European Shareholder Rights Directive takes steps to curb corporate excesses, but governance gaps remain

ShareAction and Global Witness are calling on MEPs to vote in favour of amendments to the Shareholder Rights Directive on 8th July, which could improve the transparency of businesses to their investors, and help prevent tax avoidance and environmental and human rights abuses.

Camilla de Ste Croix, Senior Policy Officer at ShareAction said: “By supporting these amendments, Parliamentarians will send a clear signal to citizens and companies alike that Europe is taking steps to curb corporate abuse and intends to strengthen the rights of shareholders to hold the companies they invest in to account.”

The proposed amendments to the Directive will call on institutional investors and asset managers to publicly disclose an engagement policy including details of how they vote, how they monitor investee companies including on reduction of social and environmental risks and how they collaborate with other investors. The amendments also strengthen requirements for company and investor disclosure to the public. On tax, amendments will require investee companies to report on their taxes and profits on a country-by-country basis.

Disappointingly though, recent negotiations have significantly watered down the text agreed by the parliamentary Legal Affairs Committee in May. The amendments to the Directive now only provide that shareholders have an advisory, rather than a binding ‘say on pay’ in relation to company director remuneration. Furthermore, disclosure of investor engagement policies with companies will now apply on a ‘comply or explain’ rather than mandatory basis. Such a model has been implemented in the UK since the introduction of the Stewardship Code in 2010. Whilst this has improved investor engagement with companies, critics point out that many financial institutions are neither complying with the Code, nor offering explanations, due to the lack of clear sanctions.

The problems which needed to have been addressed by the Directive’s amendments are serious. Companies in Europe are shifting their profits to tax havens and avoiding paying their fair share of tax; costing the EU an estimated €1 trillion every year. Meanwhile European financial institutions, like banks and pension funds, are significant funders of large-scale projects overseas which are resulting in severe human rights abuses, land grabbing, water pollution, deforestation and natural habitat destruction. This is despite their having established environmental, social and governance policies. Wilmar, a Singaporean company with shares held by a range of European banks and pension funds for example, was recently exposed as causing land grabbing and deforestation in Nigeria, breaking its own 2013 commitment to “zero deforestation”. The failure of such pledges from agribusiness companies and of their investors, to prevent such abuses, highlights the need for binding European legislation.

Megan MacInnes, Land Advisor at Global Witness, said: “Tax avoidance, land grabbing and high executive pay are symptomatic of the short-termism dominating Europe’s financial sector, which contributed to the previous financial crisis and still have not yet been adequately addressed. It’s essential that before the Directive is finalised the corporate governance gaps are addressed, for example through the introduction of clear sanctions if investors fail to meet disclosure and engagement requirements.”

Read more about the the comply or explain issue here.