The newly updated European Shareholder Rights Directive (“SRD II”) (2017/828/EU) aims to promote long-term shareholder engagement at companies listed in EU-regulated markets. These changes were prompted by an almost decade-long conversation that arose in the wake of the 2008 global financial crisis. Since then, many market actors have flagged shareholder short-termism as a key contributor to the crisis, with long-term engagement conversely seen as a bulwark against similar failures in the future.
As is the case for all directives issued by the European Commission (EC), each European Member State must “transpose” the text into their local legal codes within a specified deadline.
As the June 10, 2019 transposition deadline for SRD II has now passed, this blog post will look at one of the most impactful governance areas mandated by the directive, namely directors’ remuneration, and how a selection of Member States have transposed the remuneration-related requirements.* We consider this a key feature of SRD II, as many markets had previously not regulated shareholders’ right to vote on board and executive pay.
Key Remuneration Features
SRD II includes the following concrete policy provisions concerning directors’ remuneration:
- Shareholders should have the right to cast their vote (as a binding or advisory decision) on the remuneration policy for members of the board and at a minimum, the CEO and deputy CEO. The vote should be held at least every four years or when an important change to the policy is introduced.
- The remuneration policy should present a breakdown of fixed and variable compensation and should disclose the metrics (financial and non-financial) to which performance-based remuneration is linked and how these align with the company’s business strategy. In addition, the vesting schedule of the share-based remuneration should be provided.
- Shareholders should also have the right to vote, as an advisory decision, on the company’s remuneration report – essentially, how the remuneration policy is implemented. The report should provide a clear explanation of the remuneration awarded to each director, broken down by component. Information on clawback policies and the number of shares and share options awarded is also required. Small and medium-sized companies can be omitted from this vote and can just hold a discussion at the AGM about the remuneration report.
Shareholders’ Say on Pay
Generally, Europe’s five largest markets (France, Germany, Italy, Spain and UK) will not experience significant changes to their say on pay regimes following the transposition of SRD II, as each of these markets already have some form of say on pay.
Since 2016, France’s “Sapin 2” law has mandated shareholder votes for the remuneration policy and report. Both documents are submitted for voting on an annual basis, through a binding outcome.
The UK and Spain maintained previous provisions which required a shareholder vote on both the remuneration policy and report. The vote for the former is made through a binding decision, while the latter with an advisory outcome.
In Italy, the SRD II converted the say on pay vote on the remuneration policy from an annual advisory vote to a triennial mandatory one, while introducing an advisory vote on the remuneration report.
In Germany, following the implementation of SRD II, the votes on both the remuneration report and policy will be carried through an advisory decision. However, the country makes use of the exception for small- and medium-sized companies, which are entitled to hold a non-voting discussion at the AGM in lieu of an actual vote on the remuneration report.
Romania and Poland, both of which lacked say-on-pay provisions prior to the transposition of SRD II, will allow for a binding shareholder vote for the remuneration policy and an advisory vote for the remuneration report.
The Netherlands adopted a similar regime, with an ex-ante and ex-post shareholder vote on remuneration, the former having a binding outcome and the latter as an advisory decision. Like Germany, the country also allows small- and medium-sized companies to hold a discussion on the remuneration report instead of a formal vote.
Furthermore, following the implementation of SRD II both Finland and Austria gives shareholders the right to vote on the remuneration policy and report, as advisory decisions. Both countries previously lacked specific requirements on the approval of executive remuneration by shareholders.
Finally, Belgium required an advisory shareholder vote only on the remuneration report (presented on an aggregate basis for executive directors) prior to SRD II. The updated directive introduced an advisory vote on the remuneration policy, while the remuneration report will have to disclose the remuneration awarded on an individual basis, including for executive directors.
2020 Proxy Season
Next year’s proxy season will mark the first binding votes on companies’ remuneration policies in multiple markets, whereas in 2021 the first remuneration reports based on these policies will be submitted for shareholder vote. Regardless of whether next year’s say on pay votes are binding or non-binding, if shareholders reject proposed remuneration policies, companies are now required to address shareholder dissent and propose revised policies at the following AGM. SRD II also requires companies to disclose how past shareholder votes on remuneration reports were taken into consideration. The requirements to revise policies and disclose how past votes were considered provides shareholders with an unprecedented set of tools through which to voice their concerns and raise awareness. While it remains to be seen how effectively these say on pay mechanisms will contribute to the creation of long-term shareholder value, they will, nonetheless, enable shareholders to exert influence on pay decisions in the highly disputed field of aligning pay with performance.
*Note that for some of the Member States the comment period for the transposition is still open. Therefore, changes to the proposed local rules and regulations might occur.