to the efforts of banks and market infrastructures, but rather other European markets, where the chain of sub-custody has not always allowed the end investor to be identified and voting mechanisms were not in place.
Investment in resources, which adapting to the new regulation may undoubtedly entail, also represents an opportunity for issuers, custodians and institutional investors to improve their position on the market and to provide value to their customers. Without a doubt, responsibly exercising voting rights will become a differentiating factor of the services of the different market players.
This is the challenge and the opportunity we face as a system. It calls for responsibility and commitment on the part of all players, but in particular custodians and depositories and we must provide all the parties involved along the chain with the possibility of exercising the rights and obligations set forth in the standard.
