Shareholder Rights Directive
Corporate governance scandals across the globe and recent questions raised by the media about transparency and accountability have compelled regulators to take a close look at ownership and shareholder rights.
The influence, for example, of major overseas conglomerates on European financial institutions is under scrutiny in the region.
The European regulatory community has also cracked down on corporate tax avoidance in the wake of the revelations from the Panama Papers in 2016.
In this light, the European Council adopted the new Shareholder Rights Directive (SRD) in June 2017, with a view to encouraging shareholders’ engagement in listed companies in Europe and improving the transparency of related processes, including proxy voting. SRD provides an update to the 2007 version of the directive and adds requirements related to remuneration of directors, identification of shareholders, facilitation of exercise of shareholder rights, transmission of information, and transparency for institutional investors, asset managers, and proxy advisors.
The majority of SRD must be translated into national law by individual European member states by June 2019. The directive is extensive and is likely to entail some significant and costly changes related to process reforms and transparency requirements.
It will affect issuers, asset managers, custodians, central securities depositories and a range of other intermediaries and service providers.
As with any significant change, it will present both challenges and opportunities for the constituent parties involved. Among many other changes, intermediaries such as custodians will be required to transmit general meeting agendas and voting information ‘without delay’, to shareholders in a standardised format—potentially challenging current workflows and time-sensitive scalability.
Blockchain
Those involved in the shareholder value chain, such as custodians, have been quick to explore and understand the impact of emerging technologies such as blockchain on their business. Emerging technologies are largely viewed as both enablers and a threat. Most understand, however, that doing more of the same is not a viable strategy for the future. There is demand for change in the industry and new technology offers the fastest route to that change.
Broadridge, working with three leading financial firms, successfully completed a pilot that employs a blockchain technology to enhance global proxy vote transparency and analytics. The pilot provided transparency by adapting distributed ledger technology (DLT) capabilities to provide daily insight into vote progress throughout the issuer’s proxy voting period, from meeting announcement data to the annual general meeting (AGM). The application ensures role-based access to voting data through the use of cryptography and smart contract technology. The pilot was run in parallel to the AGM, with blockchain utilised to produce a ‘shadow’ digital register of the proxy voting taking place in the traditional model.
As part of our roadmap, we continue to expand the proxy minimum viable product’s functionality and deepen the use of DLT among market participants. While global proxy processing is an obvious place to start, it is clear that learnings from earlier pilots can be easily transferred to other areas of the corporate action universe in the future.
Shared service models
The opportunity to improve cost and income ratios, respond to regulatory change—the SRD being a current example—and drive efficiency through shared services is generally well understood by custody and securities services providers. Proxy processing, not just at the global level but also locally, is well-suited to a shared service model.
Taking advantage of a managed, mutualised and global best-in-class service—a shared service model that provides an end-to-end proxy solution at a local market level, covering agenda sourcing and translation, distribution of meeting announcements and vote execution—enables custodians to reduce the cost and complexity of their local operations and respond to the pace and depth of regulatory change, while streamlining efficiency and reinforcing the firm’s market reputation.
At the same time, it also enables the custodians to capture the benefits of transformative technology innovation through investments applied centrally by the shared service provider.
