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New rules, regulations pave path for further European shareholder activism

Euro

Changes and developments in rules and regulations relating to shareholders have impacted shareholder activism in Europe, sources said.

Increased awareness of the impact of climate change on companies has upped the ante for shareholders when it comes to their holdings.

“Investors and regulators have taken the view that more oversight of companies on the part of investors can help to mitigate financial, environmental and societal risks,” said Stuart Dalheim, vice president, shareholder advocacy manager for Calvert Investments in Bethesda, Md. “The regulatory system is evolving in the EU to encourage investor engagement.”

He highlighted the formal adoption by the European Union of the Shareholder Rights Directive in April, which encourages long-term shareholder engagement.

The introduction of a record date mechanism, which identifies shareholders eligible to vote, “has facilitated the participation of foreign institutional investors” at annual general meetings, said Joseph Oughourlian, London-based founder and CEO at Amber Capital LP, an event-driven hedge fund. The move has also increased the pressure and “moral suasion of EU and local authorities on institutional investors to duly exercise their fiduciary duties — and therefore attend and vote their shares at the shareholders meeting.”

Mr. Oughourlian said institutional investors have also “substantially increased their participation in the share capital of European Union-listed companies and the possibility for activist investors to amplify their power by getting the support of other shareholders.”

Also in the EU, the European Union Directive on Non-Financial Information Disclosure, which entered into force in 2014 by the European Commission, requires companies with more than 500 employees to report on environmental, social and governance matters and include this in the annual management report.

Mr. Dalheim said the first reports under this law are required next year. “When there is a regulatory requirement for disclosure … engagement starts in a different place. You do not need to spend as much time asking for information, but rather asking about strategy and risk management. Instead of asking if a company is addressing human capital management, water scarcity or climate change, the discussion is about whether or not there has been progress in addressing known challenges or opportunities.”

Meanwhile, in the U.S., the Financial CHOICE Act, recently passed out of the House Financial Services Committee to replace the Dodd-Frank Wall Street Reform and Consumer Protection Act, “would restrict and weaken shareholder engagement, by making it much more difficult to file shareholder proposals, potentially taking away an important mechanism for dialogue and an important source of information for investors,” said Mr. Dalheim.

“The EU is moving to strengthen shareholder rights, understanding that long-term owners with skin in the game have an interest in promoting well-managed and sustainable business.”

Two other factors are also driving increased activism by long-term holders of stocks, said Liad Meidar, London-based managing director and chief investment officer at Gatemore Capital Management LLP.

“One, Europe is very ripe for activism. The U.K., for instance, has amongst the most shareholder-friendly rules in the world yet still has not had the level of activism seen in the U.S. Cultural norms in Europe are changing such that we expect to see more shareholder-board disputes play out in the open.

“Two, in a market environment where nothing seems cheap anymore, active managers need to find new sources of returns. Long-only managers can benefit from tagging along to the activists who are affecting change in companies,” said Mr. Meidar.

And the growth of shareholder activism in the U.K. and Europe is different than that in the U.S.

“There is a unique and growing opportunity in Europe to engage constructively with management teams to improve corporate governance and build significant long-term business values,” said Scott Cobb, managing partner for southeastern concentrated value at Southeastern Asset Management Inc. in London. “Historically, U.S. style, confrontational activists have had little success within Europe. We have begun to see more players entering the market in the past few years to employ a more constructively engaged approach.”

Executives at the firm believe Europe is seven to 10 years behind the U.S. in terms of owner operators focused on building value for shareholders, and Mr. Cobb thinks the U.S. activist approach of buying a small stake in a company, writing “an aggressive letter to the board, (making) noise in the process, and often (having) success in seeing at least some of the proposals enacted” tends to be counterproductive in Europe.

Mr. Cobb said that “in order to successfully engage (in Europe), it is essential to have a long time horizon and a strong, local network to enable behind-the-scenes collaborative interaction with all key stakeholders to drive productive, long-term change.”