Brian Bollen asks if the SRD II directive has been worth all the inconvenience and investment expense imposed upon the investment management and investment services industry in the interests of improving the overall investment experience
Most readers will likely have their own strongly held opinions on the issue of the Shareholder Rights Directive II (SRD II).
The majority of those interviewed for the purpose of this article cited SRD II as a key factor in the proxy voting equation at some point in their learned conversation, if only because it has contributed to the growth of proxy voting volumes.
“SRD II represents quite an undertaking for everyone in the custodian chain,” says Thilo Derenbach, head of European custody products at Clearstream. “It adds more requirements for many, impacts a wider range of market participants, but also encourages the emergence of new providers and introduces different message formats and forms.”
Further complicating matters is that, as things stand, compliance with SRD II remains largely optional rather than mandatory as directives issued by the European Commission are not necessarily translated into member state law consistently. This is expressed in the marketplace on occasion by the mantra: Europe is not a single country.
“Market practices are very different across Europe,” says Pierre Colladon, senior adviser, public affairs and regulation at Societe Generale Securities Services (SGSS), reinforcing this philosophical and technical reality.
The intent behind SRD II was right, states Clearstream’s Derenbach. It aims at improving transparency, proximity, harmonisation and shareholder engagement. “It has triggered a review of existing processes and an improvement in the industry ecosystem,” he says. “Information for shareholders is now better though there remains much room for improvement in the market harmonisation context. SRD II was not ideally designed from that point of view.”
The impression that came across to this writer was that the people who arguably stood to benefit most from SRD II were intended to be retail investors.
And as more than one interviewee put it, retail might account for 85 per cent of investor numbers but it only accounts for about 15 per cent of overall market capitalisation.
With this in mind, was it worth it?
Retail investors
Demi Derem, general manager of international investor communication solutions at Broadridge, comments: “What we see is the rise of the retail investor’s voice.”
“We live in interesting times. Issuers have typically focused on knowing who their institutional investors are so that they can engage them to obtain the endorsements they require at general meetings.”
“In the EU, where a shareholder is defined as the beneficial owner, they can now obtain more granular information on who these beneficial owners are, on demand within a 24-hour period.”
“In this changed environment however, with retail investors now also having the ability to vote, issuers may find that ignoring the retail voice can quickly cause them unexpected and unwelcome consequences.”
Derem adds. “The size of the retail investor holding in an issuer is less important than their ability to cause embarrassment. An outspoken celebrity, a trendsetter or influencer via social media can play a disproportionate role in shaping sentiment.
“You can control the mindset of the crowd today in a way that was not possible before, and every single vote counts, even if that vote represents a tiny position,” he says.
“Retail investors have the same rights as institutional investors,” says SGSS’ Colladon. Or, as David Chase Lopes, managing director, Europe, Middle East and Africa, at DF King, part of Link Group, puts it: “Consider the Roman way. If you are a Roman citizen, you have rights. Civis Romanus sum.”
Demi Derem cites as one example of his thesis an instance in which an unidentified company stated its intention to pay directors an unjustified bonus. “This went viral through social media and institutional investors changed their vote. Is this a good thing or a bad thing? As Father Jack of Irish situation comedy Father Ted might say: “That would be an ecumenical matter.”
For the record, during the research and writing of this feature, WealthSeed, a digital application for easy investing and personal finance in Poland launched by Fair Place Finance S.A., announced it will use Broadridge’s new shareholder disclosure hub to support its new obligations under SRD II. The hub is described in the formal announcement as an industry-wide digital solution that uses the latest application platform interface — and blockchain-based technologies, to address SRD II’s new shareholder disclosure requirements and provide data security for WealthSeed’s business in Poland and other European markets over time.
“SRD II has pushed forward corporate governance standards across Europe, while transforming market transparency through a secure and efficient disclosure process,” said Micha? Antoniak, chief legal and compliance officer, WealthSeed and Fair Place Finance.
Rudi Kuntz, managing director, head of global proxy distribution at ISS, notes that alongside the expectation from institutional investors for proxy voting services through their custodian banks, regulatory requirements place additional pressure on intermediaries to proactively offer proxy voting services to their underlying clients.
Bringing together various elements of the overarching theme, he further notes that the updated SRD II mandates that all intermediaries, whose clients hold equities listed in the EU, notify their clients of upcoming shareholder meetings and facilitate any proxy voting instruction returned to them by their clients. As the directive applies to all intermediaries, local custodian banks, retail banks and wealth managers who may not have offered proxy voting services in the past to their clients must do so now.
A question of transparency
One of the largest challenges faced by intermediaries and investors globally has been transparency through the proxy voting chain; specifically the transparency of vote confirmation from issuer to intermediary to investor. The tendency of institutional investors to actively vote a high volume of shareholder meetings for companies within their investment portfolio has increased in recent years.
This increase in the importance and frequency of active voting has carried with it the need from investors to confirm their vote counted at the shareholder meeting. Given the various parties involved in the chain and the differences in how investor shares and accounts may be structured by each party, confirmation of successful vote processing to the underlying investor has proven challenging.
Greater alignment across markets and the intermediary chain are needed to ensure increased transparency and efficiency. While SRD II has clear objectives for intermediaries, the interpretation of the directive per market and per intermediary may differ. This has resulted in an initial lack of alignment in approach to voting across markets and the intermediary chain.
Even though the volume of intermediaries offering voting services to investors is growing and the ability to receive vote confirmation in certain markets now exists, there are many issuers and participants within the intermediary chain who are still in the process of aligning standards and practices with their own interpretation of the directive.
Issuers, intermediaries, investors, and service providers all play a role in the global proxy voting landscape. In the EU, SRD II has placed requirements on all constituents of the proxy voting chain, from issuers to investors. All parties must adhere to the updated standards set forth in the directive, with the requirements set forth for intermediaries constituting a potential major shift in how certain many provide services to their clients. The volume of participants in the market is now much larger as institutions which have typically not offered solutions in the past, such as wealth managers and retail banks, are now required to provide proxy voting solutions to their underlying clients. Given the directive was transposed into local law by each individual member state and each intermediary may define their requirements to adhere to SRD II differently, alignment in standards across the proxy voting chain is still to be achieved.
What next, then? Clear market alignment and standards applied by all participants in the chain can assist in resolving challenges with transparency and the timeliness for distribution of information, says ISS’ Kuntz. The use of external providers can help alleviate many challenges faced by intermediaries in not only notifying their clients of events, but also in distributing any vote instructions returned and obtaining transparency through the chain.
“We can expect to see further collaboration across market constituents and service providers as market standards begin to align and intermediaries continue to evolve their current service models,” Kuntz says.
“The updated standards introduced by SRD II resulted in significant development requirements for intermediaries. While the deadline for intermediaries to implement services and adhere to the directive was September 2020, many market constituents are still in the process of updating their services to their clients. Service providers have devoted significant time and resources to ensure solutions adhere to the directive and, given the ongoing alignment across markets and potential differing interpretation across members of the proxy chain, further development and enhancements to solutions will continue,” he concludes.
In the meantime, though, we have to ask again: was SRD II worth it, to enhance the perceived rights of investors accounting for (at most) 20 per cent of total market capitalisation? Not for those of a utilitarian philosophical mindset, perhaps.
