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."