ECGS COMMENT TO THE E.C. ON THE DIRECTIVE FOR BETTER SHAREHOLDERS RIGHTS
Gentlemen :Expert Corporate Governance Service (ECGS) is a European proxy advisory company registered in London and managed in Paris as a partnership of independent local market experts which have come together to provide specialist governance research and proxy voting advice. ECGS offers institutions access to unrivalled experience on corporate governance and responsible investment issues.
The Managing Partner of ECGS is Paris based Proxinvest. Other active ECGS Partners are DSW (Düsseldorf), Ethos Services (Geneva), Shareholder Support (Rotterdam) and Frontis Governance in Rome. ECGS also employs local governance experts in London (Manifest), Montreal and Melbourne. ECGS acts solely in the interest of all shareholders and is generally free of conflicts of interests in the production and sale of its advisory services.
Voting shares in an open market economy is service rendered to all passive shareholders and to the society as a whole by thoughtful investors: it should be encouraged. ECGS strongly supports the European Commission’s proposals for amendments to the Shareholders Rights Directive regarding long-term Shareholder engagement.
We generally support and develop hereunder the August 2010 letter of ABI, Eurosif and Eumedion to Michel Barnier
🙁http://eumedion.nl/nl/public/kennisbank/brieven/2010-08-ec-securities-law-directive.pdf )
requesting a new legal definition of the duties of the security custody franchise be set for banking intermediaries to contribute to the voting of shareholders.
ECGS comments and suggestions to further improve the Commission’s proposals are the following:
• Cross border Voting
In line with many issuers and shareholders representatives, we believe that the ability to vote shares abroad without any obstacles or disproportionate costs is essential. We consider with many of our investor clients that major obstacles still hinder the effective right to cross border voting and we therefore strongly supports the Commission’s efforts to increase the efficiency of the chain of intermediaries.
Full transparency of the shareholders list at the time of the general meeting, on the record date should be ensured on record date and when subsequently requested to facilitate dialogue among shareholders and dialogue between investors and issuers. The conflicts of interests of registrars or centralizing banks appointed by the company’s management to create the shareholders list should be disclosed in order to foster a fair voting process, and the appointment of substantially conflicted agents , such as company investment bankers should also be prohibited.
Any existing restrictions to the right of the shareholder to appoint a personal proxy holder for voting should be lifted and the registrar should be held responsible for insuring that the shares under proxy be associated to the instructions given by the proxy designated by each holder. The voting instructions remitted by the holder or his proxy should be carefully respected by any agent in the voting chain and because the voting right is a fundamental element of a stock its use should not trigger any cost for the individual voting holder.
• Banks Voting Fees
In view of the drop of the cost for transmitting information, the cross-border voting process in the 21th Century should be mostly, if not entirely, internet based, and free of any marginal charges for the voting shareholders. The identification costs at custodian level should be borne by all securities accounts holders, clients of this custodian while the centralizing and voting site costs at registrar level should be borne by the company and should never generate a marginal charge for the voting investor.
As stated above, voting the shares is a service rendered by thoughtful shareholders to all shareholders and to the society as a whole: these should therefore not be further penalized and active voting should be basically free of charge. Because of the lack of serious opposition of investors paralyzed by the universal banks influence in the asset management and custody business, custodians, often universal banks subsidiaries themselves, have used their protected oligopolistic position for charging fees per line of shares voted sometimes exceeding 100€ per line. They appear to have also opposed any serious attempt to modernize the unreliable and-time consuming prior to the vote identification process (see hereunder).
The exercise of cross border voting rights within the EU should not cost anything and should be paid either by the general custody fee charged by banks on all securities accounts or paid by the issuer in the name of all shareholders.
Besides the Commission should consider that in order to avoid frequent conflicts of interests, the AGM centralizing, registrar and vote counting process should be open to non-bank competition as this is not a custodial or financial process[1].
We support the Commission proposals to regulate the voting fees as crucial: a disclosure of prices, fees and charges by intermediaries is not sufficient; we therefore propose that the charges for the identification services should be included in the basic custody fee charged to all shares accounts and no longer charged only on voted shares.
• Shareholder identification
In order to hold fair and well attended shareholders general meetings, intermediaries should help shareholders and issuers by providing the voting shareholder identification on the legal voting record date as requested by the August 2010 letter to Michel Barnier.
Preparing their shareholders general meeting issuers should create no additional identification rights than to request from the voting shareholder the proof upon record date of its shareholding attested by the chain of custodians. The Revised SRD should not provide a commercial opportunity for financial intermediaries to charge companies with additional services which they should offer for free (see above). It should further be stated that shareholders should not pay any fees to the intermediaries for identification purposes and should be all equally entitled to initiate the identification process any time before record date for free, using the issuer approved Internet voting site.
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Besides, in some countries companies and regulators have imposed shareholding declaration thresholds: such statutory and or legal provision, imposed to all shareholders forces them appropriately to disclose their identity when they exceed a thresholds as low as 0.5% of the company’s capital if they want to keep their voting power. We at ECGS consider that this declaration thresholds imposed to all potentially influential shareholder is fair, practical and efficient. Here again ECGS supports Better Finance that all information related to the shareholder given by the shareholders to the company should also be given to all shareholders and their associations to create a level playing field.
These two complimentary above mentioned identification processes respect the appropriate agency direction and no conflict of interest is created: it is clearly on request of the voting end-shareholders that custodians, paid by depositors, should disclose the holder’s identity and share holdings. The custodian chains should be legally obliged to provide the identification to the issuer but only upon request of the voting shareholders for the AGM record date[2]. The simple use of these two experienced fair processes should result in an improved disclosure for the benefit of all shareholders.
We also support this way that the privacy rights of small or non-voting shareholders should be preserved if they so wish by granting anonymous shareholding for non-voting shareholders. The money laundering issues should be treated by other methods than adding unnecessary burden to the useful shareholders voting process. In all cases the full final identification obtained by the issuer should be made available to all shareholders on the attendance list.
• Investors engagement and transparency
Improvement of the engagement of institutional investors and asset managers should be encouraged and because of their responsibility towards their retail investors and savers. Funds and other institutional investors are welcome to justify and disclose their activities in order to fulfill their fiduciary duties. We see as a fundamental financial regulation requirement that investment management teams must act in the interests of clients, and that doing otherwise be an offence.
ECGS welcomes the proposals regarding the increased transparency of the voting practice of institutional investors, especially when these belong to a publicly distributed or open investment funds or collective pension funds. We also welcome when investors demonstrate how their investment and voting strategies and practice are aligned to their liability profile and “how it contributes to the medium to long term performance of their assets”.
Some consider that the lack of voting diligence and engagement is a result of structural conflicts of interests which not best addressed by additional disclosure requirements from investors, especially independent asset managers should not be subject to additional disclosure.
The end-investors of publicly offered assets should be protected by regulators because the asset-management business is often subject to important conflicts of interests (as in the case of assets managed by multi-business financial groups). For these a disclosure requirement on their independent voting and other diligences should therefore be made compulsory and not left to a “comply or explain” minimal requirement. Besides, the conditions to meet a “comply or explain” requirement are not clear in the Commission proposal.
Their due diligence should also include the active search for judiciary redress in cases of market damages due to third responsibility including the participation to possible class actions.
When asset managers are part of multi-business financial groups the management of conflicted situations could be easily improved by the compulsory introduction of sufficient number of independent non-group directors at the board of the asset management firm as it is practiced by the asset management subsidiaries of groups like the Axa group.
• Say on Pay
The General Meeting of Shareholders is the sovereign body of the corporation. It is by delegation of power from the GM that the Board supervises the accounts, appoints or controls management and, in case of failure of the Board to act, the GM is expected to take all relevant decisions
It is primarily because of the failure of Board to control and limit reasonable executive pay levels that governments or parliaments have requested a Say on Pay vote at the AGM. ECGS therefore supports the proposal by the Commission for shareholders to have the right to approve the remuneration policy via either a binding or non-binding vote.
The Say on Pay vote is especially important with respect to the annual short term variable pay.ECGS is therefore in agreement with the Commission that this should be performance-related and not exceed the base salary. Furthermore, ECGS is in favor of a cap on directors’ pay at all publically listed companies in Europe.
Another justification for this practice is the lax control of Related Party Transactions. The RPT process was in some European countries the legitimate legal framework for controlling the exceptional pay and benefit remitted to Managing Directors, it but was not seriously enforced.
Shareholders also need clear and understandable information especially on the maximum possible pay in a best-case scenario and/or a general pay cap. There should not be any reward for failure and a reasonable ratio should be maintained between the directors’ pay, the next management levels and the peer group.
• Related Party Transactions
ECGS also sees room for improvement with regard to the control and an increased transparency of Related Party Transactions.
ECGS welcomes the proposal to let shareholders vote on relevant related parties’ transactions and excluding the related party beneficiary shareholder(s) or Director(s) from the vote.
As many company boards are not in majority independent, an approval excluding the interested party is a central protection item of minority shareholders. This process should apply to all direct or indirect group transaction interesting a Director of significant shareholders. In order to make the company’s life easier it can be limited to an an ex-post approval but it should not be restricted to transactions representing more than 5% of the companies’ assets or transactions. It should extend to “all material transactions that are not in the company or group’s usual business line or not concluded in normal arms-length conditions” since shareholders are not expected to vote on minor matters .
The external auditor should have a special legal responsibility to insure that such RPTs are transparency and properly reported to directors and shareholders.
A survey of the application of the French protective RPT proceedings conducted by Proxinvest has revealed that, based on current disclosure practices, shareholders are not informed of RPTs transacted through controlled subsidiaries. The research shows that when RPTs are reported by a listed subsidiary and benefiting to a Managing Director of both parent and subsidiary company they are not reported to the parent company shareholders. Such failure to properly enforce the French law offers a siginficant opportunity to freely transfer wealth out of the group shareholders equity for the benefit of one or several interested managing parties. This approach does not ensure adequate protection of minority shareholders of the top company.
Our experience has shown that RPTs have become a black-box for shareholders. We therefore question whether an “independent report” confirming that transactions were fair and reasonable is sufficient when the independent party is appointed by the Board, especially where the interested parties can vote for the approval of its own self-dealings.
ECCG believes that the European basic RPT regulation should create a binding control over these transactions for the shareholders and leave no room to circumvent companies’ information duties to all shareholders. In line with the recent British FCA proposal for premium listing, ECGS recommends that the special auditors report and or the independent report describing the RPT should be subject to the majority binding approval of all shareholders excluding the RPT beneficiaries.
• Transparency• of Proxy Voting Agencies
We welcome the Commission’s suggestion that there should be better understanding of the role of shareholder voting research services. However it is surprising that the Commission is seeking to regulate this area so soon after ESMA’s positive 2012 review of the industry.
We therefore recommend that the Commission takes into account the recent publication by the industry of the Best Practice Principles for Corporate Governance Research Providers (http://bppgrp.info/). These principles cover a number of substantial and material issues following detailed public consultation.
In formulating the final Directive we would point out that proxy voting agencies are responsible to their clients, the investors, under contracts drawn up with detailed commercial terms In many cases they compete against many similar private advisors such as lawyers, associations, remuneration consultants and proxy solicitors paid for by the companies for the defense of management. A balanced treatment of all agents advising for the vote should be ensured.
The research and advisory services provided toinvestors are undertaken by private independent companies under commercial contractual terms. Where these services are paid for by investors they are far less exposed to conflicts of interests than other services along the share voting chain. We at ECGS consider that such conflicts of interest should be as much as possible avoided and whenever they occur fully disclosed.
In line with the recently released Best Practices Principles for proxy advisory services, agencies should be also fully transparent on their voting principles and methodology: the Best Practices Principles group recommended a “comply or explain “approach for voluntary compliance, which ECGS supports.
However, if any new European regulation of these services is imposed then this must be done in a non-discriminatory way and made compulsory for all types of advisory services including those made by banks, proxy solicitors or trade associations. There should be no exceptions in order to enable the necessary level playing field; we believe that this is consistent with fundamental EU law.
• Amendments to the AGM Agenda
We believe first that it is of paramount importance that shareholders are able to, individually or jointly, table binding resolutions at the AGMs subject to the demonstrated holding of at least 0.1% of the issued shares. The current European legal frameworks and current practices are by far more demanding and as a result, the shareholders engagement and control efficiency are reduced accordingly. Moreover, as the investors community is generally under the influence of conflicted multi-business financial groups such as universal banks who act as both asset managers and advisors to the issuers, the shareholders rights are poorly enforced and the number of external initiatives is very minor in Europe and this also reduces the action of shareholders for better governance.
For ECGS, this right to initiate a binding resolution is certainly more important than any right to discuss a non-voted point or present an amendment to a resolution presented by the Board.
Certain EU Member States require very low thresholds to put forward items for discussion in AGMs: United Kingdom requires a minimum of 100 shareholders, each holding 100 pounds in shares; or even, in more progressive countries like Sweden, one shareholder holding one share can suggest an amendments for discussion at the AGM. German law allows a shareholder with only one share to file a counter proposal. French law allows any shareholder holding only one share and participating to the AGM to propose the dismissal of a Director or an amendment, however only finally if the meeting chairman accepts to put it for a vote. Therefore, ECGS supports the move to include the right of a shareholder holding at least one share to put forward issues for discussion in the AGM agenda.
June of 2014
[1]The registrar services would be much more competitive, fair and efficient if they were stand-alone businesses as is the case in the UK US/Australia/Canada/Scandinavia
[2]ECGS does not support the proposal that the ownership of company shares should be registered in real time by electronic means and be available to issuers and shareholders. Such a system would be far too expensive and not environmentally healthy. It would “heat the planet for nothing” as it would impose billions of unneeded computer signals as thousands of shares change hands every day while no one should or will really care 364 out of 365 days for the identification of these small changing stakes
