SRD II: ‘Across Europe, retail investors are starting to have a voice,’ says Broadridge manager

Mar 15, 2022
IR Magazine research shows small caps most likely to be held by retail investors

Europe’s Shareholder Rights Directive II (SRD II) has mandated the provision of proxy voting services by intermediaries to both institutional and retail investors, a move that is paving the way for retail investors to have a greater say in the governance of the companies they hold, according to a recent Broadridge white paper on retail voting in Europe.

Demi Derem, Broadridge
Demi Derem, Broadridge

Globally, small-cap companies have a much higher proportion of individual shareholders, at an average of 24 percent, compared with 11 percent at large and mid-caps and 10 percent at mega-cap companies, according to the latest Global and Regional IR Practice Report from IR Magazine. Regionally, however, it is North American companies that see the greatest retail holding, at 17 percent.

But Demi Derem, bank broker-dealer general manager at Broadridge, tells IR Magazine that the landscape in Europe is shifting.

Broadridge’s white paper, produced in collaboration with Firebrand Research, describes the US as a ‘frontrunner’ for European markets in terms of retail engagement but also says ‘European markets have never been more accessible to retail investors’, noting a number of ongoing reviews that are all seeking to reduce barriers to retail equity investment in the region. Part of this, says Broadridge, includes an EU goal of increasing engagement as well as ownership.

Derem says one big barrier has already been removed – in theory. Under the EU’s wide-ranging SRD II regulation, brokers, banks, wealth managers and other intermediaries must now offer voting capabilities to retail investors, something that wasn’t always available to individuals.

‘Management and the board want shareholders to endorse and support their plans and their remuneration, so institutional investors that represent large holdings have been the focus of their attention historically,’ Derem says. ‘Now that barriers to entry have been lifted for the retail voice and these investors are going to be provided the opportunity to express their concerns, I expect that to change.’

Voting as a draw

Derem explains that the vote return of retail investors varies from 2 percent to 35 percent across different markets. ‘There’s a difference between how retail investors in one market act and behave compared with other markets,’ he says. ‘What that tells you is that in certain markets, retail investors are really focused on issues around ESG accountability and calling up perceived unjustified or illogical decisions from a board of directors. In other markets there’s less of an appetite for that, partially due to cultural attitudes.’

But he argues that rather than being an issue of access, the difference between markets is ‘largely around the definition of ‘shareholder’ that drives the compliance obligations of financial intermediaries – such as banks, brokers and wealth managers – in different markets.

‘The shift I’m expecting is that some intermediaries will start to see retail voting as a differentiator and say, I’m going to offer this to my retail investors and promote awareness of what I’ve done. There are already a number of firms that have done that, but most haven’t yet promoted access to retail investors as there are costs involved.’

A social revolution

One key point Derem makes is about what drives retail investors: they buy and vote with their hearts and are heavily influenced by social media. This is something he predicts could come together in a new type of social media movement in the future.

At the moment, the impact of retail investors’ holdings versus their influence is small but Derem says things could change dramatically in the coming decade. ‘What will really tip the balance is when you have an ESG social network of like-minded individuals, who collectively communicate and share concerns to gather momentum for a certain outcome,’ he predicts.

Such a network would mean ‘the ownership of equity [would no longer be] a representation of the influence [retail investors] could have on the institutional world through social media sentiment being promoted in a certain way.’

So what should companies be doing to prepare? Derem says issuers should already be communicating their strategy – and their ESG credentials – to existing and potential retail investors, noting again the influence of social media on this group.

‘Accountability – social responsibility – is really being played out at the AGM now,’ he says.

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