EU revised shareholder rights directive and its impacts on general meetings

It is unusual for government to encourage activism, yet the EU’s newly revised Shareholder Rights Directive does just that. Once the directive is implemented across 27 member states later in 2019, it is likely that institutional shareholders will seek to influence company managements far more actively, including on topics related to corporate social responsibility (CSR).

The directive aims to make shareholders press listed companies more assertively to improve long-term performance, and gives them more rights, including a say on directors’ pay. General meetings are, naturally, the key forum for investors to assert influence, and the directive makes clear their responsibility for both financial and non-financial performance related to CSR.

While investor activism on CSR is on the rise, it is far from widespread in Europe. In the oil and gas sector, Royal Dutch Shell has recently been forced by investors to commit to reducing carbon issues and others are under pressure to follow suit. But shareholder activism like this is still far from the norm, and it is rare for CSR-related shareholder resolutions to be presented at annual general meetings.

In fact, both companies and their investors must adapt their approach to general meetings and to CSR-related topics if they are to comply with the revised directive and follow the rising tide of activism. The general meeting must not only address CSR topics directly but also there should be an ongoing dialogue between assets owners and their representatives on one side, and companies on the other.

“Shareholder general meetings are the ideal forum for promoting sustainable and positive impact investments,” says Emmanuelle Choukroun, head of business development for asset owners at Société Generale Securities Services. “But is the way to do this so obvious? And how realistic are our expectations that dialogue between investors and companies will yield tangible benefits for CSR policies?”

Are general meetings an effective forum?

For general meetings to become effective forums for shareholders to challenge and influence CSR strategy, something has to change. Currently, CSR issues might be discussed but investors have few ways of influencing strategy. They can vote against approving the company accounts or the renewal of an auditor. But this is an inexact way of addressing CSR concerns.

In the UK, advertising company WPP and insurer Aviva have requested by consultative votes on their CSR reports, but this is unusual. It would be more effective for shareholders to adopt the practice that is common in the US of putting forward resolutions that can be withdrawn if they are addressed.

Thierry Bogaty, head of Amundi's responsible investment team, said: “It’s not always easy to address ESG issues through resolutions in a lot of countries. But nevertheless, at Amundi, ESG performance will be systematically taken into account in its shareholder dialogue with issuers and its voting policies.”

Understanding what is material

If shareholder activism is to encourage more responsible long-term corporate behavior, there must be an ongoing effective dialogue between shareholders and companies.  But there are barriers to this that must be overcome. One of them is the split between ESG teams and portfolio managers at asset management companies. Typically, the former contact a company to discuss non-financial matters and the latter do so separately to talk about financial issues.

Additionally, CSR encompasses a huge volume of information relating to environmental and social issues. This means that companies must have an ongoing dialogue with shareholders to develop a mutual understanding. Capgemini, for example, already holds investor meetings specifically to discuss CSR. Jean-Baptiste Massignon, general secretary of Capgemini, explains: “As CSR is a key component of our corporate policy, it is now a crucial item of our permanent dialogue with our shareholders.”

Reaching a full understanding of a company’s CSR position requires extensive knowledge of its business. An asset manager’s CSR analysts must know what is ‘material’ for a company and recognize that there is always a trade off between ESG benefits and costs.

From dialogue to effective engagement

But when dialogue ends and engagement to influence change begins, it may be necessary to collaborate with other shareholders. Filing of shareholder resolutions might be common practice in the US, but this has never happened in France for cultural reasons. If this is to change then shareholders will need to club together to be taken seriously, using a platform such as the PRI Collaboration Platform.

It seems likely that soon CSR activism will become common at European general meetings. But for this to become effective, asset owners and their representatives must improve their understanding of CSR materiality and become comfortable with the currently controversial concept of filing investor resolutions.