EU Shareholder Rights Directive Could Fail: Hermes

EU legislation aiming to increase the stability and sustainability of European companies “could fail” because of a lack of awareness and readiness on the part of investors, governments and regulators, Hermes Investment Management has suggested.

It commissioned a survey of European institutional investors to gauge levels of awareness and preparedness for the revised Shareholder Rights Directive (SRD II), and found that out of 175 respondents, 42% had not heard of it.

More worrying, according to the manager, was that only 3% believed their organisation already met the requirements of the directive. In a paper, Hermes said this suggested that “significant and rapid strategic business changes will be required”.

“There is a real danger that the lack of understanding and awareness reported in our survey will result in the directive failing,” it added.

Member states and relevant regulators also had “more work to do on understanding and implementing the directive”, according to the manager.

“In our view this research illustrates a disconnect in some European countries and, as a result, investors across the continent are in the dark and unable to start addressing compliance gaps,” Hermes stated.

SRD II introduces rules relating to asset managers, asset owners, companies, and proxy advisers. The deadline for member states to pass implementing legislation is 19 June.

Hans-Christoph Hirt, head of Hermes EOS, Hermes’ engagement provider, said the directive was misnamed, being more about shareholder obligations than rights.

In his view, the most important pillar of the legislation was the measures encouraging long-term engagement and transparency of stewardship activities. The directive will require asset owners and asset managers to have a shareholder engagement policy and report on their activities – or explain why they have not done so.

Also bundled into SRD II are rules to make it easier for shareholders to exercise their rights and subjecting proxy advisers to transparency requirements.

The European Fund and Asset Management Association (EFAMA) previously said some parts of SRD II overlapped with legislation such as the UCITS directive, which it believed would lead to “incoherence of legislation and unnecessary duplication of duties for asset managers”.

Mixed picture across EU

German respondents to Hermes’ survey showed the highest levels of awareness of SRD II at 88% – although 70% believed their organisation did not fully meet the requirements.

According to the asset manager, the surveyed German investors indicated that the most important outcomes from SRD II would be increased transparency from companies on the process of exercising shareholder rights.

This was also among the top priorities of outcomes for surveyed Dutch and Italian investors.

According to Hermes, respondents from the Netherlands showed a high awareness of the directive, at 79%, but many did not understand what was expected of them: 51% of asset managers and 41% of companies said they did not know how to meet the requirements.

The manager found that 93% of Spanish respondents were unsure of the steps they needed to take to comply with SRD II.

In the UK, awareness of the directive was surprisingly low, at 45%, said Hermes. Only 8% of respondents believed their organisation already met the requirements and 46% did not know either way.

Hermes suggested this could be because regulators had only recently clarified what was covered by the country’s stewardship code and what needed to be added to meet SRD II’s requirements.

Last month the Financial Reporting Council launched a consultation on a proposed new stewardship code and the Financial Conduct Authority launched a consultation on measures to implement SRD II.

According to Hermes, the Dutch, German and Italian governments have issued draft legislative texts to implement SRD II. A public consultation on the directive was held in Spain last year.

Hirt said the UK would have to implement SRD II if it agrees to a withdrawal deal with the EU for its departure from the bloc.