This article describes and analyses some of the proposed changes resulting from the implementation of the second Shareholder Rights Directive and concludes with recommendations for publicly listed companies in Finland relating to director’s remuneration and transparency.
By: Hanna-Mari Manninen and Tuomas Tiensuu
Firm: Dittmar & Indrenius
The EU’s Second Shareholder Rights Directive ((EU) 2017/828, ‘SHRD II’ or the ‘Directive’) is expected to be implemented in Finland on 10 June 2019. New provisions amending the Securities Markets Act, the Companies Act and the Act on Investment Services will concern publicly listed companies, institutional investors, asset managers and proxy advisors. The following highlights some of the key changes brought into Finnish legislation. In addition, publicly listed companies are recommended to keep an eye on the Finnish Corporate Governance Code (‘CG Code’) that will also be amended during 2019.
What’s the proposal about?
SHRD II amends the contents of EU’s First Shareholder Rights Directive 2007/36/EC, which was released a few months before the financial crisis of 2007 began to unfold. Like other directives based on EU’s Financial Services Action Plan, the Directive is designed to address systemic risks identified by European regulatory authorities in the aftermath of the financial crisis. These issues included, among others, excessive short-term risk-taking by corporate managers and an inadequate level of monitoring by institutional investors and asset managers. The Directive attempts to address these risks by introducing new rules meant to encourage long-term shareholder engagement and to enhance transparency between companies and investors.
The subject matter of the proposal is divisible into four main themes: director remuneration, related party transactions, identification of shareholders and transmission of information and transparency requirements for institutional investors, asset managers and proxy advisors. Here we will examine the provisions relating to director remuneration and transparency.
1. Director remuneration
New provisions governing decision-making on director remuneration and related reporting will be included in the Companies Act and the Securities Markets Act. The provisions are meant to promote transparency by providing a new means of expression of shareholder voice on executive remuneration, and hence to improve the efficiency of corporate governance.
Listed companies will need to establish a remuneration policy as regards the members of the board of directors, managing director and the supervisory board (if applicable). The policy will need to be submitted to an advisory vote by the shareholders’ meeting at the time of every material change and, in any case, at least every four years. A temporary derogation from the remuneration policy will be possible if necessary, to serve the long-term interests and sustainability of the company.
Listed companies will also need to draw up a remuneration report that provides a comprehensive overview of realised remuneration. The report will need to describe all benefits awarded or due to individual directors during the previous financial year and must be submitted to an advisory vote by the shareholders’ meeting.
The remuneration policy and report will need to be publicly disclosed no later than three weeks before they are submitted to the shareholders’ meeting for approval. If the remuneration policy is not approved, the company may continue to pay remuneration to its directors in accordance with its existing practices or approved existing policy, whichever is applicable. However, in this case, the company must submit a revised policy for approval at the following shareholders’ meeting.
We believe that the new rules will promote transparency as intended and may lead to increased consideration of shareholders’ interests. Increased expenses will admittedly be the flip side of the new, heavier compliance requirements. ‘Say-on-pay’ is not a complete novelty in Finland. Under the CG Code, listed companies have been required to publicly disclose a remuneration statement that describes how directors, the managing director and other executives are remunerated. However, the idea that the company’s remuneration system in its entirety would be put to a shareholder vote is a new one. For now, only the chosen level of director remuneration has been on the agenda of shareholder meetings.
Amendments to the CG Code have been planned to ensure compliance with the new statutory reporting requirements.
We believe that the new rules will promote transparency as intended and may lead to increased consideration of shareholders’ interests. Increased expenses will admittedly be the flip side of the new, heavier compliance requirements.
2. Transparency requirements for institutional investors, asset managers and proxy advisors
Institutional investors and asset managers will be required to develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement with their investment strategy. In practice, the requirement will apply to Finnish life insurance companies as well as most pension and insurance funds.
The engagement policy should describe how institutional investors and asset managers:
- monitor investee companies on relevant matters, including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance;
- conduct dialogues with investee companies;
- exercise voting rights and other rights attached to shares;
- cooperate with other shareholders;
- communicate with relevant stakeholders of the investee companies; and
- manage actual and potential conflicts of interests in relation to their engagement.
The activities of proxy advisors (such as ISS and Glass, Lewis & Co) will also be regulated correspondingly by the Securities Markets Act. Proxy advisors will be required to develop and publicly disclose a code of conduct. The code of conduct must describe how proxy advisors prepare their research, advice and voting recommendations. Further, proxy advisors are required to prevent and manage any actual or potential conflicts of interests and disclose them to clients without delay. This is of large practical importance because the recommendations of proxy advisors significantly impact the decision-making of foreign shareholders, who owned approximately 43 percent of the market capitalisation of all Finnish listed companies (12/2017).
Common denominators of the transparency requirements are public disclosure, the ‘comply or explain’ principle, and the applicable sanctions regime. Institutional investors, asset managers and proxy advisors respectively must publicly disclose the above-mentioned documents free of charge on their websites and update them annually. Non-compliance with one or more of the requirements is permitted only for good cause and the reasons for non-compliance must be publicly disclosed. If the rules are violated, an administrative fee may apply as a sanction.
In consideration of the subset of proposed changes described here, Finnish publicly listed companies should:
- Justify the chosen form and level of director remuneration better than previously at AGMs held from 1 January 2020 onwards; and
- Comply with disclosure requirements on director remuneration.
Moreover, institutional investors, asset managers and proxy advisors operating in Finland should:
- Develop an engagement policy and/or code of conduct; and
- Comply with related disclosure requirements.
A full analysis of the impact of implementation of the second Shareholder Rights Directive in Finland is available here.