Commission Proposal for a Directive amending the shareholders' rights directive as regards encouragement of long- term shareholder engagement Council Working Party 6 May 2014

Summary I. Background II. Content of the proposal 1.Shareholder Identification and facilitation of exercise of shareholders rights 2.Transparency of institutional investors and asset managers 3.Transparency of proxy advisors 4.Remuneration 5.Related party transactions 6.Final provisions III. Recommendation on 'comply or explain'

BACKGROUND

Overview of developments Financial crisis Shareholders rights directive Communication on long-term financing Proposal for the revision of the shareholders' rights directive Recommendation on 'comply or explain' Directive on corporate governance statement in annual accounts Study on 'comply or explain' Green Paper on corporate governance in financial institutions CRD III Green Paper on EU corporate governance framework Proposal CRD IV Green Paper on long-term financing of the EU economy Action Plan: EU company law and corporate governance Adoption CRD IV

Main findings of the review of the EU corporate governance framework Insufficient long-term ownership and shareholder engagement Crucial role of shareholders in the EU corporate governance framework – the EU model based on self-regulation supposes that shareholders engage with companies and hold the management to account Shareholders, and in particular institutional investors often fail to look into the long term value of companies and do not establish long-term relationships with them (shareholder engagement) Evidence from the financial crisis : institutional investors did not exercise sufficient control or even supported excessive short term risk taken by banks

Evidence from financial and non-financial sector: Low level of engagement Low level of general turnout in general meetings (60% in average in the EU, compared to 81% in the US and 74% in Japan) Low level of dissent in general meetings (2-3%) Low level of private engagement with companies (39% of 'responsible investors' Short-termism Average holding period of 8 months Average annual fund portfolio turnover 72%

Concerns about the role of proxy advisors Increasing influence of proxy advisors as institutional investors, especially foreign, rely to a large extend on proxy advisors (ex. in DE 80% of foreign investors follow the advice of proxy advisors) Incertitude concerning the reliability of advice and the treatment of conflicts of interests Concerns over directors' pay Insufficient link between pay and performance (increase of pay while share price decreased) Insufficient alignment of directors' incentives with long-term interest of the company Information on remuneration often not appropriate Shareholders' oversight on remuneration is insufficient Concerns over related party transactions Lack of appropriate information Lack of adequate safeguards for minority shareholders

Despite the adoption of the shareholders' rights directive, still difficulties to exercise the rights of shareholders and to engage with companies Shares held through a network of intermediaries, ex. investment firms, banks, custodians, Central Securities Depositories Intermediated holding chain can be an obstacle to contacts between company and shareholder and a barrier to engagement Concerns regarding the transmission of information and voting instructions in the holding chain: voting instruction not passed over to companies Price discrimination for cross-border situations Concerns regarding the quality of corporate governance reports 60% of companies do not provide sufficient information on deviations from corporate governance codes recommendations

Cumulative impact of these problems Listed companies  Short term pressure (ex. listed companies invest less into product development, R&D, etc. than similar privately held companies)  Lost potential for improved financial performance: studies show that shareholder engagement improves the performance of investee companies Shareholders  Difficulties to exercise their rights in cross-border context  Lost potential for higher returns : Studies show that investment strategies based on engagement improve the long- term performance of the investors' portfolio

Need for EU action: International/European dimension of the equity market 44% of the market value of EU listed companies belong to foreign (European or other) owners, in particular foreign institutional investors and asset managers. Increasing importance of institutional investors (in some MS hold over 50% of shares of listed companies) 66% of all assets managed in three largest Member States (UK, FR, DE) International importance of proxy advisors

CONTENT OF THE PROPOSAL

Introduction Extended scope of the existing Shareholders' Rights Directive new substantial rights for shareholders new transparency requirements for certain categories of investors new requirements for intermediaries New definitions added: intermediary institutional investor asset manager shareholder engagement proxy advisor related party

Shareholder identification and facilitation of exercise of shareholders rights Increased importance of intermediaries in the equity holding chain make the exercise of shareholders rights and the engagement between companies and investors more difficult Information from companies not always passed on time to shareholders Voting instruction not always transmitted to companies Direct contacts between companies and investors can improve corporate governance, but identification of shareholders not always possible, particularly in cross-border situations Transparency Directive only subjects investors to transparency requirements when they acquire 5% of the voting rights of a company Divergences between national frameworks and uncertainty among foreign intermediaries create a barrier to shareholder identification Price discrimination by intermediaries for cross-border services

Shareholder identification On the request of the company, intermediaries are required to transmit to the company the name and contact details of the shareholders and for legal persons their unique identifier Contrary to the Transparency Directive, no public transparency, but information only transmitted to the issuer Safeguards for shareholders with regards to their data: Shareholders to be informed of the possibility of transmission of their data Information only to be used for the purpose of facilitation of the exercise of shareholders' rights Right to rectify or erase any incomplete or inaccurate date Information not to be conserved longer than 24 months Commission shall adopt implementing act to specify the requirements to transmit the information, including: the format of the request and the transmission the deadlines Shareholder identification would allow listed companies to communicate directly with their shareholders and to proactively engage with shareholders

Transmission of information Transmission from company to shareholders Intermediaries shall transmit without undue delay to shareholders the information related to their shares when: the information is necessary to the exercise of shareholder rights flowing from shares or the information is directed to all shareholders in a class Companies to provide to intermediaries the information related to the exercise of shareholder rights in a standardised and timely manner Transmission from shareholders to company Intermediaries shall transmit without undue delay to the company the information received from the shareholders related to the exercise of the rights flowing of their shares, according to their instructions Commission shall adopt implementing act to specify the requirements to transmit the information, including: the content the deadlines the types the format of information

Facilitation of exercise of shareholders rights Facilitation of exercise of rights flowing from shares, including voting Intermediaries shall facilitate the exercise of shareholder rights, including the right to participate and vote in general meetings at least in one of following ways: arrangements for shareholders or persons nominated by them to be able to exercise the rights themselvesµ exercise of rights flowing from the shares upon explicit authorization and instruction of the shareholder and for his benefit Confirmation of votes cast by shareholders Companies shall confirm the votes cast in general meetings by shareholders. If the vote cast by the intermediary, he should transmit the voting confirmation to the shareholder. Commission shall adopt implementing act to specify the requirements to facilitate the exercise of shareholder rights, including: the type and content of the facilitation the form of voting confirmation the deadlines

Transparency on costs Intermediaries are allowed to charge prices and fees for their services Prices, fees and other charges should be publicly disclosed, separately for each service Charges on shareholders, companies and other intermediaries shall be non-discriminatory and proportional Any differences between charges for domestic and cross-border exercise of rights shall be duly justified. NB: third country intermediaries with a branch in the EU also subject to rules of this chapter.

Transparency of institutional investors and asset managers 18

Turnover of 900 institutional actively managed equity portfolios (June 2006-June 2009), average 72% - 19/15

Why is shareholder engagement important? Who will benefit from more shareholder engagement? 20/15 Companies: - Proper control over management is crucial for good governance: studies show that shareholder engagement (including on corporate governance issues) improves the performance, efficiency and profitability of investee companies - Studies show that lack of monitoring and/or short-term pressure from institutional investors results in underinvestment Shareholders, beneficiaries of institutional investors (future pensioners, insured): - Studies show that investment strategies based on shareholder engagement improves the long-term performance of the investors' portfolio - Current level of turnover is very costly: 100% turnover reduces the value of the pension fund by 30%! in 25 years -

Who are institutional investors? Why do they not engage enough? 21

Transparency obligations for institutional investors and asset managers – objectives of the proposal 1.Increase the accountability of institutional investors to impose their long-term interests (stemming from long-term liability) better on asset managers 2.Raise awareness about the consequences of short-term investment strategies (transparency of asset managers) 3.Encourage engagement 22

Transparency obligations for institutional investors and asset managers – content of the proposal 1.Transparency on engagement policies and their implementation (comply or explain) 2.Transparency of institutional investors about how their equity investment strategy is aligned with the profile and duration of their liabilities and how it contributes to the medium to long-term performance of their assets 3.Transparency of the asset management mandates on issues which determine the time horizon of the investment strategy and on incentives to engage (incentives to take non-financial information into account, performance evaluation, remuneration, portfolio turnover limit) 4.Transparency of the asset manager towards the institutional investor on whether they make investment decisions on the basis of medium to long-term performance of the company portfolio composition, portfolio turnover, turnover costs, etc. 23

Transparency of proxy advisors 24

Obligations of proxy advisors in the proposal MS to ensure that PA adopt and implement adequate measures to ensure that voting recommendations are accurate and reliable Public disclosure on key issues: methodologies and information sources how they take national conditions into account contacts with companies subject which are the object of the voting recommendation total number of staff/total number of voting recommendations Disclosure to clients on conflicts of interest 25

Remuneration – existing problems Agency Theory has shown that: - delegation of power leads to asymmetries of information and divergence of interests between directors and shareholders - remuneration is a key tool to ensure the alignment of directors' interests with those of the company First problem: lack of transparency - in more than 50% of the Member States, shareholders do not have comprehensive, clear nor comparable information on directors' remuneration - in the EU, only 1/3 of the companies disclose link between pay and performance - result: it is difficult, time consuming and costly to know how directors are paid and if directors' pay is justified by performance Second problem: lack of oversight - in more than 50% of the Member States, shareholders do not have tools to express their opinion on directors' remuneration (even when not justified by performance) - result: repeated cases of mismatch between directors’ pay and companies’ performance

Remuneration – opinion of stakeholders Green Paper on "Corporate governance in financial institutions and remuneration policies" – June 2010: result: in favor of mandatory disclosure of remuneration policy and report & mandatory shareholder vote on directors' remuneration declared as such: a significant majority of shareholders, institutional investors, asset managers and proxy advisors, as well as a small majority of Member States Green Paper on "The EU corporate governance framework" – April 2011: result: in favor of mandatory disclosure of remuneration policy and report based on a standardised template & mandatory shareholder vote on remuneration policy and individual remuneration of directors declared as such: 75% of shareholders, institutional investors, asset managers and proxy advisors, as well as a majority of Member States

Remuneration – elements of the proposal Improved transparency on directors' remuneration: publication of information on remuneration policy: -maximum amount & proportion of the components of fixed and variable pay -performance criteria & contribution to the long-term interests of the company -ratio between directors' pay and workers' pay publication of information on individual remuneration (based on a template): -remuneration components & proportion of fixed and variable remuneration -application of performance criteria & link between pay and performance -evolution of directors' pay & evolution of the ratio directors'/workers' pay Improved oversight on directors' remuneration: mandatory shareholder (ex ante) vote on the remuneration policy: -policy submitted for approval at least every three years -remuneration paid only in accordance with an approved policy mandatory shareholder (ex post) vote on the remuneration report: -report submitted for approval each year -next report explains whether or not, and how, the shareholders' opinion has been taken into account

Remuneration – expected impact of the proposal To improve quantity and quality of information on directors' remuneration (and to make it less time consuming and less costly to assess remuneration) To create a link between directors' pay and companies' performance (and to avoid unjustified transfer of value from companies to directors) no shareholder vote ( ) performancepay France-34%+94% Austria -46%+27% before advisory vote ( ) after advisory vote ( ) performancepay performancepay Italy-130%+29% +10% +1% Spain -40%+26% -5%-10% before binding vote ( ) after binding vote ( ) performancepay performancepay Sweden-17%+18% +16% +18% Belgium -45%+95% +18% -10%

Related party transactions – existing problem RPTs can have a negative impact on the value of the company, since they transfer value from the company and its minority shareholders to those who control the company (directors, controlling shareholders, companies affiliated with them) However, shareholders do not have access to information ahead of the planned RPTs and do not have tools to oppose to abusive RPTs: no EU rules that provide for public disclosure at the time of the conclusion of the RPT, nor for involvement of shareholders national legislations are so diverse that it makes it difficult, time consuming and costly for foreign investors to influence decisions on important RPTs Green Paper on "The EU corporate governance framework" – April 2011: result: in favor of increased transparency on RPTs & shareholder approval of significant RPTs (related parties excluded from the vote) declared as such: a majority of shareholders, institutional investors, asset managers and proxy advisors, as well as a small majority of Member States

Related party transactions – elements of the proposal RPTs that represent more than 1% of a company's assets: public announcement at the time of the conclusion of the RPT report from an independent third party assessing if the RPT is on market terms and is fair and reasonable from the perspective of the (minority) shareholders RPTs that represent more than 5% of a company's assets: submission to a shareholder vote (related parties excluded from the vote) no conclusion of the RPT before shareholder approval or conclusion under the condition of shareholder approval High degree of flexibility: for RPTs of 1%: no report in case of prior shareholder approval of clearly defined types of recurrent RPTs with identified related party in a period of 12 months for RPTs of 5%: no vote in case of prior shareholder approval of clearly defined types of recurrent RPTs with identified related party in a period of 12 months for RPTs of 1% and 5%: no requirement in case of transactions between a company and a wholly owned subsidiary

Related party transactions – expected impact of the proposal A public announcement of RPTs would: provide shareholders with timely, more and better information, which facilitates monitoring and engagement of RPTs enable stakeholders (employee representatives, monitoring bodies) to take legal action against problematic RPTs prevent boards from entering into doubtful RPTs & prevent unjustified RPTs A shareholder vote on RPTs would: enable shareholders to reject RPTs they consider not to be in their interest protect minority shareholders since related parties are excluded from the vote prevent boards from entering into problematic RPTs & prevent unjustified RPTs stimulate companies to reflect on RPTs & to engage with shareholders A public announcement & a shareholder vote would: provide an effective barrier against unjustified transfer of value have a positive effect on the competitiveness, sustainability of EU companies and cross-border investment

Final provisions Commission empowered to adopt implementing acts : transmission of information concerning shareholder identification transmission of information in the holding chain facilitation of the exercise of shareholder rights standardised presentation of information to be included in the remuneration report Commission assisted by the European Securities Committee, application of the examination procedure within the meaning of Article 5 of Regulation(EU) 182/2011 Requirement to put in place appropriate penalties for infringements, to be notified to the Commission Transposition request for explanatory documents (recital 24)

RECOMMENDATION ON 'COMPLY OR EXPLAIN'

Recommendation on 'comply or explain' 'Comply or explain' – key feature of EU corporate governance It may be good corporate governance not to follow corporate governance codes' recommendation, but explanations are crucial Companies' explanations for departures from codes still often not appropriate Commission Recommendation 2014/208/EU on the quality of corporate governance reporting ( ‘comply or explain’ ) Guidance to improve the overall quality of corporate governance statements and specifically of explanations for deviations

Recommendation on 'comply or explain' Explanations should : explain in which manner the company deviates describe reasons describe the decision process specify the timing describe measure taken instead of compliance Need for efficient monitoring at national level, within the existing monitoring arrangements Member States should inform the Commission of measures taken in accordance with the Recommendation by 13 April 2015

Thank you!