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Europe reaches deal giving shareholders influence on executive pay

The European Union has reached agreement on shareholders' rights to vote on a company's pay policy.12 Dec 2016

The EU's committee of permanent representatives (COREPER) endorsed an agreement between the European Parliament and the Slovak presidency on a revision to the Shareholders' Rights Directive that aims to strengthen shareholder engagement in large European companies and reduce short-term risk taking.

Under the new rules shareholders will have the right to vote on the remuneration policy of the directors of a company. This policy should "contribute to the overall business strategy, long-term interests and sustainability of the company and should not be linked to short-term objectives", the statement said.

Directors’ performance should be assessed on the basis of "both financial and non-financial performance criteria, including where appropriate environmental, social and governance factors", it said.

Lucia Žitňanská, Slovakia's minister for justice, said: "The financial crisis revealed that in many cases shareholders supported excessive short-term risk-taking by managers. The revised directive is intended to redress this situation and contribute to the sustainability of companies, which will in turn help generate growth and create jobs. "

Institutional investors and asset managers will have to develop and disclose their policies on shareholder engagement, and on managing any real or potential conflicts of interest such as where they have a significant business relationship with the company being invested in.

Under the new directive companies must be able to identify their shareholders, and obtain information on shareholder identity from any intermediary. This is designed to help shareholders to exercise their rights and engage with the company.

Member states can decide whether to allow companies to only request identification for those shareholders who hold a certain amount of shares, although this must not be more than 0.5%.

Proxy advisors will be subject to a code of conduct and to transparency requirements that reflect their potential influence on voting behaviour. 

"Many institutional investors and asset managers use the services of proxy advisors who provide research, advice and recommendations how to vote in general meetings of listed companies. While proxy advisors play an important role in corporate governance by contributing to reduce costs of the analysis related to company information, they may also have an important influence on voting behaviour of investors," the statement said.

The new directive also covers transactions with related parties, which "may give the related party the opportunity to appropriate value belonging to the company". These must now be approved by shareholders or their administrative or supervisory body, and companies will have to provide information on any publicly material transactions to allow shareholders to assess the fairness of the agreement, it said.

Remuneration expert Suzannah Crookes of Pinsent Masons, the law firm behind Out-Law.com said: "The directive addresses a number of issues where there have been recent developments in the UK, for example in relation to the identification of shareholders, the UK now has an requirement for a register of "people with significant control".

"Executive remuneration and in particular the link with strategy and long-term sustainability is particularly under the spotlight in the UK with the government's green paper on corporate governance reform having directors' pay as one of its key areas of focus," Crookes said

"From a UK perspective it will be interesting to note the extent to which finalised arrangements in relation to executive pay, both under the directive and domestically, will overlap and to see how implementation of any differing requirements will work out in practice especially for multi-national groups in the context of the UK's leaving the EU," she said.