Shareholder Rights Directive

This regulatory update is for audit leaders across all sectors, not just financial services.

The Shareholder Rights Directive II marks a step change in governance. It is not only a regulatory compliance issue but one of transparency and accountability that all organisations need to uphold.

In response to corporate failures, it is about enhancing stewardship.

Audit leaders need to be aware of how this impacts their organisation:

  • Financial Services - compliance risk, operational impact on activities of asset owners/ managers
  • Private Sector - strategic risk, corporate governance impact, ability to attract investors
  • Charities - reputation risk through investment association and lack of stewardship activity
  • Public Sector - reputation risk through investment association and lack of stewardship activity

Background

The Shareholder Rights Directive (SRD)II has been effective since June 2019.

The previous version was revised by the EU following learnings from the financial crisis to encourage more effective stewardship and long-term investment decision-making. The UK has been progressive in its approach to stewardship and many elements are already common practice in the UK. The revisions also took into account the 2018 Kingman Review.

The FCA produced rules, PS19/13, to ensure compliance SRD II.

 

Why was the change necessary?

The stewardship role of investors in good corporate governance has increased in importance following numerous corporate failures. The pursuit of profit at any cost is no longer tolerated.

Speaking in March 2019, Edwin Schooling Latter of the FCA, attributed the “unprecedented interest in stewardship” to the concern “in how companies and investment firms manage environmental, social and governance risks.”

SRD II builds on existing good practices, aiming to address issues such as:

  • Excessive/Unjustified pay, the misalignment of reward and performance
  • Short-termism, pressure to produce results that risk long-term performance/sustainability
  • Impeded decisions, poor engagement by shareholders fails to support good decision-making
  • Strategic clarity, investors…