Long-term investor engagement and sustainable corporate governance hampered by antiquated, fragmented and costly processes in the hands of financial intermediaries
Despite the great importance the EU attaches to corporate governance (the ‘G' part of ‘ESG’) and to shareholder engagement, there are still considerable obstacles to the exercise of shareholder voting rights; namely the right to participate in the annual general meetings (AGMs) of listed companies and/or to cast a vote. This is especially true cross-border within the European Union, where a combination of long, complex, and antiquated financial intermediary chains and omnibus accounts make it difficult and costly for shareholders to exercise those fundamental rights. Furthermore, the multiplicity of financial intermediaries involved implies a scattered liability across the chain. Despite an EU legal framework and processes that sought to facilitate shareholder engagement, numerous are the instances where shareholders voting rights are impaired or denied. Yet, with the second Shareholder Rights Directive (SRD II or SRD2) and its Implementing Regulation in force since September 2020, EU legislators sought to remove obstacles to the participation of shareholders in such intermediated corporate governance processes, notably by seeking to improve the transmission of information through the traditional, long-established, but deficient, intermediated systems.
The 2021 general meeting season was the first one completed under the full application of the new European rules that are supposed to pave the way towards greater ‘shareholder engagement’. That same year, BETTER FINANCE, together with DSW, and its other member organisations, undertook a first research project to determine whether intermediaries are ‘SRD II-ready’ and, more specifically, to what extent shareholders would really be able to fully exercise their rights by attending and/or voting at AGMs when they held stocks of companies domiciled in a different EU Member State than that of their bank or broker. To this end, an EU-wide mystery shopping exercise was carried out to obtain a representative sample of respondents and identify, in practice, what real obstacles these European retail investors/shareholders face when trying to enforce their voting rights. In 2022 we renewed and pushed our analysis further, notably by including an exclusive case study focused on neobrokers’ services related to shareholders’ voting rights.
Like last year, the results of the research project remain disastrous in 2022. One reason for this was that the implementation of ‘ISO 20022’ – the only SRD II-compliant message format –, has been further postponed to November 2023. Since there is no common language used by intermediaries yet, processing of general meeting-related messages will remain prone to errors for at least one more general meeting “season”, hampering the exercise of shareholders’ fundamental rights at general meetings abroad within the EU “Single Market”. In 2021, a prominent obstacle identified was the high fees charged to investors (by the bank or broker) as 50% of those surveyed had to pay to vote at AGMs (ranging from EUR 20 to 250). In 2022, for the first time, we identified costs exceeding EUR 250 per AGM, plus expensive new voting service packages, and the number of cases where shareholders had to pay increased to 64%.
In 2022, less than half (a mere 48%) of the respondents were ultimately able to vote at AGMs, an improvement of only 14 percentage points on last year's survey results. Yet, 63% of participants had first to get the information on the AGM by themselves when this should have been provided to them automatically. Likewise, 63% of shareholders perceive the voting process, if completed, as difficult – and yet many of them are deemed knowledgeable, since we recorded many second-time participations.
This 2022 study therefore reiterates the need to make the cross-border voting process simpler, more effective, and less costly for shareholders across the EU. The more easily and cheaply shareholders can vote at their companies' general meetings and the more securely they can exercise their voting rights abroad, the stronger they will be in their engagement with management and the better they will be able to contribute to enhancing companies’ governance and by that support the sustainable transition of European companies.
BETTER FINANCE & DSW reiterate the urgent need to improve the shareholder engagement process by:
- Ensuring that costs and charges no longer discriminate against shareholder voting within the single market.
- Enforcing intermediaries’ compliance with the provisions and spirit of both the Treaty of Rome and of the SRD II
- Improving cost transparency pre-general meeting
- Fostering direct communication between issuers and shareholders, also by embracing new technologies
- Fostering proxy voting through independent shareholder representatives
- Improving the (intermediated) shareholder engagement process by:
- Abolishing barriers to shareholder engagement
- Tackling problems resulting from complex, fragmented and antiquated voting chains, including omnibus accounts
- Harmonising and simplifying documentation requirements for shareholders related to engagement processes (as planned in the European Commission’s Capital Market Union Action Plan of 2020);
- Discarding the requirement to give advance notice for participation in a general meeting;
- Standardised EU-wide form to prove shareownership at record date and proxy form should be introduced in national and English language.
- Harmonising record dates and deadlines
- Promptly introducing an EU-wide definition of ‘shareholder’
- Reviewing vote confirmation provisions
- Clarifying the actor(s) responsible for supervising shareholders’ rights-related processes and harmonising their supervisory and regulatory control regime.
- Investigating the involvement of neobrokers in the shareholder engagement process
- Enforcing compliance by entrants (FinTech, such as neobrokers), and addressing the implications of their business model on shareholders' rights (i.e. securities lending issues).
Therefore, in the 21st century, it is time for Europe to embrace modernisation and new technologies such as blockchain/DLT to enable and foster direct communication between issuers and shareholders. The General Meetings and the shareholders’ (as co-owners) voting processes are not financial ones per se, and non-financial providers should be allowed to step in. In addition, European citizens should be directly enabled to exercise their voting rights (either by themselves or by giving a proxy – for example to independent investor associations) as co-owners of EU companies, and also via their smartphones.