Updated with correction
A new European Union regulation will make pay disclosure mandatory, allowing European investors to further probe executives on pay at annual general meetings.
Set to even the playing field across the European markets, the new directive goes into effect in June 2019 and will ask companies to supply information about the remuneration of their top executives to asset owners and money managers. Investors will regularly vote on the policies presented at annual general meetings and the implementation of those policies afterward.
Sources praised the Shareholder Rights Directive II for removing confusion about whether asset owners or other intermediaries in the investment chain have to weigh in on voting obligations regarding pay issues. They predicted it will boost voting activities that money managers will conduct on behalf of asset owners, potentially increasing manager’s costs of setting up processes or outsourcing to proxy-voting advisers.
But asset owners and money managers leading the industry on active ownership welcomed the regulatory development.
Carola van Lamoen, head of active ownership at Robeco in Rotterdam, Netherlands, said that although Robeco has been voting on all equities in its portfolios for years, “the impact (of the directive) is that we should explain in more detail what we do and how our voting process works” to asset owners.
“Asset owners and money managers need to step up their action,” she said.
Issuers, money managers and asset owners must implement the directive before the 2020 proxy season.
Under the directive, money managers, pension funds and insurance companies will be required to develop and publicly disclose their engagement policy with investee companies on remuneration. Aimed at improving transparency in the voting process, the directive also requires intermediaries — custodians, subcustodians and proxy advisers — to provide relevant information to stakeholders so that issuers can directly communicate with shareholders.
Carlota Garcia-Manas, senior investment stewardship analyst for Church Commissioners and Church of England charitable endowment, which has £8.3 billion ($11 billion) in assets in London, said: “The directive is helping to align the practices across the industry over time.”
“A benefit will be if our peers and managers have a voting policy in place for remuneration,” Ms. Garcia-Manas said.
Louis Barbier, partner at corporate advisory firm SquareWell Partners Ltd., in London, said, “Asset owners will be scrutinizing money managers to be better ‘stewards’ of assets under the directive,” by making the reporting process less generic.
Voting on remuneration under the directive will be expected to be conducted at least every four years, allowing investors to track the progress on implementation annually — and establish processes, which have not been obligatory in many European countries before.
Michael Herskovich, head of corporate governance at BNP Paribas Asset Management in Paris, said the directive will dramatically change disclosure from investee companies across Germany, Eastern Europe and the Nordics. “We are probably going to increase our overall voting by 30% to 35%,” he said.
While money managers relied on national stewardship laws in the U.K. and France for engagement, managers in Germany, Eastern Europe and the Nordics will be obliged to vote for the first time. Similarly, the Netherlands’ first stewardship code launched in 2018.
Sources said at present, stakeholders are not deciding which topics appear on the agendas of annual general meetings, making it harder to influence remuneration polices. Michiel van Esch, specialist governance and active ownership at Robeco in Rotterdam, Netherlands, said that now, with the directive, “shareholders will vote regularly, at least every four years on the remuneration policy and annually on policy implementation,” he said.
Lorraine Kelly, head of governance solutions at proxy firm Institutional Shareholder Services Inc. in New York, said: “SRD II includes more prescription than before regarding what engagement policies should cover and also stipulates annual disclosure with regard to implementation, including how investors vote their shares in an informed and independent manner. ISS is therefore seeing an increase in requests for cost-effective, customizable disclosure solutions to help investors meet these requirements.”
Effect on intermediaries
The directive also is giving investors better insight into who exercised the votes in the investment chains, by highlighting the responsibilities of managers, proxy advisers, custodians and subcustodians. Mr. van Esch said “the directive is more specific on that we need to disclose how we make sure that our policy is aligned if we are using proxy advisers.”
SquareWell Partners’ Mr. Barbier added: “Now investors will have to show they are not solely relying on proxy advisory firms’ recommendations to inform their voting decision. Money managers will have to do more work and demonstrate why they have taken (certain) views when (conducting the) voting in accordance with the underlying asset owners’ guidelines.”
“For us, stewardship is not just about engaging with investee companies but also engaging with our managers on how they conduct the voting on our behalf,” and how they implement the Church of England’s policy, Ms. Garcia-Manas said.
Mr. Barbier explained that asset owners were previously looking at money managers’ voting decisions on an aggregate basis to determine the level of scrutiny placed by managers on certain topics like executive pay. “But it doesn’t tell the full story,” he said. Under the new rules, “asset owners will now be able to further question how their managers came to the conclusion through either direct engagement or increased public disclosures,” he said.
Sources warned that money managers might have been voting and engaging on remuneration policies but they may not have control over information in their investment chains. Sources said the directive is helping with the issue of transparency as votes are often permitted to be aggregated under current rules. “Votes are sent through a chain of intermediaries, and if votes are collected on aggregate, it is often not possible to verify or confirm who voted how,” Mr. van Esch said.
Cross-border voting issues
The new directive will help with identifying shareholders that are often voting on policies on a cross-border basis, sources said. Guillaume Prache, managing director at Better Finance, the European Federation of Investors and Financial Services Users, a non-governmental organization in Brussels, said before the directive, intermediaries often voted instead of the beneficial owners.
“Abroad, global custodians would often vote instead of the real shareholder,” he said.
But now the SRD II regulation resolves the technical issues in the custody chain, sources said. Julia Backmann, vice president at BVI, a German association of money managers in Frankfurt, said: “At the moment, there is a lot of technical issues around cross-border implementation of voting.”
“We would like to be able to vote on a cross-border basis but the problem is there are intermediary chains, which make it difficult to conduct cross-border voting,” she said. “The votes get lost in the investment chain.”
But Mr. Prache disagreed, saying: “Money managers don’t do it because it bears costs to establish a voting process. They are not really motivated because they are not the shareholders.”
However, Ms. Garcia-Manas said: “We welcome that with better transparency shareholders get better access to information to support the vote.”