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JURI approves proposals to enhance transparency between pay and performance and improve shareholder engagement in listed companies

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10 May 2015

The Legal Affairs Committee of the European Parliament (JURI), which is the committee responsible for changes in the legal requirements around company reporting, has approved new draft legislation which, among other things, aims to enhance transparency between pay and performance and improve shareholder engagement in listed companies.

The proposals amend the Shareholder Rights Directive (Directive 2007/36/EC) (link to European Commission website) and were originally announced by the European Commission in April 2014

They 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 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.    

Additional proposals to improve tax transparency are also included which would require “large undertakings and public-interest entities” to publish information, country by country, on profit or loss before tax, taxes on profit or loss, and public subsidies received.  Finally, to promote long-term shareholding, the rules include a requirement for EU member states to introduce mechanisms to reward long-term shareholders.

JURI approved the draft legislation by 13 votes to 10.  Agreement must now be reached for a first reading in Parliament.

Click here for the European Parliament press release (link to European Parliament website).

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