Shareholder Rights Directive: roundtable discussion

For a piece of EU legislation, the Shareholder Rights Directive (SRD) has caused a fair amount of controversy. Some view it as an activists’ charter, given the new powers it hands to shareholders. To address this concern and others arising from the new rules, IR magazine convened a roundtable in London, featuring issuers, members of the buy side, voting experts and the general manager of the UK’s IR Society.

The panelists expected shareholder participation to rise at shareholder meetings across the EU as a result of the SRD’s implementation. They didn’t foresee a concurrent increase in levels of shareholder activism, however. 

‘I don’t think this is going to result in an increase in the number of activist investors,’ commented Mirza Baig, associate director at F&C Investments. ‘It will increase the number of active, engaged investors. There has been a degree of concern throughout Europe that it will increase companies’ exposure to activist investors. We hope the message gets back clearly to issuers that this is not something to be concerned or worried about.’

Of more concern to the roundtable participants was the fact that shareblocking – where shares are blocked from trading to allow voting rights to be exercised – is continuing despite the implementation of the directive, which was supposed to stamp out the practice, back in August. Many shareholders choose to forgo voting rights in order to be able to continue trading.

Custodian banks that have proved slow to change their practices are to blame, according to certain panelists. ‘You can remove the right of companies to block shares in law, but that doesn’t necessarily mean custodians are geared up to it,’ explained Frank Curtiss, head of corporate governance at UK pension fund manager Railpen Investments. ‘Some continue to block voting simply because it’s administratively convenient for them.’

Justin Chapman, global head of process management at custodian bank Northern Trust, was contacted after the roundtable for comment. He says there is no local market regulation governing the blocking practices adopted by the custodians.

‘Northern Trust would always look to use any market legislation to assist the client in its governance activities, but it’s up to the institutional investor that appoints the custodian to make sure the service it provides includes best practices in line with the markets it serves,’ Chapman advises. ‘If not, the investor’s governance or investment strategies will suffer.’

The investors represented on the panel were interested in voting all their shares; this is not always feasible, as not all custodians offer proxy services. ‘The larger custodians all provide a proxy service for investors,’ said James O’Regan, general manager of international investor communication solutions at Broadridge Financial Solutions. ‘Some of the smaller custodians may or may not.’

Cross-border expansion
Despite the practices of some smaller custodians, however, the roundtable panelists were confident the implementation of the directive would facilitate more cross-border voting in Europe.

‘Over the last few years we have seen the positive effects of removing blocking,’ noted Baig. ‘Germany and France have removed the requirements for blocking and, if you look at studies, there has been an increase in votes cast. For the first time F&C has been able to vote in these markets, as we have a blanket policy of not voting where there is a risk of our shares being blocked.’

‘The removal of the impediments to voting is critical so that people will exercise their corporate governance rights,’ added O’Regan. ‘Finland recently abolished blocking, and we’ve seen an increase in voting there as a result. While they’re mechanical in nature, some of the provisions in the SRD will absolutely help investors exercise their corporate governance rights.’