Europe proposes greater transparency - again

The European Commission has proposed a Directive to increase transparency for shareholders. The Directive is part of the 2012 Corporate Governance Action Plan.

The Directive addresses:

  • Increasing the level and quality of engagement of asset owners and asset managers with their investee companies
  • Creating a better link between the pay and performance of company directors
  • Enhancing the transparency and shareholder oversight of related party transactions
  • Ensuring the reliability and quality of advice of proxy advisors
  • Facilitating the transmission of cross-border information (including voting) across the investment chain

Of these, remuneration will cause a big splash for corporates in Member States where transparency and voting arrangements are lagging behind. Alongside some challenging disclosure requirements - including for instance the ratio between the average pay of the directors and the average pay of employees – there is a new ‘say on pay’ voting regime which requires the future remuneration policy to be put to a shareholder vote at least every three years.

The Directive also includes some very specific requirements around the activities and transparency of institutional investors and asset managers. And, in a move that may surprise some, the Directive addresses proxy advisers when that industry was relatively recently the subject of a probe by the European Securities and Markets Authority which resulted in a recommendation for a code of conduct that is still a work in progress.

The wider Corporate Governance Action Plan was focused on enhancing transparency in areas important to shareholders and encouraging greater engagement between them and their investee companies. Both of these aims were part of the wider post-crisis agenda to focus on the sustainability of EU companies, set out in detail in the 2013 Green Paper –“Long term financing of the European economy”.

The Directive is not likely to progress much further in 2014 due to the European elections and change in Commission. “But there is still an opportunity for stakeholders to influence the final outcome of these proposals once the European processes kick back in” urged John Patterson, corporate governance specialist at PwC. “There is always a risk of unintended consequences when legislative proposals are as prescriptive as some aspects of this proposed Directive”.