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European Parliament approves rules to improve shareholder rights

Directive also required institutional investors, managers to increase transparency


The European Parliament has voted in favor of new rules that will strengthen shareholder rights and facilitate cross-border voting under the Shareholders Rights Directive.

The changes will make it easier for shareholders residing in another European Union country to the location of the company in which it invests to participate in the general meetings of those companies and to vote on shareholder issues, said a question and answer document on the European Commission's website.

The rules will require institutional investors and money management firms to be transparent about how they invest and engage with companies. The directive encourages these investors to adopt a more long-term focus in their investment strategies, and to consider social and environmental issues. The rules will be based on a “comply-or-explain” approach — if an investor does not comply with the rules they need to provide an explanation as to why.

Proxy advisers will also be required to disclose certain key information about the preparation of their recommendation and advice, and to report about the code of conduct they apply.

The rules will also encourage more transparency and accountability from companies about directors' pay, and shareholders will have the right to know how much a company's directors are paid. They will also be able to influence this, which the Q&A said “will guarantee a stronger link between pay and performance.”

The new rules aim to contribute to the long-term sustainability of EU companies, to enhance the efficiency of the chain of intermediaries and to encourage long-term shareholder engagement. The Q&A document said there is evidence that there is often a focus on short-term strategies when it comes to corporate governance, which it said was the case in particular when it comes to institutional investors and money management firms. It cited quarterly or even shorter periods over which the performance of money managers is evaluated by institutional investors, that the average holding period of shares in eight months, and that, on average, money managers turn over their entire portfolio every 1.7 years as examples of short-termism.

The final adoption step will take place shortly in the European Council, which defines the EU's political direction and priorities. The directive will become effective two years after its official publication.