European Commission proposes measures to enhance transparency and to improve shareholder engagement and corporate governance reporting

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09 Apr, 2014

The European Commission has today announced a package to improve corporate governance for listed companies within the European Union (EU). The proposals aim to encourage long-term shareholder engagement and to improve corporate governance reporting by listed companies.

The package includes:

  • A proposal to revise the Shareholder Rights Directive (Directive 2007/36/EC) (link to European Commission website).
  • A Recommendation on the quality of corporate governance reporting (‘comply or explain principle’) (“the Recommendation”). 

Proposal to revise the Shareholder Rights Directive (Directive 2007/36/EC) 

The European Commission explains that the proposal to revise the Shareholder Rights Directive has been made to address “corporate governance shortcomings relating to listed companies and their boards, shareholders (institutional investors and asset managers), intermediaries and proxy advisors”.  The European Commission identify that such “shortcomings include” insufficient engagement of institutional investors and asset managers and insufficient linkage between pay and performance of directors.  

The European Commission highlight that “long term shareholder engagement would contribute to a significant improvement in the performance, profitability and efficiency with which the investor engages” and in turn this will “contribute to an increase in long-term financing of the EU economy, something that the European Commission has recently adopted a package of measures on.  

Key aspects of the proposals (extracts of text taken from the Directive) to revise the Shareholder Rights Directive include:  

  • Improving engagement of institutional investors and asset managers.  Institutional investors and asset managers will be required to develop a policy on shareholder engagement.  They will be required to disclose to the public their engagement policy, how it has been implemented and the results.  Where institutional investors or asset managers decide not to develop an engagement policy and disclose the results they shall give a clear and reasoned explanation as to why this is the case.  

These duties are similar to those in the FRC’s Stewardship Code (link to FRC website); however, only asset managers are subject to a regulatory requirement to comply or explain against this Code, whereas the proposed directive will also apply to institutional investors and proxy advisors. 


  • Strengthening the link between pay and performance for directors.  The European Commission highlight that “today, there is an insufficient link between management pay and performance and this encourages harmful short-term tendencies”.  The proposal aims at creating more transparency on remuneration policy and the actual remuneration awarded to directors and creating a better link between pay and performance of directors by improving shareholder oversight of directors’ remuneration.  The proposal does not regulate the level of remuneration and leaves decisions on this to companies and their shareholders.  Listed companies will be required to publish information on the remuneration policy and remuneration of individual directors.  The remuneration policy must be submitted to shareholders at least every three years and, among other things, must explain how the pay and conditions of employees were taken into account when setting the policy on directors' remuneration by explaining the ratio between the average remuneration of directors and the average remuneration of full-time employees of the company and why this ratio is appropriate.  Shareholders will have the right to approve the remuneration policy and to vote on the remuneration report which describes how the remuneration policy has been applied in the last year. 

The transparency and voting requirements are similar to those already in place for UK quoted companies. Unlike the UK position, there are no detailed requirements for disclosure, although the European Commission may develop these once the Directive comes into force. 

Recommendation on the quality of corporate governance reporting 

The European Commission comment that there are “shortcomings in the way the ‘comply or explain’ principle is applied” by European listed companies.  Specifically they highlight that “companies often do not provide appropriate explanations when they depart from corporate governance codes”.  

The Recommendation mainly aims to “provide guidance on how listed companies should explain their departures from the recommendations of the relevant corporate governance codes”.  It will not be legally binding but is intended to “improve the overall quality of corporate governance statements published by companies”. 

The revisions made to the UK Corporate Governance Code in 2012 already require an enhanced quality of ‘explanation’ 

Additionally a new Directive has been proposed which aims to make it easier and less costly to set up companies across the EU especially in relation to subsidiary companies. 

The Association of Chartered Certified Accountants (ACCA) has welcomed the package of measures that they say will “contribute to competitiveness and long-term performance”.  However they comment that “different economic environments in Europe must be acknowledged and companies have to be provided flexibility by allowing them to manage their corporate governance according to their specialities in each member state”.  The Institute of Chartered Accountants in England and Wales (ICAEW) warn that "individual regulatory measures are unlikely to be effective in isolation" to address short-termism and a "co-ordinated plan" will be required to help promote long-term shareholder engagement.

The Financial Reporting Council (FRC) comment that the Recommendation on the quality of corporate governance reporting will “help to enshrine good corporate governance throughout Europe”.  They further comment: 

The FRC advocates the concept of comply or explain as a key feature of European corporate governance structures and one which the FRC champions through the UK Corporate Governance Code.  A European corporate governance framework will assist companies in how they report and help investors better to understand the companies in which they invest. 

The proposals to revise the shareholder Directive must now be submitted to the Council and European Parliament for their consideration and final adoption.  Once adopted the revised Directive will need to be implemented into the laws of all EU Member States.  EU Member States have until spring 2015 to notify the European Commission of measures they have taken in relation to the Recommendation. 

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