COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement and COMMISSION RECOMMENDATION on the quality of corporate governance reporting ('comply or explain')
Date: 2014-04-09
Institutions: European Commission
Subjects: access to information, administrative transparency, board of directors, corporate governance, management audit, protection of shareholders, remuneration of work, shareholder, trade intermediary













EUR-Lex - 52014SC0127 - EN











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52014SC0127

COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement and COMMISSION RECOMMENDATION on the quality of corporate governance reporting ('comply or explain') /* SWD/2014/0127 final  */









TABLE OF CONTENT
1.       Introduction.. 6
2.       Procedural Issues and
Consultation of Interested Parties. 6
2.1.         External expertise and
consultation of interested parties. 6
2.2.         Procedural issues. 8
3.       Policy context.. 9
3.1.         Nature and size of the
equity market. 9
3.2.         Regulatory framework.. 13
3.2.1.      Existing
framework. 13
3.2.2.      Ongoing
developments. 14
4.       Problem definition.. 15
4.1.         Background.. 15
4.2.         Insufficient
engagement of institutional investors and asset managers. 17
4.3.         Insufficient link
between pay and performance of directors. 25
4.4.         Lack of shareholder
oversight on related party transactions. 29
4.5.         Doubts on the
reliability of the advice of proxy advisors. 32
4.6.         Obstacles to the
exercise of shareholder rights. 34
4.6.1.      Identification
of shareholders. 34
4.6.2.      Cross-border
transmission of information by intermediaries, including exercise of
shareholder rights. 35
4.6.3.      Price
discrimination by intermediaries for cross-border transmission of information,
including exercise of shareholder rights  36
4.7.         Insufficient quality
of corporate governance information.. 37
4.8.         Which stakeholders are
affected and how?. 38
5.       Baseline scenario, the
EU's right to act and justification.. 42
5.1.         Baseline scenario.. 42
6.       EU’s right to act,
subsidiarity and proportionality, respect for fundamental rights. 44
7.       Objectives. 45
8.       Policy Options, Impact
Analysis and choice of preferred option.. 46
8.1.         Increase the level of
engagement of institutional investors and asset managers. 46
8.1.1.      Description. 46
8.1.2.      Analysis
of impacts and choice of preferred option. 47
8.2.         Create a better link
between pay and performance. 51
8.2.1.      Description. 51
8.2.1.      Analysis
of impacts and choice of preferred option. 52
8.3.         Transparency and
oversight on related party transactions. 57
8.3.1.      Description. 57
8.3.2.      Analysis
of impacts and choice of preferred option. 58
8.4.         Transparency of proxy
advisors. 62
8.4.1.      Description. 62
8.4.2.      Analysis
of impacts and choice of preferred option. 62
8.5.         Shareholder
identification, transmission of information and instructions by intermediaries. 65
8.5.1.      Description. 65
8.5.2.      Analysis
of impacts and choice of preferred option. 65
8.6.         Improving the quality
of corporate governance reporting.. 73
8.6.1.      Analysis
of impacts and choice of preferred option. 74
9.       Overall impacts of the
package.. 76
10.     Monitoring and
Evaluation.. 78
Annex I. Glossary.. 80
Annex II. List of main EU measures in the area of
corporate governance.. 82
Annex III. Overview of responses to consultations
specifically devoted to corporate governance   83
Annex IV. Summary of ad hoc discussion with
stakeholders. 88
Annex V. Main findings of the external Study on
Monitoring and Enforcement Practices in Corporate Governance in the Member
States. 93
Annex VI. Overview of situation in MemberStates. 94
Annex VII. Additional information on policy context,
problems and drivers. 104
Annex IX. Impact on competitiveness of EU companies. 115
Annex XI. List of references. 118
 Executive Summary Sheet 
 Impact assessment on Proposal for a Directive on encouraging shareholder engagement amending Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies and proposal for a Recommendation on enhancing the corporate governance framework 
 A. Need for action 
 Why? What is the problem being addressed? 
 This impact assessment analyses certain problems in the area of corporate governance of European listed companies. Five main problems have been identified: 1)  Insufficient shareholder engagement 2) Insufficient link between pay and performance of directors 3) Lack of shareholder oversight on related party transactions 4) Doubts on the reliability of the advice of proxy advisors, 5) Difficult and costly exercise of rights flowing from shares,  6) Insufficient quality of corporate governance information. These problems lead to suboptimal corporate governance and a risk of suboptimal and/or excessively short-term focused managerial decisions which result in lost potential for better financial performance of listed companies and lost potential for cross-border investment. 
 What is this initiative expected to achieve? 
 This initiative should improve the governance and (financial) performance of EU listed companies, contribute to enhancing the long-term financing of companies through equity markets and improve the conditions for cross-border equity investments. This objective should be reached by increasing the level of engagement of institutional investors and asset managers with their investee companies; by creating a better link between pay and performance of company directors; by enhancing the transparency and shareholder oversight on related party transactions; ensuring the reliability and quality of advice of proxy advisors, by facilitating the exercise of existing rights flowing from shares by shareholders and by an improvement of the quality of information on corporate governance provided by companies. 
 What is the value added of action at the EU level? 
 Considering the growing importance of cross-border equity investments (some 44% of the total market capitalisation of EU listed companies is held by foreign investors), there is need for targeted EU intervention to address the problems described above. Only a limited number of Member States has undertaken action or is considering doing so, and these actions cannot bring effective solutions to these problems. Action from Member States alone is likely to result in different sets of rules creating an uneven level playing field, which may undermine or create new obstacles to the good functioning of the internal market. 
 B. Solutions 
 What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why? 
 A variety of options has been considered to solve the problems, including a no policy change scenario, soft law/recommendation and different degrees of legislative actions. The following preferred options have been identified: 1) Shareholder engagement  – transparency of institutional investors and asset managers’ as regards their voting and engagement policy and investment strategies, together with certain aspects of asset management mandates and their implementation; 2) Remuneration – requiring disclosure of the remuneration policy and individual remunerations and submitting it to shareholder vote; 3) Related party transactions – requiring additional transparency and an independent opinion on more important transactions and submitting the most substantial transactions to shareholder approval. 4) Proxy advisors – requiring disclosure on conflicts of interests and methodology, 5) Facilitation of the exercise of existing rights of shareholders – obligation for intermediaries keeping securities accounts to facilitate shareholder identification and the exercise of rights flowing from shares 6) Corporate governance reporting – recommendation providing guidance on the quality of reports   
 Who supports which option? 
 1) Institutional investors and asset managers’ – support by shareholders, institutional investors and companies. 2) Remuneration –supported by shareholders, institutional investors, asset managers and proxy advisors, but also companies, provided that the concrete measures remain flexible; 3) Related party transactions – support by shareholders especially minority shareholders and asset managers; 4) Proxy advisors – support by shareholders, institutional investors, asset managers and companies; 5) Facilitation of the exercise of existing rights of shareholders – support by shareholders and companies; 6) Corporate governance reporting – shareholders, asset managers, institutional investors and companies. 
 C. Impacts of the preferred option 
 What are the benefits of the preferred option (if any, otherwise main ones)?                                      
 The benefits of the proposed package of options are difficult to quantify. The package will increase the level of transparency  in the equity investment chain, which will contribute to a realignment of interests among actors and a better focus on the long-term interests of final beneficiaries in investment strategies. Moreover, it should give shareholders more effective tools to oversee directors. Proxy advisors’ services could gain on reliability. The proposed package is expected to have positive economic effects, as it contributes to an improvement of corporate governance of listed companies and their long-term sustainability. This in turn could have indirect positive social impacts on employees and consumer, i.e. in this case, ultimate beneficiaries of assets institutional investment. No specific environmental benefits are expected. 
 What are the costs of the preferred option (if any, otherwise main ones)?                                       
 The exact costs of the proposed package of options are difficult to quantify. Most  options imply improved transparency and disclosure which will create limited additional costs. These costs would be incurred by different stakeholders – listed companies, institutional investors and asset managers,  proxy advisors and intermediaries keeping securities accounts. The main costs for companies would be related to the disclosure of the remuneration policy and the remuneration report as well as of the most significant related party transactions and its external evaluation. Only negligible cost would be linked to a shareholder vote on these issues, mostly to take place during general meetings. Companies will also have to pay if they want to benefit from the services of shareholder identification. Some limited costs could also be linked to the improved corporate governance reporting. Costs for institutional investors and asset managers would be linked to the publication of the voting and engagement policies and voting records. Shareholders may see a rise in the costs for an improved service of facilitation of shareholder rights. Some limited costs for proxy advisors would be linked to the publication of their policy regarding conflicts of interests and the methodology for the preparation of advice. There should be no negative social or environmental impacts. 
 How will businesses, SMEs and micro-enterprises be affected? 
 The proposed measures would only apply to listed companies. This means that only listed SMEs would be affected and micro-enterprises will not be covered. In principle, there should be no general derogatory regime for the listed SMEs as the proposed rules should be flexible so as to allow companies to adapt them to their situation, but derogations from certain specific requirements could be envisaged. The costs and burden should be limited. There should be a positive impact on the sustainability of listed companies in general, including SMEs. 
 Will there be significant impacts on national budgets and administrations? 
 There should be no significant impact on national budgets and administration. The latter would be required to transpose the proposed measures into national law. 
 Will there be other significant impacts? 
 Disclosure of individual remuneration might have an impact on fundamental rights (right to protection of personal data of the directors concerned). The package might have an impact on the competitiveness of  EU companies, as it might slightly increase their costs and burden, while also enhancing their long-term sustainability. 
 D. Follow up 
 When will the policy be reviewed? 
 The Commission will monitor the implementation of the proposed measures and evaluate their effectiveness. It will consider the need for amendments on the basis of the assessment done five years after the expiry of the implementation period. 
1.           Introduction
The past years have highlighted certain corporate
governance shortcomings in European listed companies. These shortcomings relate
to different actors in the corporate governance of companies: companies’ and
their boards, shareholders (institutional investors and asset managers),
intermediaries and proxy advisors. Companies and their boards have paid
remuneration to their directors that was insufficiently linked to performance, concluded
related party transactions of which it was not clear whether it was in the best
interest of the company, including from a long-term perspective, and have
provided corporate governance information that lacked quality. Institutional
investors and asset managers have, generally speaking, not sufficiently engaged
with companies they invest in, while the advice from proxy advisors to
institutional investors and asset managers gave rise to doubts on its quality
and reliability, thereby compromising the voting and engagement of shareholders.
Finally, intermediaries have, especially in a cross-border context, not always
enabled shareholders to exercise their rights in an effective and efficient manner.
On the basis of consultations and research conducted,
the Commission adopted on 12 December 2012 an Action Plan on European company
law and corporate governance[1]
outlining the initiatives to be taken in the coming years in order to modernise
the current framework. The main objectives in the area of corporate governance
are enhancing shareholder engagement and improving transparency between
companies and investors.
This impact assessment considers possible
ways to achieve the objectives set out in the Action Plan. 
2.           Procedural Issues and
Consultation of Interested Parties 
2.1.        External expertise and consultation
of interested parties
In
its reflection on the functioning of the European corporate governance
framework the Commission has benefited from the advice of the European
Corporate Governance Forum.[2]
In addition, an external study on the monitoring and enforcement of corporate
governance rules in Member States was performed in 2009.[3]
A study performed by an external contractor
on directors’ duties and liabilities  evaluates current rules on related party
transactions.[4]
Following the financial crisis, the Commission undertook a thorough
review of the current corporate governance framework and held two public
consultations in line with Commission standards. First, the 2010 Green Paper on
corporate governance in financial institutions and remuneration policies[5] discussed the role of
shareholders and in particular the lack of shareholder engagement. A majority
of respondents was in favour of mandatory disclosure of voting policies and
records by institutional investors.[6]
As regards listed companies in general, the
2011 Green Paper on the EU corporate governance framework contained a chapter on
the role of shareholders.[7]
Respondents[8]
were in favour of increasing transparency as regards executive remuneration, of
granting shareholders a say on pay and of improving the informative quality of
corporate governance reports. They also supported measures regarding monitoring
of asset managers by asset owners, more transparency from proxy advisors and
reinforcing current rules on related party transactions.[9] Although
there was an overrepresentation of replies from the UK[10], the results of the
consultations would have been essentially the same if there were no replies
from the UK.[11]
The low response of public authorities[12]
can be explained by the fact that only a low level of shares of European listed
companies are held by public authorities in general, namely 4%.[13]
As regards the issue of shareholder
identification, transmission of information and facilitation of shareholder
rights two public consultations containing questions on these issues were held
in line with Commission standards. The responses and two extensive summaries
are published on the internet[14].
The first consultation in 2009 aimed to collect information on the need to
improve the EU-wide framework for securities holding and disposition and how
future EU legislation could address the issues identified[15]. The
Commission got 99 responses. The majority supported the legislative action based
on their own experience of the difficulties (but support was heterogeneous and
dependent on the respondents' field of business or nationality). All factual
information provided is fully integrated in this report, especially with regard
to the need for evidence to justify EU action. A second consultation[16]
was conducted in 2011 on principles for harmonising EU securities law.
The Commission sent a questionnaire to the
Company Law Experts Group[17],
which is composed of Member States representatives, on the Member State framework on the issues analysed in this Impact assessment. Moreover, it conducted
a number of technical discussions with experts from groups of stakeholders (in
particular pension funds, asset managers, issuer companies, retail investors,
employees, proxy advisors, stock exchanges and regulators).[18] In addition, corporate
governance issues were debated during an academic conference on the Action Plan
on Company Law and Corporate Governance organised by the European Corporate
Governance Institute (ECGI).[19]
Finally, some corporate governance problems have been discussed in the Green
Paper on the long-term financing of the European economy[20] which has initiated a broad
debate about how to foster the supply of long-term financing and how to improve
and diversify the system of financial intermediation for long-term investment
in Europe.
2.2.        Procedural issues
The impact assessment was prepared by the
Directorate-General for Internal Market and Services.[21] An Inter-Service
Steering Group (ISSG) was set up to follow progress and feed in views from
other services of the Commission, including Directorates-General for Enterprise
and Industry, Employment, Social Affairs and Inclusion, Taxation and Customs
Union, Economic and Financial Affairs, Justice, Competition, Environment, Legal
Service and Secretariat General and the European Data Protection Supervisor.
The steering group met three times, in February, April and May 2013.
This report was submitted to the Impact
Assessment Board, which discussed it on 17 July 2013 and issued an opinion. The
comments received from the Impact Assessment Board resulted in the following
changes in the revised impact assessment that was finalised on 10 October 2013.
First, to the problem definition additional
data were added to identify more clearly the size of the problems. Moreover,
the links between the different problems identified in the problem definition
were clarified, as were the links with the existing legislative framework and
the on-going work of the Commission. With regard to the analysis of impacts,
evidence was added to demonstrate the impact of the options. Where possible
this evidence is quantitative, but stakeholder opinions were also reported in
more details, in order to give insight into the opinions of the different
stakeholder groups. Moreover, the potential impact in terms of administrative
burden was strengthened. Finally, the effectiveness of the package of measures
to solve the problems in the problem description was further analysed.
It should be noted that the part of the
impact assessment on shareholder identification, transmission of information
and facilitation of the exercise of shareholder rights was initially dealt with
in a separate context and was integrated only in the final impact assessment
report. For that part, the impact assessment procedures were also followed and
the text was cleared by the Impact Assessment Board in April 2013. 
3.           Policy context
3.1.        Nature and size of the equity market 
The European rules on corporate governance
apply only to ‘listed’ companies, which are companies that issue securities
admitted to trading on a regulated market situated or operating in a Member State.[22] It is considered that
companies that do not raise money on capital markets should not be subject to
the same requirements as listed companies, as there is no need to ensure
protection of external investors.[23]
There are currently some 10400 listed
companies in the EU The total market capitalisation of EU listed companies is a
bit more than 8 trillion euro.[24]
The size of the market in Member States is very different. The UK stock market
is the largest with a market capitalisation of some 2,4 trillion euro after
which come the French stock market with a market cap of some 1,4 trillion euro,
the German stock market with 1,2 trillion euro and the Spanish stock market
some 780 billion. These four Member States cover 70% of total market
capitalisation in the EU and 66% of all listed companies.
The ownership structures in the EU are
diverse – while in the UK, Ireland and the Netherlands dispersed ownership of
the capital is predominant, in continental Europe the concentrated ownership
model is the leading scheme, although there is a clear tendency towards the
dominance of dispersed ownership in some Member States.[25] For example, only 25%
of large cap companies have large block holders in Germany.[26] In the dispersed
ownership system, there is a “separation of ownership and control” with share
ownership being dispersed among many institutional and retail shareholders and
no shareholders typically holding significant blocks.[27] In the concentrated
ownership system, a shareholder, a family group, or a small number of shareholders
hold a significant block of shares and often have the power to appoint representatives
on the companies’ boards, thus obtaining a certain level of control over its
management.[28]
Listed companies in Europe have a limited
number of retail shareholders: only 11% of the market value of shares was owned
by individuals in 2011. The largest category of shareholders is foreign
investors with 44% of the market value. 23% of the value of shares is owned by
institutional investors such as pension funds, insurers and other financial
intermediary companies, mutual funds and collective investment companies; 16%
by non-financial companies (limited liability companies, foundations etc.), 4%
by general government and 3% by banks.[29]
The share of foreign investors in total
market capitalisation in the different Member States is depicted is shown in
the below figure. For the four Member States with the largest market
capitalisation and the largest number of listed companies foreign investors
hold between 40 and 50% of the market capitalisation of shares. This percentage
of foreign ownership over has gone up from 10% in 1975 to 44% in 2011.[30]
A large part of the foreign investors are
foreign institutional investors and asset managers. Over the last decades the
ownership structure of listed companies in most OECD countries has moved from
direct ownership to intermediary ownership.[31]
According to the OECD, in 2010 institutional investors and asset managers held
nearly half of the shares of listed companies in the world, which would mean
that this percentage is considerably higher for shares in free float.[32] Institutional
investors’ share in European companies’ capital has increased substantially,
which makes them a major force on the stock market; although their importance
varies across markets (for example it attains only 6% in Romania but as much as 50% in Germany and Ireland).[33]
In total, EU pension funds and insurers have invested more than 4 trillion Euros
in equities,[34]
which equals some 57% of the total market capitalisation of EU listed
companies. 
As regards the term ‘institutional
investors’, for the purposes of this impact assessment, it will be used to
designate asset owners. Asset owners hold assets on behalf of ultimate
investors who bear the economic risks of the investment. The most typical of
these are pension funds, insurance companies, banks and sovereign wealth funds.
According to InsuranceEurope total assets under management of insurers are some
8.5 trillion Euro[35],
of which almost 33% is invested in shares.[36]
PensionsEurope stated that it represents some 3.5 trillion in assets.[37] Many asset owners manage
assets in-house, but they increasingly rely on the expertise of external asset
managers. An example is that in 2009 approximately 93% of Dutch pension assets were
invested externally with one or more asset managers, while this percentage was
less than 50% in 2001.[38]
The Kay report notes that decisions on voting and acquisition and disposal of
shares are most often exercised by asset managers.[39]
Asset managers manage the assets of asset owners and households. They can do so either
through investment funds (the most important being Undertakings
for Collective Investment in Transferable Securities (UCITS)[40], or through discretionary mandates. Most assets managed by asset
managers are done so by means of discretionary mandates[41], namely 53%.[42] European asset managers
had in 2012 some 14 trillion euro of assets under management. 29% of these are
invested in equity. 75% of the assets under management came from institutional
investors. From this 75%, 42% came from insurers and 33% of pension funds,
which suggest that a very large majority of assets of pension funds and more
than half of those of insurance companies are managed by asset managers. Most
of these assets are managed in a limited number of Member States, namely in the
 UK (36%), France (20%) and Germany (10%). For assets managed under
discretionary mandate the UK’s market share is 47%, for France 19%, the Netherland and Italy 6% and 4% for Germany.[43]
Proxy advisors are important advisors to institutional investors and asset
managers, since they provide voting advice to shareholders, which is
particularly important for institutional investors and asset managers that hold
shares in hundreds or thousands of companies.[44]
A simplified structure of the equity
(share) investment chain is described in the schema below. It is important to
note that there is no uniform EU definition of a shareholder, so Member States
laws define who is entitled to exercise shareholder rights. In case of the use
of asset managers generally the asset owners define the general framework for
the investment strategy and asset allocation and the terms of the mandate also
define who will be entitled to vote as a shareholder.[45] In practice it is
increasingly the asset manager and almost never final beneficiaries, such as future
pensioners, insurance policy holders or bank account holders who decide on how
the vote should be cast.
Figure 1:
schema of the equity investment chain
Shares are held and transferred through a
complex, sophisticated and international network of intermediaries. Intermediaries
hold securities in an account for someone else, e.g. when an issuer decides to
issue securities to the public (investors) it usually hires an intermediary,
e.g. investment banking firm. The newly issued securities are then deposited in
a Central Securities Depository (CSD) or an International Central Security
Depository (ICSD). Banks can also hold and trade securities on behalf of others
as intermediaries or on their own books as an investor. Intermediaries, though,
do more than just hold the securities for investors. Generally, intermediaries
act on investors’ instructions to carry out transactions. They channel the
rights flowing from the share to the investor (e.g. dividends) and, in cases
they are instructed to do so, they exercise the rights attached to the share on
behalf of the investor (e.g. voting).
3.2.        Regulatory framework
3.2.1.     Existing framework
The EU corporate governance framework is a
combination of legislative rules and soft law, in particular corporate
governance codes.[46]
While corporate governance codes are adopted at
national level, Directive 2006/46/EC promotes their application by requiring
that listed companies refer in their corporate governance statement to a code
and that they report on their application of that code on a ‘comply or explain’
basis.[47]
This approach gives companies an important degree of flexibility in their
corporate governance, since these national codes are not only adapted to the
different national corporate governance models, but in addition companies can
deviate from their provisions.
However, some key corporate governance
aspects have been harmonised at EU level through directives. Most relevant in
this respect is Directive 2007/36/EC on the exercise of certain rights of shareholders
in listed companies, which contains rules on information provided to
shareholders before the general meeting and on the participation and voting in
such meetings. According to the Directive a shareholder is a legal or natural
person that is recognised as a shareholder under the law of the Member State
where the listed company has its registered office (Article 2 and 1(2) of the
Directive).Other important acts are the Transparency Directive[48] which requires issuers
of listed securities to provide to investors financial information and information
on major holdings, and the Takeover Bids Directive[49] that provides for common
rules for takeover bids, in particular as regards the protection of minority
shareholders in cases when control of a company changes hands. Moreover,
Directive 2012/30/EU on the capital of companies addresses shareholders’
situation in case of capital increase or reduction. Finally, the Commission has adopted a number of recommendations[50], which deal in
particular with the role of non-executive directors and the composition of
board committees as well as the remuneration of directors.[51]
Stricter corporate governance rules apply
to financial institutions. In particular, the new Capital Requirements
Directive and Regulation (CRD IV package)[52],
which will replace the existing rules as of 1st January 2014,
constitutes a major step towards creating a sounder and safer financial system.
In the area of corporate governance, the new provisions concern in particular
the composition of boards, their functioning and their role in risk oversight
and strategy in order to improve the effectiveness of risk oversight by boards.
The status and the independence of the risk management function are also
enhanced. Finally, the package strengthens the existing rules on remuneration,
by setting a ratio between the variable and the fixed component of
remuneration.
A number of specific EU acts regulate institutional
investors and asset managers. In particular, as regards the activity of asset
owners, Solvency I[53]
and II rules are applicable to insurance companies, including life insurance.
Solvency II is currently under revision to improve the conditions for insurers
to invest in the long-term.[54]
Directive 2003/41/EC on the activities and supervision of
institutions for occupational retirement provision (IORP)[55] regulates
pension funds. As regards asset managers, the UCITS Directive[56],
currently under revision[57] and Directive 2011/61/EU on
Alternative Investment Fund Managers (AIFM)[58] contain rules applicable to management
through certain funds, while the Markets in Financial Instruments Directive (MIFID)
(Directive
2004/39/EC)[59], currently also under
revision[60],
is applicable to management under discretionary mandates. More details on the
provisions relevant for corporate governance can be found in annex XII.
There is no international harmonisation in
the field of corporate governance, however the OECD
Principles on Corporate Governance[61]
of 2004 are considered as a major benchmark in this field.
As regards rules applicable to
intermediaries keeping securities accounts for investors and transmit
information between companies and investors, the MIFID Directive referred to
above is relevant. Central Securities depositories are currently regulated by
national law but will be subject to EU regulation in the future (see 2012
Proposal for a Regulation on Central Securities Depositories, currently under
negotiation with the Council and Parliament[62])

3.2.2.     Ongoing developments
Among the current initiatives, the revision
of the Transparency Directive[63]
has impact on shareholders, as it modifies the regime of notification of major
holdings of voting rights. The recent Commission proposal on disclosure of
non-financial and diversity information by certain large companies and groups[64] aims at increasing EU companies’ transparency and performance on environmental
and social matters, but also on risk management and diversity in company boards,
and, therefore, to contribute to sustainable  growth and employment. The
Commission also proposed a
regulation on European Long-term Investment Funds (ELTIF).
The ELTIF allow investors to put money into companies and projects that need
long-term capital. It is aimed at investment fund managers who want to offer
long-term investment opportunities to institutional and private investors
across Europe, e.g. in infrastructure projects. However, this proposal targets
long-term investments in non-listed companies.[65]

The so called "Omnibus II"
Directive was adopted at the end of 2013 and would amend the solvency regime
for insurance companies. The Omnibus Directive includes a new so called
"long-term guarantees package" that will support overcoming
regulatory distortions to long-term business and investments triggered by
short-term volatility in financial markets. This should improve the conditions
for insurance companies to invest in the long-term.  The new regime would
apply from January 2016.
Furthermore, the Commission has recently
presented a follow-up to the Green paper on long-term financing of the European
economy, which includes a number of measures to improve the regulatory
framework and incentives for long-term investments. It proposes a transparency  measure
to incentivise institutional investors and asset managers to take better
account of environmental, sustainability and governance information (ESG) in
their investment decisions. This measure would be complementary to this
proposal as it would also aim at incentivising institutional investors and
asset managers to take better account of the medium to long-term interests of
their end-beneficiaries and of the companies they invest in when defining and
executing investment strategies and awarding asset management mandates. It
would thus also contribute to more responsible share-ownership.
 
4.           Problem definition
4.1.        Background
This impact assessment analyses a number of
problems in the area of corporate governance. Corporate governance is
traditionally defined as a set of relationships between a company’s management,
its board, shareholders and other stakeholders.[66] One of the key issues
in corporate governance is the separation between ownership and control and the
resulting principal-agent relationship between shareholders and directors. Classic principal-agent theory demonstrates
that the fact that shareholders (“principals”) delegate
management of the company to the
directors (“agents”) leads to information asymmetries[67] and leaves room for these directors to act sometimes more in their own self-interest than in the interest of the shareholders. This could lead to suboptimal corporate governance and suboptimal
financial performance of companies.
Good corporate governance is in the first
place a responsibility of listed companies themselves, but there is, like in
any governance system, a need for checks and balances. If not, directors ‘mark
their own homework’, which often leads to non-objective assessments of their
own performance. Shareholders, in particular institutional investors and asset
managers, but also other stakeholders like employees, play a key role in
providing, from their different perspectives, checks and balances. The precise
checks and balances differ however from Member State to Member State.
Changes in the equity investment chain, in
particular the increased role of intermediaries and increased cross-border
shareholdings, have exacerbated the existing principal-agent problem and have
contributed to a lack of shareholder engagement with investee companies and
have made the identification of the shareholder, the transmission of
information to shareholders and the exercise of shareholder rights more
difficult and costly. These changes in the equity investment chain make it
necessary to look beyond the mere relation between shareholders and the listed
company.
Shareholder engagement is generally
understood as the active monitoring of companies by shareholders, engaging in a
constructive dialogue with the company’s board, and using shareholder rights, including
voting, to improve the governance and financial performance of the company. Whether
the corporate governance of listed companies’ functions well depends, amongst
others, on the engagement of shareholders and use of their rights. 
In this regard the question is whether institutional investors and
asset managers are interested at all to engage on corporate governance of
listed companies: Stakeholders indicate that asset managers are, on purpose or
not, often not incentivised by the asset owner to engage on companies’
corporate governance and performance. Moreover, such engagement is more
difficult with large number of (cross-border) holdings, since it presupposes
more detailed knowledge on (all) these companies and their corporate
governance, but also on the national corporate governance framework applicable
to them. However,  Member States’ themselves have given shareholders important
tools, for instance on remuneration and on related party transactions, and
shareholders themselves ask for more tools.[68]
Finally, there is a growing group of investors that opt for an engagement investment
strategy. Academic studies underpin these decisions, since they demonstrate
that such strategies lead to increased performance of both investments and of
investee companies.
The extent to which institutional investors and asset managers will
decide to engage more with investee companies depends, amongst others, on the costs and difficulties attached to it. Consultations and
extensive informal meetings have shown the Commission in which areas
stakeholders see particular problems and where they cannot, due to a lack of
comprehensive, clear and comparable information or proportionate tools, engage.
Secondly, whether institutional investors and asset managers will engage
depends on whether they have incentives to do so. For
this reason this impact assessment looks at two distinct, but closely related
problems: on the one hand the lack of good and reliable information on EU
companies’ corporate governance and proportionate tools to engage and on the
other hand the lack of engagement of institutional investors and asset
managers.
The problems, their drivers and their consequences are depicted
graphically in the following problem tree and are described more in detail
below. It should be noted that the analysis of the problems described below is
constrained by the scarcity of statistical data and by the confidential nature
of some of the evidence available to the Commission.
Figure 2:
problem tree
Drivers                                                                 Problems                                                            Consequences
                                                                
                                                                
4.2.        Insufficient
engagement of institutional investors and asset managers
The financial crisis has revealed that
shareholder control did not function properly in the financial sector. Rather
than ensuring good decision-taking by companies, shareholders, especially
institutional investors, have often been either absent or did not take action
against or even supported excessive, short-term risk taking.[69] Listed companies in
general do not have markedly different shareholders
than financial institutions and there are signs of a
lack of sufficient long-term oriented shareholder engagement here too.
A recent OECD report considered that ‘the current
level of “monitoring” of investee companies by institutional investors is
sub-optimal’ and that a great deal can be done by private agents and policy
makers to improve the corporate governance outcomes of institutional investors
behaviour”.[70]
A UK government commissioned study, the Kay review, concluded that “short-termism”
of investors is a problem in UK equity markets, and that the principal cause of
this is the misalignment of interests between asset owners and asset managers.
According to this study equity markets currently encourage exit (the sale of
shares) over voice (the exchange of views with the company) as a means of
engagement, replacing the concerned investor with the anonymous trader.
Moreover, the study pointed also to increased foreign shareholding, which would
have reduced the incentives for engagement and the level of control enjoyed by
each shareholder[71]:
shareholders hold, generally speaking, smaller (minority) holdings in listed
companies and it is, for cross-border investors, more difficult and costly to
engage with these companies, while the relative benefits of engagement are
shared with more investors. The data on the concentration of asset management
in a limited number of Member States show the cross-border relevance of this
problem.
The problem analysed in this chapter is the
lack of engagement of institutional investors and asset managers. This lack of
engagement leads to suboptimal corporate governance of listed companies, a risk
of short term focused strategic decisions and lost potential for better
financial performance of listed companies. Studies demonstrate that shareholder
engagement on corporate governance issues is not only creating value for the
shareholders[72],
but contributes also to a significant improvement of the governance, operating
performance, profitability and efficiency of the investee companies.[73]
Looking at the current level of shareholder engagement, the most
common form of shareholder engagement is voting in general meetings.[74] With regard to this means
of engagement studies show that average turnout is around 60% in Europe. However, the turnout of minority shareholders (typically (foreign) institutional
investors and asset managers) is a mere 37%, while average dissent regarding
resolutions is around 2-3%.[75]
Where minority shareholders do vote, they typically rely heavily on proxy
advisors, especially in case of cross-border holdings. In the USA[76] average turnout is some 81% and in Japan some 74%. The relatively
low turnout at general meetings in Europe can be
explained by the relatively high level of foreign share ownership.[77] Furthermore, the low level of dissent in general meetings of
shareholders may also be an indication of a suboptimal level of shareholder
engagement.
After voting in general meetings the most
commonly mentioned forms of shareholder engagement are private engagement and
collaboration with other shareholders. Among the most responsible investors
surveyed in 2012, only 39% claim to engage in private with companies. There is
however no extensive data available on these means of engagement by
shareholders, which can be explained by the fact that such engagement is not
necessarily recorded.[78]
The below figure gives an overview of investors’ use
of engagement strategies.[79]
The proportion of assets managed under
engagement and voting strategies is still relatively small compared to other
investment strategies in Europe.[80]
According to the European Sustainable Investment Forum (Eurosif), engagement
and voting strategies[81]
now represent less than 2 trillion Euros[82]
in Europe, compared to 14 trillion Euros of assets under management by asset
managers. In the last two years this number increased however with 8,1%. It is
to be noted that almost three quarters of this 2 trillion euro concern assets
under management in the UK and the Netherlands.[83] Recently, the Norwegian sovereign wealth fund, that, according to
the Economist, on average holds 2,5% of every European listed company, was
reported as having decided to take a more active role in managing its portfolio
of companies and push them to improve their corporate governance.[84]
Figure 5: Growth of engagement and voting strategies in Europe[85]
In a recent Dutch
survey, Dutch listed companies were asked how they perceive engagement of
shareholders. Only 30% of Dutch institutional investors are perceived to have a
dialogue with the company.[86]

There is however a rising interest in
responsible investing, which typically aims at maximising financial return by
integrating a wider range of long-term risk and return factors, such as
environmental, social and governance matters into the valuations of companies (‘Integration
strategies’). Using data from 9 European countries, Eurosif finds that almost
70% of all engagement assets (2 trillion) are subject to such integration.[87]
The UN Principles for Responsible Investing gave further impetus to
the development of responsible investing when adopted in 2006. Responsible investors "seek a sustained competitive advantage
and outperformance, partly by evaluating a company's overall management ability
to adapt to dynamic business climate and create enduring value"[88]. They are interested
in the long-term value of companies and are said to exhibit active ownership
which entails shareholder engagement.[89]
Many UN PRI signatories are European asset owners and asset managers.[90] The reporting system
for signatories does at this moment however not allow seeing how much
shareholder engagement takes place by signatories.[91]
The most recent survey (2013) of the UK association of pension funds[92] reports that 82% of
respondent pension funds agreed that ESG factors can have a material impact on
their fund’s investments in the long-term. The survey also reports about an
increasing interest of being more active owners:  56% of respondents agreed
that institutional investors had played an active enough role in their investee
companies, compared to 50% in 2012 and 54% agreed that engagement had added (or
prevented loss of) value to the fund (53% in 2011 and 2012). The survey
demonstrates that respondents see more evidence of engagement activities
influencing changes on corporate governance issues (such as board composition,
remuneration, corporate strategy and performance) than on social and
environmental issues[93].
At EU level the recently adopted Commission
proposal on disclosure of non-financial and diversity information by certain
large companies and groups will increase the transparency on
environmental, social and some governance matters (diversity and risk management)
and will therefore give shareholders important material to engage with listed
companies. However, it does not give further tools to shareholders, nor does it
aim to make shareholders more engaged.
The main driver for an insufficient level of shareholder engagement
appears to be the incentives within the equity investment chain which do not
sufficiently encourage increasing the value of the
investments through shareholder engagement and creating real economic value
stemming from increased efficiency and competitiveness of the investee
companies. Asset owners make more and more use of asset managers. Delegation of asset management to asset managers creates an agency
problem.[94] Asset managers have access to more and better information than the asset
owners that make use of them and the interests and objectives of agents may
differ from those of their principals. Although they have different portfolio
horizons, the largest asset owners, such as pension funds and insurers are
inherently long-term oriented as their liabilities are long-term.[95] However, for the selection and evaluation
of asset managers they often rely on benchmarks, such
as market indexes. Underperformance relative to the benchmark index may lead to
the termination of the asset management mandate[96], while the
performance is often evaluated and discussed on a quarterly basis.[97]
Furthermore, performance fees for individual fund managers are, to varying
degrees, linked to performance versus a standard industry benchmark.[98]
As a result, although asset owners have an
important interest in the long-term absolute performance of their assets, many asset
managers’ main concern has become their short term
performance relative to a benchmark, while they have an incentive to outperform
each other on the shorter-term. Moreover, the fact
that the performance horizon on which the asset manager is often evaluated is
short, is a disincentive to engage, because shareholder engagement usually
bears fruit only over a longer period of time[99],
while the benefits of engagement will be shared with other shareholders.[100] Short-term incentives
turn focus and resources away from making investments based on the fundamentals
(strategy, performance and governance) and longer term perspectives, from
evaluating the real value of companies and increasing their value through
shareholder engagement.[101]
One indicator of the short performance
horizon of shareholders is the average holding period of shares which now
stands at some 8 months (see figure 2).
Figure 2.
Average Holding Period - Selected Exchanges [102]
In view of the existence of high frequency
trading this figure may however not be the best indicator for short-termism of
traditional longer-term asset owners and managers.[103] Looking at data about
deviations from expected levels of portfolio turnover (i.e. the frequency of
buying and selling stocks) of traditional longer term asset managers provides a
better picture about the magnitude of short-termism of traditional asset
managers. When portfolio turnover rates exceed their expected range by a
notable margin, this could be an indicator of a lack of conviction in investment
decisions and momentum-following behaviour.
A recent study[104] examined the
differences between planned and actual turnover rates.[105] Of
822 fund strategies between 2006 and 2009[106],
nearly two thirds considerably exceeded their expected turnover levels. Average
annual turnover was 72% with some 20% of funds being above 100% which implies a
full turnover of the entire portfolio in one year or less. Less than 10%
of asset managers have less than 33% of turnover, the equivalent of a three
year investment horizon. 65% exceeded their expected turnover by approximately
30% on average.[107]
The study concludes that short-termism exists and managers do not necessarily
behave according to their stated approach.[108]
At EU level there are currently a limited number of provisions
that ensure a certain transparency on the engagement and voting policies and
their application in practice of asset owners and managers.[109] As regards
transparency of asset managers, for assets managed through discretionary
mandates (53% of the market), regulated by MIFID[110], and
where there is potentially the biggest scope for improvement for giving better
incentives for shareholder engagement[111], there is only a limited rule on
disclosure about investment strategies and costs to investors. For assets
managed in funds (47% of the market) both the UCITS and the AIFM Directive
require that these funds set up a strategy for the exercise of voting rights, but
they are only required to make a short description of these strategies
available to investors on their request.[112] There are some rules on the
disclosure of the costs of asset management too.[113] In sum,
these provisions do not ensure a sufficient transparency of the large majority
of asset managers towards institutional investors, nor of institutional
investors towards final beneficiaries, which contribute to informed decision
taking. In practice, a survey under 189 institutional investors and asset
managers showed that 35% has an engagement policy which is disclosed by only 24%,
whereas only 16% disclose the outcome of such policies.[114]
As regards potential solutions to these
problems the 2010 and 2011 Green papers as well as the Green paper on long-term
financing of the European economy asked a number of questions. In the context
of the 2010 Green Paper disclosure of institutional investors’ voting practices
and policies received strong support from stakeholders. A clear majority of
Member States responding supported EU action on this issue[115], while some Member
States were against EU action.[116]
Stakeholders considered that such disclosure would raise awareness of
investors, optimise investment decision of ultimate investors and facilitate
engagement between shareholders and listed companies.
In the context of the 2011 Green Paper the
majority of shareholders and institutional investors supported a more effective
monitoring of asset managers by institutional investors, particularly with
regard to strategies, costs, trading, and the extent to which asset managers
engage with the investee companies. However, they expressed themselves mostly
in favour of transparency and the diffusion of best practices (but not binding
regulation). Companies were also slightly in favour. Asset managers strongly
opposed such measures claiming that these aspects are already covered by
contractual agreement (mandates) and therefore there is no further need of
intervention. Finally, the majority of Member States supported non-binding rule[117] while those opposing
an action mostly justified their view affirming that mandates should regulate
this aspect.[118]
In the context of the Green paper on the
long-term financing of the European economy asset owners, asset managers and
companies seemed to agree that the interaction between asset owners and asset
managers is key to the promotion of shareholder engagement and that current
practice reinforce their short-term focus. EuropeanIssuers[119] considers that capital
markets do not reward fundamental analysis sufficiently; instead, it is easier
to make money from trading activities which do not require analysis of
underlying economic realities. Thus
market incentives reward traders rather than investors.[120] EFAMA[121] agrees that there are
a number of practices that are currently common in the relation asset
owner/manager interaction that reinforce a focus on the short term. These
practices include the review of performance on a quarterly basis and the
reporting of performance drivers on a quarterly basis. The almost continuous
focus on short term movements by asset owners and their advisers lead asset
managers to hold companies to account over more short term periods. PensionsEurope[122] considers that "no incentives should be given within the equity investment
chain to drive short-term behaviour" and that pension funds should monitor
their manager’s investment performance ideally with reference to long-term
absolute performance and (…) when assessing
investment performance, pension funds should seek to discuss performance with
reference to the previously agreed upon investment strategy and not feel
pressured to respond to what may be short-term market fluctuations.[123] Insurance Europe is of the view that "long-term commitment in investment strategies is key in
delivering performance and beneficial to investors and the economy as a
whole" and that long-term performance measures and high watermarks should
be used by asset owners when defining asset manager mandates.[124] 
The
consultation on long-term financing of the European economy asked stakeholders
what kind of incentives could help promote better long-term shareholder
engagement. It also asked how the mandates and incentives given to asset
managers can be developed to support long-term investment strategies and
relationships and whether there is a need to revisit the definition of
fiduciary duty in the context of long-term financing.[125] Stakeholders strongly
supported encouraging better alignment of interests in the equity investment chain,
and many stakeholders are in favour of more transparency about portfolio
turnover and costs and how asset owners and managers take the long-term
interests of their beneficiaries into account and many of them support
longer-horizon performance review.
It should be
noted however that long-term investors are also
interested in short-term profits, also to meet their liquidity needs.
Furthermore, selling shares and consequent price declines may also exert a
certain pressure on managers for self-discipline to regain credibility. The
problem, from a corporate governance point of view, arises when there is a
significant shift towards interest primarily in short term value, as
demonstrated by portfolio turnover data of long-term investors, crowding out
longer-term relationships and engagement. Furthermore, long-term asset owners
recognize the importance of and the opportunity in long-term investing.[126] The growing
importance of ESG investors shows that more and more asset owners and managers
look at a broader range of longer-term risk factors, including governance, when
assessing the overall risk of their portfolio and engage with investee
companies to improve their governance and performance. More shareholder
engagement is likely to bring benefits for the shareholders and investee
companies alike (see under chapter 4.7 and 9).
4.3.        Insufficient
link between pay and performance of directors
Remuneration of directors has been a constant theme for policy makers, academics[127] and the media for a number of years. Shareholders may
agree with a high pay to directors when they
perform very well and when they get value for their investment. However,
such pay to directors who are perceived as having underperformed has attracted much
criticism from shareholders and, also, from civil
society which cannot, especially in times of financial crisis and unemployment,
understand the justification for such pay.
This problem occurs because of the
principal-agent relation between shareholders and directors which leaves room for directors to act more in their own self-interest than in the
interest of the shareholders. Directors’ remuneration plays a key role in aligning the interests of directors and shareholders and ensuring that the directors act in the best interest of the
company. Where shareholders do not oversee directors’ pay,
there is an important risk that directors will apply a strategy
which rewards them personally,
but that may not contribute to the long-term
value of the company. Therefore,
lack of oversight may lead to unjustified transfers of value from companies and their shareholders to directors.
The existence of this problem is shown by recent data which
demonstrate that there is often an insufficient link between pay and
performance. In France[128] and Austria[129], where shareholders do not have a say on directors’ pay, the average remuneration
of directors in the years 2006 to 2012 increased with respectively 94% and 27%,
although the average share prices of listed companies in these countries
decreased with respectively 34% and 46%. Moreover, recent
scandals show the award of
generous pay packages with no
obvious link to performance.
For instance, the WPP advertising company paid £13
million to the CEO in 2011 and £17 million in 2012 although shareholders
considered this package not proportionate to performance.[130] Before that, at the
French company Vivendi, a € 21 million severance package gave rise to public
criticism.[131]
More recently, the golden handshake of the CEO of Nokia caused furore.[132]
Consultations and academic studies[133] show that regulation of directors’ pay, and in particular its relationship with performance[134], is a key concern for shareholders and
that significant improvements could be made. Stakeholders argue that it is often difficult to identify the important information amongst all kind of detailed information in the
current directors’ remuneration
reports.
The complexity of directors’ pay makes it hard to
disentangle what executives are actually earning and for shareholders to judge
whether this is appropriate.[135] Moreover, the quality of disclosure is insufficient since information on the fixed and
variable component of the remuneration policy, and in particular the link
between pay and performance, continues to be one of the least published pieces
of information by companies.[136] This makes it time
consuming, if not impossible, and costly to assess remuneration
and to compare between companies, especially across borders. Moreover, academic studies and factual evidence suggest that the proportion of
long-term incentives[137] in the variable pay of directors is quite low[138], and that the performance criteria adopted in relation to variable
pay (and the time horizon)[139] are often insufficiently aligned with the longer term interests of
the company.
However, at the EU level, there are currently no binding rules on
director’s remuneration in listed companies, except for the requirement for
companies to report, in the annual accounts, on the amount of emoluments paid
to members of the administrative, managerial and supervisory bodies.[140]
The Commission adopted three Recommendations on directors’ remuneration.[141] The main recommendations are disclosure of remuneration policy, the individual
remuneration of executive and non-executive directors,
and a shareholder vote on the remuneration. However, Commission reports[142] and further analysis by the Commission show
that the application of these main recommendations by Member States is not satisfactory, since only 6 Member States
have fully implemented these main principles. As a result, in Europe, shareholders currently often face difficulties to be properly
informed and to exercise  control over directors’ pay.
By comparison, in the United   States, federal legislation requires a high level of
disclosure of executive remuneration, with comprehensive disclosure in 12
tables amongst which the ratio CEO salary/mean salary information.[143]
In addition listed companies must submit remuneration policies of some of their
directors (including the CEO and CFO) to an advisory vote by the general
meeting at least every three years. In Switzerland, a recent referendum introduced a shareholder vote
on the global amount of remuneration and banned the golden parachutes and other
termination payments.[144]
Indeed, in many Member States, shareholders
do not have sufficient information on directors’ remuneration since the information disclosed by companies is not comprehensive, clear
nor comparable. 15 Member States[145] require disclosure of the remuneration
policy and only 11 Member
States[146] require disclosure of individual directors’ pay. Four Member States have published
templates that companies should use to disclose directors’ remuneration.[147] According to available data from 19 Member
States, only around a third of the listed companies disclose how remuneration
is dependent on performance.[148] Even in the other Member States, the situation is problematic: in
the Netherlands for instance, under the relevant corporate governance code
provisions, compliance with the obligation to describe the relation between pay
and performance is one of the least applied provisions with an application of
64%; moreover, there was almost never an explication for non-compliance.[149] The Dutch corporate governance monitoring committee in this respect
also noted in 2013 that in general pay structures and remuneration policy are
not simple and transparent and that the committee has not been able to bring
any improvements in this area.[150]
Furthermore, in many Member States, shareholders
often do not have sufficient tools to express their opinion on directors’
remuneration which in their view is not appropriate or not justified by performance.
Indeed, only 13 Member States
give shareholders a say on pay through either a vote on directors’ remuneration
policy and/or report.[151]
10 Member States have introduced a binding shareholder vote[152] and three an advisory one.[153] Moreover, the Member States approaches are very diverse. For
example, in France, there is currently no legislative requirement to have a vote
on the remuneration policy, report or on individual remuneration, but
shareholders have a right to vote on certain specific
issues linked to remuneration.[154] 
The experience of Member States shows the positive impact of “say on
pay” on creating a link between directors’ remuneration
and companies’ performance.[155] In Italy[156] and Spain[157], before the introduction of an advisory say on pay in 2011, the average share price in the years 2006 to 2011 went down with respectively 130% and 40%, while the average
remuneration of directors of listed companies increased by respectively 29% and
26%. However, since the law has been adopted in 2011, the
average share price of listed companies has respectively increased by 10% and
decreased by 5%, but the remuneration of directors has also increased by 1% and
declined by 10%. There may be several reasons for this development, but this
correlation has also been demonstrated by academic studies that showed in 2004
that the implementation of the regulation introducing an advisory say on pay in
the United Kingdom has resulted in reduction of CEO remuneration in case of
poor performance.[158]
Such link between pay and performance is even stronger in Member States
where shareholders have been granted a binding say on pay. In Sweden[159] and Belgium[160], before the adoption of a binding say on pay in respectively 2010 and
2011, the average share price from 2006 to 2009 and from
2006 to 2011 went down respectively with 17% and 45%, while average pay of directors of listed
companies increased respectively
with 18% and 95%. However, since the laws were adopted in
respectively 2010 and 2011, the share price has respectively increased by 16%
and 18% but the remuneration of directors has also increased with 18% and
decreased (as a correction) by 10%. Academic studies also show that the
introduction of a binding say on pay in the Netherlands in 2007 has resulted in
a closer link between shareholder value and remuneration and in greater levels
of engagement between companies and shareholders.[161]
4.4.        Lack
of shareholder oversight on related party transactions
One of the most commonly heard complaints about corporate behaviour
concerns related party transactions (RPTs): transactions between a company and
its management, directors, controlling entities or shareholders.[162]
An example of such a transaction is a contract between a company and its chief
executive officer under which the former sells a 100% subsidiary to the latter.
Generally, the approach is not to forbid such transactions, since they can be
productive and create value, but to regulate them.[163]
The EU legislative framework requires
companies to include in their annual accounts a note on material transactions
entered into with related parties that are not concluded under normal market
conditions, stating the amount and the nature of the transaction and other
necessary information.[164]
The Transparency Directive 2004/109/EC[165] and the
implementing Directive 2007/14/EC[166]
contain some further transparency obligations for listed companies. This
framework provides some harmonisation of the rules on RPTs, focused on ex
post disclosure.[167]
There are however no EU rules that provide for public disclosure at the time of
the conclusion of the RPT, nor for involvement of shareholders.
Member States have regulated RPTs in very
different manners. Some Member States have solely taken
over the EU Accounting provisions in this area[168], others
have created more detailed transparency rules with specific thresholds or
specific procedural obligations[169],
while many Member States give the (supervisory) board a specific role whereas directors
with whom a transaction would be concluded are sometimes excluded from voting.[170]
In addition, in some Member States independent advisors have been given a role[171]
and in a number of Member States shareholders have to approve RPTs.[172]
Finally, a number of Member States also forbid certain specific RPTs.[173]
However, even where Member States follow in essence the same approach, the
details of their rules are very often quite different[174], which
makes it difficult, time consuming and costly for foreign investors to try to
influence decisions on important RPTs. 
EU companies report a high level of RPTs. In Spain 78% of listed companies reported a significant RPT[175]
in the last three years; in Ireland 47%; in Austria 22%; in France 15%; in Poland 14%; in Italy 8%; in Germany 7%; in the UK 5,5% and in the Netherlands 0%.[176]
The three Member States with the highest percentage of reported RPT do not
foresee an obligatory fairness opinion for the largest RPT, nor a shareholder
vote. 35 % out of a sample of 54 listed companies in Germany reported significant RPTs in the year 2011.[177]
In a sample of 85 companies listed on the Paris stock exchange 80 %
reported RPTs. In total, the latter reported 1.186 RPTs over a period of three
years. 30 % of these companies reported ten or more transactions. 371 of the
RPTs were considered likely to lead to unjustified transfer of value to related
parties.[178]
It should be noted that under EU law companies are only obliged to report those
transactions that are not concluded on market terms, and therefore could entail
unjustified transfers of value to the related party.[179]
In the OECD’s Peer review on RPTs a number of Member State systems were assessed. For Belgium, the OECD report considered that a more direct role for shareholders in approving key transactions
might be considered as well as greater formalisation of the law.[180]
In France the existing rules are actively debated and the streamlining of the
rules and an improvement of the information to the market are advocated.[181]
Moreover, the French Autorité du Marché Financier has recommended the
nomination of an independent expert and a shareholder vote in case of a
significant RPTs.[182]
Finally, studies show that RPTs can have a negative
impact on the value of the company[183],
since they transfer value from the company and its minority shareholder to
those who control the company, the directors and/or the companies affiliated
with them.[184]
The high level of reporting of RPTs concluded
on non-market terms does not mean that all reported transactions entail
unjustified transfers of value. However, it does mean, certainly in view of the
opinions of stakeholders, that there is an EU corporate governance issue as far
as minority shareholder protection is concerned. A significant majority of the shareholders
and asset managers and a small majority of
institutional investors that responded to the 2011
Green Paper are in favour of EU action to ensure more procedural
protection against RPTs. All of them support an increase in transparency. Most responding
shareholders and asset managers, supported by the views of several
institutional investors, explicitly call for shareholders' approval of
significant related party transaction, excluding the interested party. On the
other hand a majority of responding companies oppose EU actions on related
party transactions, since national measures would in their view be sufficient.
A majority of Member States that replied to this question advocate however an
EU wide disclosure regime that would make related party transactions more
transparent[185],
while a large minority of Member States[186]
supports an EU action giving shareholders a vote. The existing rules do not provide
minority shareholders, amongst which asset owners and managers with large
portfolios of foreign shares with the necessary information and proportionate and cost-effective tools to assess and defend
themselves against RPTs.
4.5.        Doubts
on the reliability of the advice of proxy advisors 
Many institutional investors and asset
managers use the services of proxy advisors who provide recommendations how to
vote in general meetings of listed companies. The number of (cross-border)
holdings by many institutional investors and asset managers and the complexity of
the issues to be considered make the use of proxy advisors in many cases
inevitable. One important benefit for investors is that these specialised advisors
help reduce costs of the analysis of the information on companies.
Proxy advisors are not subject to any
regulation at EU level. Non-binding rules exist only in few Member States. For
example, the French Autorité du Marché Financier (AMF) recommendation on proxy
advisors promotes transparency in the establishment and execution of voting
policies by proxy advisors and recommends establishing appropriate rules on the
management of conflicts of interest.[187]
In the UK, the Financial Reporting Council’s Stewardship Code also applies to
proxy advisors.[188]
Although in many cases institutional
investors and asset managers vote on the basis of various sources of data,
proxy advisors have an important influence on voting behaviour of investors[189],
which makes them, to some extent, a standard setter in the area of corporate
governance.[190]
In particular, investors with highly diversified portfolios and many foreign
holdings of shares rely more on proxy recommendations.[191] During a
recent consultation by ESMA[192],
“most respondents acknowledged there is a high correlation between voting
outcomes and proxy advices”. The impact of proxy advisory firms’
recommendations is reinforced by the characteristics of this sector[193],
in which there is currently limited competition:  only two proxy advisors are able
to meet the (European) needs of internationally operating investors.[194] In the Netherlands the Dutch Corporate governance code Monitoring Committee noted that of the
Dutch and foreign institutional investors that took part in a survey 56%
indicated that they made use of proxy advisors. Of the asset managers 100% made
use of them. 83% of these two groups made use of one the two biggest proxy
advisors, ISS and Glass Lewis. They only very slightly deviate from the advice
given.[195]
According to the underlying study the influence of the proxy advice is, on a
scale of 10, 5.5 for Dutch companies, but 7,8 for foreign listed companies. Institutional
investors and asset managers estimate that the degree of checking the advice is
8.3 for Dutch companies and only 3.4 for foreign listed companies.[196] According to an OECD
study the German government stated that 80% of the foreign institutional
investors follow the advice of proxy advisors.[197] In other words,
especially for cross-border shareholdings the influence of proxy advisors is
very significant, to a large extent uncontrolled by their users and issuers and,
in view of the existing lack of transparency, uncontrollable. The 2012 survey
conducted by the Dutch Monitoring Committee of the Corporate Governance Code states
that investors in companies with widespread shareholdings in particular,
especially foreign investors tend to be guided by proxy advisors on the basis
of "foreign best practices" that cannot be considered in all cases as
being generally accepted best practices. 
Proxy advisors’ relations with issuers may
also give rise to concerns. The different services provided to issuers, such as
governance consultancy, may affect the independence of the proxy advisor and
their ability to provide an objective and reliable advice. As proxy advisors
are subject to conflicts of interests[198],
appropriate procedures for the prevention, detection and treatment of such
conflicts are necessary.
In view of the important role of the recommendations
of proxy advisors these should be accurate and reliable. However, stakeholders
noted shortcomings concerning the quality of advice, such as for example advice
not taking account of certain key features of the national corporate governance
framework, as well as situations of conflict of interests, for example when
proxy advisors also provide services to companies.[199] A majority of
respondents to the 2011 Green Paper considered that the level of transparency
of proxy advisors was not sufficient, which made the evaluation of accuracy and
reliability of the work of proxy advisors difficult. There was a strong support
from shareholders, institutional investors and asset managers to increase the
transparency of the methodology used and for addressing the conflict of
interest problem. Companies also called for regulation of the sector, mainly
justifying it by pointing to the risk that could arise from the influence proxy
advisors currently have. Furthermore, all proxy advisors that answered to the
consultation affirm to be in favour of more transparency and the diffusion of a
code of conduct.[200]
Finally, the majority of the Member States that expressed their views were in
favour of increasing the transparency of the methodology used and addressing
the conflict of interest,[201]
while only few saw it was unnecessary.[202]
Also the ESMA consultation showed that
there is a support for increased transparency on the methodologies used by
proxy advisors and on their handling of conflicts of interest.[203] In
particular most issuers considered that proxy advisors do not take into account
local legal framework and practices, that they do not devote enough resources
and that there is a lack of specific knowledge.[204] In this
respect it is important to note that materials for general meetings are often
only available 21 days before the date of this meeting and that most general
meetings are clustered around a limited number of months from March to July.[205]
Where the methodologies used by proxy
advisors to make their recommendations do not sufficiently take into account
local market and regulatory conditions, the quality and the accuracy of the
advice to investors is negatively affected.[206]
This leads to a one size fits all approach in corporate governance, which
negatively affects the corporate governance of listed companies. It is moreover
to be noted that the suggested developments on enhanced shareholder rights (on
remuneration and related party transactions) will result in an increase of
their influence and work for a relatively small sector: the divulgation of
methodologies used is a key element to assess the work they perform, both for the
issuer which is the object of the recommendation and of the users of this
information.
4.6.        Obstacles
to the exercise of shareholder rights
4.6.1.     Identification
of shareholders
The Commission’s Action Plan envisages to
enhance transparency between companies and investors, encourage long-term
shareholder engagement [207],
but intermediated holding chains act as significant obstacles to shareholder engagement.

It is difficult for the company to identify who
the shareholder is. Identification of the shareholder is essential to
facilitate the exercise of shareholder rights as it is a prerequisite for
direct communication between the shareholder and the company. The cooperation
between the company and the shareholder is improved when the issuer can directly
communicate with them. This strengthens corporate governance, e.g. through the
direct casting of votes without the intervention of the chain of
intermediaries.[208].

The identification of the shareholder in a domestic
context is difficult in some Member States, e.g. the UK’s successful s.793 rule[209]
may be effective but it is highly intensive and time-consuming. But the
cross-border situation is even more cumbersome, particularly where multi-tiered
holding chains cross several jurisdictions. The shareholders right to represent
himself or to give instructions can only be realised if the link can be traced
in a timely and reliable way. Although market practices vary widely, there are
efficient national solutions for local shareholder identification in most
markets, but a significant obstacle to cross-border identification is the legal
uncertainty among foreign intermediaries as to if they can share their client’s
data.[210]
This is often brought to the Commission's attention: in public consultations, a
number of stakeholders argued for a "shareholder identification
principle"[211]
and the Reflection Group on the Future of EU Company Law recommended allowing
companies to identify their shareholders and directly communicate with them.[212]
This is supported by 81% of issuers and 88% of investors.[213]
Example: An intermediary in the
Netherlands, where there is no legal framework allowing Dutch company to obtain
shareholders identification[214],
may not be aware of the laws of another country, e.g. shares issued under Irish
law, that requires shareholder disclosure and in any event may consider that
their own local laws (e.g. on banking secrecy) may prohibit such disclosure. In
effect, the Irish company has no means to identify its shareholders, even if
the Irish law, under which the securities are constituted, gives him the right.
4.6.2.     Cross-border
transmission of information by intermediaries, including exercise of
shareholder rights
There is wide-spread agreement among
stakeholders that significant problems occur in the internal market regarding
the cross-border exercise of rights attached to shares.[215] Investors
face difficulties in exercising the rights flowing from their shares,
especially if they are held cross-border. Such rights include, e.g. the right
to attend meetings and to vote, to get a dividend, to participate in decisions
on mergers, takeovers or stock splits and to challenge decisions of a company
in court proceedings.
The longer the holding chain and the more
intermediaries are involved, the higher the chance that information is not
passed to shareholders from companies or that investors' votes get lost. This
results in instructions given by shareholders to intermediaries to vote for
shares held not always being executed. There is also a greater likelihood of
misuse of the voting rights by intermediaries. Companies and shareholders have
repeatedly raised these problems in discussions with the Commission and
characterise them as recurring.
The exercise of rights from shares requires
that shareholders get information and messages from companies on time, e.g.
when deciding whether to approve a transaction to which the counterparty is a
director, shareholders need to have details of the transaction including the
price and the existence of other potential counterparties. Equally, information
and messages from the shareholder to the company (e.g. voting instructions)
need to reach the company to achieve its objective. There is general agreement
among stakeholders that significant problems occur in the internal market
regarding the cross-border exercise of rights attached to shares.[216]
Timely transmission of information (e.g.
instructions) and rights (e.g. dividends), relies on the intermediaries in a
holding chain,. Though dividend payments normally arrive to the investor,
disenfranchisement from participation in the company's decision-making is
widespread.[217]
This is mainly due to jurisdictional differences in the levels of assistance
given by intermediaries to clients and compliance with duties to send
information.[218]
So rights flowing from the shares may not be processed properly through the
holding chain and the exercise of cross-border shareholder rights may suffer.
Intermediaries suffer from the lack of standardisation of messaging from companies.
Differing national standards on intermediary duties pose a high legal risk to
intermediaries when they process corporate information; if it goes wrong,
intermediaries can be exposed to financial risk.
4.6.3.     Price
discrimination by intermediaries for cross-border transmission of information,
including exercise of shareholder rights
The problem of intermediaries who charge
higher fees for cross-border transmission of information and the processing of
rights was raised in the Commission's 2009 consultation. A large majority of the respondents replying to the question
(companies/shareholders as well as intermediaries), considered that there are
additional costs related to cross-border situations in case of need for
information, as well as when trying to exercise shareholder rights. The size of
the difference between domestic and cross-border costs ranged from an
"insignificant increase" (from an Irish intermediaries association),
through 30% higher for wholesale trades and 150% higher for retails trades
(from an International Central Security Depository (“ICSD”), "for General Meetings from 200 to 300% more" (from 18
German listed companies), or "minimum 500% more" (according to UK
intermediaries), to as much as a "dozen times more" (from
the Polish Central Security Depository (”CSD”).[219]
The scale of price discrimination acts as a deterrent to cross-border
investment and the efficient functioning of the Internal Market. In the second
public consultation, 20 stakeholders confirmed that they had encountered
different prices for cross-border exercise of rights. The following examples
were provided: specific fees were required for the registering of shares from
France to Belgium (ECGS); a certification of holdings of a security (which is
necessary to exercise the rights enshrined in the security) was more expensive
if it involved a cross-border aspect (German issuers and investors); the
cross-border exercise of voting rights was much more expensive, normally more
than ten times, sometimes more than hundred times the cost of a purely domestic
voting rights exercise (German issuers and investors). Furthermore, according
to ECGS and ESH voting charges can reach up to EUR 150 per voting session.
The request for a ballot (voting card) at a French general meeting in Germany may easily be charged with EUR 100 by the deposit bank whereas the request for
a ballot at a German general meeting would still be free of charge for the shareholder.
In a survey, 27% respondents indicated that they take cost of voting into
account in making the decision to vote at a shareholder meeting.[220]
Price discrimination
creates a barrier to the internal market as an intermediary’s services relating
to passing on voting instructions become an indirect barrier for shareholders
to vote and thus to be engaged. Stakeholders confirmed that they had
encountered different prices for the cross-border exercise of rights. Two
associations of intermediaries explained that their members applied different
pricing models as the costs in the cross-border context were increased due to
longer chains or different currencies.[221]
Cross-border investment will continue to be discouraged by unjustifiably higher
fees. This has the effect of reinforcing fragmentation and restricting
investment to domestic opportunities. 
4.7.        Insufficient
quality of corporate governance information
Article 20 of Directive 2013/34/EU requires
listed companies to provide an annual corporate governance statement. This statement
should provide essential information on the corporate governance arrangements
of the company and in particular include a reference to the corporate
governance code applied on a ‘comply or explain’ basis. Under the 'comply or
explain' approach, a company which chooses to depart from a corporate
governance code recommendation must give detailed, specific and concrete
reasons for the non-application. These explanations require a company to
reflect on its corporate governance and are used by investors to make their investment
decisions.
The main advantage of this method is its
flexibility as it allows companies to adapt their corporate governance to their
size, shareholding structure, and sectorial specificities. This approach
recognises that, in certain circumstances, non-compliance with certain
recommendations might correspond better to the company’s interest than 100%
compliance with the code. Appropriate disclosure of deviations from the
relevant codes and the reasons for this reduces the information asymmetry
between the company directors and its shareholders and decreases the monitoring
costs. It also confers legitimacy to the company’s choice to put in place
corporate governance arrangements which are not in line with the code’s
recommendations.[222]
However,
the ‘comply or explain’ approach is in practice not applied very well by
companies. A
study on monitoring and enforcement systems for Member States’ corporate
governance codes[223]
revealed important shortcomings in applying the 'comply or explain' principle.
According to the study, the overall quality of companies’ corporate governance
statements when departing from a corporate governance code recommendation is
unsatisfactory. In over 60% of cases where companies chose not to apply certain
recommendations, they did not provide sufficient explanation.[224] Although
the study dates from 2009 information further analysis by the
Commission and discussions with the European Corporate Governance Codes Network[225] on the application of
the 'comply or explain' approach in 15 Member States shows that the situation
has not improved significantly since then. In its 2012 report the UK Financial
Reporting Council noted that “the standard of explanations is variable. Companies
are generally better at setting out the background and actions taken to
mitigate any governance concerns than they are at explaining the rationale for
their decisions” and that “there were still many examples of generic and
boiler-plate reporting”.[226]
Concerning the need to increase the quality
of the information given by companies departing from the recommendations of
corporate governance codes, an overwhelming support was shown by shareholders,
asset managers and proxy advisors as well as by institutional investors that
unanimously called for the measure. All stakeholders pointed out to the
benefits that they could receive from receiving more information from
companies. Additionally, also the majority of companies were in favour of more
information. They asked for guidelines on what information is needed. The
majority of Member States that answered to the question showed clear support for
improving the system[227]
however they suggested being careful not to increase the cost for companies.
Some other Member States[228]
support the objective, but believe it should be addressed without imposing new
rules. Following on from the 2011 Green Paper, certain
Member States, such as Finland, UK and Belgium have initiated discussions or
issued guidelines on the quality of the explanations provided by companies.[229] However, such
initiatives have only been undertaken in a minority of Member States. Consultations
have shown that since then these problems have not been solved.
These deficiencies in the quality of
corporate governance reporting make it more difficult for shareholders to take
informed investment decisions. They also make engaging with and monitoring of
companies more difficult and expensive, as investors do not have an adequate
picture of the situation of the company and cannot on that basis engage in a
dialogue with the company.
4.8.        Which stakeholders are affected and how?
The combined impact that
of the problems described above on different stakeholders groups (listed companies, shareholders, ultimate beneficiaries) is further analysed below.
(i)    
Listed companies
Companies are affected in a number of ways
by the problems described above. First of all, the lack of shareholder
engagement and possibilities to identify shareholders makes it difficult for
listed companies to know what the objectives of its investors are. They have to
rely on the signals given on the market. As shown above, in practice many
institutional investors and asset managers focus on trading in the short-term,
which puts pressure on companies to “respond” to short term share price
movements.[230]
Such short-term market pressure may lead to underinvestment and a company
strategy focusing primarily on restructuring, mergers and acquisitions or
financial engineering. In a survey of more than 400
financial executives, 80% of the respondents indicated that they would reduce
discretionary spending on such areas as research and development, advertising,
maintenance, and hiring in order to meet short-term earnings targets. More than
50% said they would delay new projects, even if it meant sacrifices in value
creation.[231] In a recent global survey of McKinsey and the Canada Pension Plan Investment Board, 63% of
the business leaders said that the amount of pressure to demonstrate strong
short-term financial performance has increased in the last five years.
According to respondents a longer term view would increase innovation and lead
to stronger financial results.[232]
In this respect, a recent study on
the effects of capital markets’ short-termism on levels of investments[233]
documented sizeable differences in investment behaviour between listed and
privately held companies. Listed companies invest substantially less (4 % of
total assets, compared with 10% for observably similar privately held
companies) and are less responsive to changes in investment opportunities
compared to privately held firms, even during the recent financial crisis.[234] The study
concludes that the most important factor lies in the agency problems affecting
listed companies, and more probably, short-term incentives.[235]
Moreover, studies demonstrate that
shareholder engagement on corporate governance issues is not only creating
value for the shareholders[236],
but contributes also to a significant improvement of the governance, operating
performance, profitability and efficiency of the investee companies.[237] According to the most
recent meta study on sustainable investing, 100 % of existing studies agree
that companies with high rating for ESG factors (environmental, social and
governance) have lower cost of capital and 89% of the studies show that such
companies exhibit market or accounting based outperformace. Studies demonstrate
that the governance aspect had the strongest influence and good governance
leads to better financial performance.[238]
Good corporate governance attracts investment, as certain investors have a
preference for the shares of companies with good corporate governance.[239] Evidence shows that
successful shareholder engagement actions of a US responsible investor
increases the shareholdings of other asset managers and pension funds and leads
to a decrease in the investee firm's return volatility.[240]
EVCA[241]
considers that the key contribution to the long-term success of the companies
in which private equity funds invest comes not only from the long-term duration
of their holdings but, primarily from their active ownership and the long-term perspective
they bring.[242]
In other words, the lack of sufficient
shareholder engagement leads to suboptimal financial performance of listed
companies.
The lack of
transparency of proxy advisors has the effect that companies’ may have
difficulty in understanding the reasons for certain voting recommendations,
which makes it particularly challenging for them to react and explain its
corporate governance approach on the relevant issue. This also decreases in
practice their scope to decide what is for them the best corporate governance
arrangement and might lead to ‘one size fits all’ corporate governance. The
lack of a sufficient link of directors’ remuneration with (long-term) performance
of the company leads to unjustified transfers of value of the company to directors
and provides company directors with incentives that are not aligned with the
interest of the company, which could be detrimental to financial performance of
the company. Related party transactions have a negative impact on the value of
the company, since they may lead to the unjustified transfer of value to the
related party. Finally, the consequence of insufficient quality of reporting on
corporate governance is that company boards are not stimulated to reflect on
corporate governance, which might lead to inappropriate corporate governance
arrangements, and, in view of the link between corporate governance and
financial performance, might negatively impact financial performance of the
company.
(ii)   Shareholders  
For institutional investors and asset managers
the impact depends to some extent on their profile. Not all investors are or
will be interested in the corporate governance of investee companies. However,
for a growing group corporate governance is important for their investment
decisions and engagement is a part of their efforts to increase the performance
of their investments. Those investors need accurate and reliable information on
corporate governance and tools to engage on these issues. The problem
definition has shown that such information is absent, incomplete, difficult to
understand or that doubts have arisen on their reliability (remuneration,
related party transactions, proxy advisors, corporate governance reporting),
which could lead to uninformed (investment) decisions and suboptimal corporate
governance of the companies invested in. Moreover, tools are, according to
stakeholders, missing to engage on issues such as related party transactions
and remuneration.The effect on shareholders is that it is more difficult
(and/or costly) for them to take informed decisions, especially in case of
cross-border investments and that value is unjustifiably transferred to related
parties and directors. As indicated in the above paragraph on listed companies,
studies demonstrate that shareholder engagement on
corporate governance, with remuneration being one of the key issues, may
generate an average of 7-8% abnormal cumulative and buy and hold stock return[243]
over a year.[244] By analysing companies’ fundamental value and long-term prospects
and engaging on that basis, investors act not only in their own interest, but
also fulfil an important social function by helping companies to take decisions
that will contribute to their long-term success.[245] 
The lack of certainty about whether or not
votes get through the complex chain of intermediaries administering securities
accounts and the disproportionately high cost of voting across the borders
discourage shareholders to use their voting rights, which is one of the most
efficient direct tools to exert influence on the management
(iii) Ultimate beneficiaries
From the perspective of ultimate
beneficiaries, the impact of the insufficient engagement of institutional
investors and asset managers, the lack of sufficient transparency and
shareholder oversight on remuneration and related party transactions, but also
the insufficient transparancy of proxy advisors and corporate governance
reporting may also be considerable. The ultimate beneficiaries are, in most
cases, not directly affected by these corporate governance problems, since they
often do not directly manage their assets. However, these problems result in
high costs of asset management, in lost potential for better corporate
governance and thus for better results of the investments resulting finally in
missed opportunities for growth, jobs and sustainability of the EU economies.
In the end these problems have an impact on EU citizens who are future
pensioners, insured, but also employees.
In particular, the cost of intermediation
in the equity investment chain decreases the ultimate return to final
beneficiaries from their investments. Studies say that active management fees
and their associated trading costs based on 100% annual turnover erode the
value of a pension fund by around 1.0% per year.[246] Pension funds are
having their assets exchanged with other pension funds at a rate of 25 times in
the life of the average liability for no collective advantage, but at a cost
that reduces the end-value of a pension fund by around 30%.[247] EuroFinuse[248] considers that one of
the root causes of the destruction of the value of pension savings is the
misaligned interests within the investment chain and the high costs of
intermediation. They highlight the case of a Belgian occupational pension fund
which wiped almost a fifth off the real value of the fund between 2000 and
2012, mainly due to commissions paid to intermediaries.[249] Moreover, the lack of
transparency of institutional investors and asset managers leads to less
well-informed investment decisions of final beneficiaries and to a lack of
accountability.
In addition, disproportionately high costs
for cross-border voting by the asset owner/asset manager through the complex
chain of intermediaries maintaining securities accounts adds to the costs of
intermediation for the ultimate beneficiaries. 
5.           Baseline scenario, the EU's right to act and
justification
5.1.        Baseline scenario
The different problems identified in this
impact assessment are likely to evolve in different ways, not only at the EU
level, but also at a Member State level.
The current EU rules applicable to
institutional investors and asset managers[250]
do not sufficiently take into account the relevance of these investors for the
corporate governance of listed companies, and in particular they do ensure
transparency of the policies and practices of asset owners and managers. For
example, asset managers managing assets on the basis of discretionary mandates
regulated by the MIFID Directive are to disclose costs and associated charges
to clients[251],
however there is no specific mention about portfolio transaction costs.
In the absence of an EU and Member State
framework a few, predominantly self-regulatory Codes
have been created to stimulate shareholder engagement[252] that attempt to change behaviour of asset owners and managers, such
as in particular the UK Stewardship Code[253],
the Eumedion best practices for engaged shareholders[254], the European Fund
and Asset Management Association principles for the exercise of ownership
rights in investee companies[255],
the International Corporate Governance Network model contract between asset
owners and their fund managers[256],
and the German BVI Code.[257] These Codes are diverse and only two of
them (the German BVI Code, the ICGN model mandate) cover issues such as
portfolio turnover. These initiatives may focus asset
owners and/or managers more on engagement. It is difficult to assess their
precise impact, also in view of the fact that a number of these initiatives are
relatively recent. However, these initiatives have different contents, they
cover different groups of not all asset owners and managers and not all Member
States. In other words, they do not lead to a level playing field for
institutional investors and asset managers. With regard to reported impact of
the best known and arguably most successful initiative, the UK Stewardship Code, evidence seems to suggest that it did not really
result in a change in the investors' attitude towards engagement. In a recent
survey, 79% of responding FTSE 350 companies reported no increase in
engagement since the introduction of the Code, with the remaining 21%
reporting only a slight increase[258],
despite the fact that virtually the entire UK asset management industry
declared its commitment to the Code.
As regards remuneration of directors, the
Commission Recommendations are applied partially but not all Member States have
adopted rules that ensure better disclosure or that grant shareholders a say on
pay. In many of those Member States the existing situation would most probably
remain as it is, although individual companies or stock exchanges may decide to
change their internal rules. The current situation could therefore evolve in
increasingly divergent legislation and practices in Member States.
Although the current framework on related
party transactions is subject to criticism and debate at the international,
European and Member State level, there is no coherent and common approach to
this issue. Possible improvements depend thus fully on initiatives of
individual Member States and companies. For instance, in Italy (2010) and the   Netherlands (2013) the relevant rules were recently modified. Also here, the
current situation could evolve in increasingly divergent legislation in Member
States. For proxy advisors, ESMA recommended self-regulation of the sector
within the two coming years, with an adoption of a code of conduct by the proxy
advisors. Since the industry itself is responsible for the drafting of this
code and its application in practice it is difficult to predict how the problem
would develop without EU intervention, although some improvement is likely. In
addition, Member States may adopt their own legal or soft-law framework on
proxy advisors. As regards corporate governance reporting, and in particular
the quality of explanations for deviations, some Member States already issued
guidelines providing specific recommendations on the desired quality of
explanations. It could be expected that more Member States would follow this
path. However, improvements will be limited to certain Member States and the
different approaches to this issue will not make it easier or less costly for
investors to monitor the investee companies. It could also mean that the EU law
concept of ‘comply or explain’ would be given a diverging interpretation.
It is highly unlikely that Member States'
action alone could be sufficient in tackling the issue of a proper shareholder
identification and channelling of voting information and instructions through
the complex international  chain of intermediaries administering securities
accounts. Only limited progress can be made through voluntary
market standards, e.g. Market Standards on Corporate Actions Processing and
Market Standards on General Meetings.[259]
The implementation of such voluntary market standards is slow due to its
complexity and the need for increased coordination between Member States such
as the existence of a legal basis for them in national
legislation. Similarly, the Code of Conduct for
Clearing and Settlement does not apply to intermediaries (it only applies to
CCPs and CSDs) and where it is applicable, the results are not optimal.[260]
As most of the problems in this area are cross-border
in nature (such as the disproportionate cost imposed for channelling
information across the borders and uncertainty as regards the possibility to disclose
the identity of the shareholder), EU action is necessary.
In conclusion, without action at EU level
the problems are likely to persist and only partial and fragmented remedies are
likely to be proposed at national level.
6.           EU’s right to act, subsidiarity and proportionality,
respect for fundamental rights
Article 50(2)(g) of the Treaty on the
Functioning of the European Union (TFEU) gives the EU competence to act in the
area of company law and corporate governance. It provides in particular for coordination
measures concerning the protection of interests of companies’ members and other
stakeholders, such as creditors, with
a view to making such protection equivalent throughout the Union.
According to the subsidiarity principle,
the EU should only act where the objectives of the proposed action cannot be
achieved sufficiently by Member States and where the objectives can be better
achieved by the EU. As shown in the policy context section, the EU equity
market has to a very large extent become an European/international market, with
some 44% of total EU market capitalisation in the hands of foreign investors,
in particular of foreign institutional investors and asset managers. Moreover,
also asset management is very concentrated in a small number of Member States,
with 66% of all assets being managed in the three largest Member States. These
developments have only been partially followed by the further development of
the EU (legal) framework in the area of corporate governance, in order to protect, in these changed circumstances, the interests of
shareholders and other stakeholders. From the different consultations held by
the Commission it becomes clear that there is strong support from shareholders,
institutional investors and asset managers, but also from other stakeholders, for
measures to protect their interests: more transparency and effective tools. Targeted
further development of the EU legal framework for corporate governance would
further stimulate the cross-border holding of shares and foreign direct
investment, but at the same time create a better framework for shareholder
engagement.
As regards this engagement,
as well as the reliability of proxy advisors, in view of the international
nature of activities of these players, the objectives cannot be sufficiently
achieved by Member States. Action from Member States can only cover some of the
institutions concerned and would most likely lead to different requirements,
which could lead to an uneven level playing field on the internal market, but
also potentially create, due to the existence of different rules, administrative
burdens for the institutions concerned. Moreover, final beneficiaries and other
investors would in many cases not receive the necessary information to take
informed decisions. The objectives can therefore be better achieved by the EU.
The existing EU measures related to engagement of institutional investors and
asset managers only cover only some specific aspects.[261] With regard to the
'comply or explain' approach, the main features of this concept of EU law
should be interpreted in a uniform manner throughout the EU, which cannot be (efficiently)
achieved through action at Member State level.
On the objectives to ensure sufficient transparency and shareholder oversight on directors’
remuneration and related party transactions, stakeholders and in particular
institutional investors and asset managers ask for greater harmonisation in
this area and in particular for more transparency and a shareholder vote. The
existing Member State rules in these areas are very
different and as a result, they provide an uneven level of transparency and protection
for investors, which could lead to unjustified transfers of value and directors’
incentives that are insufficiently aligned with shareholders’ interests. In
both cases, the result of the divergence of rules is that investors are, in
particular in the increasingly normal case of cross-border holdings of shares,
subject to difficulties and costs when they want to monitor companies and
engage with them. Moreover, they lack sufficiently effective tools to protect
their investments. Although this does not mean that they do not invest
across-borders, it does mean that the current regulatory framework inhibits
them to play a more optimal role in the corporate governance of listed
companies. Common standards at EU level are therefore necessary to promote a
well-functioning internal market and avoid the development of different rules
and practices in the Member States.
The problems regarding the barriers and
difficulties in identifying shareholders and channelling of voting information
and instructions through the complex cross-border chain of intermediaries
administering securities accounts are European in nature. The different
constituencies in the chain may not be required by national law to transfer
information across the borders and uncertainties remain regarding the ways in
which such intermediaries are expected to fulfil their obligations, especially
across the borders. Therefore, in order to ensure a swift and cost-effective
channelling of information and instructions through the cross-border chain of
intermediaries, EU intervention is necessary. 
The proportionality of possible action will
be examined in sections 7 and 8. Moreover, the actions will, where possible, be
in line with developments in Member States.
The following Articles of the EU Charter of
Fundamental Rights are relevant for the policy options discussed below: Article
7 (respect for private and family life), Article 8 (protection of personal
data), and Article 16 (freedom to conduct a business). Certain aspects of this
initiative might have a limiting impact on one or more of these rights but the
Commission will demonstrate that any negative impact may be justified and would
not result in a violation of these rights, which are not absolute in nature.
7.           Objectives
The overarching objective of this
initiative is to contribute to the long-term sustainability of EU companies and
to the creation of an attractive environment for investors in order to
contribute to growth, jobs and EU competitiveness. In the light of the analysis
of the risks and problems above, the general objectives are in particular to:
·     
Improve the governance and (financial)
performance of EU listed companies;
·     
Contribute to enhancing the long-term financing
of companies through equity markets;
·     
Improve the conditions for cross-border equity investments;
This requires the realisation of the following
more specific objectives:
·     
Increase the level of engagement of asset owners
and asset managers with their investee companies;
·     
Create a better link between pay and performance
of company directors
·     
Enhancing transparency and shareholder oversight
on related party transactions;
·     
Ensuring  reliability and quality of advice of proxy
advisors;
·      Facilitate the exercise of rights by shareholders.
·     
Improving the quality of information on
corporate governance provided by companies;
The specific objectives above require the
attainment of the following operational objectives:
·     
 Lower turnover of asset managers' portfolios;
higher level of shareholder engagement actions
·     
Greater correlation between directors' pay and
company performance 
·     
Lower number of unjustified related party
transactions and better protection of minority shareholders 
·     
Better transparency of proxy advisors on the
methodologies for the preparation of their voting
recommendations and their handling of conflicts of interest, increased number
of higher quality recommendations; 
·        
Create a European legal framework for
identification of shareholders and ensure   timely transmission of information
and rights by intermediaries
·        
Reduce cross-border price discrimination
·     
Ensure a higher level of useful explanations of
deviations of national corporate governance codes
8.           Policy Options, Impact Analysis and choice of preferred
option
This section contains a description of
relevant policy options that have been considered with the view to attaining
the objectives set out in the previous section. It also provides an analysis of
impacts of different options and their comparison in terms of effectiveness,
efficiency and coherence, as well as impact on different stakeholder groups.
8.1.        Increase
the level of engagement of institutional investors and asset managers
8.1.1.     Description
Option 1 – No policy change – would mean that no action at EU level would be undertaken.
Option 2 – Recommendation on
transparency of institutional investors and asset managers Asset owners would be encouraged to publish to which extent their
investment strategies are in line with the best long-term interests of their
beneficiaries and how they incentivise their asset managers in asset management
mandates to act in the best interest of their final beneficiaries and to engage
with investee companies. They would be recommended to publish
information regarding issues such as shareholder engagement, including
engagement policy and the outcome of engagement actions, voting records,
performance evaluation of asset managers used, expected and actual levels of
portfolio turnover, stock-lending, use of proxy advisors etc.
Asset managers would be
encouraged to disclose to which extent their investment strategies are in line
with the investment horizons of their clients and to disclose information on
engagement and voting policy and records, portfolio concentration, portfolio
turnover, actual and estimated cost of portfolio turnover and whether the level
of portfolio turnover is in line with the agreed investment strategy.
Option 3 – Mandatory transparency of
institutional investors and asset managers – would introduce the same transparency measures for institutional
investors and asset managers as option 2, but in the form of binding rules.
8.1.2.     Analysis
of impacts and choice of preferred option
Option 1 – No policy change
This baseline scenario is discussed in paragraph 5.1. This option
does not appear to be an effective approach for dealing
with the problems. The current legal framework and self-regulatory initiatives have
not been effective in solving the problems.
Option 2 – Recommendation on transparency of institutional investors
and asset managers 
The information to be provided under this
option would enable final beneficiaries to make better informed decisions and
to evaluate the extent to which the investment strategies defined by the asset
owner are aligned with their interests. Moreover, it would stimulate asset
owners to reflect more about these issues and to engage more with investee
companies. Asset owners would be able to make better informed investment
decisions and be able to verify whether the asset manager implements the agreed
investment strategy and assess its consequences in terms of costs, turnover
etc. Transparency on the costs of frequent portfolio
turnover may reduce the magnitude of such transactions, contributing to a
better focus on longer-term performance and more shareholder engagement. These
measures may ultimately result in cost savings and potentially a better return
for asset owners.[262]

This option leaves a lot of flexibility to
Member States, but provides at the same time a European standard in this area.
The effectiveness of this option depends on its application in practice. It is
not unlikely that its application in practice would be different from Member State to   Member State, which could be detrimental to the EU level playing field for
these investors that often work cross-borders.[263] The impact on Member
States would thus depend on their own follow-up to the recommendation.
As a result of such transparency mainstream
asset managers might have to refocus some of their activities. On the other
hand responsible asset managers, having a strong record of integrating
governance (and more broadly environmental, social and governance matters (ESG)
and engagement into investment strategies may benefit from these measures. In
this respect these investors would on the basis of the non-financial
information proposal of the Commission already have better information on these
matters, but such responsible investing would be further stimulated. This
option could have a positive impact on companies, since institutional investors
and asset managers will be incentivized to engage more and to reflect about the
basis (fundamental value or short-term perspective) and consequences of their
investment decisions. Disclosure of voting and engagement policies of
institutional investors and asset managers could facilitate dialogue between
them and listed companies. Moreover, more  focus on the
fundamentals and the real value-creating capacity of companies could in
particular be beneficial for listed SMEs. SMEs seem to be more affected by
current investment strategies which do not allow the
performance of investors to diverge too much from an index benchmark, so that
investment decisions are taken on the basis of the structure of a certain
benchmark. European capital markets are reported to
perform well in terms of providing a venue for trading in blue chips, but they
do not seem to provide sufficient liquidity for SMEs.[264] 
This option is also likely to have positive
social impacts. In particular, for pensioners or insurance policy-holders, more
engaged institutional investors and asset managers and a better focus on
long-term absolute performance will, according to studies[265], contribute to a
better financial performance of listed companies and could thus contribute to
more sustainable pension- and insurance systems. More engagement and a
longer-term perspective could also contribute to higher investments by
companies and thus more employment.
This option would entail administrative
burden for institutional investors and asset managers.[266] The costs of publication of engagement and voting policies and information on the main features of asset management mandates should not be substantial, as this would concern only the publication
of a statement on the policies adopted by the concerned institution and making
public already available information. In line with previous Commission
estimation, the cost of preparing such publications would range between 600 and
1000 euros per year.[267]
A more significant burden could, depending on the level
of detail required, lie in the publication of voting records. A detailed
disclosure could, for a large institutional investor with 2000 holdings, create
between 15.000 euro and 20.000 euro of costs. Costs
would be significantly lower (approximately 500 euro) if they are required to
draft and disclose an aggregated overview of their voting behaviour (number of
general meetings attended, % against management proposals and some ‘highlights’
(e.g. remuneration). Total costs for an institutional investor with
concentrated holdings (approx. 80), disclosing the detailed voting behaviour
would also amount to approximately 500 euro.[268] Similarly, the requirement for asset
managers to disclose information on the investment
horizons, engagement and voting policy and records, portfolio concentration,
portfolio turnover, actual and estimated cost of portfolio turnover portfolio turnover and its costs would not be very high. Moreover, EU legislation already requires, for some asset managers,
to disclose information on investment strategies and costs.
This option would not affect fundamental
rights: the publication would not involve personal data
and thus not impact the right to protection of personal data.
Option 3 – binding rules on transparency
of institutional investors and asset managers On
substance this option is similar to option 2. However,
it would be in a binding form, for which reason it would be more effective.
Binding rules ensure that the same transparency obligations will apply across
the EU, which ensures an EU level playing field and should facilitate
cross-border investment. As one of the key underlying problems is information
asymmetry, this can only be dealt with through uniform transparency measures. Finally,
existing rules for institutional investors and asset managers contain only a
limited number of transparency obligations in this area.
Stakeholder views emphasise the efficiency
of transparency measures to achieve a better alignment of interest between
institutional investors and asset managers. For example, Eurosif[269], in its contribution
to the green paper on long-term financing states that in order to create
incentives for changing asset management for a better alignment of interest and
more shareholder engagement,  asset owners need to disclose their investment
philosophy and to what extent and how they incorporate long-term considerations
(…) Contractual details that drive asset management behaviour are important in
this context such as the use of short-term benchmarks[270]. In addition, asset
owners need more disclosure and incorporation of long-term strategies from
their asset managers. Asset managers equally need to increase disclosure and
improve incentive mechanisms[271].

On the other hand, binding rules are less
flexible for institutional investors and asset managers.[272] In this respect, as
the binding transparency requirement would cover all institutional investors
and asset managers, a comply or explain regime would need to be introduced as
the business model of some asset managers is not necessarily focussing on
achieving results in the longer term and on shareholder engagement. The measures would thus in no way prescribe an investment policy of
investors; also long-term investors are interested in short-term performance.
The impact on Member States depends in
particular on the number of institutions, their market share and the applicable
framework in their Member State. European Asset
management is highly concentrated in the UK, France and Germany, which account for 66% of the total assets under management in Europe. This option would
therefore have the largest impact on these Member States and in particular the UK with a 36% market share.[273].
As far as asset owners are concerned, the biggest impact for pension funds can be
expected in the UK and the Netherlands, where the size of pension assets is 67%
of total assets of EU pension funds. As regards the number of pensions funds
the UK, Ireland, Netherlands and Spain have the highest number of pension funds
covered by the IORP Directive.[274]
For insurers the biggest impact can be expected in France, the UK and Germany that together have 65% of assets of European insurers and 43% of the number of
insurers.[275]
In view of the fact that voting and engagement policies are more practised in
the UK and the Netherlands it is expected that particularly these Member States
would find it the easiest to adapt to this approach. As
regards the administrative burden, they would remain the same as for option 2,
however in case of binding rules they would concern most likely a larger number
of asset owners and asset managers.
 Overview of costs implications: transparency of institutional investors and asset managers on their voting and engagement and certain aspects of asset management mandates 
 Publication of engagement and voting policies and information on the main features of asset management || Publication of voting records and past engagement || Disclosure of relevant  information by asset managers 
 Approximately 600 - 1000 € per year +  website publication ~ 70 €. Mostly one-off costs || Detailed: 15.000 to 20.000 € Aggregate overview of their voting behaviour: 500 € || Very limited – dependent from strategy, no estimation possible 
The table below summarises the assessment
of the policy options:
 Assessment of policy options 
   || Effectiveness || Efficiency || Coherence 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: recommendation on transparency of institutional investors and asset managers || + || + || + 
 Option 3: binding rules on transparency of institutional investors and asset managers || ++   || + || + 
   ||   ||   ||   
 Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 
 Assessment of policy options by stakeholders group 
   || Companies || Institutional investors) || Asset managers || Ultimate beneficiaries 
 Option 1: no policy change || 0 || 0 || 0 || 0 
 Option 2: recommendation on transparency of institutional investors and asset managers || + || + || -/+ || + 
 Option 3: binding rules on transparency of institutional investors and asset managers || ++ || ++ || -/+ || ++ 
   ||   ||   ||   ||   
In the light of this assessment, it appears
that the most appropriate option at this stage would be option 3 (binding
rules on transparency of institutional investors and asset managers), which
would increase awareness of final beneficiaries, asset owners and asset
managers of these issues and by ensuring transparency enables them to take
informed investment decisions.
8.2.        Create a better link between pay and performance
8.2.1.     Description
With regard to the creation of a better
link between pay and performance, the option of soft-law was discarded during
preliminary analysis. The Commission has adopted three recommendations on this
subject, but they have not produced sufficient results.
Option 1 – no policy change – means that no new action would be undertaken at EU level and the
existing recommendations would continue to apply.
Option 2 – binding rules on transparency
of remuneration – implies a minimum harmonisation
of disclosure requirements.
Information should be disclosed on the
remuneration policy, in particular on its objectives, adoption process, its link
with long-term performance and business strategy and how it contributes to the
long-term performance of the company. It should include information on the
breakdown of fixed and variable remuneration, on performance criteria and on
the parameters for annual bonus schemes or non-cash benefits.
Information should also be disclosed on
individual remuneration paid and all its components such as fixed pay, variable
pay, stock options, retirement benefits and all benefits in kind. Potentially
sensitive information should however be explicitly excluded in order not to
disproportionately interfere with the private and family life of individuals. A
common template regarding the disclosure of remuneration should be used to
ensure comparability for investors across the EU.
Option 3 – shareholder vote on
remuneration – means that there
should be, in addition to the transparency measures of option 2, an ex-ante shareholder
vote on the remuneration policy and an ex-post vote on the remuneration report.[276]
The vote should be an explicit
item on the agenda of the annual
general meeting. The shareholders vote could be
advisory, which means that the boards would not be obliged to follow it, or
binding, which means that the board would not be able to derogate from it.
8.2.1.     Analysis
of impacts and choice of preferred option
Option 1 – no policy change. Maintaining the current framework is not likely to solve the
problems described in the problem definition. The recommendations on remuneration did not
produce sufficient results, since only 6 Member States have implemented all the
main principles thereof. As a result, shareholders face difficulties to be properly informed and to
exercise their control over directors’ pay, which results in pay that is
insufficiently linked to performance.[277]
Option 2 – binding
rules on transparency of remuneration. Providing shareholders with clear,
comprehensive and comparable information on remuneration policies and
individual remuneration of directors would help them in exercising effective
oversight. Disclosure of information is an
important precondition for aligning the incentives
of directors with the interest of shareholders. It
allows shareholders to assess the main parameters and rationale for the
different components of the remuneration package, notably the link between pay
and performance. 
Increased transparency is supported by
stakeholders and experts. In reply to the 2011 Green Paper, shareholders, institutional investors, asset managers and proxy
advisors almost unanimously supported mandatory rules to increase the
transparency of remuneration policy and report and, also, called for making the
information on remuneration comparable in Europe.[278] Companies are however generally less in
favour of increasing transparency. The majority of Member States that answered
to the consultation were in favour of a European action to increase
transparency[279],
a minority of Member States is of the view that remuneration should be dealt with
by the board.[280] The European Corporate
Governance Forum recommended the mandatory disclosure of remuneration policy and individual
remunerations.[281] The European Company Law Experts pointed out in 2011[282]
that, in the absence of binding rules, companies are reluctant to provide full disclosure concerning remuneration, particularly on
the pay/performance link and
on termination payments.
Harmonisation of
disclosure requirements at EU level would be a remedy
to asymmetry of information which is detrimental to shareholders and,
therefore, plays a key role for minimising agency costs. It would be beneficial
for cross-border investment, since it would facilitate comparison of information and make engagement easier
and thus less costly. Moreover, it would make companies more accountable to
other stakeholders like employees. For the argument that
individual disclosure of director pay can lead to an upward pay spiral, there
is, according to the OECD, little hard evidence.[283]
As regards the impact on Member States it
is noted that 15 Member States already foresee disclosure of remuneration policy
and 11 foresee disclosure of individual remuneration, which would mean that the
impact on these Member States would be relatively limited.[284] This option would
entail certain administrative burdens for listed companies.[285] However,
these burdens should be limited. As regards disclosure of the remuneration
policy companies already have, implicitly or explicitly, such a policy. Since the
preparation for publication of the policy should take approximately 2 to 4
working days, average cost would be between 525 and 1050 euro. In addition, it
should be noted that remuneration policies are normally not revised on a yearly
basis, which means that costs will be lower after the first year and then only
reach the initial level after a revision of the remuneration policy. As regards
the remuneration report, which involves a disclosure of individual
remunerations granted, the preferred option foresees a degree of
standardisation of the disclosure; these costs would however be very limited,
since this requirement is only a matter of presentation of the information
disclosed. In line with previous estimations made by the Commission's services
for comparable disclosures[286],
the preparation of such additional statement in the annual report would range
between 600 and 1000 euros per year per company. However, the additional burden
flowing from this option would be much lower, since companies are already
required to report on the amount of remuneration paid to members of the
administrative, managerial and supervisory bodies in the annual accounts[287];
moreover, publication of remuneration reports/statements is also in general
required by the Corporate Governance Codes applicable to companies listed on
European stock exchanges. Finally, such standard of disclosure will make it
much clearer how much is earned by each director by reference to the
performance of the company, and will reduce the agency costs by limiting the
time shareholders need to spend reviewing pay policy statements
 Overview of cost implications: binding rules on transparency and mandatory shareholder vote 
 Disclosure of the remuneration policy || Remuneration report 
 Approximately 525 - 1050 € || Approximately 600 - 1000 € 
This option is unlikely to have a specific impact on the
availability of new directors. Although transparency of individual remuneration
might be difficult to accept for certain directors, the remuneration is not
changed by disclosure. The high level of disclosure of individual remuneration
required in certain markets, such as US or Australia, did not negatively impact
companies’ ability to attract competent directors.[288]
This option should overall have a rather
positive impact on the competitiveness of European companies[289]: more
transparency on pay could contribute to a stronger link between pay and
performance and decrease unjustified transfers of value to directors. Better
aligned interests of directors and shareholders could also contribute to better
financial performance of companies and strengthened corporate governance. The positive
impacts would thus appear to clearly outweigh the limited costs and burdens.
This option could have also an indirect
positive social impact. More transparency on remuneration could increase
well-informed social dialogue and accountability of companies towards
stakeholders and increase the long-term sustainability of companies.
This option requires the processing of
certain personal data and therefore touches upon the fundamental rights to
privacy and protection of personal data of directors. The processing of personal
data must always be carried out in accordance with national data protection
laws implementing EU data protection law, particularly Directive 95/46/EC.[290]
The Commission has considered the possibility of introducing less intrusive
alternatives, such as for instance requiring an aggregated disclosure for the
entire board of directors where only the number of directors and the total
remuneration would be indicated. Such disclosure would however not fulfil the
objectives of the initiative, since it would not allow shareholders to assess
the link between pay and performance and to remedy potential situations where
an individual director seriously underperforms.
Option 3 – shareholder vote on
remuneration. Granting
shareholders a vote on pay would give them an effective tool to
oversee directors’ remuneration
and engage with companies. Thus, it would contribute to aligning the interests of directors with those of
shareholders and help to avoid unjustified transfers of value to directors. The vote on the remuneration policy would ensure that shareholders can have a real influence on shaping important
aspects of this policy, while the vote on the remuneration
report allows them to control the execution thereof.
Such a vote can be advisory or binding. The
difference in practice might be less important though, as even an advisory vote sends a strong message to the board of directors or
supervisory board. It encourages the board to negotiate the remuneration policy
upstream with major shareholders and to revise the remuneration policy to avoid
further negative votes, in other words to engage on this issue. A binding vote gives
more importance to shareholders and studies show that such vote creates a
stronger link between pay and performance than an advisory vote[291]; on the other hand,
it could in some Member States lead to a transfer of powers from certain
corporate bodies to shareholders. A number of Member
States already gives shareholder a binding vote on remuneration policy (Belgium, Bulgaria, Hungary, Latvia, Portugal, Slovakia, Sweden, United Kingdom and the Netherlands), whereas others (Czech Republic, Spain and Italy) have an advisory vote. As set out in the problem definition, studies suggest that shareholder approval creates a
better link between pay and performance of directors.
Consultations conducted by the Commission
show a strong support for the shareholder ‘say on pay’ from most stakeholder groups.[292]
Shareholders, institutional investors, asset managers
and proxy advisors almost unanimously supported a say on pay.[293] However, a majority
of companies were not in favour of granting a vote on shareholders. A small
majority of Member States responding was in favour of granting such a right to
vote,[294]
while a small majority suggested that more evidence and studies were needed
before considering the idea of imposing rules.[295] The support for say on pay is also evident
from the study on monitoring and enforcement practices on corporate governance[296],
which shows that 95% of
responding investors favour enhanced rights to vote on remuneration. The European Corporate
Governance Forum also recommended[297]
a shareholder vote on
remuneration policy.
The OECD good governance principles[298] recommend that
shareholders should be able to make their views known on remuneration policy
and, according to the OECD, it is increasingly good practice for remuneration
policies and implementation measures to be subject to binding or non-binding
shareholder votes. Experience of OECD
countries suggests that the effectiveness of ‘say on pay’ depends on active,
informed and capable shareholders and providing institutional shareholders and
asset managers with incentives and
cost effective means for exercising shareholder rights.[299] When
it comes to directors’ pay, shareholders do exercise their rights. Average EU
dissent in general meetings is the second highest for remuneration.[300] Academic
studies[301] have also found that the level of dissent concerning
resolutions on remuneration is higher than against other company resolutions
and that companies with the highest paid CEOs have seen higher levels of
dissent.[302] For example, in the UK in 2009, around one
fifth of FTSE100 companies had more than 20% of their shareholders withhold
support for their remuneration reports.[303]
This option would
entail, in addition to those related to transparency which are estimated under
option 2, some very limited costs for companies, namely the organisation of the shareholder vote. In practice, companies would
have to add one additional point on the agenda of their general meeting.
Certain indirect costs may nevertheless need to be taken into account, linked
in particular with dealing with the potential consequences of the negative vote
and with discussions with important shareholders that will most likely be
intensified. However, these costs would appear to be rather limited.[304]
Also, there will be no familiarisation costs as companies
already deal with binding votes on a number of key issues, including
director re-election. Finally, a
shareholder vote will make engagement with companies over pay easier and will
reduce the agency costs.
As regards the impact on Member States it
is noted that 13 Member States already foresee some kind of shareholder vote,
which suggests that the impact of a shareholder vote in these Member States would
therefore be relatively limited.[305]
This option should
have no negative impact on the availability of new directors, as the vote
itself does not necessarily result in a decrease of the level of remuneration. Companies and shareholders will retain flexibility and will still be able to reward excellent performance. Member States (in particular United Kingdom and
the Netherlands) that have introduced say on pay didn’t face any obvious detrimental impacts on their ability to attract talented directors. This is also
true outside Europe, since Australia and the United States have introduced say
on pay without knowing any negative effect on the availability of new directors.
There should be no negative impact on the
competitiveness of European listed companies, including listed SMEs. As suggested
by studies, say on pay would lead to a stronger link between pay and
performance and have a positive impact on the sustainability of companies. Shareholders
could use their new power on remuneration to push directors to perform on the
short term. To counterbalance such use of ‘say on pay’ it is foreseen that
companies should explain the link of the remuneration policy with long-term performance and business strategy and how it contributes
to the long-term performance of the company. 
As the previous, this option could
indirectly have a positive social impact. Concerning
the impact of this option on fundamental rights, the vote on the remuneration
policy and report would not affect fundamental rights, but for the transparency
of the report the same assessment has to be made as for option two.
 Assessment of policy options 
   || Effectiveness || Efficiency || Coherence 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: binding rules on transparency of remuneration || + || + || + 
 Option 3: shareholder vote on remuneration || + || ++ || + 
   ||   ||   ||   
 Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 
 Assessment of policy options by stakeholders group 
   || Companies || Investors || Directors 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: binding rules on transparency of remuneration || - || + || ≈ 
 Option 3: shareholder vote on remuneration || - || ++ || ≈ 
   ||   ||   ||   
In the light of this assessment, the
preferred option is option 3 (mandatory shareholder vote on remuneration),
which includes the transparency measures of option 2. As the different causes
for the mismatch between pay and performance are interlinked and mutually
re-enforcing, there is a need to ensure both increased transparency and a
shareholder vote on remuneration policy and report.
8.3.        Transparency and oversight on related party transactions
8.3.1.     Description
Option 1 – no policy change – means that no action would be
undertaken at EU level in order to improve the control of related party
transactions (RTP).
Option 2 – soft-law providing guidance – would entail the adoption of a
recommendation, that provides guidance for Member States on the transparency
and oversight of RPTs
Option 3 – additional transparency requirements
for RPTs – would entail a
binding legal framework that would require listed companies to publicly announce
the most substantial transactions and provide a fairness opinion by an
independent advisor for.[306]
Option 4 – shareholder vote on the most
important RPTs – would
give shareholders the power to approve or reject the most important related
party transactions[307],
with the concerned related party being precluded from participating in the
vote.
8.3.2.     Analysis of impacts and choice of preferred option
Option 1 - No policy change. The baseline scenario is analysed above. Although discussions are
on-going on different levels on the appropriateness of the current rules, there
is no common approach in sight in Member States or at international level that
could solve the problems described in the problem definition.
Option 2 – soft-law providing guidance. This option
is likely to have some positive impact on companies’ handling of RPTs. It would
leave a lot of flexibility to Member States, but could contribute to a more
harmonised approach on this issue. The impact on Member States would depend on
their application in practice of the recommendation. Minority shareholders
could benefit of the increased transparency and oversight. Its effectiveness
would depend however on whether Member States would decide to follow the
recommendation. In general, the impact would be lower than the impact of
binding rules. As regards the costs and administrative burden, this option
might entail modification by companies of existing procedures so as to improve
information of investors and the procedures for approval of transactions.
However, in particular providing investors with certain ex ante information
could be done though the websites of companies and should not be costly.
This option would have an overall positive
economic impact and consequences for economic growth and employment, as it
would stimulate a better handling of related party transactions by companies
and decrease the risk of unjustified transfers of value. There would be no
impact on fundamental rights.
Option 3 – additional transparency
requirements for RPTs Enhancing existing
transparency rules on RPTs would create a more harmonised EU approach.
Investors, amongst which minority shareholders, would receive timely, more, and
better information, which facilitates monitoring and engagement of more
important RPTs. Also other stakeholders, such as employee representatives and
monitoring bodies, would benefit of increased transparency and accountability which
would enable all stakeholders to take legal action against such transactions. Increased
transparency could be expected to prevent unjustified RPTs, as the enhanced
transparency should prevent boards from entering into more doubtful RPTs.
Increased transparency would thus be a barrier against the unjustified transfer
of value from companies, which in turn could have a positive effect on the competiveness
and sustainability of companies.
As explained in the problem definition
there is strong support from certain stakeholders for
more and better information RPTs.[308]
The European Corporate Governance Forum also recommended that transactions
above a threshold of 1% of the assets should be announced publicly and be subject
to evaluation by an independent advisor.[309]
The adoption of binding rules is expected
to have a bigger impact than soft-law. On the other hand, this option would
leave less flexibility to Member States and companies to decide on their own
arrangements. In addition, providing shareholders solely with information
without ensuring that they have real impact on the decision making process
might not guarantee an optimal level of protection and give them the necessary
tools to act against abusive transactions.  For instance, court proceedings
often take a long period of time and are costly.
Public announcement involves some limited
additional costs for companies, including SMEs, since EU law already contains
an obligation to report on RPTs in the annual report.[310] The only difference
would be that under this option the transactions should be announced at the
moment of conclusion thereof. The disclosure of each substantial RPT would
therefore cost to a company an estimated 120 €. Administrative burden would
also be linked to the requirement to have a fairness opinion on the proposed RPT
above the 1% threshold transaction of an independent advisor. Depending on the
complexity of the transaction and it would seem that an experienced advisor
would be able to assess the fairness of the given transaction within between
approximately 5 and 10 hours. This could result in a cost of maximum 2500-5000
€ in case the opinion is made by an auditor. Finally, overall costs and
administrative burdens would not offset the gains realised thanks to a decrease
in unjustified transfer of value and the increase in legal insecurity. Based on
the OECD repor[311]t
on related party transactions it would appear that each year some 15% of the
listed companies could have one transaction equal or above 1% of their assets.
This would mean that approximatly 1550 companies should apply the foreseen
rules. This option would not require further disclosure of personal data than
already foreseen under EU law.
 Overview of costs implications: improving transparency requirements and shareholders vote on the most important related party transactions 
 Public announcement of RPTs || Fairness opinion by an independent advisor || Shareholder vote on most substantial transactions 
 Disclosure approximately 50 € + publication approximately 70 € || Approximately 2500 - 5000 € || No additional costs if held during AGM. Limited and ad-hoc costs if a GM must me organized. 
The impact on Member States would depend on
the one hand on the current rules in force and on the other hand on the number
of listed companies and reported RPTs. In Spain both the percentage of related
party transactions and number of listed companies is very high, (3167).[312] In Ireland and Austria, with a relatively high percentage of RPTs, the number of listed companies is
relatively low (42 and 70), while in France and Poland who have a relatively
high percentage of RPTs the number are higher (862 and 844). The public
announcement of the RPTs would not have a major impact on any Member State, since RPTs already have to be disclosed, only the timing would be different. A
report by an independent advisor on the other hand, could have a bigger impact.
In a number of Member States it already exists, and from amongst the Member
States with a high reporting of RPTs and a large number of listed companies France already foresees such an obligation and in Spain the regulator could request such an opinion.
Option 4 – shareholder vote on the most
important transactions. Giving shareholders a right
to vote on the most important RPTs would enable them to reject a related party
transaction of major importance that they consider not to be in their interest.
Such a vote would presuppose that shareholders have the necessary information
to base their vote on. Minority shareholders would in particular be protected
better against related party transactions with the controlling shareholder and
directors, if this party would be excluded from the vote. Boards will be less
inclined to enter into problematic related party transactions if they know
their shareholder will have a say on this. Moreover, if they still do so,
shareholders may reject the transaction if they deem it is not in the best
interest of the company. A mandatory shareholder vote would therefore stimulate
reflection of companies on RPTs and also stimulate companies to engage with
shareholders. Even in relatively clear cases of unjustified RPTs, going to a
court is often not attractive in view of the costs and duration of the
proceedings. The shareholder vote would thus be an effective barrier against
unjustified transfers of value from companies, which could have a positive
effect on the competiveness, sustainability of European companies and
cross-border investment.
The impact on Member States depends on the
same elements as in the previous option. The legislation of the Member States
with the highest reporting of RPTs (Spain, Ireland and Austria) does not foresee a vote on related party transactions. Interestingly, the Member State with the highest percentage of reported RPTs and the highest number of RPTs (Spain) stated its support for EU action to introduce a vote of shareholders. Shareholder approval
of the most substantial related party transactions could result in some limited
administrative burden. In view of the fact that the threshold would be
relatively high (for instance 5% of the assets), only a limited number of
transactions would be subject to this obligation. 
The impact of the vote could be expected to
be stronger than in case of soft-law guidance or rules focusing solely on
transparency. It would involve marginal additional costs for companies linked
to the organisation of the shareholder vote, either in the annual meeting or a
special meeting, which could however be more costly. However, the relative costs
would not be significant, since such a vote would, to be proportional, only be
mandatory for the most important transactions. In addition, costs and
administrative burdens could be partly offset due to the fact that the stricter
control by shareholders would most likely decrease the use of other remedies,
such as court proceedings. This option should have no impact on the fundamental
rights.
The two tables below summarise the impact
of the policy options in general and per main stakeholder groups
 Assessment of policy options 
   || Effectiveness || Efficiency || Coherence 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: soft-law providing guidance || ≈ || ≈ || + 
 Option 3: additional transparency requirements for RPTs || + || + || + 
 Option 4: shareholders vote on the most important transactions || ++ || ++ || + 
 Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 
 Assessment of policy options by stakeholders group 
   || Companies || Investors || Other stakeholders (employees, competent authorities) 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: soft-law providing guidance || ≈ || ≈ || ≈ 
 Option 3: additional transparency requirements for RPTs || + || + || ++ 
 Option 4: shareholder vote on the most important transactions || + || ++ || ++ 
In the light of this assessment, it appears
that the most appropriate option at this stage would be the combination of
option 3 (improving transparency requirements for related party
transactions) and option 4 (shareholder vote on the most important
transactions). While entailing costs and administrative burden for companies,
it ensures that shareholder obtain timely information on the conclusion of
important RPTs and it gives shareholder the right to reject most important
RPTs. This provides an effective barrier against unjustified transfers of
value.
8.4.        Transparency of proxy advisors
8.4.1.     Description
Option 1 – no policy change – would mean that no action at EU level would be undertaken.
Option 2 – recommendation on
transparency – would entail a Recommendation
encouraging proxy advisors to disclose certain key information: on one hand,
their policy for the prevention, detection, disclosure and treatment of
conflicts of interests and on the other hand, the methodology for the
preparation of advice, including in particular the nature of the specific
information sources they use and how the local market, legal and regulatory
conditions to which listed companies are subject are taken into account.
Option 3 – binding transparency requirements – would require compulsory disclosure by proxy advisors of the same
information as foreseen in option 2.
Option 4 – detailed regulatory framework –would submit proxy advisors to specific rules regarding the
treatment of conflicts of interest and methodological requirements to ensure
that they act in the best interests of their clients. In addition, it would
also include measures on authorisation or registration and supervision by
competent authorities.
8.4.2.     Analysis
of impacts and choice of preferred option
Option 1 – no policy change. In the absence of EU action, further developments concerning proxy
advisors would depend on actions by Member States, market developments and also
on actions by proxy advisors themselves. In this context, their current work,
inspired by ESMA, on a code of conduct could bring some welcome developments. Considering
however the fact that the code of conduct would be made by the sector itself, would
be non-binding as well as the existing lack of competition in the sector, there
is a risk that the problems described will not be sufficiently tackled. In
addition, action by individual Members States is unlikely to be sufficient,
since the most important proxy advisors provide services on a European and even
international scale.[313]
Option 2 – recommendation on disclosure
requirements. A recommendation encouraging proxy
advisors to be transparent as regards their conflicts of interest and their
methodology could provide an additional incentive for proxy advisors to address
these concerns. Moreover, such guidance would provide a signal for
international investors that the EU takes accuracy and reliability of investor
information serious. It would leave a lot of flexibility to Member States, but
could contribute to more harmonised approach: it could increase reliability of
the advice given and could therefore give institutional investors and asset
managers a more solid basis for their engagement with listed companies,
especially in case of cross-border holdings. The effectiveness of this option
depends however on whether Member States  would decide to follow this guidance.
In general the impact would be lower than the impact of binding rules.
As regards the costs and administrative
burden, depending on the application this option would entail, as a maximum,
the same administrative burden as under option 3. On the other hand, such
guidance might not have significant added value in comparison to the baseline
scenario, according to which the proxy-advisors will establish a code of
conduct. Some positive economic impacts could be expected in view of the
increased reliability of these important advisors to investors. No direct social
impact or impact on fundamental rights is to be expected.
Option 3 – binding transparency
requirements. Introducing binding transparency
requirements on the two main areas of concern (methodology and management of
potential conflicts of interest) would put additional pressure on proxy
advisors to establish adequate procedures on these crucial aspects. This option
is more effective than a recommendation, also because Member States and proxy advisors would be bound to apply the principles. The importance of reliability
and accuracy of the information in the investment chain cannot be overestimated
and such information could have a positive effect on the competiveness and
long-term sustainability of companies. On the other hand, this option would
leave less flexibility to Member State and proxy advisors to decide on their
own rules/arrangements. The first consultation documentson a possible
self-regulatory Code on proxy advisors shows little ambition for the sector to
self-regulate.  The Member States that would be most impacted by this option
would most likely be the UK, France and Germany. These Member States have a
large stock market both in terms of market capitalisation and number of listed
companies, while they have a market share of more than two-thirds in the asset
management market. Asset managers are making the most use of proxy advisors.
However, Member States, nor institutional investors and asset managers would be
impacted in a negative manner: the option would only increase transparency and
reliability of proxy advisors.
In the context of the 2011 Green Paper
there was strong support by shareholders, institutional
investors and asset managers for increasing the transparency regarding the
methodologies used and for addressing the widely recognised problem of conflicts
of interest that was shown. Companies also called for regulation of the sector,
mainly justifying it by pointing to  the risk that could arise from the
influence proxy advisors currently have. Furthermore, all proxy advisors that
answered to the consultation[314] stated to be in favour of more transparency and the diffusion of a
code of conduct. The majority of Member States that expressed their view were
in favour of increasing transparency of the methodology used and addressing the
conflict of interest[315], while some Member States considered this unnecessary.[316]
This option would involve some
adminstrative burden for proxy advisors, in particular due to the requirement
to improve information on their internal procedures (disclosing methodology and
prevention of conflict of interest) and preparing this information for
publication. Normally, these costs would  essentially be incurred only once and
only more often if the proxy advisors would change essential parts of these
policies. The preparation of appropriate information on internal procedures
would in practice represent a few hours of work of staff. In addition, many
proxy advisors already have internal guidelines on the relevant issues and some
of them are already, at least partly, publicly disclosed on their websites.
Therefore, depending on the proxy advisors and the level of adaptation for
publication needed, the additional working hours estimated to prepare the
disclosure of the policies will range between 20 and 50 hours, suggesting that
the cost of preparing the required information for publication will therefore
range, for each proxy advisors, between € 1000 and € 2500. These costs would be
incurred by 10 proxy advisory firms that are active in the EU. Requiring proxy
advisors to be transparent on a number of issues and  not  submitting them to detailed
rules will not deprive proxy advisors of operational flexibility. The positive
impacts mentioned in option 2 would remain with a much higher likelihood to
materialise.
 Overview of cost implications: Proxy advisors' transparency 
 Disclose methodology and conflict of interest 
 Disclosure approximately 50 € + publication approximately 70 € 
Option 4 – introducing detailed
regulatory framework. The introduction of detailed
binding measures would appear, in the current circumstances, disproportionate
and could even have negative effects on the development of the sector and the
entry of new competitors. A directive with detailed rules might even induce
Member States to add more rules, which could threaten the business model of
proxy advisors and may reduce the attractiveness of such services by slowing
down the provision of proxy advice. Although the impact on the reliability and
accuracy of the proxy advisors advices could be higher, there would be higher
costs for investors and much less flexibility. Consultations and analysis have
not revealed support for such detailed legislative rules.
The analysis of policy options is
summarised in the tables below:
 Assessment of policy options 
   || Effectiveness || Efficiency || Coherence 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: recommendation on transparency || ≈ || + || ++ 
 Option 3: binding transparency requirements || + || ++ || + 
 Option 4: detailed regulatory framework || ++ || - || - 
 Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 
   || Assessment of policy options by stakeholders group 
   || Companies || Investors || Proxy advisors || Regulators 
 Option 1: no policy change || 0 || 0 || 0 || 0 
 Option 2: recommendation on transparency || + || + || ≈ || + 
 Option 3: binding transparency requirements || ++ || ++ || - || + 
 Option 4: introducing detailed regulatory framework || + || + || -- || + 
In the light of this assessment, it appears
that the most appropriate option at this stage would be option 3 (binding
transparency requirements), which would provide the highest likelihood
to trigger a positive change with limited cost.
8.5.        Shareholder
identification, transmission of information and instructions by intermediaries
8.5.1.     Description
Option 1 – no policy change – means that no new action would be undertaken at EU level.
Option 2 –defining minimum EU rules - means the introduction of mutual recognition of national investor
identification systems and a non-legislative endorsement of existing market
standards.
Option 3 –would establish an EU-wide
mechanism of shareholder identification based on an obligation for
intermediaries to provide the service of shareholder identification and oblige
intermediaries to transmit information through the holding chain and to
facilitate the exercise of shareholder rights. It would
also require intermediaries to disclose the prices and fees of the services
provided and to justify any differences in pricing between domestic and
cross-border holdings 
8.5.2.     Analysis
of impacts and choice of preferred option
Option 1 – No policy change
Without Union action, the problems identified
in the area of cross-border exercise of rights and shareholder identification
will remain largely unresolved as different legal rules would continue to exist
within the EU. The determination of the duties of intermediaries in respect of
transmission of information and monetary rights would be left to Member States.
The Single Market would continue to face barriers to cross-border holdings and
to the cross-border exercise of rights. This would constrain progress towards
improved exercise of shareholders’ rights only for cross-border holdings
between Member States with similar legal and operational systems providing the
exercise of rights. Market participants would still bear the costs of remaining
legal uncertainty due to persistent differences between national legislation.
On a cross-border basis, companies, who under their home member state law, have
the right to identify their shareholder, would continue to run the risk that
their request for identification is refused by an intermediary established in
another, less transparent jurisdiction. Thus, this option would not
re-establish a direct relationship between the company and its shareholders.
Member States would not be required to introduce any rules aimed at preventing
cost discrimination and/or requiring transparency of pricing. This would
prevent shareholders and companies from fully benefiting from their rights in
the case of cross-border holdings. Intermediaries would continue to have the
possibility to differentiate the prices of purely domestic and cross-border
holdings on the basis of the geographical location of the shareholder and the
place of the issuance of the shares. As price transparency would be left to
voluntary self-commitment of the intermediaries, price comparability would
remain difficult. Moreover, the Code of Conduct for Clearing and Settlement[317] does not apply to all intermediaries, and where it is applicable,
the results are not optimal.[318]
Although a better application of voluntary
market standards could potentially improve the situation, it would be rather
limited due to the voluntary nature of these standards (i.e. to be applied by a
certain percentage of market participants) and the slow pace of implementation[319] (i.e. multiple legal obstacles in Member States which continuously
delay the implementation process). 
Therefore, maintaining the status quo would
not solve any of the problems outlined in the problem definition and would not
achieve the objectives set.
Option 2 – defining minimum EU rules
This option would, amongst others, promote
existing market standards, namely the ‘Market Standards on Corporate Actions
Processing’[320] and the ‘Market Standards on General Meetings’.[321] These were developed by the industry and cover the main relevant
constituencies, i.e. listed companies, market infrastructures and
intermediaries.[322] They introduce streamlined communication and operational processes
based on a best practices approach, so as to ensure that information from the
company reaches the shareholder and vice versa in a timely and cost efficient
manner. According to the 2012 implementation report[323], although the overall implementation process of the Standards for
Corporate Actions has been kept at a high level (the compliance rate in 8 major
markets is 85 to 90%), it faces many legal and operation hurdles in Member
States due to differences in national rules and information requirements.
Given that the consistent
and timely processing of information heavily depends on the standardisation of
operational procedures and key dates used by companies and intermediaries, the
Commission has always strongly encouraged market-led standardisation as it
plays a primordial role for the development of cross-border investment. In the long run, standardising these processes across all EU
markets would achieve a significant reduction of respective costs and
operational risks (e.g. for intermediaries). These efficiency gains could be
passed on to shareholders and other market participants (e.g. investors,
issuers, intermediaries) would benefit from increased cross-border as well as
domestic efficiency. However, in the short-term, important investments by
intermediaries may be required in order to become compliant with the standards.
As reported to the
Commission, the effectiveness of the implementation progress of these market
standards depends very much on the existence of a legal basis for them in
legislation. For example, at a meeting on September 2011, the Chair of the
European Market Implementation Group stated that the Austrians have argued that
without legal basis they do not even make the effort to become compliant with
the standards, whereas Italians are champions in implementing the standards as
the Italian regulator made the web based template developed by intermediaries
compulsory for listed companies. Furthermore, according to the 5th progress report on the application of the Market Standards for
Corporate Actions Processing and the Market Standards for General Meetings
(February 2013), the implementation is slow and the target date of 2013 for
full implementation is unrealistic. This option would therefore not achieve the
objective, even if these standards were to be promoted by means of
non-legislative endorsement.
The option of mutual recognition of national
identification systems would ensure
that where the applicable law under which the shares are constituted entitles
the company to identify its investors, intermediaries would be obliged to
provide the requested information. As 78% of Member States (only in Belgium,
Netherlands and Germany is there no access of any sort) provide companies with
some sort of access to the information on the holding of the shareholder for
domestic participants[324], the disclosure obligation would not result from the proposal, but
would come from the applicable corporate law of the relevant issuer. The
EU-wide recognition of national identification systems was not included in the 2nd
public consultation, but was advocated by the T2S Taskforce on Shareholder Transparency.
It would enlarge the number of identified
shareholders in cross-border scenarios when the existing national
identification systems prove effective. However, it would only partially solve
the problem in shareholder identification as not all shareholders would be covered, but only those who hold
their shares under a disclosure-friendly jurisdiction. In practice this would
mean that for 23% of the market capitalisation of EU listed companies no
identification at all would be available (Germany, Belgium and the
Netherlands), and for another significant part only information on the first
layer of shareholders would be available. In some
markets, e.g. Austria, Belgium, Netherlands, Spain, companies have no or only
very limited information available, even on the domestic shareholder level.[325]
This option touches upon the fundamental
right of protection of personal data (Article 8 of the Charter). Member States
that currently have strong privacy rules allowing the shareholder to remain
anonymous would have to make their residents reveal their identity to an entity
governed by foreign law. Given that more than two thirds of Member States (all except Belgium, Netherlands and Germany) have already granted companies the right to know their domestic
shareholders, this option would reduce the level of privacy protection in less
than one third of Member States. In terms of financial costs, the impact would
be minimal, as the national identification schemes would not have to be
changed, but are only enforced on a cross-border basis. However, this option
would not fully solve the problem.
Option 3 – Creation of an EU shareholder
identification instrument and obligations for intermediaries to transmit
information through the holding chain
The different elements of this option are
closely linked, since they require action of intermediaries. Listed companies
could request intermediaries in the chain to identify the shareholders. The
intermediaries would be under a legal obligation to provide the identity to the
next intermediary in the holding chain until the company has received the name
and contact details of the shareholder. At the same time, for the obligation to
transmit information and the facilitation of exercise of rights, the same
intermediaries in the same chain would be used, unless the company decides,
after identifying its shareholders directly contacts them.
This option would leave it to the company to
decide whether or not to seek to identify its shareholders.[326] In cases where the company does not request identification, the
shareholder would not be able to enter into direct contact with the company for
the exercise of his rights and the company would not be able to identify the
shareholder itself and get into direct contact with him. It has to be noted that the Shareholders' Rights Directive does not
aim at harmonising the concept of the "shareholder" or defining who
the beneficial owner of a share is. In this respect, the different national
regimes will continue to apply. 
Over 81% of issuers who responded to a public
consultation[327] supported a harmonised EU system identifying shareholders. Member State authorities broadly also supported a technical and/or legal EU mechanism to
help issuers identify their shareholders. During the second public
consultation, investors, including pension funds, also backed an EU mechanism
to identify shareholders (approx. 88% of investors’ replies); however,
intermediaries were not favourable to such a mechanism due to the potential
increased costs and the sufficient transparency of existing national systems.[328] 
Identification of shareholders has an impact on
fundamental rights recognised in particular in the Treaty on the Functioning of
the European Union (TFEU) and in the Charter of Fundamental Rights of the
European Union (Charter), notably the right to the protection of personal data
recognized in Article 16 TFEU and in Article 8 of the Charter.
In view of this it is necessary to strike a balance
between the facilitation of the exercise of shareholders' rights and the right
to privacy and the protection of personal data. The identification information
on shareholders would be limited to the name and contact details of the
shareholders and could only be used for facilitation of the exercise of
shareholder rights. Consequently the measure would not
go beyond what is necessary to achieve the objective. In the light of this, the
limitation of the investor's privacy rights would be justified.
Such an EU-wide identification mechanism
would entail certain costs. In 2005, the annual amount spent on shareholder
identification ranged from an average EUR 9 000 per company in Denmark to EUR 36 000 per company in Spain.[329] According to a recent report, in most Member States (e.g. Belgium, Bulgaria, Cyprus, Denmark, Estonia, Germany, Spain, Finland, France, Greece, Malta, Poland, Sweden and Slovenia, the Central Securities Depository is remunerated for
providing the data to issuers.[330] It is difficult to compare the actual level of fees due to national
differences.[331] In any event, since this option would also entail an obligation for
the intermediaries to transmit information necessary to exercise shareholder
rights, it does not add any additional costs, except with regard to costs
related to the processing of a disclosure request. 
For companies the impact would most
importantly be that they have an additional right that they can use, but are
not obliged to use. It is noteworthy that the creation of a system whereby
companies could request the identification of shareholders and in which
intermediaries will offer identification as a service and therefore they can
charge the costs of data processing on the company, it is likely, as confirmed
by EuropeanIssuers, that companies will want to identify their shareholders
once or twice a year, for instance before general meetings.
Under this option all intermediaries would also
have the duty to transmit, where necessary via other intermediaries, without
undue delay, shareholder information from the company that is necessary to exercise
a right flowing from securities, if that information is directed to all
shareholders in that class. They would pass on all monetary rights attached to
securities (dividends, rights issues). The information should be provided by
the company in a standardised and timely manner, for instance in a brief,
standardised and electronic form which would facilitate transmission of the
information. This would be important since it was in practice, especially in a
cross-border context, often impossible for the intermediaries to assess which
part of a long document was necessary to forward and which part of the document
only contained ancillary information.[332]
By requiring intermediaries to transit such
information, this option would effectively ensure timely transmission of
information and monetary rights by intermediaries and thus facilitate the
exercise of shareholder rights. At the same time, this would limit the burden
placed on intermediaries to the necessary minimum, as it would restrict the
duty to pass only some information that is inevitable for the exercise of
rights and companies should provide it in standardised form.
Intermediaries commonly expected this option
to have repercussions on their business model. In the second public
consultation the particular concern was voiced that the automatic transmission
of information to all shareholders would be unnecessary, unduly expensive, and
that the costs would outweigh the benefits. There would be one-off costs
for adjusting existing infrastructure, notably IT infrastructure and changing
the relevant internal processes. Additionally, the contractual documentation
governing the relationship with account holders would need to be amended.
Second, existing linkages amongst intermediaries may need to be updated, new
ones established and useless or unfavourable ones abolished. On the other side,
the current efforts of the financial industry to streamline the cross-border
exercise of rights on an operational basis needs to be factored in. In this
context, infrastructure, procedure, documentation and links will be revised
anyway.
The ongoing costs involved in passing
on information have  been analysed in the German law on the compensation of
reimbursement of credit institutions which specifies the sums.[333] Depending on the market size, these costs may represent a not insignificant
burden (e.g. 20 000 for every 100 000 letters sent to clients). The quantification of ongoing costs for intermediaries can be based
on some national laws which would provide a cost per letter of
EUR 0.20 - 3 depending on the distribution channel used and how
much information sent,[334] but they can, from their side charge costs for these services. Intermediaries would have to "duly justify" any
differences in pricing between domestic and cross-border holdings and to
disclose to their clients the prices and fees of the services provided
On the saving side, there is the
possibility of a considerable cut of expenses. At the moment, processing
information is more expensive in a cross-border context as differing standards
do not allow the introduction of standardised procedures and still a
considerable amount of manual and paper work is required. This means that
savings due to simplification on the side of the industry are able to offset
the cost identified above. The fact that industry itself works on
standardisation in this field shows that it expects this cost to be compensated
by the savings. The impact of this option on Member States would be negligible.
As regards
the facilitation of the
exercise of rights by the
shareholder, this obligation would address the
situation where the shareholder needs assistance from its intermediary in order
to exercise his rights, e.g. to be able to participate and vote in a general
meeting or where it wants the intermediary to vote on his behalf. Intermediaries
would be bound to administer instructions with regard to the essential rights
of shareholders. It would have an important positive impact not only on the
cross-border exercise of rights but also at national level.  
For intermediaries, the costs involved would be proportionate, as not
all, but only the most important rights would be covered. This would not prevent investors from agreeing on a contractual basis with
intermediaries on a broader range of services. This would significantly improve
the efficiency of the Single Market and provide for increase standard of
service by intermediaries. This flexibility would allow investors to make these
decisions based on their individual expected utility, without imposing the
corresponding costs to all other shareholders and intermediaries.
The discussion on price discrimination in the
second consultation showed that the transparency of pricing of cross-border
services could be significantly improved. Most stakeholders emphasised the need
to ensure high levels of investor protection and system integrity . The option
to prevent cost discrimination of cross-border holdings as opposed to purely
domestic holdings was strongly opposed by intermediaries. It was regarded as
evident that the longer the intermediary chain is, the higher the costs of the
exercise of rights attached to securities will be. An obligation on price
justification would improve the price formation mechanism while the increased
transparency of pricing would help to reduce the high level of custody and
broker fees which make respectively 22% and 71% of the equity
holding and transacting costs. This has a considerable
potential to promote the Single Market and create growth. On the cost side, this
option would trigger compliance costs for intermediaries. However, costs
incurred by intermediaries for implementation the transparency requirement
would be low, especially for those who have already taken initiatives in this
field, e.g. by complying with the Code of Conduct for Clearing and Settlement. 
For listed companies this
option would lead to some additional costs in relation to the revision of
internal processes to provide standardized information to the intermediaries. However, they would be able to identify their shareholders, while
increased engagement of better informed shareholders  would be beneficial for
the company.
For investors, including
retail investors this option will greatly improve their
situation, since a direct relation could be established between the company and
the shareholder, the latter would receive more timely information and he will
be able to exercise his rights in a much more efficient way. 
On the cost side, shareholders may face
higher costs (charged by their intermediaries) for the increased standard of
services. 
Member States will face one-off costs for
amending legislative frameworks as well as ongoing costs for supervising the
implementation of the legislation. The mechanism on investors’ identification
would uniformly impact all Member States as it would redefine existing national
identification systems in order to address existing bottlenecks as well as
cross-border holdings. The obligations on intermediaries and the rights of companies
and shareholders would generate moderate to substantial costs for
intermediaries, but these would be uniformly distributed among market players.
Depending on the size of the market, certain Member States (e.g. UK, Germany, France) would face higher absolute adaptation costs but, at the same time, would
benefit from important economies of scale as well as improved corporate
governance of their multinational companies and enhanced investors’ rights in
cross-border holdings. 
 Assessment of policy options 
   || Effectiveness || Efficiency || Coherence 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: defining minimum EU rules || + || ++ || + 
 Option 3: introduction shareholder identification mechanism and creation of transmission and facilitation obligations for intermediaries || ++ || ++ || + 
   ||   ||   ||   
 Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 
 Assessment of policy options by stakeholders group 
   || Investors || Intermediaries || Companies 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: defining minimum EU rules || + || 0 || + 
 Option 3: introduction shareholder identification mechanism and creation of transmission and facilitation obligations for intermediaries || ++ || + || ++ 
   ||   ||   ||   
In the light of this assessment, the
preferred option is option 3 (introduction shareholder identification
mechanism and creation of transmission and facilitation obligations for
intermediaries).
This option creates an efficient and
effective mechanism for shareholder identification, ensures efficient and
timely transmission of information through the holding chain of intermediaries
and facilitates the exercise of shareholder rights (e.g. voting rights). The
three types of requirements on intermediaries make all use of the same existing
infrastructure, ensuring productive investments. Although the requirements will
be put on intermediaries, they could charge fees for the services to be
provided to companies and shareholders, ensuring that those that benefit from
they services also bear (part of) the costs. 
8.6.        Improving
the quality of corporate governance reporting
With regard to corporate governance
reporting and the application of the ‘comply or explain’ principle, replacing
this approach by binding corporate governance rules or by an EU Corporate governance
Code has not been considered a realistic option. Public consultations show that
there is strong support for maintaining the current approach and improving it.
Option 1 – no policy change – would mean that no action would be undertaken at EU level in order
to improve the quality of corporate governance reports.
Option 2 – recommendation providing
guidance – would involve issuing a Commission
recommendation providing guidelines on the quality of corporate governance
reports and on the practical application of the ‘comply or explain’ approach.
It would in particular provide guidance on what kind of explanations for
deviations from corporate governance codes can be considered sufficient.
Option 3 – detailed requirements
regarding corporate governance reporting – would
mean that the current rules on corporate governance reporting contained in
Article 20  of the Accounting Directive[335] would be amended and that detailed requirements on the quality of
the reports and of the explanations for deviations would be introduced in the
directive.
8.6.1.     Analysis
of impacts and choice of preferred option
Option 1 – no policy change. Under this option, there would be no common guidance on the
desired quality of corporate governance reports. Eventual corrective action
could be expected from the competent bodies in individual Member States. This
is however likely to result in increasingly divergent approaches to corporate
governance reporting and interpretation of the Directive in Member States and,
as a result, in diverging quality of corporate governance reports. The level of
information available to investors is likely to remain uneven which, taking
into account the increasingly cross-border character of investment, is likely
to have a negative impact on investors.
Option 2 – providing guidelines on the
quality of corporate governance reports through a recommendation. Providing guidelines on the preparation of reports and in
particular of explanations for deviations is likely to have a positive impact
on the quality of these reports and on the practical functioning of the ‘comply
or explain’ approach. Clear guidance on the key features of appropriate
reporting and of appropriate explanations for deviation would help companies
prepare such reports and would enhance the quality of information available to
investors across the EU.
A recommendation would have a weaker impact
that binding rules. On the other hand, flexibility is one of the main
advantages of the ‘comply or explain’ approach. A recommendation would help
enhancing this approach while giving the competent national bodies in charge of
monitoring of corporate governance reports an important degree of flexibility
to adapt, where necessary, the guidance to the specificities of the national
framework. As stated in the problem definition, a very
clear support for this approach was shown by all stakeholders.
This option does not entail additional
administrative burden, since listed companies are already required to produce
such reports and the recommendation would only clarify what is the desired
quality of reports and of explanations. In fact, issuers would mainly be
stimulated to apply a greater degree of diligence when preparing the statement
currently required, but would also know more clearly what is expected of them,
which decreases legal uncertainty. In terms of practical impact there could at
most be a few additional hours of work for the relevant staff. Moreover, it
should be noted that the cost will mostly be a one-off cost, since the
corporate governance arrangement of companies on these aspects do not change
often.
This option would have an overall positive
impact on the corporate governance of companies, as it would encourage
companies to undertake a more thorough reflection on their corporate governance
arrangements and increase the level and the quality of information available to
investors and other stakeholders. It could also contribute to cross-border
investment, due to increased transparency and comparability of reports. Due to
low costs, the competitiveness of European undertakings would not be affected.[336] As corporate governance statements are prepared by all listed
companies, listed SMEs might also be affected. However, as already pointed out,
the impact would not be significant. There would be also no impact on
fundamental rights.
Option 3 – introducing detailed
requirements regarding corporate governance reporting through modification of
the current Accounting Directive. Introducing
detailed requirements for corporate governance reporting is also likely to have
a positive impact on the quality of reports and of explanations for deviations.
The impact of binding rules would be
stronger than in case of a recommendation. On the other hand, this option would
leave less flexibility to national monitoring bodies to adapt the guidelines to
national specificities and would leave less flexibility to companies to adapt
the rules to their situation. Moreover, as explained above, stakeholders appear
not to be in favour of legislative rules.
As the previous one, this option would not
entail significant costs, since no new statements would be required. However,
as it is likely to leave less flexibility to companies, possible costs and
administrative burdens could be slightly higher than in case of option 2.
Similarly as option 1, this option would
have a globally positive economic impact and no significant negative impacts.
It entails no significant increase of costs and administrative burden and thus
should have a very limited impact on the competitiveness of European undertakings,
including SMEs. The two tables below summarise the impact of the policy options
in general and per main stakeholder groups.
 Assessment of policy options 
   || Effectiveness || Efficiency || Coherence 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: recommendation providing guidelines || + || ++ || ++ 
 Option 3: detailed rules || ++ || + || + 
 Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 
 Assessment of policy options by stakeholders group 
   || Companies || Investors || National monitoring bodies 
 Option 1: no policy change || 0 || 0 || 0 
 Option 2: recommendation providing guidelines || + || + || + 
 Option 3: detailed rules || - || ++ || + 
In the light of this assessment, it appears
that the most appropriate option at this stage would be option 2
(recommendation providing guidelines). While relatively effective in
attaining the objective of increasing the quality of corporate governance
reports, it would leave greater room for flexibility and thus only entail very
low costs. It would also have positive impact on the stakeholders affected.
9.           Overall impacts of the package
The proposed approach constitutes a package
of complementary actions, targeting problems relating to the different players
in the equity investment chain. A majority of respondents to the consultations
of the Commission support the analysis of the Commission, but also the options
chosen. Moreover, studies have demonstrated the existence of the problems and,
at least in a number of cases, shown the best way forward. The preferred
approach is fully consistent with the Commission’s non-financial reporting
proposal that will give investors more and better non-financial information and
should strengthen the impact thereof by stimulating investors to be engaged. In
this respect it is noted that engagement on corporate governance often goes
together with engagement on environmental and social issues.[337] Moreover, the package
is part of the Commission’s work on the long-term financing of the European
economy: it contributes to a more long-term perspective of shareholders which
ensures better conditions for listed companies. 
The benefits of this package are more and
better quality information on the corporate governance of EU listed companies,
in particular on directors’ remuneration, related party transactions and the application
of national corporate governance codes and information transmitted to
shareholders. Investors request such information to take informed decisions and
to defend their interests. Investors would also receive more reliable
information from proxy advisors, which gives them a stronger and better basis
for monitoring and engaging with companies. Such information enables institutional
investors and asset managers to oversee investee companies and to engage with
them. Easier and cheaper ways to exercise rights, especially in a cross-border
context, will also allow them to oversee companies more effectively. As suggested
by studies, the shareholder vote on remuneration and related party transactions
will, combined with the increased transparency, respectively ensure a stronger
link between pay and performance and prevent unjustified transfers of value to
related parties.
Not only shareholders will benefit of
increased transparency. Also companies will benefit from transparency of their
shareholder base, institutional investors and asset managers, since they would
disclose their voting and engagement policies and practices. The precise impact
on (financial) performance of EU companies of these measures is difficult to
estimate, since tools and information can be used in different manners and/or
not used. Their use depends, amongst others, on how easy it is too make use of
them. The objective of the preferred options is to ensure that investors have
clear, comprehensive and comparable information at their disposition, which
removes, certainly for cross-border investors, barriers to engagement. Evidence
in this impact assessment shows however that there is a growing group of
investors who make use of shareholder engagement to increase performance of
their investments. Creating more transparency on the impact of such, but also
other investment policies will result in more informed decisions of investors
and final beneficiaries, but will also incentivise investors to become more
engaged with their investee companies. This development could, in the
longer-term also drive more mainstream investors towards an investment policy with
more engagement. Any increase in shareholder engagement
is likely to have a positive effect on both shareholder value and the
efficiency and performance of the target company.[338] Shareholder
engagement on corporate governance, with remuneration being one of the key issues,
may generate an average of 7-8% abnormal cumulative and buy and hold stock
return[339]
over a year.[340]
The engagement of a single investor may thus have a significant impact on
profits for investors. Such positive effect on companies will be most successful
with poorly performing and under-investing firms with lower R&D
expenditure. Potential benefits for company performance could also be
significant. Return on assets, profit margin, asset turnover and sales over
employees measures are reported to improve one year after the initial
engagement by 1%, 1.5%, 2.1% and 8.8% respectively.[341] This
indicates that not only shareholders value, but also operating performance of
the company increases. More shareholder engagement is thus likely to contribute
to significantly improved returns for the investors and lower cost of capital,
improved performance, profitability, efficiency and governance for target
companies.
The proposed package could thus positively
impact the long-term sustainability of listed companies, including SMEs, which
are likely to benefit from a better access to capital markets. Some indirect
positive social impacts could also be expected, since long-term oriented
companies could create more employment. Moreover, companies, institutional
investors, asset managers and proxy advisors would be more accountable for
other stakeholders. No direct environmental is anticipated, nor will
micro-enterprises be affected.
The package would result in an increase in administrative burden.[342] However, these costs
would be distributed evenly between the different stakeholders groups. Additional costs relate in particular to drafting, publication, or
specific staff training. Some additional data may also need to be collected,
although one should bear in mind that in most cases the options chosen merely
strengthen already existing legislative requirements, and the necessary systems
and procedures should already be in place in many companies.
Costs for companies would be linked to
disclosure of the remuneration policy and report as well as of the most
significant related party transactions. Some limited costs could also be linked
to the improved corporate governance reporting. The impact on the
competitiveness of EU companies would therefore not be significant.
Costs would also be linked to the
publication of the voting and engagement policies and application thereof for
institutional investors and asset managers. Costs for proxy advisors would be
linked to the publication of their policy regarding the conflicts of interests
and the methodology for the preparation of advice. Those costs would also be
limited. Costs for intermediaries would be linked to the EU mechanism for
shareholder identification, transmission of information and facilitation of the
exercise of shareholder rights, but these costs would be (partially) carried by
companies and investors. 
The proposed package may affect the protection of personal data of
certain stakeholders (essentially directors and shareholders). This right may however
be subject to limitations, which must be provided for
by law and respect the essence of those rights and freedoms. Moreover, such
limitations may only be made if they are necessary and genuinely meet
objectives of general interest recognised by the Union or the need to protect
the rights and freedoms of others.[343]
In line with the 2004 Recommendation on remuneration, such limitation appears
to be necessary.
10.         Monitoring and Evaluation
In order to ensure that Member States
implement the proposed initiatives in a clear and consistent way, an
implementation plan would be prepared. In particular, implementation workshops
could be organised by the Commission to deal with questions/issues that might
arise in the course of the implementation period and guidance may be issued by
the Commission. The Commission will monitor the implementation of the revised
Directive and of the new Recommendation. In compliance with the principle of
subsidiarity, the relevant information should be gathered primarily by Member
States through relevant national authorities and bodies. The Company Law Expert
Group and the European Corporate Governance Codes Network (ECGCN)[344] will be used to share
information. The costs of such activity could be met from existing operational
budgets, and would not be significant. Monitoring activity should involve
sample reviews of corporate governance reports, including information on
remuneration and on related party transactions, as well as of information
published by institutional investors, asset managers and proxy advisors.
An evaluation of the effects of the
preferred policy options should be carried out to see to what extent the
anticipated impacts materialise. Different indicators should be taken into
account, such as in particular, the level of shareholder turnout and dissent in
general meetings, the quality in terms of clarity, comparability and
comprehensiveness of explanations from provisions of national corporate
governance codes, of remuneration disclosures and of institutional investors,
asset managers and proxy advisors, price differences for exercising
shareholders' rights across the borders, etc. Moreover, the impact of the
preferred policy options on the link between pay and performance and the level
of engagement of institutional investors and asset managers will be assessed. In
terms of possible downsides it will be necessary to assess whether any
companies have chosen to de-list from EU regulated stock exchanges as a
consequence of the policy. Such an evaluation will be carried out by the
Commission, on the basis of all the relevant information collected in the
framework of the monitoring activities described above. Consultations with
European companies, investors and other stakeholders could be carried out via
existing platforms, and on an informal basis. The possibility of commissioning
an external study will be considered. On the basis of the data collected, and five
years after the expiration of the transposition deadline, the Commission would
consider the need to produce an ex-post evaluation report. The results and
feedback from monitoring and evaluation will also be considered with a view to
propose further amendments where appropriate.
Annex I. Glossary
Asset managers – Person managing the
assets of institutional investors and households either through investment
funds, or through discretionary mandates.
Asset Owners – Institutional investors which own assets on behalf of ultimate
investors. 
Comply or explain – Approach taken when a company choosing to depart from a corporate
governance code has to explain which parts of the corporate governance code it
has departed from and the reasons for doing so.
Corporate governance
codes – Non-binding set of principles, standards or
best practices, issued by a collective body, and relating to the internal
governance of corporations. 
Discretionary mandates - Mandates giving asset managers the authority to manage the assets
on behalf of an asset owner in compliance with a predefined set of rules and
principles, on a segregated basis and separate from other investors’ assets.
Equity - A stock or any other security representing an ownership interest.
Institutional investors -
Any institution of considerable size which
professionally invests (also) on behalf of clients and beneficiaries, e.g.
pension funds or insurance companies.
Investment funds - Pools of assets with specified risk levels and asset allocations,
into which one can buy and redeem shares. 
Listed company - Companies that issue securities admitted to trading on a regulated
market.
Persons acting in concert – Persons or entities who have
concluded an agreement, which obliges them to adopt, by concerted exercise of
the voting rights they hold, a lasting common policy towards the management of
the issuer in question.
Proxy advisor –Firms providing voting services to investors including voting
advice. 
Related party
transactions - Self-dealing transactions by
corporate insiders that can either be management, directors and/or controlling
entities or shareholders and their relatives.
Remuneration – Salary plus additional amounts of benefits and bonuses.
Remuneration policy – Policy defining all forms of compensation,
including fixed remuneration, performance-related remuneration schemes, pension
arrangements, and termination payments.
Individual
remuneration – Remuneration to be attributed,
individually, to directors.
Additional
remuneration - Any participation in a share option
or any other performance-related pay scheme; it does not cover the receipt of
fixed amounts of compensation under a retirement plan (including deferred
compensation) for prior service with the company (provided that such
compensation is not contingent in any way on continued service).
Variable components of
remuneration – The components of directors’
remuneration entitlement which are awarded on the basis of performance
criteria, including bonuses.
Say on pay – Shareholders' right to vote on remuneration of directors. 
Shareholders Engagement -
The active monitoring of companies, engaging in a
dialogue with the company’s board, and using shareholder rights, including
voting and cooperation with other shareholders, if need be to improve the
governance of the investee company in the interests of long-term value
creation.
Annex II. List of
main EU measures in the area of corporate governance
–                        
Directive 2013/34/EU of the European Parliament
and of the Council of 26 June  2013 on the annual financial
statements, consolidated financial statements and related reports of certain
types of undertakings, amending Directive 2006/43/EC of the European Parliament
and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC
–                        
Directive 2007/36/EC on the exercise of certain
rights of shareholders in listed companies
–                        
Directive 2004/109/EC of 15 December 2004 on the
harmonisation of transparency requirements in relation to information about
issuers whose securities are admitted to trading on a regulated market and
amending Directive 2001/34/EC
–                        
Directive 2004/25/EC of 21 April 2004 on
takeover bids
–                        
Directive 2012/30/EU of the European Parliament
and of the Council of 25 October 2012 on coordination of safeguards which, for
the protection of the interests of members and others, are required by Member
States of companies within the meaning of the second paragraph of Article 54 of
the Treaty on the Functioning of the European Union, in respect of the
formation of public limited liability companies and the maintenance and
alteration of their capital, with a view to making such safeguards equivalent
(recast of Second Council Directive 77/91/EEC).
–                        
Commission Recommendation 2005/162/EC of 15
February 2005 on the role of non-executive or supervisory directors of listed
companies and on the committees of the (supervisory) board
–                        
Commission Recommendation 2004/913/EC of 14
December 2004 fostering an appropriate regime for the remuneration of directors
of listed companies
–                        
Commission Recommendation 2009/385/EC of 30
April 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards
the regime for the remuneration of directors of listed companies
Annex III. Overview
of responses to consultations specifically devoted to corporate governance
1.
Public consultation - Corporate Governance in Financial Institutions. The consultation was
launched on 2nd June 2010, together with the adoption of a Green Paper[345].
It was closed
on 1st September 2010. 214 answers were received.
2.
Public consultation - EU Corporate Governance Framework. The consultation was
launched the 5 April 2011, together with the adoption of a Green Paper[346]. The
consultation closed on 22 July 2011. In total, 409 answers were received.
REMUNERATION
Should disclosure of the
remuneration policy, the annual remuneration report (a report on how the
remuneration policy was implemented in the past year) and individual
remuneration of executive and non-executive directors be mandatory? 
Almost
three quarters of respondents who provided an answer to this question agree
that disclosure of the remuneration policy, the annual remuneration report and
individual remuneration of directors should be mandatory. They mention that
this would contribute to the level playing field in the EU and improve the
comparability of disclosed information on remuneration between companies in
different Member States. Respondents also often mention that measures should be
taken to avoid box-ticking in relation to disclosure on remuneration. 
The
respondents who are not in favour of mandatory disclosure of remuneration
policy, the remuneration report and individual remuneration give, amongst
others, the following reasons: the issue is already sufficiently regulated in
their national jurisdiction, more time is needed to see the effect of the
Commission Recommendations on remuneration and such a rule would interfere with
the capacity of the board to decide on executive remuneration. Some respondents
mentioned that they were in particular against mandatory disclosure of
individual remuneration because this would interfere with the privacy of the
concerned board members and could have an upward driving effect on remuneration
levels.
Should it be mandatory to put
the remuneration policy and the remuneration report to a vote by shareholders? 
A
small majority of respondents who provided an answer to this question agrees
that the remuneration policy and remuneration report should be put to a
mandatory vote by shareholders. Most of those in favour of a mandatory vote
further indicate that the vote should be advisory only, although some indicate
that they would prefer a binding vote. One reason cited for this is that they
believe that the advisory vote which is currently being applied in their
jurisdiction has not brought forward enough reform in the area. Reasons which
are given by respondents who are against include that the issue is already
sufficiently regulated in their national jurisdiction and that such a rule
would only be useful if shareholders have become more engaged in corporate
governance issues.
PROXY ADVISORS
Should EU law require proxy
advisors to be more transparent, e.g. about their analytical methods, conflicts
of interest and their policy for managing them and/or whether they apply a code
of conduct? If so, how can this best be achieved? 
More
than three quarters of respondents who provided an answer to this question
agree that EU law should require proxy advisors to be more transparent. Amongst
others, respondents mentioned that proxy advisors should be more transparent
about the following issues: their methodology for preparing voting advice,
voting policies and records, conflicts of interest and the system in place to
manage them, whether a code of conduct applies or whether there are internal
rules of conduct, applicable procedures for contacting companies when preparing
the advice and stewardship policies. A number of respondents believe that in
particular the issue of conflicts of interest of proxy advisors should be
addressed. Moreover, some respondents are of the view that proxy advisors
should be required to register and become supervised entities. It was also
mentioned that institutional investors should disclose when they make use of
the services of a proxy advisor.
Most
respondents who are not in favour of requiring proxy advisors to be more
transparent mention that the issue should be addressed through voluntary or
self-regulation measures. Others are of the view that this should be addressed
at national level or would prefer to investigate the issue in more detail
before committing to action. 
Do you believe that other
(legislative) measures are necessary, e.g. restrictions on the ability of proxy
advisors to provide consulting services to investee companies?  
A
small majority of respondents who provided an answer to this question believe
that other measures are necessary to address conflicts of interest of proxy
advisors. A number of respondents suggested that there should be mandatory
separation of services to investors and services to companies, while a few
respondents mention that it should be disclosed if proxy advisors also provide
services to investee companies.  Respondents who provided a negative answer to
the question said that the issue could be addressed through self-regulation or
codes, or were of the opinion that the issue would be resolved if there were
sufficient disclosure on conflicts of interest.
RELATED PARTY
TRANSACTION
Do you think that
minority shareholders need more protection against related party transactions?
If so, what measures could be taken?
The slight majority of respondents that
provided an answer to this question, in particular companies, business
federations, the banking and financial services sector, share the view that
sufficient safeguards are already in place and that, accordingly, there is no
need for regulatory intervention. In their view, the focus, if any, should be
on clarifying and simplifying existing rules on related party transactions. Furthermore,
respondents suggest first to assess the impact of new regulation before taking
new measures into consideration. Some respondents stress that the general
meeting is not the right place to discuss transaction agreements.
The slight minority of respondents in favour
of more protection consider that more and better information on related party
transaction is necessary. They also share the view that related party
transactions above certain thresholds (at least) should be subject to ex ante
board or shareholder approval with interested parties being excluded from
voting. Many respondents think that common principles should be introduced at
EU level on the basis of the ECGF Statement[347].
Some respondents insist on the need of an independent opinion on the
transaction or wish to see the auditors' role extended and strengthened.
Others, in particular retail investors, suggest the introduction of an EU
procedure when shareholders are squeezed-out.
COMPLY OR EXPLAIN
Do you agree that
companies departing from the recommendations of corporate governance codes
should be required to provide detailed explanations for such departures and
describe the alternative solutions adopted?
The large majority of responses were
favourable to requiring companies departing from the recommendations of
corporate governance codes to provide detailed explanations for such departure.
Better quality of these explanations should be provided by companies (i.e.
explanations should be meaningful and informative).
Several respondents indicated the Swedish
model as being an adequate solution to tackle the current shortcomings in the
"comply or explain" principle.
The justifications for the negative responses
were that there is no need for further provisions as the existing ones suffice,
it should be left to the Member States to deal with the matter, developments
are already moving into this direction, the market should have its saying on
the level of detail, difficulties in providing an alternative solution, etc. In
addition, some respondents considered that the issue is sufficiently dealt with
at the national level.
Many respondents expressed their position
against compulsory rules. Some respondents underlined the need mostly for
clear, rather than detailed explanations.
Do you agree that
monitoring bodies should be authorised to check the informative quality of the
explanations in the corporate governance statements and require companies to
complete the explanations where necessary? If yes, what exactly should be their
role?
Most of the responses to the present question
were against authorising monitoring bodies to check the informative
quality of the explanations in the corporate governance statements and to
require companies additional explanations if need be.
A large number of those against consider that
there are already control mechanisms, such as shareholders, boards, auditors,
etc to assess the information. Others deem that there is no need for regulation
or that it would be incompatible with the "comply and explain"
principle. Practical difficulties relating to the monitoring of the quality of
explanations have also been raised (e.g. costs to set them up, definition of
roles, enforcement/difficult to measure 'informative quality', etc.) and
different measures such as recognition and award or to stimulate in general a
continuous improvement have been proposed as an alternative.
Certain respondents referred to the Danish,
French and Italian experience which should be assessed before deciding on the
matter.
Some respondents who replied positively to
the present question considered that the "comply or explain"
principle would work better with a sound monitoring process and that uniform
sanctions would be need in order to ensure efficient enforcement.
INSTITUTIONAL INVESTORS
Should disclosure of institutional investors
voting practices and policies be compulsory? How often?
The vast
majority of respondents that provided an answer to this question are in favour
of mandatory disclosure of voting policies and records by institutional
investors 
They consider
that such disclosure would have a positive impact on the awareness of
investors, optimise investment decision of ultimate investors, facilitate
issuers' dialogue with investors and encourage shareholder engagement. However,
certain respondents are relatively cautious with regard to public disclosure of
voting records for confidentiality reasons.
A number of respondents think that the
disclosure should be done at least on an annual basis, with voting records
being disclosed after each general meeting of the invested company. There are
also some voices in favour of half-yearly or even quarterly disclosure.
Those respondents which are opposed to
disclosure by institutional investors of their voting policies and records
either feared that such disclosure obligation for a specific category of
shareholders would be contrary to the principle of equal treatment or thought
that it should be left for each institutional investor to decide on whether to
disclose or not its voting policy.
Should institutional investors be obliged to
adhere to a code of best practice (national or international) such as, for
example, the code of the International Corporate Governance Network (ICGN)?
This code requires signatories to develop and publish their investment and
voting policies, to take measures to avoid conflicts of interest and to use
their voting rights in a responsible way.
The majority of respondents that provided
an answer to this question think that institutional investors should adhere to
a code of best practice, whether to national, European or international code,
at least on a "comply or explain" basis. A number of respondents
consider the UK Stewardship Code as being a model for investor codes of best
practice. Some respondents are of the opinion that there is a need either for a
European code of best practice or for a common standard at European level with
mutual recognition of national stewardship codes.
One respondent thinks that self-regulatory
codices are not a viable means to assure the quality of corporate governance.
In his view, responsibility of external control should lie with the supervisory
authorities and external auditors.
ADITIONAL RELEVANT ELEMENTS
Are there measures to be taken,
and if so, which ones, as regards the incentive structures for and performance
evaluation of asset managers managing long-term institutional investors´
portfolios? 
This
question was only answered by around half of the respondents to the
consultation. A small majority of respondents who provided an answer to this
question agrees that there is a need to take measures with regard to fee and
incentive structures of asset managers. Most of the respondents who are in
favour of measures would prefer legislative measures, while a few have
mentioned that they would prefer to address the issue in a code or through
self-regulation. Even some respondents who did not support measures in this
field indicated that a code or self-regulation might be a better way of
addressing these issues. Some also mention the UK stewardship code and are of
the opinion that this code will catalyse improvement. Respondents who are
against measures in this field also give as reasons that it is for the parties
to the asset management agreement, the investors and the asset management
company, to negotiate and decide on the terms of the agreement and the
incentive and fee structures included therein. 
As
regards which measures could be taken to address fee and incentive structures
and performance evaluation of asset managers, many of the respondents, who are
in favour of taking measures, are of the opinion that there should be more
transparency about the fee and incentive structure and/or that asset managers
should more clearly report on this to their clients. It was mentioned that
reporting to clients should clearly set out all elements of the fee structure
and show how fees are linked to longer term performance and how incentives are
aligned to investors´ objectives. Some respondents also mentioned that the
incentive structure should be better aligned to investors´ interests and that
it should include a broader set of indicators. Some respondents also noted that
it might be useful to educate investors on what to look for in an effective
asset manager.
Should EU law promote more
effective monitoring of asset managers by institutional investors with regard
to strategies, costs, trading, and the extent to which asset managers engage
with the investee companies? If so, how?
This
question was answered by about half of the respondents to the consultation. Of
the respondents who provided an answer to this question, about half said they
were in favour of EU regulations promoting more effective monitoring of asset
managers by their clients. The other half said they did not favour such
regulations, yet some of them supported measures subject to the "comply or
explain" principle. Of those in favour of EU action, most mentioned that
it is necessary to increase transparency on asset managers´ policies and the
exercise of their duties. Respondents have, amongst others, suggested increased
transparency on voting policy, investment policy, exercise of rights attached
to securities, engagement activities, costs, including management costs, cost
of trading or churning the portfolio and incentive structures, risk and
(potential) conflicts of interest. Some also mentioned that more consistency is
needed as regards disclosure by asset managers in the EU.  
Should EU rules require a
certain independence of the asset managers´ governing body for example from its
parent company, or are other (legislative) measures needed to enhance
disclosure and management of conflicts of interest? 
This
question was answered by about half of the respondents to the consultation. A
majority of respondents who provided an answer to this question is not in favour
of EU rules which require a certain independence of the asset managers´
governing body or any other measures to enhance disclosure and management on
conflicts of interest of asset managers. Many respondents who are not in favour
of EU rules to address this issue point out that they find the existing
conflicts of interest rules for asset managers sufficient, or that existing
rules should be better enforced.
Of
the respondents who provided a positive answer to this question, most mentioned
that they would support further conflicts of interest rules. A number of
respondents added that they would also support rules which require a certain
independence of members of the asset managers´ governing body. A few
respondents mentioned it is necessary to disclose it when an asset manager is
not an independent institution. 
Annex IV. Summary
of ad hoc discussion with stakeholders
1.         OVERVIEW
In December 2012 the European Commission
has adopted the Action Plan on European Company Law and Corporate Governance. 
As a follow up, the Services of the
Commission engaged in informal discussions with a number of stakeholders in
order to consider how to better achieve the goals set out in the Action Plan,
namely on measures aimed at increasing long-term shareholder engagement and
transparency between management and shareholders. The aim was to collect the
views and receive an early feedback of practitioners and experts and to benefit
from their insight and expertise in the field of corporate governance in
general and shareholder engagement in particular. In order to cover all
interest groups and to receive a diversified feedback a variety of stakeholders
were invited to these roundtable debates, such as asset owners, asset managers,
issuers, proxy advisors, consultants, stock exchanges, public authorities,
customers, employees and trade union representatives. The roundtable debates
took place in Brussels between Tuesday the 29th of January and Friday the 1st
of February. 
The subsequent summary of the roundtable
debates gives an overview of the main issues and arguments raised by the
stakeholders. It outlines their most frequent observations and main concerns
regarding the actions set out in the Action Plan, especially a possible
revision of the current directive on the exercise of certain rights of
shareholders in listed companies (2007/36/EC).
2.         SUMMARY/
DETAILED ANALYSIS OF RESPONSES
a) Shareholder engagement
All participants acknowledged that, in the
past years, shareholders have often been insufficiently engaged with companies
and did not exercise sufficient oversight over management. Therefore, all
stakeholders said that shareholder engagement is an important issue of
corporate governance and that more and better shareholder engagement could
enhance the European corporate governance framework.
Some participants explained the fact that
the majority of investors do not engage with the “free rider problem”. Others
explained the lack of shareholder engagement with market failures and missing
incentives for institutional investors to engage. Especially in an environment
of highly diversified portfolios, a lot of participants saw difficulties for
institutional investors to engage in single companies or to monitor in depth
the asset managers. Thus, a concentrated investor portfolio was generally
regarded to be beneficial for shareholder engagement but at the same time found
to be more risky. Therefore, it was not recommended to impede the
diversification of portfolios or to prescribe concentrated portfolios. In
addition it was pointed out that rules such as Solvency II or MIFID lead to
more diversification as they do not allow offering a concentrated portfolio to
a risk adverse investor.
Besides that, institutional investors and
their relationship to asset managers were generally regarded to be of major
importance for the debate concerning shareholder engagement. 
Some experts asked to bear in mind that
sometimes the “financial literacy” among institutional investors is
surprisingly low and that financial products in general tend to become more and
more complex and more difficult to understand. 
Furthermore, there was a widespread
agreement throughout the participants that effective shareholder rights are a
key prerequisite for shareholder engagement. In this context, a number of
experts referred to the U.S. where they considered shareholder engagement to be
weak, which – to their mind – is due to weakness of shareholder rights. 
In exchange for more shareholder rights
some recommended that shareholders should be subject to obligations comparable
to those set up in the “UK Stewardship Code” which was also paraphrased as
“Ownership Code”. Some argued with respect to the UK Stewardship Code that it
is just one example which should not be imposed on whole Europe as the European
markets are very different and no “one size fits all”. Moreover, it was argued
that there is a lack of resources in the institutional investors industry to
offer stewardship. According to that, asset managers already publish reports,
but asset owners do not have sufficient time and resources to analyse
information. 
Others pointed out that engagement in
general and stewardship in particular should be competitive issues by creating
marked demands for engagement and stewardship. It was suggested to create this
demand by going beyond the UK Stewardship Code on the basis of a European “opt
in” standard concerning engagement – possibly on a “comply or explain basis”.
Thus, an acknowledged standard would create a level playing field for the
financial industry. Others suggested enhancing stewardship and engagement by
making clear that fiduciary duty includes these issues.
b) “Long-term” shareholder engagement 
There was a widespread recognition amongst
the members of the roundtable debates that the focus of shareholder engagement should
be placed on the quality of the engagement and not on the quantity as
shareholders in the past tended to concentrate on short-term profits. Therefore
some participants proposed to grant asset owners financial incentives for their
long-term engagement. Others pointed out that the asset managers are important
players as well. Thus, one should turn to them if the engagement policy of
asset owners should be shifted towards long-term perspectives. It was argued
that the average mandate for asset managers is 2-3 years which was not seen as
long-term. Therefore it was proposed to design the mandate given to the asset
managers in a way that they enhance engagement in general and long-term
engagement in particular.
Moreover, it was argued that short-term
incentives are sometimes even generated by legislation, such as Solvency II.
Others mentioned that the common understanding of fiduciary duties (that is to
say the obligation to act in client’s best interest) is a possible impediment
for long-term shareholder engagement. In this context it was argued that
long-termism is nothing else but an accumulation of short-term events and that
sometimes it is a fiduciary duty to sell shares spontaneously, e.g. when a
share prize is highly overestimated. Therefore, some stated that it is
difficult to encourage more long-term investment in equities in a system that
is short-term orientated (e.g. investors relying on daily figures or quarterly
reports). 
Moreover, it was noticed that all
investment strategies somehow relate to benchmarks which tend to define the
fiduciary duty. It was criticised that the fiduciary duty has become the duty
to follow the rest of the industry which promotes herd behaviour. Furthermore,
it was argued that due to the herd behaviour (caused by the fiduciary duties),
anomalies in corporate governance might remain undetected and little events
might add up to a crisis (black swan problem). Hence some proposed to revise
the definition of fiduciary duty and also to take long-term perspective and ESG
(environmental and social governance) factors into account. In this context,
some criticised average main-stream investors as they look at corporate
governance and risk management in a traditional sense whereas responsible
investors have a broader understanding of risks and also take diversity,
long-term and ESG-issues into account.
Some argued that the correlation between
good corporate governance and long-term profitability might be difficult to
prove as benefits of long-term engagement take a long time to materialize. It
was stated that a good long-term effect of shareholder engagement is also
difficult to prove as there are many issues influencing the performance of a
company. Some pointed to the instance that there might also be cases in which
shareholder engagement turned out to be bad for the long-term perspective of a
company. Others underlined that short-term investors do not always have a bad
influence and that they are also crucial for the smooth functioning of the
system.
c) Transparency of voting policies and
engagement policies
Most participants regarded the disclosure
of voting policies to be an important issue and recommended a disclosure at
least on a “comply or explain” basis. Some also recommended that transparency
and disclosure requirements should also entail non-financial issues such as
ESG-risks. Some participants considered that the disclosure of engagement is a
difficult topic and that disclosure at a policy level might be appropriate
whereas disclosure of engagement records might sometimes be harmful to
engagement. These participants believed that discussions between shareholders
and companies are best conducted on a confidential basis. Therefore, there
shouldn’t be any disclosure requirements concerning on-going engagement
activities and such engagement activities should only be disclosed ex-post on a
more generalized and aggregated basis. In this context some participants stated
that engagement activities can take several years. Therefore it was recommended
only to disclose backward looking and summarized information, or information
where shareholders and management have reached a successful conclusion or they
are finally stuck in a conflict (and no longer speak to each other). In the
latter case, it was argued that public disclosure (to the media) can be used by
the shareholder as a means of putting pressure on the board.
Furthermore, some stated that a mandatory
disclosure of voting records will practically force people to vote which could
have at least two effects. First, it could have a detrimental impact on the
quality of votes being cast. Secondly, it could increase the influence of proxy
advisors. 
d) Proxy Advisors
With respect to proxy advisors, the
participants admitted that they are an important link in the chain and that
certain players in the equity chain need their advice. It was asserted that
especially foreign investors tend to rely on their advice. Thus, it was
reasoned that the more international a financial market becomes the greater is
the need for proxy advisors and that proxy voting is still better than
thoughtless voting. 
However, a lot of participants criticised
that the proxy advisor industry isn’t subject to any rules. On the other hand,
it was pointed out that the proxy advisor industry is small and that
overregulation could make it shrink. Therefore, some proposed a code of
conduct, which could be established by self-regulation. Others proposed that
the Commission should endorse such a code and that the code should apply on a
“comply or explain” basis. 
Some said that there is a lack of
transparency as to how proxy advisors operate and reach their decisions.
Moreover it was argued that proxy advisors might apply very different standards
in different markets, which could create a problem of lack of continuity of
advice. Furthermore, some reported on possible conflicts of interest as proxy
advisors often have multiple and incompatible duties (also as CG advisors,
proxy agents, etc). In this context, the relationship between proxy advisors
and proxy solicitors (the former gets paid to advice on votes, the latter gets
paid to raise votes) was regarded to be potentially problematic. Therefore, it
was proposed that conflict of interest should be disclosed as well as the
measures the proxy advisor took in order to prevent such conflicts. With
respect to disclosure, some stated that problems might arise if proxy advisors
were obliged to disclose their recommendation to issuers before the AGM. In
this situation, it could be possible for issuers to outwit or fool the proxy
advisors.
Moreover, it was said that proxy advisors
usually only have one model of advice, although they ought to offer a variety
of recommendations based on the preferences of individual investors. 
e) Remuneration
Questions on remuneration and the
disclosure of remuneration raised a lively debate. Most participants argued
that there should generally be more information and disclosure on the structure
of payment, although some expressed their concerns that transparency in this
field might lead to a general pay increase. Many regarded it to be problematic
that the disclosure requirements concerning remuneration differ throughout the
European Member States. In particular, in the southern countries, the
disclosure on remuneration was seen to be bad. Therefore, many recommended a
European wide standardization of the disclosure on remuneration. Some
participants believed that a standardized disclosure would make the information
more comparable throughout the different Member States which could also have a
positive effect on cross-border activities. 
As a remuneration package often comprises
fix and variable parts as well as pension plans, some saw practical
difficulties in establishing a system of full and comprehensive disclosure
reducing the complexity of a remuneration system to a single figure or a range
of expected payments. Others argued that it should at least be possible to
present full and comprehensive information on 4-5 pages. 
In the view of some, it would be good to
introduce a general principle according to which one can only pay on the basis
of a remuneration policy in which the remuneration can be valued beforehand. As
a result, remuneration policy should not be adopted if it is not possible to
determine the real value of a pay-package. It was said that such a rule would
for example prevent the use of leveraged share schemes. 
It was proposed that a disclosure should
also reflect the sustainable payment criteria and non-financial (ESG) factors.
Moreover it was argued that pay packages should contain long-term perspectives
and claw back provisions.
With respect to shareholders vote on
remuneration, most participants favoured a vote on the remuneration
policy and the remuneration report. Few participants suggested also a vote on
the individual remuneration. Certain pointed to two tier systems and stated
that these systems will have problems with binding shareholder votes on
remuneration as this will challenge the power of the supervisory board. Others
saw a risk of increasing short-termism by giving more voting rights to possibly
short-term orientated shareholders. 
f) Cross border / Electronic voting
With respect to cross border voting, a lot
of participants criticised that there are still financial and jurisdictional
impediments to cross border voting (e.g. special power of attorney). Some
participants stated that in spite of the shareholders rights directive, you can
still find share blocking in some Member States.
Others stated that electronic voting
remains an important issue and is still not working properly. It was argued
that many barriers (also regulatory) must be removed. Moreover some
participants expressed their concerns about empty voting.
Annex V. Main
findings of the external Study on Monitoring and Enforcement Practices in
Corporate Governance in the Member States
The study on monitoring and enforcement
systems of Member Sates' Corporate Governance codes published in end of
September 2009 has for objective to examine the existing monitoring and
enforcement mechanisms in Member States and to evaluate their efficiency[348].
It provides
an overview of the legal frameworks of 18 Member States. The study revealed
important shortcomings in applying 'comply or explain' principle that reduces
the efficiency of the EU's corporate governance framework and hinders the
system's usefulness. 
The 'comply-or-explain' approach enjoys
broad support from regulators, companies and investors. However, its practical
implementation suffers some deficiencies, which affect its proper functioning.
According to the study the main reasons are the unsatisfactory level and
quality of information on deviations by companies and a low level of
shareholder monitoring. The study showed that in over 60% of cases where
companies chose not to apply recommendations, they did not provide sufficient
explanation. They either simply stated that they had departed from a
recommendation without any further explanation, or provided only a general
explanation without reference to the company specificity or just a limited
explanation [349].
This view is supported by the institutional investors' assessment of companies'
disclosure. Only a quarter of investors consider the quality as being
satisfactory[350].
Moreover, the study points out to the fact
that the level of activity of institutional investors is quite divergent[351].
The general observation is that the institutional investor community consists
of a small active minority and majority of passive investors. The majority of
respondents feel that shareholders rights need enhancement in two areas: the
vote on remuneration statements and the vote on corporate governance
statements. The general perception is that enhancement is required not only for
shareholder rights but also for shareholder responsibilities. Over 60% of
respondents share the opinion that there should be a requirement to report on
the implementation of corporate governance policy[352].
The study suggests that the functioning of
the 'comply or explain' can be improved by the existence of a genuine
obligation to comply or explain with a higher level of transparency and
qualitative and comprehensive disclosure of information. The information serves
as material for monitors and enforcers to analyse and take appropriate actions.
Furthermore, the issues could be remedied by strengthening the role of
market-wide monitors and statutory auditors, and by developing a
comply-or-explain regime for institutional investors. Moreover, the study
underlines the importance of shareholders exercising their monitoring and
enforcement responsibilities. It is suggested that general meetings should
become a forum where corporate governance practices would be systematically
discussed. In addition to this, significant improvements could be realised by
ensuring that shareholders effectively use the rights which they have been
provided. 
The study concludes that the 'comply or
explain' approach should not be abandoned. However its effectiveness should be
improved.
Annex VI.
Overview of situation in MemberStates
1. NATIONAL
INITIATIVES AIMING AT ENHANCING THE QUALITY OF CORPORATE GOVERNANCE REPORTING
Finland:
The Securities Markets Association issued
on 20 January 2012 guidelines on explanations that companies should provide[353]. It recommends in
particular that an explanation shall specify what recommendation it departs
from (number and heading of the recommendation), explain in what manner it
departs from said recommendation, provide an explanation for the departure, and
present the solution that the company has adopted instead.
Belgium:
The Corporate Governance Committee
commissioned an independent study on the quality of explanation and, on the
basis of the findings of this study, issued a number of practical
recommendations in 2012[354].
In particular, reasons for deviations must always comply with both their
underlying principle and the spirit of the Code, they must relate to the
company’s defining features and situation (e.g. with regard to its sector,
size, structure, international character, etc.) and specify how these features
justify the deviation in question and they must be sufficiently detailed and
provide a clear enough idea of the justification for the deviation, so that the
recipients can assess the impact of the information they are given. Temporary
deviations must specify why they will be temporary, when this temporary
situation will end and, where appropriate, whether the company has now
fulfilled the provisions of the Code.
UK:
The Financial Reporting Council launched in
December 2011 a discussion between companies and investors on what constitutes an
appropriate explanation and introduced guidelines on the 'comply or explain
approach' in the Corporate Governance Code[355].
According to the code, in providing an explanation, the company should aim to
illustrate how its actual practices are consistent with the principle to which
the particular provision relates, contribute to good governance and promote
delivery of business objectives. It should set out the background, provide a
clear rationale for the action it is taking, and describe any mitigating
actions taken to address any additional risk and maintain conformity with the
relevant principle. Where deviation from a particular provision is intended to
be limited in time, the explanation should indicate when the company expects to
conform with the provision.
Greece:
In addition, also the Hellenic Corporate
Governance Council is planning to provide more guidance on the quality of
explanations.
2. NATIONAL RULES ON DIRECTORS’ REMUNERATION
Austria
Austrian stock corporations are organised
in a two tier-system. The remuneration of the supervisory board is a matter to
be decided on by the shareholders, either generally in the articles of
association or by a binding vote of the general meeting. 
The remuneration of the management board is
determined by the supervisory board. This remuneration should be in line with
the principles set by the Stock Corporation Act: the total remuneration of the
members of the management board must be commensurate with the tasks and
performance of each individual member of the management board, the situation of
the company, the usual level of remuneration, and must also create incentives
to promote the long-term development of the company. 
Section 243b of the Austrian Commercial
Code, requires stock corporations listed on a regulated market to draw up a
corporate governance report every year, containing inter alia the total
remuneration of each member of the management board as well as the principles
of the company´s remuneration policy. The total remuneration of the management
board for a business year must be reported in the notes to the financial
statements.
Additionally the Austrian Corporate
Governance Code requires the chairperson of the supervisory board to inform the
general meeting once a year of the principles of the remuneration system.
Finland
The Finnish Companies Act mandates that the
general meeting of shareholders votes, as regards remuneration, on: a) any
remuneration payable to the board of directors and to the supervisory board, if
any (ch. 5 s. 3) and b) all equity –based instruments entitling to the
company’s shares (ch. 9 s. 1−3) including when such financial instruments are
issued as remuneration.
Under the Finnish Company law, the Board of
Directors takes decisions regarding management remuneration and generally on
the remuneration payable in the company. However, the Finnish Companies Act
(ch. 6 s. 7) allows the Board of Directors to submit a specific matter for the
approval of the general meeting of shareholders, including remuneration
matters. This approach has never been used to date by the Finnish listed
companies.
As far as transparency is concerned the
accounting law includes provision on the obligation to disclose information on
the total remuneration paid to the managing director (CEO) and in the total
remuneration paid to the board of directors, in the notes to financial
statements and the annual report.
Furthermore, the Finnish Corporate
Governance Code for Listed Companies (“Code”), recommendation 47, recommends
that the company shall make available on its website ahead of the annual general
meeting of shareholders a remuneration statement. According to the Code, only
the information on the CEO is indicated per person. Remuneration paid to the
board of directors and supervisory board are disclosed per organ. In addition,
the statement includes the main principles and decision-making processes
regarding the remuneration of executive directors, including long-term
incentive plans, the proportion of their variable remuneration and pension
schemes.
France 
Currently, in France there is no general
vote on the remuneration policy, report or on individual remuneration. However,
under the Commercial Code the annual general meeting has the right to votes on
specific issues: a) to determine the total value of the manager’s attendance
fees (article L. 225-45 paragraph 1 of the code of commerce); b) to allow the
Board to grant stock options (article L. 225-185 paragraph 4 of the code of
commerce) or the attribution of bonus shares (articles L. 225-197-1-II of the
code of commerce) to corporate officers; c) in listed companies, to approve all
deferred payments such as termination payments, pension schemes etc. (articles
L.225-42-1 and L. 225-90-1 of the code of commerce).
Concerning transparency, in the code of
commerce there is no obligation to present to shareholders the remuneration
policy. However, there are several measures that grant transparency. In limited
companies the report to the general meeting has to: a) take into account the
total remuneration (including variable remuneration, bonuses etc) of all
corporate officers; b) analyse the fix, variable and exceptional elements of
remuneration of corporate officers and describe the methods for their
calculation (article L. 225-102-1 of the code of commerce). Furthermore, the
chairman of the board of directors writes a report describing the remuneration
granted to corporate officers (articles L. 225-37 paragraph 5 and L. 225-68
paragraph 7 of the code of commerce). This report must be approved by the board
and disclosed to the public.
The AMF (L’Autorité des marchés financiers)
issued a recommendation including an advised format for the transparency of
remuneration.
The AFEP-MEDEF code comprises several
recommendations concerning the transparency of remuneration. Between them, it
is advised to devote a separate chapter for remuneration in the annual report. In
June 2013 this Code has been revised and now contains the recommendation to
have an advisory shareholder vote on the remuneration report.
Germany
The Akiengesetz § 120(4) [Companies Act]
(AktG) provides for the general meeting of a listed company (public limited
company) to have an advisory vote on the remuneration system for management
board members. However, this vote is not mandatory, since this item should only
be put on the agenda on request of at least 20% of the shareholders.
The Commercial Code (HGB) § 289(5) No 9
requires detailed total remuneration disclosure to be annexed to the annual
financial statement for each category of person with regard to the members of
the management body, supervisory board, advisory board or similar body.
The German system sets also rules for the
disclosure of individual remuneration of directors. In the Handelsgesetzbuch (Commercial
Code) § 285(9) individual remuneration transparency requirements are applicable
to corporations and big partnership and listed public limited companies for
each member of the management board. However, the disclosure is not required if
so decided by a majority of the general meeting representing at least three
quarters of share capital. 
Finally, the Deutsche Kodex für gute
Unternehmensführung [German Corporate Governance Code] (DCGK) contains a number
of relevant provisions requiring a detailed disclosure of individual
remuneration of the members of the management board. Under paragraph 5.4.6, the
remuneration of supervisory board members is decided by the general meeting or
set out in the articles of association. It should reflect the responsibilities
and scope of activities of the supervisory board members, as well as the
company’s economic situation and performance.
Italy
In the Italian system, shareholders have an
advisory vote on remuneration policy. However, industry regulation applying to
banks and insurance companies mandates binding shareholder approval of
remuneration policy.
As far as transparency on remuneration is
concerned, Art. 123-ter of TUF (Consolidated Law on Financial Intermediation),
contains provisions regarding the report on remuneration. Listed companies must
publish a report on remuneration available before the general meeting; this
report is approved by the Board of Directors. 
The precise and analytic content of the
remuneration report has been detailed by the Consob deliberation No.18049 of 23
December 2011. The report must include two sections. The first one includes a
precise description of the company's policy on the remuneration of the members
of the board, general managers and executives with strategic responsibilities
and the procedures used to adopt and implement this policy. The criteria of the
policy have been envisaged by the Code of Corporate Governance.
The second section, which is intended for
the members of the board and auditing bodies, discloses total individual
remuneration. For companies different from small companies, the illustration of
the remuneration is individual also for some executives with strategic
responsibilities limited to those whose pay is higher than that of the chief
executive director (while for small companies the illustration is aggregate).
Lithuania
Currently, in the Lithuanian legal system
does not include transparency requirement on remuneration.
Furthermore, there is no obligation to hold
a vote on remuneration even if the Corporate Governance Code recommends that
“The general shareholders’ meeting should approve the amount of
remuneration". However, there is a proposal, still pending approval, to
amend the Law on Companies of Lithuania to give shareholders a binding vote on
the conditions (including remuneration) of the civil agreement which will be
signed by directors.
The Netherlands
Dutch limited companies (NVs) must have
remuneration policy established by their general meeting. The remuneration of
individual directors is established by supervisory board following the
recommendation of the remuneration committee. Individual remuneration must in
any case be in line with the remuneration policy (Article 2:135 of the Civil
Code).
As far as transparency is concerned, Dutch
limited companies (NVs) must, in their annual accounts, state the remuneration
of each member of the management board and of the supervisory board. The pay of
members of the management board must be broken down into a) regular pay, b) pay
receivable in the long term, c) pay receivable upon termination of employment,
d) profit-sharing and bonuses. The annual report must mention the remuneration
policy and how this policy was implemented in practice during the reporting
year (Article 2:391 of the Civil Code). The remuneration report is placed on
the company website (Principle II.2 and best practice provisions II.2.10 to
II.2.15).
Poland
The Polish Commercial Companies Code
Article 392(1) and (2), gives shareholders the rights to decide on the
remunerations which may be granted to members of the supervisory board, unless
otherwise provided in the articles of association. No other vote on
remuneration is granted to shareholders. Under Article 378(1) CCC, the
remuneration of management board members is determined by the supervisory
board, unless the articles of association provide otherwise.
Remuneration policy issues in listed
companies are regulated in Poland by the provisions of the Finance Minister's
Order of 19 February 2009 on current and periodic information provided by
issuers of securities and conditions for recognising information required by
the law of a non-EU member state as equivalent and the 'Code of Best Practice
for WSE Listed Companies'. In particular, according to Section I.5 of the 'Code
of Best Practice for WSE Listed Companies', a company should have a
remuneration policy and rules for defining this policy. The remuneration policy
should determine the form, structure, and level of remuneration of members of
supervisory and management bodies. 
Concerning disclosure requirements, members
of the management and supervisory bodies of public companies are required to
disclose their salaries, bonuses and benefits according to Article 68a of the
Act of 29 July 2005 on public offer(s) and conditions for admitting financial
instruments to the regulated system of trading, and on public companies.
Similarly, article 91(5)(17) of the aforementioned Order of the Minister of
Finance requires issuers to disclose in the account annual report of the
activities of the management board the total amount of salaries, bonuses and
benefits paid, payable or potentially payable to each individual member of
managing and supervising bodies.
Spain
Law 2/2011 includes, for the first time,
the obligation for listed companies and saving banks to elaborate an annual
report on the remuneration of directors. This report must include: a) complete
information regarding the remuneration policy of the Board of Directors for the
year in course and the coming years together with a reference to the
implementation of the remuneration policy during the past year and b)
information in respect of the individual remuneration accrued for any of the
Directors. This according to article 61ter paragraph 4 the report on Directors’
remuneration must be submitted to the advisory vote of the General Assembly.
The unified Good Governance Code of listed
Companies (recommendation 8) states that is the Board of Director responsible
to decide on director’s remuneration. Following recommendation 35 the company’s
remuneration policy must specify in details the fixed and the variable
components.
Concerning transparency on remuneration,
according to article 27 of the Law 2/2011 remuneration policies of listed
companies must be disclosed in relation to the remuneration of directors,
either executives or non-executives (the remuneration report). Furthermore, the
final provisions of the Law 2/2011 include information on the identity and
remuneration of the directors in the annual corporate governance report. 
Slovakia
With respect to the right to vote on
remuneration policy, the relevant regulation is contained in provisions of Art.
187 (1) point i) of the Slovakian Commercial Code, which provides that, the
powers of the general meeting include: a) approving individual annual financial
statements and individual extraordinary financial statements, deciding in the
distribution of profit or payment of loses, and determining director´s fees and
b) approving the rules for remunerating members of the company´s bodies, unless
the articles of association determine that such remuneration rules are to be
approved by the supervisory board.
Furthermore, the Corporate Governance Code
states that shareholders should have the opportunity to participate effectively
in decisions concerning the remuneration of board members and key executives.
The Corporate Governance Code advises to disclose in details both remuneration
policy and individual remuneration of the members of the company´s bodies.
Sweden
In Sweden there is a distinction between
remuneration to Board members, which are all non-executives, and remuneration
to the executive management. Remuneration to Board members for Board work is
resolved upon, individually, by the AGM for each Board member. Remuneration to
management (the CEO, other person in management), is resolved upon by the
Board.
The Companies Act requires an AGM vote on a
remuneration policy. The remuneration policy should cover all compensation,
including salaries, variable compensation and incentive programs. The AGM vote
is binding. It is possible to deviate from the remuneration policy only if the
resolution allows a deviation or in special unpredictable circumstances.
Concerning transparency, according to the
Annual Accounts Act, the Annual report should contain the previous year’s
Remuneration policy, as well as the proposed new policy. The auditors are
required to produce a written statement to the Board on the correct application
of the previous year policy. This statement should be made public to the
shareholders not later than three weeks ahead of the AGM.
United Kingdom
At present, the Companies Act requires shareholders
to be given an advisory vote on the remuneration report (DRR) published as part
of the annual reporting cycle. Under Section 217, the Companies Act 2006 also
requires that all companies must seek shareholder approval for compensation
payments to directors for loss of office. However, this applies only to
payments made over and above that which the director is contractually entitled
to.
The UK Government is currently proposing to
introduce new requirements through the Enterprise and Regulatory Reform Bill.
The proposed legislation requires companies to produce a two part remuneration
report, with the first part setting out the forward-looking remuneration policy
(“the policy statement”) and the second part setting out what remuneration
executive directors received in the previous year (“the implementation
report”). 
Shareholders will get a binding vote on the
directors’ remuneration policy report. Companies will be able to choose how
frequently to put the remuneration policy to a shareholder vote but must do so
as a minimum every three years. However, if a company wishes to make any
changes to the remuneration policy it will have to re-present it to
shareholders for approval.
Companies will also have to produce an
annual implementation report that includes a single figure for the total pay
directors received that year. Shareholders will get an annual advisory vote on
the implementation report. If a company fails the annual advisory vote (i.e. if
it is rejected by the majority of those voting), in a year in which the
remuneration policy has not been put to shareholders, the company have to
re-present their remuneration policy to shareholders the following year.
Finally, to improve transparency around
loss of office payments, companies will need to promptly publish a statement
setting out the exact payments the director has received or may receive in
future. Companies will not be able to pay more than shareholders have agreed. 
As regards non-executive directors, the
Corporate Governance Code currently states that “the board itself, or if
required by the Articles of Association, the shareholders should determine
their remuneration” and the shareholder approval should be sought in advance if
non-executive directors are to be given share options or other performance-related
remuneration.
As far as transparency is concerned, the
law provides that all UK registered companies must include information about
directors’ remuneration in the notes to their accounts. The extent to which
companies have to disclose details of directors’ remuneration depends on the
size and nature of the company.
Finally, as far as Financial Services is
concerned the Financial Services Authority (FSA) issued a Remuneration Code.
Among other measures, it gives shareholders a binding vote on directors’ pay.
5. NATIONAL
RULES ON RELATED PARTY TRANSACTIONS
Italy
According to relevant legislation (Civil
Code, Consolidated Law on Financial Intermediation) and regulations from the
Government regulation Authority (Consob), material RPTs must be submitted to a Committee
of independent directors which must receive all relevant information and issues
a binding opinion on the transaction. The committee can seek an advice of an
independent expert of its choice at the expense of the company.
Material RPTs must also be approved by
decision of the Board of Directors. The interested parties are not excluded
from the vote, but they must disclose theirs interests in the transaction. In
case of negative opinion of the Committee of independent directors, the transaction
still could be approved ex ante at the shareholders' meeting. Interested
parties are again not excluded from the vote. Moreover, companies must provide
adequate information on individual material RPTs by issuing (within 7 days) a
circular describing the transaction while also enclosing the independent
committee opinion.
UK
Rules on related party transactions are
provided in the Companies Act 2006, which applies to all companies and in the UK
Listing Rules for companies with premium listings. In case of smaller RPTs
(less than 5% but more than 0,25% of the assets) listed companies must provide
a confirmation of an independent advisor. However, a decision of the
Supervisory Board is not required. Shareholders hold a right of approval if the
transaction represents more than 5% of the assets. The approval is required
before the entering or the completion of the transaction. The interested
parties are excluded from the vote.
Finland
Provisions on RPTs are included in the Finnish
Companies Act. The opinion from an independent advisor is not required; however
the Board of Directors may request advice from an independent advice as a
prudent measure. All transactions, even non material, are subject to the
approval of the Board of Directors, with the related party not participating in
the decision. There is no requirement of ex ante shareholder approval for most
important transactions.
France
Rules on related party transactions are set
up in the French Code de commerce. RPTs which are not concluded at normal market
conditions are subject to ex ante approval by the board, with the related party
being precluded from voting. A special report by the company’s auditor must be
established and disclosed to shareholders. The general meeting, with the
related party not participating in voting, gives an ex post approval of
RPTs. If no approval is granted, the liability of the board members can be
engaged.
5. NATIONAL RULES ON PROXY ADVISORS
UK:
Proxy advisors are not subject to any
direct regulatory provisions or guidance and disclosure in not required from
proxy advisors themselves. However the UK Stewardship Code[356], which is addressed
to institutional investors, applies to proxy advisors by extension.
Institutional investors are not permitted to delegate responsibility for
stewardship. In addition they are required to disclose the use they have made
of proxy voting or proxy advisory services. They must describe the scope of
such services, identify the provider, and the extend they rely upon the
advices. Currently, there are no provisions imposing the alignment of the end
owners’ interests and the proxy advisors’ interests. Nevertheless, the
Stewardship Code encourages this alignment. 
France:
The AMF, the Financial Markets Authority,
issued a recommendation on proxy advisors promoting transparency in the
establishment and execution of voting policies and recommending the
establishment of appropriate rules on the management of conflicts of interests[357].
Netherlands:
There are no specific rules regarding proxy
advisors. According to Code of best practice shareholders using proxy advisors
are expected to form their own judgement on the voting practice and advice of
the advisor.
Finland:
There are no legislative or regulatory
provisions regarding proxy advisors in Finland other than the general
provisions of civil law (obligation to act with due care and accountability to
the client). However, if a bank or investment firm provide proxy service, the
provider is subjected to the sector regulatory framework, including the
conflicts of interest.
5. NATIONAL RULES ON TRANSPARENCY OF INSTITUTIONAL INVESTORS AND
ASSET MANAGER AS REGARDS VOTING AND ENGAGAMENT
UK:
The UK Financial Reporting Council's
Stewardship Code[358]
sets out good practice for institutional investors on the monitoring of and
engagement with the companies in which they invest. The principles of this Code
make clear that institutional investors should disclose their engagement policy
and voting records. The Financial Services Authority requires UK asset managers to produce a statement of commitment to the Code or to explain why it is
not appropriate to their business model.
Sweden
The Act on national pension funds[359] requires the 4
national AP funds to issue internal voting policy guidelines. There is no
obligation to publish it.
The Swedish Investment Fund Association’s
Code[360]
for fund managers recommends the disclosure of voting policies.
Germany
The voluntary code of conduct of the German
Association for Investment and Asset Management[361] seeks to establish a
governance framework for the industry. When performing its functions, the
investment company (KAG) acts exclusively in the interest of the investors and
the integrity of the market.
The investment company must establish
procedures which are suitable to identify circumstances giving rise to
conflicts of interest; and to resolve such conflicts paying due regard to the
protection of the interests of the investors and/or investment undertakings. Of
particular importance, for the funds managed by a company, there will be
suitable procedures to avoid excessive transactions costs as a result of inter
alia, excessive turnover. Transactions which merely serve to generate
additional fees are not permissible.
The supervisory board and management of the
investment company will work towards good corporate governance on the
investment company. The two boards may not pursue their own interests and the
supervisory board will ensure that the management have appropriate risk
management and control.
The investment company informs the
investors about its voting policy.
Finland
Act on common funds[362] requires the
disclosure of voting policies in the fund prospectus. The fund management
company is to disclose in its half-year annual report how it has used the
voting rights. Disclosure is also required if a fund holds more than 5 % of the
total voting rights, if this policy deviated from the general voting policies.
Based on this requirement the Finnish
federation of Financial Services has issued guidelines for UCITS[363]. The Finnish pension
alliance has issued non-binding guidelines on stewardship (2006) and
responsible investments (2008)[364].
Netherlands:
Dutch institutional investors are obliged
to include in their annual report or on their websites a statement about their
compliance with the best practice provisions of the Dutch Corporate Governance
Code[365].
The investor that has not applied a best practice provision has to explain why
(comply or explain). Principle: Institutional investors shall act primarily in
the interests of the ultimate beneficiaries or investors and have a
responsibility to the ultimate beneficiaries or investors and the companies in
which they invest, to decide in a careful and transparent way, whether they
wish to exercise their rights as shareholder of listed companies.
Institutional investors shall publish
annually their policy on the exercise of the voting rights for shares they hold
in listed companies. They shall report annually, on their website or in their
annual report, on how they have implemented their policy on the exercise of the
voting rights in the year under review. Institutional investors shall report at
least once a quarter on whether and, if so how they have voted at shareholder
meetings.
France:
In line with the EU UCITS rules, the French
Financial Market Authority has issued rules regarding the obligations of UCITS
to provide their investors with their voting policy[366]. The French asset
management association has issued guidelines about the implementation of these
rules[367]
and a transparency Code for funds specialized in responsible investing.
Annex VII.
Additional information on policy context, problems and drivers
Figure 1: Listed Companies in the EU Member States and market capitalization
in 2012)[368]
  Member State || Market Capitalization (Mio. EUR) || Total number of domestic listed companies. 
 UK || 2,355,184 || 2,179 
 France || 1,422,204 || 862 
 Germany || 1,159,325 || 665 
 Spain || 776,174 || 3,167 
 Netherlands || 507,784 || 105 
 Sweden || 437,210 || 332 
 Italy || 347,753 || 297 
 Belgium || 234,045 || 154 
 Denmark || 175,387 || 174 
 Poland || 138,629 || 844 
 Finland || 123,775 || 119 
 Ireland || 85,030 || 42 
 Austria || 82,708 || 70 
 Luxembourg || 54,864 || 29 
 Portugal || 51,113 || 46 
 Greece || 34,775 || 267 
 Czech Republic || 28,987 || 17 
 Croatia || 16,816 || 184 
 Hungary || 16,442 || 51 
 Romania || 12,421 || 77 
 Bulgaria || 5,199 || 387 
 Slovenia || 5,050 || 61 
 Slovak Republic || 3,596 || 69 
 Lithuania || 3,091 || 33 
 Malta || 2,832 || 20 
 Estonia || 1,818 || 16 
 Cyprus || 1,556 || 111 
 Latvia || 869 || 31 
 Total Amount in the EU || 8,084,637 || 10,409 
Figure 2: The ownership
structure of EU listed companies in 2011[369]
Figure 3: Participation of institutional investors in European
companies
Source: Factsets Lionshares 2013
Figure 4:
Engagement and voting strategies by country (Source: Eurosif) 
Figure 5: IPOs
and job creation
Annex VIII.
Details on administative burden
The estimates of the administrative burden presented
relate to the proposed package of options. While certain of these costs would
be imposed on listed companies, others would be borne by institutional
investors, asset managers and proxy advisors. All estimations are based on the
available public data, as well as on evidence gathered by the Commission
(during consultations and meetings with stakeholders[370]). The exact
costs will depend on the precise content of the requirements, as well as on how
the concerned stakeholders choose to disclose relevant information. Therefore,
and due to the qualitative nature of the measures potentially to be
implemented, all the figures provided should be considered as estimates and a
fair amount of uncertainty needs to be included in the numbers provided.
Moreover, this annex does not take account of the benefits potentially stemming
from the proposed measures.
Transparency of institutional
investors and asset managers on their voting and engagement and certain aspects
of asset management mandates
The preferred option would entail some
administrative burdens for instititional investors and asset managers. These
costs would be linked to publication of the voting and engagement policy of
institutional investors as well as of a narrative report on past engagement and
voting records. In addition the preferred option would require asset owners to
disclose how they incentivise their asset managers (in asset management
mandates, regarding issues such as shareholder engagement, performance
evaluation, expected levels of portfolio turnover, stock-lending, etc.) to act
in the best interest of their final beneficiaries. As regards the asset
managers, the preferred option would require them to disclose information on
portfolio concentration, portfolio turnover, actual and estimated cost of
portfolio turnover and whether the level of portfolio turnover is in line with
the agreed investment strategy.
The costs of publication of engagement and
voting policies and information on the main features of
asset management mandates should not be substantial, as
this would entail only publication of a statement on the policies adopted by
the concerned institution and making public already available information. In
line with previous Commission estimation, the cost of preparing such
publications would range between 600 and 1000 euros per year.[371] Moreover,
as estimated above a website publication costs approximately € 70. It should
however also be noted that normally such costs are mostly incurred in the first
year and much less costs in further years, since such policies and mandates do
not change each year.
Similarly, the administrative burden
related to disclosure by asset managers of information on portfolio concentration, portfolio turnover, actual and estimated
cost of portfolio turnover and whether the level of portfolio turnover is in
line with the agreed investment strategy should be rather limited. First of all, the information is already available to asset
managers, but has to be prepared for disclosure. Moreover, EU legislation
already requires, for some asset managers, to disclose information on
investment strategies and costs. 
In addition, it should be noted that some
asset owners and asset managers already publish information regarding voting
and engagement policy and voting records, as they sign up to self-regulatory
codes, or because they are required by law to do so.[372] In a few
markets, publication of such information is considered to be best practice
already.
More substantial costs could be linked with
the publication of voting records and past engagement. This would however
largely depend on the level of details required, as a detailed report would be
more costly than a report in an aggregated form.
One Dutch institutional investor estimates
that the annual total costs for a large institutional investor with over 2000
investee companies in the portfolio for the publication of a detailed report
(votes per company and per agenda item; all general meetings and disclosing
reasons for voting against management proposals) are between € 15.000 and €
20.000. According to the same source, costs would be significantly lower
(approx. € 500) if institutional investors are required to draft and disclose
an aggregated overview of their voting behaviour (number of general meetings
attended, % against management proposals and some ‘highlights’ (e.g.
remuneration). Total costs for an institutional investor with concentrated
holdings (approx. 80), disclosing the detailed voting behaviour would also
amount to approx. € 500. One of the biggest
international asset managers also estimated that if only aggregated voting
record is required, without the requirement for an external audit, then the
cost would be extremely limited and would represent a few hours of staff time
to run the report, check it for accuracy and prepare it for publication on the
website[373].
The proposed changes would affect
approximately 3200 asset management companies active in the EU.[374]
The exact number of institutional investors potentially affected is more
difficult to determine, due to lack of aggregated information, however, it
could be estimated that it could affect approximately 5400 insurance companies[375]
and 7400 pension funds.[376]
Remuneration: binding rules on transparency and mandatory shareholder vote
The proposed combination of options would
entail certain additional, though limited costs and burdens for listed
companies. It would require them to disclose the remuneration policy and the
individual remunerations granted to members of the board. It will also require
putting the remuneration policy and the remuneration report to a vote by
shareholders. The administrative burdens could be expected to be mostly
incurred in the first year and more limited for the following years.
Disclosure remuneration policy
As regards disclosure of the remuneration
policy it implies the preparation of a statement which describes the rationale
for the policy, how it is prepared and linked to performance and business
strategy and how it takes into account the long-term sustainability of the
company.
Listed companies either already have such a
formal policy or they have it de facto (the contracts with the different board
members). Informal consultations would seem to indicate that, depending also on
how complicated the policy will be, the preparation for publication of the
policy should take approximately 2 to 4 working days depending from the
company, the rules currently applied and the policy they have in place.
Considering the different hourly wages in
Member States, the cost could range between € 90 to € 180 (Bulgaria) and € 1140 and € 2280 (Luxembourg) per company, with an average cost between € 525 and €
1050. However, it should be noted that in 15 Member States there is already an
obligation to disclose remuneration policy. Furthermore, providing information
on the remuneration policy is already foreseen in Commission Recommendation
2004/913, which has at least partly been implemented by Member States. Finally,
it should be noted that remuneration policies are normally not revised on a
yearly basis, which means that costs will be lower after the first year and
then only reach the initial level after a more significant revision of
remuneration policy.
Disclosure remuneration report
As regards the remuneration report, which
involves a disclosure of individual remunerations granted, the preferred option
foresees a degree of standardisation of the disclosure. In the first year this
will create some adaptation costs, but in further years such a standardisation
will facilitate disclosure.
Given that the average European board of
directors consists of 12 members[377],
the processing of the information required for the disclosure should not give
rise to considerable burden. In line with previous estimations made by the
Commission's services for comparable disclosures[378], the
preparation of such additional statement in the annual report would range
between 600 and 1000 euros per year per company. However, the additional burden
flowing from this option would be much lower. Companies are already required to
report on the amount of remuneration paid to members of the administrative,
managerial and supervisory bodies in the annual accounts.[379] Providing
information on individual remuneration is also foreseen in the Commission
Recommendation 2004/913, which has at least partly been implemented by Member
States. 11 Member States already require publication of individual
remuneration.
Say on Pay
The administrative burden linked to a
shareholder ‘say on pay’ are due to the organisation of the shareholder vote.
As this would in practice imply only adding the discussion and vote on
remuneration to the agenda of the general meeting, it has been estimated that
an additional vote does not add any cost for the company.[380]
Related party transactions: improving transparency requirements and shareholders vote on the
most important transactions
The preferred options would involve some
additional costs for listed companies.
Public announcement
First, the public announcement at the time
of the transaction for more important related party transactions would
involve some administrative burden. It has been estimated that the cost of
disclosing related party transaction for accounting reasons for a company
equals to 265 euros.[381]
This administrative burden is already in place and the only relevant change
would be that the moment of publication is at an earlier moment. Costs of this
would be estimated to add a fraction to the costs of the accouting disclosure,
around 50 euro. The publication of this information could be provided via
companies’ websites in order to reduce costs. A website publication costs
approximately 70 € per company. The disclosure of each substantial related
party transaction would therefore cost to a company an estimation of 120 €.
Fairness opinion
Additional administrative burden would also
be linked to the requirement to have a fairness opinion on the proposed
transaction of an independent expert. Depending on the complexity of the
transaction it would seem that an experienced advisor would be able to assess
the fairness of the given transaction within between approximately 5 and 10
hours. This could result in a cost of maximum 2500-5000 € in case the opinion
is made by an auditor. Moreover, this cost results in line with previous
extimation made by the Commission for similar policy actions in a comparable
field.[382]
Since this transparency would only be
required for transactions above a certain threshold (for instance above 1% of
assets of the company)[383],
only the more important transactions would be covered. Transactions executed on
normal market conditions would not be covered. On the basis of the OECD report[384]
on related party transactions it would appear that each year some 15% of the
listed companies could have one transaction equal or above 1% of their revenue.
This would mean that approximatly 1550 companies should apply the foreseen
rules.
Therefore, the introduction of the
transparency requirements on each related party transactions together with the
fairness opinion by an external evaluator (auditor) woud arise a total maximum
costs of 2620 and 5120€. Taking into account that there are approximately 1550
substantial transactions each year, the yearly aggregate cost of the proposed
measure for the market results approximately 4,06 and 7,93 million €.
Shareholder vote
A shareholder approval of the most
substantial related party transactions could result in some limited
administrative burden. In view of the fact that the threshold would be
relatively high (for instance 5% of the assets), only a limited number of
transactions would be subject to this obligation. As to the potential
administrative burden involved, as this would in practice imply only adding the
discussion and vote on the RPT to the agenda of the general meeting, no
administrative burden would be there. In the case of the organisation of a
special shareholder meeting, the costs could of course be more important, in
view of the need to convoke and holding the meeting (including venue etc.).
Proxy advisors: binding rules on
transparency
The preferred option would involve some
adminstrative burden for proxy advisors, linked with the disclosure of certain
key information, such as their policy for the prevention, detection, disclosure
and treatment of conflicts of interests and the methodology for the preparation
of advice, including in particular the nature of the specific information
sources they use and how the local market and, legal and regulatory conditions
to which issuers are subject are taken into account. 
The additional costs would be linked to
improving information on their internal procedures (disclosing methodology and
prevention of conflict of interest) and preparing this information for
publication. Normally, these costs would essentially be incurred once and only
more often if the proxy advisors would change essential parts of these
policies.
The preparation of appropriate information
on internal procedures would in practice represent a few hours of work of
staff. In addition, many proxy advisors already have internal guidelines on the
relevant issues and some of them are already, at least partly, publicly
disclosed on their websites. Therefore, depending on the proxy advisors and the
level of adaptation for publication needed, the additional working hours
estimated to prepare the disclosure of the policies will range between 20 and
50. The average hourly wage of senior officials and managers in the country in
which proxy advisors are incorporate is approximately 50 €.[385] The cost of
preparing the required information for publication will therefore range, for
each proxy advisors, between € 1000 and € 2500. As regards the publication, it
could take place via websites for an approximate cost of € 70 for proxy
advisors’.
There are currently around 10 proxy
advisory firms (with 2 main actors sharing most of the market) active in the EU
that would be potentially affected by these measures. Total aggregate cost of
the measure should therefore range between € 10 700 and € 25 700.
Quality of corporate governance
reporting: recommendation providing guidance
The preferred option does not entail any
significant costs for listed companies. Under Article 46a of the Directive
78/660/EEC[386]
listed companies are already required to provide an annual corporate governance
statement. This report should provide essential information on the corporate
governance arrangements of the company and in particular include the reference
to the corporate governance code applied on a ‘comply or explain’ basis. Under
the 'comply or explain' approach, a company which chooses to depart from a
corporate governance code recommendation must give detailed, specific and
concrete reasons for the departure.
The proposed recommendation would not
require companies to prepare a new statement, but only clarify what is the
desired quality of explanations. In practice issuers would mainly be encouraged
to apply a greater degree of diligence while preparing the statement currently
required, but would also know more clearly what is expected of them, which
decreases legal uncertainty. 
It has been calculated that the whole
annual corporate governance statement costs on average to large listed
companies €1674.[387]
However, this administrative burden already exist. In terms of direct costs,
the new requirement could only translate in additional few hours of work for
the staff preparing the statement in order to increase the level of
explanation. Estimation of these costs and of the hours of additional work
imposed is made difficult by the case by case improvement needed, which can
differ substantially from company to company. However, an external study
performed on a sample of companies demonstrates that on average companies would
need to provide 5 explanations.[388]
Considering the total cost of preparing the report, the greater diligence in
explaining the reasons not to apply the parts of the code not complied with,
will only result in negligible costs. 
Finally, it should be noted that the cost
will mostly be a one-off cost. Companies will need to adapt their annual
corporate governance statement in order to provide better explanation once the
measure will be introduced. However, unless significant change in the
application of the code by the company occurs, the company will not need to
further elaborate or modify its explanation. Therefore, considering the limited
cost of the explanation and the insurgence of the cost mostly for the first
year, the possible increase of administrative burden would thus be extremely
limited.
Overview of the cost implications of the
proposal:
 Increase the level of engagement of institutional investors and asset managers || Create a better link between pay and performance || Transparency and oversight on related party transactions || Transparency of proxy advisors || Improve corporate governance reporting 
 Transparency of voting policy/ mandates  || voting records || Disclosure of the remuneration policy || Remuneration report || Disclosure of each substantial RPT || Opinion of an independent adviser || Disclose methodology and conflict of interest || Recommendation on guidelines on the quality of corporate governance reports 
 600 to 1000 || Detailed: 15.000 to 20.000 Aggregate: 500 || 525 and 1050 euro || 600 to 1000 || 120 € || 2500-5000 € || 1000-2500 € || Negligible estimated additional costs 
 Total per investor For institutional investors: between 1.100 and 21.000 For asset managers: between 1.000 and 5.000 || Total per company Between 525 and 2050 + possible adjustment costs in case of a negative vote at a GM.   || Total per company Between 2620 and 5120 + eventual vote to be organized outside an AGM. (OECD estimates that 15% of companies have a RPT annually for a total of 1550 companies) || Total per proxy advisor 1000-2500 €   || Total per company Negligible 
Specific formula used for the calculation
of costs: 
Disclosure of remuneration policies:
average EU hourly wage for middle management * estimation of hours needed to
prepare the document
Opinion of an independent adviser for
related party transactions: average EU hourly wage for auditor * estimation of
hours needed to prepare the document
Transparency of methodology and conflict of
interest for proxy advisors: average EU hourly wage for middle management proxy
advisor * estimation of hours needed to prepare the document
Annex IX. Impact on competitiveness of EU companies
Certain of the options included in the
proposed package might have an impact, though limited on the competitiveness of
European listed companies, as they involve certain additional costs and
disclosure of certain sensitive information. Unlisted companies will not be
affected. As regards SME, only listed SMEs will be covered and micro-entitities
will not be affected. No disctinction between sectors can be made: the impacts
will be the same for all sectors, as the options will apply to all listed
companies without distinction.
As regards the costs for companies, it
should be noted that mosts of the costs are likely to be offset by the benefits
that companies might draw from the proposal. Certain options might also induce
costs not for companies but other stakeholders (institutional investors and
proxy advisors).
The impact on the competitiveness of EU
companies are depicted below:
Corporate governance reporting
 Competitive impacts || Description of impacts || Size and duration of impact || Risks and uncertainty 
 Positive || Negative 
 Cost and price competitiveness || More guidance on the quality of reports would facilitate the preparation of those || More diligence in the preparation of reports migh induce  limited additional costs || Very low costs (few hours of staff preparing the report), occuring once a year || none 
 Capacity to innovate || none || none || n.a. || n.a. 
 International competitiveness || none || none || n.a. || n.a. 
Remuneration
 Competitive impacts || Description of impacts || Size and duration of impact || Risks and uncertainty 
 Positive || Negative 
 Cost and price competitiveness || More oversight by shareholders is likely to induce a stronger link between pay and perfomance and avoid unjustified transfers of value to the detriment of the company || Disclosure of re muneration policy and of individual remuneration would involve some additional costs, which should be limited, some not significant costs are also linked with the organisation of the shareholder vote.   || Costs occuring once a year (publication of remuneration policy and report), plus one-off costs linked to the adaptation to new standardised disclosure requirement || Costs of dealing with consequences of a negative shareholder vote 
 Capacity to innovate || none || none || n.a. || n.a. 
 International competitiveness || Positive impact on the sustainability of the company || Posible limited impact due to additional costs. . || Possible positive and negative impacts difficult to estimate || Possible positive and negative impacts difficult to estimate 
Related party transactions
 Competitive impacts || Description of impacts || Size and duration of impact || Risks and uncertainty 
 Positive || Negative 
 Cost and price competitiveness || Improved oversight would reduce the risk of unjustified transfers of value to the detriment of the company. It would also increase the legal certainty and will reduce the likehood of court proceedings || Publication of information on more substantial transactions, and especially a fairness opinion by an independent expert could generate additional costs. Organisation of shareholder vote for most substantial transactions can generate additional costs, especially if a special meeting is needed || As only transactions above certain thresholds not executed at normal market conditions would be covered, estimation of frequency of occurance is not possible || Costs of dealing with the consequences of the negative vote. 
 Capacity to innovate || none || none || n.a. || n.a. 
 International competitiveness || Increased protection of minority sharehoders might attract institutional investors || Flexibility of use of related party transactions might be reduced || Possible positive and negative impacts difficult to estimate || Possible positive and negative impacts difficult to estimate 
Annex XI. List of
references
Adams R. and Ferreira D. (2007), One Vote:
The Empirical Evidence, European Corporate Governance Institute
(ECGI).
Aggrawal R., Erel I., Ferreira M., Matos P. (2011), Does governance travel around the world? Evidence from
institutional investors, Journal of Financial Economics. 
AMF (2011), AMF
Recommendation No. 2011-06 of 18 March 2011 on proxy advisory firms
http://www.amf-france.org/documents/general/9915_1.pdf.
Ambachtsheer K.
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Annex XII:
Shareholder engagement and financial services legislation
A number of specific EU acts
regulate institutional investors and asset managers. The financial crisis has
prompted the revision of some of these and the adoption of new rules for
certain actors, for example the so called "alternative investment
funds", such as hedge funds.
Rules adopted before the
financial crisis focused primarily on improving the resilience of EU financial
markets, while those adopted after the crisis aimed at establishing a safer,
sounder, more transparent, but also more responsible financial system. Although
some of the new rules have improved the "internal governance"
of these actors (i.e. how they should organise themselves internally), such as
for example the newly adopted rules on the remuneration of certain asset
managers, they did not focus on the "external governance"
aspects, that is, how they should interact with each other to provide for
adequate incentives for shareholder engagement and what is expected from them
as shareowners of companies.
Existing rules regulating
the institutional investor and asset management sectors are the following.
As regards the activity of
asset owners, Solvency I[389]
and II rules[390]
are applicable to insurance companies, including life insurance, while Directive 2003/41/EC on the activities and supervision of institutions
for occupational retirement provision (IORP)[391]
regulates pension funds.
As regards asset managers,
the UCITS Directive[392],
currently under revision[393]
and Directive 2011/61/EU on Alternative Investment Fund Managers (AIFM
Directive 2011/61/EU )[394]
contain rules applicable to management through certain funds, while MIFID (Directive 2004/39/EC)[395], currently also under revision[396],
is applicable to management under discretionary mandates.
Only some provisions from
the above Directives have relevance from the perspective of shareholder
engagement.
For asset owners, there are
limited rules on fiduciary duties of pension funds and no framework at all for
the disclosure of asset management mandates by asset owners. For assets managed
under discretionary mandates, rules regarding asset managers are limited to the
disclosure of investment strategies and costs in general. The framework for
UCITS managers is more developed. Although professional investors also invest
into UCITS, these funds are widely used by European
households. It has been argued, however, that the specificities of UCITS funds,
notably their liquidity needs hinder their ability to become long-term
investors and may not give an appropriate incentive for shareholder engagement.
Furthermore, UCITS fund managers are not allowed to
acquire any shares carrying voting rights which would enable them to exercise
significant influence over the management of the issuing company (Article 56).
In addition, UCITS are also hindered by law to establish concentrated
portfolios, as the UCITS Directive does not allow UCITS to invest more than 5%
of their assets in securities of the same issuer (Article 52).
1. Fiduciary duty
The first category of these
rules is about fiduciary duty. Several Directives deal with fiduciary duties
and provide that asset managers and pension funds  should
act in the best interests of their clients or beneficiaries.
For pension funds, Article
18 of the IORP Directive provides that "Member States shall require
institutions located in their territories to invest in accordance with the
"prudent person" rule and in particular in accordance with the
following rules:
(a) the assets shall be
invested in the best interests of members and beneficiaries. In the case of a
potential conflict of interest, the institution, or the entity which manages
its portfolio, shall ensure that the investment is made in the sole interest of
members and beneficiaries;
(b) the assets shall be
invested in such a manner as to ensure the security, quality, liquidity and
profitability of the portfolio as a whole.
Insurance companies are not
subject to any fiduciary duty at EU level.
With regard to asset
managers managing portfolios under discretionary mandates, Article 19 of MIFID
provides that Member States shall require that, when providing investment
services to clients, an investment firm at honestly, fairly and professionally
in accordance with the best interests of its clients. The MIFID implementing
rules (article 35 of Directive 2006/73) provide that the asset manager should
gather information about the investment objectives of the client, however,
information on the length of time for which the client wishes to hold the
investment should apply only with regard to retail clients and not for
professional clients, such as pension funds and insurers.
For asset managers managing
UCITS funds, Article 14 of the UCITS Directive provides that the management
company shall act honestly and fairly and with due skill, care and diligence in
the best interest of the UCITS and integrity of the market. Furthermore, UCITS
management companies should act in such a way as to prevent undue costs being
charged to the UCITS and its unit-holders.[397]
Alternative fund managers
are required to act in the best interest of the alternative investment funds or
the investors of the AIFs they manage and take all reasonable steps to avoid
conflicts of interests (Article 12 of the AIFM Directive).
In view of the fact that
that these definitions are not specific enough and leave it open whether it
involves shareholder engagement when it is in the best interest of the client,
many contributors to the Green paper on Long-term financing support the
revision of these definitions.
2. Decision on voting
policies
Both the UCITS implementing
Directive 2010/43 and the AIFM Directive regulate voting policies (respectively
Articles 21 and 37).
Both the UCITS management
company and the AIF manager are required to set up a strategy for the exercise
of voting rights attached to the financial instruments held by the UCITS/AIF
they manage, with a view to ensuring that such rights are exercised to the
exclusive benefit of UCITS/AIF.
This strategy shall
determine measures and procedures for:
a) monitoring relevant
corporate events;
b) ensuring that the
exercise of voting rights is in accordance with the investment objectives and
policy of the relevant UCITS;
c) preventing or managing
any conflicts of interest arising from the exercise of voting rights.
However, there is no
obligation to be transparent about this policy, nor an obligation to provide it
to unit holders.
3. Disclosure between
asset managers and asset owners with regard to investment strategies and
transaction costs
Asset managers regulated by
MIFID are required to inform clients about investment strategies and costs[398], but are not required
to disclose transaction costs and associated charges to professional clients,
such as insurers and pension funds. The MIFID Implementing Directive requires
that a notice of the possibility for the emergence of transaction costs that
are not paid by the investment firm or imposed by it should be provided only to
retail clients only.[399]
Alternative investment fund
managers are required to disclose to asset owners the description of the
investment strategy and all charges[400],
but there are no specific rules on whether these include portfolio turnover
costs or not.
UCITS fund managers are
required, on request of the UCITS investor, to provide data regularly on the
changes in the composition of the portfolio and the portfolio turnover costs.[401]
Annex XIII: Overview of the
replies to the consultation on long-term financing relevant for the present
impact assessment
The public
consultation on the Green Paper yielded nearly 300 responses from a wide range
of stakeholders. The large majority of responses come from the financial sector
and a considerable part of them from think tanks and other similar NGOs. Most
of the replies come from respondents located in the UK, France and Germany respectively or represent cross-border EU organisations. Only 11 Member States 
replied. 
Respondents
overwhelmingly welcomed the initiative as a positive and useful framework for
debate on this topic and what more may need to be done to bring significantly
more long-term financing to the economy. Many respondents comment on the
importance for long-term investment in having a supportive macroeconomic
context. There seems to be wide agreement that investors have a key role to
play in promoting a longer-term, investment-oriented outlook among companies.  
The respondents  also agree on the opportunities
of long-term investments for institutional investors. Institutional investors
argue that they can help support economic growth as they are natural long-term
investors. For example Insurance Europe states that insurers’ investment in
long-term assets is a natural consequence of their liabilities, that is  investing
in assets is not an aim per se, but a consequence of insurers’ primary
role of providing protection and managing policyholders’ savings. Pensions Europe argues that the match with the long duration and maturities of their liabilities,
often amounting to as much as 10-25 years, makes pension funds very suitable
long-term investors. 
Respondents
argue that the ability of these investors to invest on the long-term depends on
a range of factors, including the regulatory framework, investment skills,
taxation regimes and investment mandates. As regards the regulatory framework,
insurance companies, as an example, argue that existing prudential regulation
have influenced investment behaviour and constrained the long-term outlook of
their investments. The Solvency II regime is frequently cited in this context. 

The
consultation had a specific chapter on the possible incentives that could help
promoting better long-term shareholder engagement. It has to be emphasised that
the questions raised in this Green paper have been formulated in an open way in
order for the widest possible range of ideas to be channelled through.
Therefore it is not possible to give an exact breakdown of respondents
supporting or not a certain policy action. 
The questions
under the corporate governance chapter have been the following. 
Q. 21.What
kind of incentives could help promote better long-term shareholder engagement? 
Q. 22. How can
the mandates and incentives given to asset managers be developed to support
long-term investment strategies and relationships?
Q. 23. Is
there a need to revisit the definition of fiduciary duty in the context of
long-term financing? 
The below analysis
focuses on those issues which are relevant for the present impact assessment.
Q. 21. What
kind of incentives could help promote better long-term shareholder engagement?
The following
ideas have been put forward by at least a few respondents and appear to be
widely supported as regards possible ways of incentivising better long-term
shareholder engagement:
1) a common EU
framework for disclosure on how environmental, social and governance (ESG)
issues are taken into account in the investment strategies of asset owners and
asset managers or encouraging asset owners to include ESG matters into
mandates.
This issue has
been raised by PensionsEurope, the umbrella organisation of European pension
fund associations and other stakeholders, such as pension funds, asset
managers, insurers, banks and the association of responsible investors in Europe (Eurosif, representing 60 investors and 8 national responsible investment fora).
2) encouraging
better alignment of incentives throughout the equity investment chain, reducing
the emphasis on short-term performance metrics reporting and benchmarking.
This issue has
been raised by many stakeholder organisations, such as for example
EuropeanIssuers and the European Roundtable of Industrialists from the issuer
side, the European Federation of Financial Services Users, representing the
final beneficiaries of the investment chain, and investor associations, such as
for example Eurosif, the French Federation of  Insurance Companies and the
Dutch corporate governance forum of investors, Eumedion. Many other individual
respondents support this policy objective (see under specific policy actions).
3) developing
an EU Stewardship Code for investors or promoting the adoption of stewardship
Codes or enforcing them more effectively.
Many
organisations, such as European Issuers, the Quoted Companies Alliance and the
European Banking Federation and investors would be in favour of promoting the
adoption of Stewardship Codes, and some have promoted the development of an EU
Stewardship Code. EFAMA, the umbrella organisation of European Asset Management
associations would be in favour of enforcing such Codes more effectively.
4) shareholder
say on pay as a means of communication with investee companies' management.
This issue has
been raised by PensionsEurope.
Q. 22. How
can the mandates and incentives given to asset managers be developed to support
long-term investment strategies and relationships?
Many
respondents agreed that mandates provide important mechanisms for changing the
time horizon applied by investors and that these mandates should be structured
to encourage a strong focus on the long-term. Some respondents specifically
mentioned that that the asset management mandates should encourage asset
managers to adopt investment strategies based on the understanding of the
underlying value of the business and how that could contribute to the long-term
investment objectives of the client. A large number of respondents argued for
more transparency in general between the different players of the equity
investment chain (European Banking Federation, Confederation of British
Industry, ETUC, Eumedion, UK Sustainable Investment and Finance Association) or
promoting better interaction between these.
Many have
specifically referred to the following policy actions:
1) pension
funds voting and engagement policies should be integrated into the investment
process / more transparency about engagement and voting policies and activities
of asset owners and asset managers to the public
Many
respondents representing a wide range of the relevant stakeholders, including
several pension funds, their organisations (UK National Association of Pension
Funds, Association of British Insurers) and asset managers (European Fund and
Asset Management Association), banks (European Banking Federation) the
regulatory side (Austria, Finland), issuers (French Association of Private
Companies, European Confederation of Directors' Associations) and others (the
UK ShareAction for responsible pensions) have promoted action in this area.
2)
transparency about the portfolio turnover and costs or restrictions on turnover
Many
respondents representing all the relevant stakeholders, including issuers
(EuropeanIssuers, the French association of private companies (AFEP), the
regulatory side (UK Financial Regulatoy Council), several pension funds and
asset managers have raised this issue.
3)
transparency about how asset owners have taken into account the best interest
of their beneficiaries when issuing mandates and how asset managers have
fulfilled their long-term fiduciary duties or improve the compliance of
institutional investors with their fiduciary duties and formalize rules for its
exercise
Many
respondents representing all the relevant stakeholders, including issuers
(Quoted Companies Alliance, Association of European Chambers of Commerce and
Industry), the regulatory side (UK Financial Reporting Council, Ireland), several pension funds and asset managers and the European Federation of Financial
Services Users have raised this issue.
3) fund
manager performance to be reviewed over longer time horizons than the quarterly
cycle / using other metrics than market index benchmarks, for example absolute
performance metrics
It is this
issue that gathered the largest number of comments and strongest support.
Respondents representing all the relevant stakeholders, including issuers
(EuropeanIssuers), the regulatory side (UK Government, Ireland), several
pension funds and asset managers and their organisations (European Fund and
Asset Management Association, European Financial Services Roundtable, French
Federation of Insurance Companies, the UK ShareAction for responsible pensions)
think tanks (CFA Institute) and others have raised this issue.
4) transparency
of the pay structures of asset managers or EU rules to require long-term
performance payments for asset managers
Many
respondents representing all the relevant stakeholders have raised this issue.
There appears to be considerable support for EU rules to require long-term
performance payments for asset managers (for example PensionsEurope and the
European Federation of Financial Services Users, but also and many other
respondents would be in favour) and important stakeholders would be in favour
of more transparency (for example the European Banking Federation).
5) promotion
of existing standard management mandate templates
Several asset owners and responsible
investment associations (for example, the UK Sustainable Investment and Finance
Association andUNEP FI, the UN Sustainable Finance Initiative) have promoted
this idea.
[1]               COM(2012)0740 final. 
[2]               The Forum was set up in 2004 to examine best
practices in Member States with a view to enhancing the convergence of national
corporate governance codes and providing advice to the Commission. The Forum
comprised fifteen senior experts from various professional backgrounds
(issuers, investors, academics, regulators, auditors, etc.) whose experience
and knowledge of corporate governance were widely recognized at European level.
It provided in particular opinions on as the exercise on shareholder’ rights,
executive remuneration, related party transactions and significant transactions.
The mandate of the forum expired in 2012. For more information, see
http://ec.europa.eu/internal_market/company/ecgforum/index_en.htm
[3]               The RiskMetrics Group, Study on Monitoring and
Enforcement Practices in Corporate Governance in the Member States, accessible
on http://ec.europa.eu/internal_market/company/docs/ecgforum/studies/comply-or-explain-090923_en.pdf.
A summary of main findings is attached in Annex V.
[4]               London School of Economics, Study on Directors’
Duties and Liabilities, 2013, see especially section 2.5.2. See at
http://ec.europa.eu/internal_market/company/board/index_en.htm 
[5]               COM(2010) 284 final. See also staff working document SEC(2010)
0669 final. The summary of main responses to the consultation is attached in
Annex III. The full feedback statement is available at:
http://ec.europa.eu/internal_market/consultations/docs/2010/governance/feedback_statement_en.pdf
[6]               The Green Paper received support the European
Parliament, see Report 2010/2009(INI).
[7]               COM(2011) 164 final, for more details see section 2.1
and Annex III.
[8]               The summary of main responses is attached in Annex
III. The full feedback statement is available at http://ec.europa.eu/internal_market/company/modern/corporate-governance-framework_en.htm.
[9]               The European Parliament adopted on 29 March 2012 a Resolution
on a corporate governance framework for European companies, see point 41, P7_TA(2012)0118:
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-2012-0118+0+DOC+XML+V0//EN&language=EN.
[10]             91 out of a total of 409 replies.
[11]             Moreover, it is noted that due to the size of the UK stock market and the importance of the asset management sector in the UK, UK organisations have an important interest in the corporate governance of EU companies.
[12]             33 out of a total of 409 replies.
[13]             See Observatoire
de l’epargne européenne- OEE, INSEAD OEE Data services, Who owns the European
economy? Evolution of the ownership of EU-listed companies between 1970 and
2012, August 2012, page 7.
[14]             See http://ec.europa.eu/internal_market/financial-markets/securities-law/index_en.htm.
[15]             See http://ec.europa.eu/internal_market/consultations/2009/securities_law_en.htm.
[16]             See http://ec.europa.eu/internal_market/consultations/2010/securities_en.htm.
[17]             The Company Law Expert Group is a Commission Expert
Group which provides advice to the Commission on the preparation of Company Law
and Corporate Governance measures.
[18]             The objective was to gather more detailed and technical
information on the practical impact of the proposed options on these specific
groups. The summary of the discussions is attached in Annex IV.
[19]             See the report from the conference, available at:
http://www.ecgi.org/conferences/eu_actionplan2013/report.php
[20]             COM(2013) 150 final.
[21]             The initiative was announced in two roadmaps (No
2013/MARKT/033 and 2013/MARKT/034) available at http://ec.europa.eu/governance/impact/planned_ia/docs/2013_markt_034_shareholders_rights_directive_en.pdf
and http://ec.europa.eu/governance/impact/planned_ia/docs/2013_markt_033_corporate_governance_framework_en.pdf

[22]             See for example Article 1 of the Directive 2004/25/EC
on Takeover bids, the Transparency Directive (2004/109/EC), of the Shareholders’
Rights Directive (2007/36/EC).
[23]             Respondents to the Green Paper on the EU corporate
governance framework clearly pronounced themselves against the extension of the
EU corporate governance rules to unlisted companies.
[24]             For more details, see Figure 1 in Annex VII. The market
capitalisation mentioned only takes into account domestically incorporated
companies and not foreign companies listed on the relevant stock exchange. 
[25]             For example Germany, Spain.
[26]             Report on the proportionality principle in the European
Union, Sherman and Sterling, ISS, 2009. http://ec.europa.eu/internal_market/company/docs/shareholders/study/final_report_en.pdf
[27]             See John C. Coffee Jr., Dispersed Ownership: the
Theories, the Evidence, and the Enduring Tension Between 'Lumpers' and
'Splitters', European Corporate Governance Institute, Law Working Paper
No. 144/2010.
[28]             Classic agency theory demonstrates
that the delegation by the owners of companies of the management of the company results
in information asymmetries and leaves room for directors to act in their own self-interest to
the detriment of the shareholders. See, for instance, A. Berle, G.
Means, The modern corporation and private property, Transaction
publishers, New Brunswick, 1991; J. E. Garen, Executive
compensation and principal-agent theory, Journal of Political Economy 1994,
102(6), 1175-1199.
[29]             See for an overview Figure 2, Annex VII. There are
however important differences between Member States.
[30]             See Observatoire de l’epargne européenne- OEE, INSEAD
OEE Data services, Who owns the European economy? Evolution of the ownership of
EU-listed companies between 1970 and 2012, August 2012, page 20 and 33.
[31]             Isaksson, M. and S. Çelik (2013), “Who Cares? Corporate
Governance in Today's Equity Markets”, OECD Corporate Governance Working
Papers, No. 8, page 25.
[32]             See Isaksson and Çelik, “Who Cares? Corporate
Governance in Today's Equity Markets, p. 20.
[33]             For more details, see figure 3 in Annex VII. See also Hewitt,
P. (2011), “The Exercise of Shareholder Rights: Country Comparison of Turnout
and Dissent”, OECD Corporate Governance Working Papers, No. 3, page 25.
[34]             OECD, Institutional investors database, at: http://stats.oecd.org/Index.aspx?DatasetCode=7IA.
Does not include Cyprus, Malta, Lithuania, Latvia, Romania and Bulgaria. See also the Asset management report 2013 of the European
Fund and Asset Management Association, page 3.
[35]             Reply to the Green Paper on long-term financing of the
European economy, page 1.
[36]             http://www.insuranceeurope.eu/uploads/Modules/Publications/final-key-facts-2013.pdf
, page 19 and  http://www.insuranceeurope.eu/uploads/Modules/Publications/eif-2013-final.pdf,
page 60.
[37]             Reply to the Green Paper on long-term financing of the
European economy, page 2. According to the OECD’s Pension markets in Focus
(September 2012), pension fund assets in the Euro area were some 1,54 trillion
euro in 2011.
[38]             See the reply of the Dutch based corporate governance
forum for institutional investors in listed companies (“Eumedion”) to the
Commission’s 2011 Green Paper, page 11.
[39]             The Kay Review of UK Equity
Markets and Long-Term Decision Making, Final Report, July 2012, page 6.
Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/34732/12-917-kay-review-of-equity-markets-final-report.pdf

[40]             UCITS are
investment funds that have been established in accordance with UCITS Directive.
They provide for a high level of investor protection and can be marketed across the EU. 72% of the assets managed in funds are UCITS. The guiding principle
behind the UCITS Directive is that investors in funds authorised under it can
get their money back at any time. Investment funds are pools of assets with
specified risk levels and asset allocations, into which one can buy and redeem
shares, such as UCITS, hedge funds, private equity funds.
[41]             In the Markets in Financial
Instruments Directive (MIFID) this is called “portfolio management” See article
4 (9) of Directive 2004/39/EC. Discretionary mandates give asset
managers the authority to manage the assets on behalf of an asset owner in
compliance with a predefined set of rules and principles, on a segregated basis
and separate from other investors’ assets. MIFID is designed to strengthen the EU legislative framework
for investment services and regulated markets with a view to furthering two
major objectives: 1) to protect investors and safeguard market integrity by
establishing harmonized requirements governing the activities of authorized
intermediaries 2) to promote fair, transparent, efficient and integrated
financial markets.
[42]             Discretionary
mandate assets represented EUR 7.3 trillion in 2011, whereas investment funds                         accounted
for the remaining EUR 6.5 trillion. See the Asset management report 2013 of the
European           Fund and Asset Management Association:                                                                          http://www.efama.org/Publications/Statistics/Asset%20Management%20Report/Asset_Management_Report_2013.pdf
, p. 15. 
[43]             See the Asset management report
2013 of the European Fund and Asset Management Association (EFAMA), page 10.
[44]             For instance, one of the
world’s biggest asset managers holds shares in some 15.000 companies worldwide.
[45]             The International Corporate Governance Networks model
contract terms between asset owners and their fund managers ask for such
clarification. See https://www.icgn.org/best-practice.
In practice asset managers play a key role in voting decisions. See the Kay
review, page 31.
[46]             A list of main EU initiatives is attached in Annex II.
[47]             This approach means that a company choosing to depart
from a corporate governance code has to explain which parts of the corporate
governance code it has departed from and the reasons for doing so.
[48]             Directive 2004/109/EC.
[49]             Directive 2004/25/EC.
[50]             Commission Recommendation 2005/162/EC on the role of
non-executive or supervisory directors of listed companies and on the
committees of the (supervisory) board, Commission Recommendation 2004/913/EC
fostering an appropriate regime for the remuneration of directors of listed
companies and Commission Recommendation 2009/385/EC complementing
Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the
remuneration of directors of listed companies.
[51]             For more information, see Section 4.3.
[52]             Directive
2013/36/EU and Regulation (EU) No 575/2013.
[53]             Directive 2002/83/EC of the
European Parliament and of the Council of 5 November 2002 concerning life
assurance.
[54]             Directive 2009/138/EC of the European Parliament and
of the Council of 25 November 2009 on the taking-up and pursuit of the business
of Insurance and Reinsurance.
Solvency II is an economic, risk-based solvency regime for insurance companies
in the EU. Solvency II is currently under revision through the so called
"Omnibus II" Directive. This includes a new so called "long-term
guarantees package" which introduces adjustments to the existing framework
that will support overcoming regulatory distortions to long-term business and
investments triggered by short-term volatility in financial markets. This
should improve the conditions for insurance companies to invest in the
long-term. It is expected that the Omnibus II Directive will be concluded
before the end of 2013 and that Solvency II (including the Omnibus II
provisions) shall apply from 01.01.2016.
[55]             Directive 2003/41/EC.
[56]             Directive 2009/65/EC.
[57]             COM(2012) 350 final.
[58]             Directive 2011/61/EU.
[59]             Directive 2004/39/EC.
[60]             COM(2011) 656 final and COM(2011) 652 final.
[61]             Available at http://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf.
The principles cover in particular shareholders’ rights and their exercise,
equitable treatment of shareholders and protection of minority shareholder, as
well as institutional investors.
[62]             Proposal for the regulation: http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52012PC0073:EN:PDF
[63]             COM(2011) 683 final
[64]             COM(2013) 207 final
[65]             COM(2013)462 final. See recital 22 of this proposal. 
[66]             See, for instance the OECD Principles of Corporate
Governance, 2004, p. 11, at http://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf.
A glossary of main terms is attached in Annex I.
[67]             Where managers are better informed about the impact of
their personal work on
company performance     than shareholders.
[68]             See for more details the
different description of the problems in this chapter..
[69]             See results of the study Corporate governance in the
2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide,
David H. Erkens, Mingyi Hung, Pedro Matos, January 2012, discussed in section
4.2
[70]             OECD, The role of institutional investors in promoting
good corporate governance, p. 10. Available at http://www.oecd.org/daf/ca/theroleofinstitutionalinvestorsinpromotinggoodcorporategovernance.htm.
[71]             Kay review, page 10.
[72]             Elroy Dimson et al, Active Ownership, 2012 analyses the
positive effects of shareholder engagement on environmental, social and
governance matters. As regards corporate governance themes, the cumulative abnormal
return of a successful engagement over a year after the initial engagement
averages + 7.1%.  See similar results about the return generated by an active UK investor in Becht et al, 2009, Returns to shareholder activism: Evidence from a clinical
study of the Hermes UK Focus Fund, review of Financial Studies 22.
[73]             Elroy Dimson et al, Active Ownership, 2012 finds
significant improvements as to return on assets, profit margin, asset turnover
and sales over employees ratios after successful engagements.
[74]             Eurosif, Shareholder Stewardship, European ESG
Engagement Practices 2013, page 32. 
[75]             See Hewitt, “The Exercise of Shareholder Rights:
Country Comparison of Turnout and Dissent”, . The ISS “2010
Voting Results Report. Europe”, shows an average turnout of 61.5% in 2010.
[76]             In the US, certain institutional investors and asset managers interpret the relevant laws as  requiring
to vote in general meetings. It has been argued therefore vote for at compliance
reasons and largely follow the recommendations made by proxy voting agencies.
See Charles M. Nathan and Parul Metha, Latham &
Watkins LLP, 2010 “The Parallel Universes of Institutional Investing and
Institutional Voting”,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1583507
[77]             Hewitt, The Exercise of Shareholder Rights: Country
Comparison of Turnout and Dissent, page 16.
[78]             Article 14 of the Shareholders
Rights Directive obliges companies to establish the voting results of general
meetings.
[79]             See Eurosif, Shareholder Stewardship, European ESG
Engagement Practices 2013, page 32. The study does not clarify how often of
intense they engaged, nor for which part of their assets.
[80]             As to the magnitude of engagement and voting strategies
in Europe, it is not easy to give exact data, since the data available for
measuring the magnitude of shareholder engagement strategies combine engagement
for environmental and social purposes and often do not separate governance
matters.
[81]             This is defined as “Engagement activities and active ownership
through voting of shares and engagement with companies on (environmental,
social and governance (ESG) matters”. European Sustainable Investment Forum, 2012 study on responsible
investments in Europe, page 17-18. See http://eurosif.org/images/stories/pdf/1/eurosif%20sri%20study_low-res%20v1.1.pdf.
This figure measures the assets covered by an engagement policy, not the
portfolio value of all companies actively engaged with.
[82]             Includes only 14 Member States.
[83]             Investors will often have an engagement policy covering
most of their assets, but will actively engage only on a small number of
companies in relation to the total number of companies held.
[84]             The Economist, 14 September 2013, “More Money than
Thor. Changes to Norway’s gigantic sovereign-wealth fund will be felt around
the world”, See http://www.economist.com/news/business/21586268-changes-norways-gigantic-sovereign-wealth-fund-will-be-felt-around-world-more-money
[85]             Eurosif, European SRI study, 2012
[86]             See Dutch Monitoring Committee of the Corporate
Governance Code, Fourth report on compliance with the Dutch corporate
governance code, 2012.
[87]             Shareholder Stewardship, European ESG Engagement
Practices 2013.
[88]             Sustainable Investing, Establishing Long-term value and
performance, 2012, DB Climate Change advisors, page 21.
[89]             Although over 85% of asset
owners have at least some funds that are passively managed. See the OECD report
on the role of institutional investors in promoting Good Corporate Governance.
[90]             The UNPRI reports in 2011 that
“in the global market as a whole, ESG integration is being implemented across
8% of listed equities in developed markets”.
[91]             According to the European Sustainable Investment Forum,
investing taking into account long-term sustainability factors (environmental,
social and governance, ESG) is on the rise. In 2011, 3.2 trillion of assets
being managed in Europe have taken ESG factors into account when investing
(compared to a total of 14 trillion of assets being managed). This number was
2.8 trillion in 2009.
[92]             http://www.napf.co.uk/PolicyandResearch/DocumentLibrary/0354_NAPF_engagement_survey_2013.aspx
[93]             Page 23 of the above NAPF survey. 
[94]             Paul Woolley, The future of finance and the theory that
underpins it, Chapter 3, Why are financial markets so inefficient and
exploitative – and a suggested remedy, in Adair Turner and others (2010), The
Future of Finance: The LSE Report, London School of Economics and Political
Science, page 125.
[95]             In their contribution to the Green paper on long-term
financing, Insurance Europe states that insurers’ investment in long-term
assets is a natural consequence of their liabilities, that is investing in
assets is not an aim per se, but a consequence of insurers’ primary role of
providing protection and managing policyholders’ savings. Pensions Europe argues that the match with the long duration and maturities of their liabilities,
often amounting to as much as 10-25 years, makes pension funds very suitable
long-term investors. It should however also be noted that pension funds and
insurers have short term obligations, which means that they have to find a
balance between short-term and long-term performance.
[96]             OECD, The role of institutional investors in promoting
good corporate governance, p. 45, see also Eumedion position paper on engaged
share ownership, March 2010.
[97]             See the reply of EFAMA to the Green paper on long-term
investment of the European economy, page 25 and the Kay review, page 40. 
[98]             Mercer, Global asset manager fee survey 2012, page 18
http://www.mercer.com/articles/1505185.
[99]             Elroy Dimson et al, Active Ownership, 2012 analysing
the engagement actions of a large US asset owner between 1999-2009 finds
improvements as to return on assets, profit margin, etc. one year after
successful engagements.
[100]            The Kay review, page 42:  noted that ‘In the current
market environment both analysis and engagement have something of the character
of public goods – most of the benefits accrue to people who do not undertake
them.’
[101]            The
shorter the timescale for judging asset manager performance, and the slower
market prices are to respond to changes in the fundamental value of the
company’s securities, the greater the incentive for the asset manager to focus
on the behaviour of other market participants rather than on understanding the
underlying value of the business. This may result in following short-term
movements in market prices (momentum strategies), trading frequently and/or not
to allow the performance of the investor diverge too much from the benchmark,
so that investment decisions are taken on the basis of the structure of a
certain benchmark. Robert Schiller, the 2013 Nobel price winner in Economics
demonstrated that stock prices are much more volatile than their fundamental
value would suggest. See his “Do Stock prices move too much to be justified by
subsequent changes in dividends?” The American Economic Review, 1981 page 421,
422.
[102]            See OECD Discussion Note. Promoting
Longer-term investment by Institutional investors: selected issues and
policies, page 6.
[103]            High frequency traders now account for some 30-40% of
trading in Europe, although they represent only a very small portion of the
ownership. See OECD, The role of institutional investors in corporate
governance, p. 35 and 43
[104]            Mercer, IRRC Institute 2010, Do managers do what they say?
http://www.irrcinstitute.org/projects.php?project=42,
page 7.
[105]            It has to be emphasised that this study examined the
behaviour of active equity managers which traditionally operate with a longer
investment horizon and excluded hedge funds and other long/short strategies.
[106]            We have to acknowledge that this period was historically
very volatile.
[107]            Both “value” managers, which typically buy equities
based on the belief that they are undervalued, and socially responsible
investment strategies have lower levels of turnover.
[108]            A practice which can have a negative effect on
engagement is stock-lending, where the institutional investors’ shares are sold
subject to a buyback right. According to a survey of RMA more than 1,1 trillion
euro of European stocks are available for lending. This can be an obvious
barrier for engagement and exercising shareholder rights. Often the stock
lending programme appears to be under the control of the asset manager. In
order to engage efficiently, both asset owners and managers should have insight
into which stocks are subject to lending and who can recall a lend stock. See
also International Corporate Governance Network, Model contract terms between
asset owners and their fund managers.
[109]            See for more details annex XII.
[110]            Article 19 MIFID
[111]            Discretionary mandates, where
the assets of an asset owner are not pooled together with assets  of others
establish a direct contractual link between the asset owner and the asset
manager to set strategies and influence and monitor the behavior of the asset
manager.
[112]            Article 21 UCITS implementing Directive 2010/43 and
Article 37 AIFM Directive.
[113]            Article 33 of MIFID implementing Directive 2006/73;
Article 23 of the AIFM Directive and Article 5 of the UCITS Directive.
[114]            Eurosif, Shareholder Stewardship, European ESG
engagement and practices, 2013, page 38.  The study covers asset managers and
asset owners based in Europe or managing European assets. The study covers 14
markets in detail; Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Poland, Spain, Sweden, Switzerland and the UK. Data were collected from 189 asset owners and asset managers from April to July 2012. 
[115]            Austria, United Kingdom, Germany, Malta, Estonia, Netherlands, Slovakia and Spain.
[116]            Czech Republic, Finland and Denmark.
[117]            Spain, Finland, United Kingdom, Estonia, Portugal, Latvia, France.
[118]            Netherlands, Sweden, Lithuania Germany, Czech Republic and Denmark.
[119]            Association of European listed companies.
[120]            European Issuers contribution to the consultation on
long-term financing of the European economy, page 28.
[121]            European Fund and Asset
Management Association reply of to the consultation on
long-term financing of the European economy.
[122]            Association of European pension funds.
[123]            PensionsEurope's contribution to the consultation on
long-term financing of the European economy, page 14.
[124]            Insurance Europe's contribution to the consultation on
long-term financing of the European economy, page 14.
[125]            See for an overview of the replies Annex XIII.
[126]            See for example reference to Insurance Europe's view
above. 
[127]            E.g. Berle and Means (1932), Jensen and Meckling (1976),
O'Reilly et al (1988), Garen (1994), Murphy (1999), Oxelheim and Randoy (2005).
[128]            For comparative data in France, see notably: ftp://ftp.cemfi.es/pdf/papers/Seminar/InternationalCEOPay_18Nov2008_final.pdf;
http://lexpansion.lexpress.fr/entreprise/la-remuneration-des-patrons-du-cac-a-augmente-de-34-en-2010_282794.html#lVGcvHTIS3xmYYOv.99;
http://www.europroxy.com/divers/ECGS%20report%20on%20Directors%20pay2012.pdf.
[129]            For comparative data in Austria, see notably: http://wiev1.orf.at/stories/195502;
http://media.arbeiterkammer.at/PDF/Vorstandsgehaelter_ATX_Unternehmen_2010-2012.pdf;
ftp://ftp.cemfi.es/pdf/papers/Seminar/InternationalCEOPay_18Nov2008_final.pdf.
[130]            See http://online.wsj.com/article/SB10001424052702303822204577464264063241178.html.
The following year the CEOs pay was significantly cut and approved by
shareholders in an advisory vote. See http://www.adweek.com/news/advertising-branding/wpp-shareholders-approve-ceo-sorrells-compensation-150228.
[131]      See http://www.ft.com/cms/s/0/8676422ad7b4-11db-b218-000b5df10621.html
("Trichet calls for executive pay restraint"), http://cachef.ft.com/cms/s/0/f17f27ee-945f-11dd-953e-000077b07658.html
("Paris warns on executive
pay"), http://www.ft.com/cms/s/d285337a-0ce1-11dd-86df-0000779fd2ac,dwp_uuid=ebe33f66-57aa-11dc-8c65-0000779fd2ac,print=yes.html
("BP shareholders criticise
executive pay packages"), http://www.ft.com/cms/s/0/f3506d4a-b588-11dd-ab71-0000779fd18c.html
("Pressure mounts on executives to renounce incentives"), http://www.ft.com/cms/s/2/712f3d9c-5245-11dd-9ba7-000077b07658.html
("The Lex Overpaid CEO
Award"), http://www.ft.com/cms/s/0/b7c7ceb8-9be2-11dd-ae76-000077b07658.html
("High pay fails to boost performance, says report").
[132]            http://yle.fi/uutiset/new_nokia_twist_-_elops_contract_revised_same_day_as_microsoft_deal/6847697.

[133]            For example, Ferrani and Moloney (2005) find that “disclosure requirements prompt the board to
justify pay choices and the pay
setting process, and can also enhance the accountability and
visibility of the remuneration
committee”. The authors also
note that since “setting executive pay is a complex process, opaque disclosure will not generate effective
shareholder oversight. In particular, aggregate disclosure concerning total firm executive pay which
does not explain remuneration
policy and the often highly complex performance conditions
applicable (…) will not allow shareholders to assess
pay policy effectively”.
[134]            As demonstrated by the European
Company Law Experts group in 2011, in the absence of binding rules, firms appear reluctant to provide full disclosure concerning
remuneration, particularly on the pay/performance link: “It is not possible to compare with any degree of ease
how Europe’s listed companies
address executive pay and, in particular, their approach to performance conditions.” available at: http://europeancompanylawexperts.wordpress.com/papers-of-the-ecle/the-eu-corporate-governance-framework-respons-to-the-european-commissions-green-paper-july-2011/,
page 10.
[135]            See,
for example, “Swimming in Words” Deloitte survey of narrative reporting in
annual reports (October 2010) and “A Snapshot of FTSE 350 reporting” PWC
(2009).
[136]            See G. Ferrarini, M.C. Ungureanu, "Fixing
Directors' Remuneration in Europe Governance, Regulation and Disclosure",
2009, available at: http://ec.europa.eu/internal_market/company/docs/directors-remun/roundtable_ferrarini_en.pdf.
See also a study conducted by
PwC in 2010, on remuneration
reports of FTSE150 companies,
which found that only around a third clearly
disclosed how remuneration is dependent
on performance (PwC, “Insight
or fatigue? FTSE350 reporting”,
http://www.pwcwebcast.co.uk/cr_ftse350.pdf). More rencently, see the “5ème rapport
sur le code AFEP/MEDEF”, October 2013, page 46, which shows that only 59% of
French listed companies provide information on the application of performance
criteria.
[137]            Long-term
incentive plans involve the granting of shares to directors after (at least)
three year period upon the achievement of performance criteria, and must
include some qualifying conditions with respect to service or performance that
cannot be fulfilled within a single financial year.
[138]            While in 2006 the total CEO’s pay was composed of 43%
of long-term incentives, in 2012 the total CEO’s pay is composed of 25% of
long-term incentives (for the year 2006, see notably: ftp://ftp.cemfi.es/pdf/papers/Seminar/InternationalCEOPay_18Nov2008_final.pdf; for the year 2012, see notably: http://www.europroxy.com/divers/ECGS%20report%20on%20Directors%20pay2012.pdf),

[139]             A
study showed that missing quarterly earnings benchmarks are associated with
higher risks of being fired and getting lower bonuses and lower equity based
compensation. See http://www.hbs.edu/research/pdf/09-014.pdf.
[140]            See Article 17(1) (d) of the Accounting Directive 2013/34/EU.
The Directive allows however Member States not to apply this requirements when
the information makes it possible to identify the position of a specific member
of such a body.
[141]            Commission Recommendations
2004/913/EC, 2005/162/EC and 2009/385/EC.
[142]            Report on the application by Member States of the EU of
the Commission Recommendation on directors’ remuneration (SEC 2007, 1022) and
Report on the application by Member States of the EU of the Commission
2009/385/EC Recommendation complementing Recommendations 2004/913/EC and
2005/162/EC as regards the regime for the remuneration of directors of listed
companies SEC(2010)285.
[143]            See http://www.sec.gov/rules/final/2006/33-8732afr.pdf
[144]            For the text, see http://www.admin.ch/ch/f//pore/vi/vis348t.html
(in French).
[145]            Member States requiring disclosure of the remuneration
policy are Austria, Belgium, Bulgaria, Czech Republic, France, Germany, Italy, Latvia, Lithuania, Netherlands, Portugal, Slovakia, Spain, Sweden and United Kingdom.
[146]            Member States requiring disclosure of individual
director pay are Austria, Belgium, France, Germany, Italy, Lithuania, Netherlands, Portugal, Spain, Sweden and United Kingdom.
[147]            These Member States are Belgium, France, Italy and Spain. Some other Member States (Lithuania, Netherlands, Portugal, Slovakia and United Kingdom) haven’t published such template, but impose minimum
information requirements.
[148]            These member States are Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Germany, Greece, Hungary, Ireland, Lithuania, Luxembourg, Malta, Poland, Romania, Slovenia and United Kingdom. See also PwC, Insight or fatigue? FTSE350 reporting, 2010. Available
at: http://www.pwcwebcast.co.uk/cr_ftse350.pdf
[149]         See Dutch Monitoring Committee of the Corporate Governance
Code, Fourth report on compliance with the Dutch corporate governance code.
page 18.
[150]            Report of 1 October 2013, page 21. See https://docs.google.com/viewer?url=http://www.mccg.nl/download/?id%3D2199.
[151]            For more details regarding the
situation in Member States, see Annex VI.
[152]            Belgium, Bulgaria, Denmark, Hungary, Latvia, Netherlands,  Portugal, Slovakia, Sweden and the United Kingdom.
[153]            Czech Republic, Italy and Spain.
[154]            See in particular, articles L.225-42-1, L.225-45 al.1,
L.225-90-1, L.225-185 al.4 and L.225-197-II of the Code de commerce.
[155]            Measured in the development of the share price.
[156]            For comparative data in Italy, see notably:
http://www.borsaitaliana.it/borsaitaliana/statistiche/statistiche-storiche/principaliindicatori/2013/principaliindicatori2013_pdf.htm;
http://www.frontisgovernance.com/attachments/article/69/Frontis%20Governance%20-%20CG%20Rating%20Report%20SAMPLE.pdf;
http://www.ilsole24ore.com/art/economia/2011-07-27/stipendio-piatto-064456.shtml?uuid=Aag1XcrD.

[157]            For comparative data in Spain, see notably:http://www.cnmv.es/DocPortal/Publicaciones/Informes/IAGC_IBEX35_2011.pdf.http://www.cnmv.es/DocPortal/Publicaciones/Informes/IAGC_IBEX35_2012.pdf.
[158]            In 2004, a study made by Deloitte has shown that the
introduction of say on pay has resulted in a reduction of severance payments
mentioned in the contracts of CEOs and the introduction of procedures for
reassessment of performance in case of non-achievement of targets (Deloitte, « Report on the impact of
the directors’ remuneration report regulation »,
2004). In 2008, a study highlights that, after the
introduction of say on pay, the sensitivity of pay to stock and operating
performance has increased, especially in case of bad performance (F. Ferri et D. Marber,
« Say on pay vote and CEO compensation : evidence
from UK », mimeo, Harvard Business School,
2008). These two studies therefore provide consistent
results: the establishment of a procedure for "say on pay" reduces
CEO compensation in case of poor performance and therefore increases the
sensitivity of pay to performance in areas of poor performance.
[159]            For comparative data in Sweden, see notably: http://www.haygroup.com/downloads/ww/HG280_Say%20on%20Pay_v05.pdf;http://www.thelocal.se/31884/20110207/;
https://gupea.ub.gu.se/bitstream/2077/33338/1/gupea_2077_33338_1.pdf.
[160]            For comparative data in Belgium, see notably:
ftp://ftp.cemfi.es/pdf/papers/Seminar/InternationalCEOPay_18Nov2008_final.pdf;

http://www.haygroup.com/downloads/ww/HG280_Say%20on%20Pay_v05.pdf;
http://www.7sur7.be/7s7/fr/2402/Crise-boursiere/article/detail/1606189/2013/03/30/Les-patrons-du-Bel20-ont-du-se-serrer-la-ceinture.dhtml.
[161]            See study by Groningen University conducted on behalf of the Dutch Corporate Governance Code Monitoring
Committee in 2007.
[162]            See OECD, Related Party Transactions and Minority
Shareholder Rights, 2012, page 20.
[163]            Ibidem.
[164]            See Article 43(1) (7b) of
Directive 78/660/EEC and Article 34(7b) of Directive 83/349/EEC.
[165]            See Article 5 (4).
[166]            See Article 4.
[167]            Certain important aspects of disclosure of related party
transactions have also been defined in the International Accounting Standard no 24 on Related Party
Disclosures, endorsed by European Union by virtue of the Commission Regulation
(EC) No 1126/2008 of 3 November 2008 adopting certain international accounting
standards in accordance with Regulation (EC) No 1606/2002 of the European
Parliament and of the Council. International Accounting
Standard 24 defines what is a related party. See http://www.iasplus.com/en/standards/ias24.
[168]            For instance Denmark, Hungary and Poland.
[169]            For instance in Belgium, Finland, Germany, Italy, Sweden and France.
[170]            For instance The Netherlands, Finland, Belgium, Spain, Portugal and France.
[171]            For instance in the UK, Belgium, Germany, Latvia, Sweden and in some cases in the Czech Republic. In Spain the supervisory authority
can request an independent advisor to provide advice.
[172]            For instance in the United Kingdom, France, Sweden, Bulgaria and Greece. For some transactions in a group context shareholder approval
is also required in Germany and the Czech Republic.
[173]            For instance Portugal, the Netherlands, Greece.
[174]            An overview of rules on related party transactions in
Member States is provided in the LSE Study on Directors Duties and
Liabilities, section 2.5.2, http://ec.europa.eu/internal_market/company/board/index_en.htm.
[175]            Defined as above 1% of revenue or more.
[176]            See OECD, Related Party Transactions and Minority
Shareholder Rights, 2012, page 31.
[177]            I. Von Keitz, Th. Gloth, Praxis ausgewählter
HGB/Anhangangaben (Teil 2) – eine empirische Analyse von 54 Jahresabschlüssen,
in: Der Betrieb (1.2.2013), p. 190.
[178]            M. Nekhili, M. Cherif, Related parties transactions and
firm's market value. The French case, in: Review of Accounting and Finance,
Vol. 10 No. 3 (2011), p. 303.
[179]            Companies
may however decide to report all significant related party transactions. On the
other hand in view of the relative flexibility of the legal framework
(“material”, “non-market terms”) companies may also underreport RPTs. See
OECD, Related Party Transactions and Minority Shareholder Rights, 2012,
page 21. Under Article 17 (1) r of the new Accounting Directive 2013/34/EC Member States may permit or require that only transactions
with related parties that have not been concluded under normal market
conditions be disclosed.
[180]            See OECD, Related Party Transactions and Minority
Shareholder Rights, 2012, page 58.
[181]            See OECD, Related Party Transactions and Minority
Shareholder Rights, 2012, page 62-63.
[182]            See Recommandation
of the AMF n° 2012-05, Les assemblées générales d’actionnaires de sociétés
cotées, proposition 25 and 32.
[183]            Measured by Tobin's Q, this effect is -2.165, according
to Nekheli and Cherif, Related parties transactions and firm's market value.
The French case, p. 302. This shows a significant negative impact (both
economically and statistically) of related party transactions on firm
valuations".
[184]            Nekhili, Cherif, Related parties transactions and firm's
market value. The French case, p. 306.
[185]            Sweden, Denmark, Finland, Germany, Czech Republic, Netherlands, France.
[186]            Spain, Lithuania, United Kingdom, Estonia, Portugal, Latvia.
[187]            AMF Recommendation No. 2011-06 of 18 March 2011 on proxy
advisory firms (EN version), at:
http://www.amf-france.org/documents/general/9915_1.pdf
[188]            The UK Stewardship Code, at: http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Stewardship-Code-September-2012.aspx
[189]            Research literature demonstrates that a negative
recommendation from the proxy advisor Institutional Shareholder Services (ISS)
can influence 19% of the votes, see Jie Cai, Jacqueline L. Garner, Ralph A.
Walkling, Electing Directors, The Journal of Finance, Vol. 64, Issue 5,
pp. 2389–2421, October 2009. See also S. Choi, J. Fisch and M. Kahan, The power
of proxy advisors; myth or reality?, Emory Law Journal, Vol. 59, p. 869,
estimating that ISS recommendation shifts 6-10% of shareholder votes. See also
D. Larcker, Allan McCally, G.Ormazabal Outsourcing Shareholder Voting to Proxy
Advisory Firms, May 2013.
[190]            Foreign asset managers active
in the Netherlands mentioned  the ISS voting behaviour guidelines the most
often as the most important guidelines for corporate governance. See Dutch
Monitoring Committee of the Corporate Governance Code, Third report on
compliance with the Dutch corporate governance code, 2012, page 43.
In the United States, “about 70% of 110 large and midsize companies said their executive-pay practices are
influenced by proxy-advisory firms, according to a 2012 study co-led by the
Conference Board, a New York research group”- The Wall Street Journal- 22 may
2013.
[191]            See M. C. Schouten, Do institutional investors follow
proxy advice blindly? 2012, available at http://ssrn.com/abstract=1978343.
[192]            See ESMA Final Report, Feedback Statement on the
consultation regarding the role of the proxy advisory industry, 19 February
2013, page 12.
[193]            According to ESMA analysis, there are currently less
than 10 players active in the EU, two of which are international players from
the US, ISS and Glass Lewis, and a number of local participants in Europe, with
mostly a domestic focus, such as Manifest in the UK, Ivox in Germany or Proxinvest in France.
[194]            See Lars Klöhn, Philip Schwarz, The regulation of proxy
advisors, December 2012, page 2-18. These authors note that ISS issues
recommendations for more than 40 000 shareholders meetings from more than 100
countries and Glass Lewis for more than 23 000 shareholders meetings of
companies from more than 100 countries.
[195]            See https://docs.google.com/viewer?url=http://www.mccg.nl/download/?id%3D579
, page 56-57.
[196]            Nyenrode Business Universiteit,
Aandeelhoudersbetrokkenheid in Nederland. Onderzoek onder institutionele
beleggers en hun relatie met Nederlandse beursfondsen, 2010, see http://commissiecorporategovernance.nl/rapport-2010
[197]            See OECD, The Role of Institutional investors in
promoting Good Corporate Governance, page 121.
[198]            Because of the large number of clients, the financial
relations they may have or the varied nature of services they may offer.
[199]            On 8 October 2013 the proxy
advisor Proxinvest apologized for an incorrect assessment of the situation of Schneider Electric. See http://www.proxinvest.com/divers/ERRATUM%20Communiqu%C3%A9%20de%20presse%202013.pdf

[200]            ISS, Glass Lewis, PIRC, Proxinvest, ECGS and
Computershare.
[201]            Spain, Finland, Germany, United Kingdom, Estonia, Portugal, Latvia, Austria and France.
[202]            Sweden, Denmark, Lithuania, Czech republic.
[203]            See ESMA Feedback Statement, page 1 and 19.
[204]            See ESMA Feedback Statement, page 16.
[205]            See article 5 (4) of the Shareholder Rights Directive.
On main markets, the annual general meeting season is heavily concentrated.
«More than 54% of annual shareholder meetings in the USA were held in April,
May or June » (Council of Institutional Investors, 2010).The market leader
ISS “covers nearly 35,000 public companies across 115 global markets annually.
ISS’ research staff is comprised of more than 200 research analysts and 75 data
analysts, located in financial centres worldwide” (ISS 2011 Due diligences
compliance package). If each staff member of ISS would only work on preparing
voting recommendations, they would have to prepare recommendations for 127
listed companies within a period of some months.
[206]            See ESMA Feedback Statement, page 16.
[207]            http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2012:0740:FIN:EN:PDF
[208]                                           Capita Registers, Response to the Green Paper on the EU Corporate
Governance Framework, p. 8, notes that where there is greater
visibility of the shareholder basis, there tends to be a higher level of
voting. 
[209]            Companies Act 2006 -
http://www.legislation.gov.uk/ukpga/2006/46/section/793
[210]         T2S Taskforce on Shareholder Transparency, Final Report to
the T2S Advisory Group, version: 28.2.2011, p. 13.
[211]  See footnote 16. 42% of stakeholders saw a
need for the EU to help issuers identify their shareholders to facilitate
dialogue on corporate governance, 43% respondents did not have a clear view,
while 15% were negative.
[212]    Report of the Reflection Group on the
Future of EU Company Law,
5. 4.2011, p. 50.
[213]  Public consultation on the EU corporate
governance framework, July 2011,
http://ec.europa.eu/internal_market/consultations/2011/corporate-governance-framework_en.htm
[214]    Ibid, Market Analysis of Shareholder Transparency Regimes in Europe, v. 21.2.2011.
[215]  C.f. footnote 16.
[216]  C.f. footnote 16.
[217]  Christian Strenger and Dirk A. Zetzsche, Corporate Governance,
Cross-border voting, and the (draft) Securities Law Directive, December
2012.
[218]  In the Giovannini Reports ‘corporate actions processing’ is
Barrier 3; “the variety of rules, information requirements and deadlines for
corporate actions.”
[219]  C.f. footnote 15.
[220]    C.f. footnote 16, Questions 36 and 37.
[221]  C.f. footnote 16.
[222]            See J. G. C. M. Galle, Consensus on the comply or
explain principle within the EU corporate governance framework: legal and
empirical research, Kluwer, 2012.
[223]            Study on Monitoring and Enforcement Practices in
Corporate Governance in the Member States, 2009, available at http://ec.europa.eu/internal_market/company/ecgforum/studies_en.htm.
The main results of the study are summarised in Annex V.
[224]            They either simply stated that they had departed from a
recommendation without any further explanation, or provided only a general
explanation without reference to the company specificity or only a limited
explanation (see page 83 of the study). The survey of investor satisfaction
performed by the contractor also showed only a limited degree of satisfaction
of investors, of which only a quarter considered the explanations provided by
companies as satisfactory, see page 155.
[225]            See http://www.ecgcn.org/Home.aspx
[226]            See Developments in Corporate Governance, page 4 and 15,
available at: http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Developments-in-Corporate-Governance-in-2012.aspx

[227]            Netherlands Spain, Finland, Lithuania, United Kingdom, Portugal, Latvia, France and Germany. 
[228]            Sweden, Denmark, Czech Republic, Austria, and Estonia.
[229]            For more details on the situation in Member States, see
Annex VI.
[230]            See for example CFA Centre for Financial Market
Integrity and the Business Roundtable for Corporate Ethics, Krehmeyer, Orsagh
and Schacht, Breaking the Short-Term Cycle, 2006, which suggest that the
obsession with short-term results by investors, asset management firms and
corporate managers collectively leads to unintended consequences of destroying
long-term value, decreasing market efficiency, reducing investment returns, and
impending efforts to strengthen corporate governance.
[231]             See
Graham, Harvey and Rajgopal, The Economic implication of corporate financial
reporting, Journal of accountings and economics, vol 40.
[232]            D. Barton, M. Wiseman, Focusing on the Long Term, presentation
22 May 2013, page 5.
[233]            Corporate investment and stock market listing: A
puzzle ? 2013, John Asker, Joan Farre-Mensa,
Alexander Jungquist. The study has been elaborated on
the basis of US data.
[234]            These differences do not reflect observable economic differences
between public and private companies (such as lifecycle differences, cash
holdings, debt, etc.). See also Barton and Wiseman, Focusing on the Long Term,
page 8.
[235]            The study points out that once a company is listed,
liquidity makes it easy for shareholders to sell their stock at the first sign
of trouble rather than to actively monitor management. Evidence suggests that
listed companies’ managers prefer investment projects with shorter time
horizons, in the belief that stock market investors fail to properly value
long-term projects. Evidence showing that investment behaviour diverges most
strongly in industries in which stock prices are particularly sensitive to
current earnings reinforces these arguments. The study also provides some
evidence that the presence of large shareholders may not affect managerial
myopia in terms of investments.
[236]            Elroy Dimson et al, Active Ownership, 2012 analyses the
positive effects of shareholder engagement on environmental, social and
governance matters. As regards corporate governance themes, the cumulative abnormal
return of a successful engagement over a year after the initial engagement
averages + 7.1%.  See similar results about the return generated by an active UK investor in Becht et al, 2009, Returns to shareholder activism: Evidence from a clinical
study of the Hermes UK Focus Fund, review of Financial Studies 22.
[237]            Elroy Dimson et al, Active Ownership, 2012 finds
significant improvements as to return on assets, profit margin, asset turnover
and sales over employees ratios after successful engagements.
[238]            Sustainable investing, establishing long-term value and
performance, Deutsche Bank (meta study), 2012.
[239]            The colors of investors’ money: the role of
institutional investors around the world, Miguel A. Ferreira, Pedro Matos,
2008. This is one of the reasons for the proliferation of corporate governance
codes across the globe.
[240]            Elroy Dimson et al, Active Ownership, 2012.
[241]            The European Private Equity and Venture Capital
Association.
[242]            EVCA's contribution to the consultation on long-term
financing, page 6. See also Barton and Wiseman, Focusing on the Long Term, page
8 who also point to this outperformance and to the fact that companies owned by
private equity have more engaged directors, higher investments grades and give
owners and management long-term compensation.
[243]            Abnormal return is calculated as the monthly stock
return, minus the value-weighted market return. Buy and hold return is
calculated as the return of a portfolio that buys the stock of the target
company at the month of the initial engagement and sells it at the month when
the company implements change in its governance (1year).
[244] Shareholder activism (including both successful and non-successful
engagements) on environmental, social and governance matters put together
generate a one-year abnormal return of +1.8%, comprising +4.4% for successful
and 0% for unsuccessful engagements.
[245]            A fresh survey of 2012 from the UK National Association
of Pension Funds covering pension funds managing assets of more than £ 300
billion finds that shareholder engagement is adding value to their fund and has
influenced changes in the investee company. See also Mercer, “Responsible
Investment’s second decade: Summary report of the State of ESG information,
policy and reporting”, 2011: pooling results from 36 studies, it shows that 30
studies evidenced a neutral to positive relationship between ESG
(environmental, social and governance) factors and financial performance. 
[246]            Paul Woolley, ‘Why are financial
markets so inefficient and exploitative — and a suggested remedy’, in: The
Future of Finance: The LSE Report, 2010, page 134.
[247]            Ibidem, page 24.
[248]            The European Federation of Financial Services users.
[249]            EuroFinuse's contribution to the Green paper on
long-term financing, page 5. Pension funds across many European countries have
delivered negative real (inflation-adjusted) returns averaging of minus 1.6 per
cent in the years 2007-2011, according to the OECD, Pension's Outlook 2012,
OECD. See also The real return of private pensions, EuroFinuse, 2013.
[250]            See annex XII.
[251]            Article 19 of MIFID. This article is applicable to asset
managers managing portfolios on the basis of discretionary mandates. The
implementing Directive 2006/73 specifies what costs should be disclosed;
however, it applies only to retail clients and does not make reference to
portfolio turnover costs.
[252]            For more details, see Annex VI.
[253]            Available at
http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Stewardship-Code-September-2012.aspx
[254]            See
http://www.eumedion.nl/en/public/knowledgenetwork/best-practices/best_practices-engaged-share-ownership.pdf
[255]            http://www.efama.org/Publications/Public/Corporate_Governance/11-4035%20EFAMA%20ECG_final_6%20April%202011%20v2.pdf
[256]            See https://www.icgn.org/images/ICGN/Best%20Practice%20Guidance%20PDFS/icgn_model_mandate_mar2012_short.pdf
[257]            Wohlverhaltensregeln des BVI, at:
http://www.bvi.de/fileadmin/user_upload/Regulierung/Wohlverhaltensregeln.pdf
[258] FT/ICSA Business Bellwether survey, see http:// www.ft.com/cms/s/0/9ec5594c-6f8f-11e1-b368-00144feab49a.html.
[259]  The Market Standards for Corporate Actions
Processing were endorsed in 2009 and being implemented. They cover the most
common and complex corporate actions, on stocks (e.g. dividend payments, early
redemptions, stock splits) and on flows (e.g. transformations). The Market
Standards for General Meetings were endorsed in 2010 and are currently being
assessed against market practices and the legal and regulatory requirements
that exist.
[260]    The Code of Conduct on Clearing and
Settlement: Three Years of Experience, Commission Services Report to ECOFIN, 6.11.2009, p. 4,
concludes that "… price comparability remains difficult in view of
underlying differences of business models" and that "the reasons for
this are broadly historical, as each CSD has developed its own business model
in isolation, and as a result label their services differently.
[261]            See annex XII.
[262]            This has been emphasised by many during the preparatory
consultations of the Commission. See also an example of Aviva Investors market
practice: Neil Brown, Steve Waygood, Making the right decision, ICGN yearbook,
2011
[263]            The European fund management industry is highly
internationalised. Asset owners and managers invest into companies across the
borders within and outside Europe. Funds can be domiciled in one country,
managed in a second and sold in a third. An indicator for this is that the United Kingdom, Germany and France have a 66% market share in the area of asset management.
[264]            According to the Federation of
European Stock Exchanges (FESE), 13% of Europe’s largest companies account for
93% of Europe’s market capitalisation, 85% of the number of trades and 96% of
turnover. Moreover, the great majority of new trading venues only offer trading
in blue‐chips. FESE is of the opinion that EU
capital markets focus more on the trading of blue chips, i.e. the largest
traded companies – at the expense of the needs of the much more numerous but
smaller listed companies that play a critical role in growth and employment in
Europe. It is argued that one of the reasons for this trend lies in the
short-term incentives in the investment chain. See the contribution of FESE to
the Green paper on Long-term financing.
[265]            Referred to in the problem definition. 
[266]            More details on the level of administrative burden are
provided in Annexes VIII.
[267]            See to this effect CRD IV Impact Assessment,
Administrative burden for credit institutions and supervisors,
http://ec.europa.eu/internal_market/bank/docs/regcapital/CRD4_reform/IA_directive_en.pdf
[268]            If there is no requirement for an external check on the
information, then the cost would be limited and would represent a few hours of
staff time to run the report, check it for accuracy and prepare it for
publication on the website.
[269]            European Sustainable Investment Forum, page 10. 
[270]            Page 14. 
[271]            Page 10.
[272]            This approach is however much more flexible than the US approach where certain institutional investors and asset managers have interpreted
legislation as requiring them to vote in general meetings. This method has been
criticized for creating a system where ‘economic decision making have been
effectively decoupled from voting decisions throughout most of the investment
management world’ See C.M. Nathan, P. Metha, Latham & Watkins LLP, The
Parallel Universes of Institutional Investing and Institutional Voting,). It
has been argued that mandatory voting has created a system where asset managers
vote for compliance reasons, largely following the recommendations made by
proxy voting agencies.
[273]            Asset management report 2013 of
the page 5.
[274]            See the statistical survey of PensionsEurope, available
at http://www.efrp.org/Statistics.aspx. The UK IORPs have some 1,176 trillion
of assets and the Netherlands 801 billion. German IORPs have the third largest
asset with 138 billion. Total assets of EU IORPs are some 2,395 trillion. See
also OECD’s Pension markets in Focus, page 4, which shows the relative size of
pension fund assets in comparison to GDP in which the Netherlands and UK are the Member States which have the largest percentage with respectively 138,2
and 88,2%.
[275]            Total investments portfolios of EU insurers is 7,24
trillion euro of which France, the UK and Germany hold some 1,7 trillion, 1,6
trillion and 1,4 trillion. Seehttp://www.insuranceeurope.eu/uploads/Modules/Publications/eif-2013-final.pdf
, page 57.
[276]            The remuneration policy determines on which criteria
individual remunerations are granted while the remuneration report describes
how the remuneration policy was applied in the previous year.
[277]            The Dutch corporate governance monitoring committee
noted in its latest report of 1 October 2013 that in general the remuneration
structure and policy is not simple and transparent and that the committee has
not been able to bring any improvements in this. See page 21 of the report. See
https://docs.google.com/viewer?url=http://www.mccg.nl/download/?id%3D2199
[278]            See Annex III. Support for disclosure was also expressed
by respondents to the Green Paper on corporate governance in financial
institutions published in 2010. 
[279]            In particular France, Germany, Ireland, Latvia, Netherlands, Norway, Portugal, United Kingdom and Spain.
[280]            Austria, Czech Republic, Denmark, Estonia, Finland, Lithuania, Latvia, .
[281]            Statement by the ECGF of 23 March 2009:
http://ec.europa.eu/internal_market/company/docs/ecgforum/ecgf-remuneration_en.pdf
[282]            Statement by the ECLE of 2011:
http://ec.europa.eu/internal_market/consultations/2011/corporate-governance-framework/individual-replies/ecle_en.pdf
[283]            See OECD (2011), Board Practices: Incentives and
Governing Risks, Corporate Governance, OECD Publishing, http://dx.doi.org/10.1787/9789264113534-en,
p. 39
[284]            See the overview in the problem definition.
[285]            More details on the level of administrative burden are
provided in Annex VIII
[286]            See to this effect CRD IV Impact Assessment,
Administrative burden for credit institutions and supervisors,
http://ec.europa.eu/internal_market/bank/docs/regcapital/CRD4_reform/IA_directive_en.pdf

[287]            See Art. 17 (1) (d) of the Accounting Directive 2013/34/EU.
The Directive allows however Member States not to apply this requirements when
the information makes it possible to identify the position of a specific member
of such a body..
[288]            See also OECD (2011), Board Practices: Incentives and
Governing Risks, Corporate Governance, p. 27 and following.
[289]            More details on the impact on competitiveness are
provided in Annex IX.
[290]            Directive 95/46/EC on the protection of individuals with
regard to the processing of personal data and on the free movement of such data.
[291]            See the problem definition.
[292]            Feedback Statement, see Annex III. Support was also
expressed by respondents to the Green Paper on corporate governance in
financial institution and remuneration.
[293]            These stakeholders were almost equally divided between
those advocating an advisory and those in favour of a binding vote.
[294]            France, Ireland, Latvia, Netherlands, Norway, Portugal and   Spain.
[295]            Denmark, Finland, Lithuania, Germany, United Kingdom, Czech Republic, Austria and Estonia.
[296]            Monitoring and Enforcement practices on Corporate
Governance in the Member States (p.163):
http://ec.europa.eu/internal_market/company/docs/ecgforum/studies/comply-or-explain-090923_en.pdf.
[297]            Statement by the ECGF of 23 March 2009:
http://ec.europa.eu/internal_market/company/docs/ecgforum/ecgf-remuneration_en.pdf
[298]            Principle II.C.3.
[299]            OECD (2011), Board Practices: Incentives and Governing
Risks, Corporate Governance, OECD Publishing, http://dx.doi.org/10.1787/9789264113534-en,
p. 39.
[300]            It was in 2010 6,7%. Only votes on share plans have a
higher average dissent, namely 8,9. ISS, 2010 Voting
Results Report: Europe, page 10. 
[301]            Conyon, Martin and Graham Sandler (2010), “Shareholder
Voting and Directors’ Remuneration Report Legislation: Say on Pay in the UK”, Corporate Governance: An International Review, 18(4), pp. 296-312.
[302]            In the 2007-2011 period there were 68 examples of
remuneration reports which received in excess of 30% of shareholder votes
against – three times the average level of dissent. In addition, in many cases,
shareholders choose to 'abstain' on the vote on the remuneration report to
signal their discontent without going so far as to vote against management.
[303]            PwC, Executive Compensation: Review of the Year, 2009. Available
at:
http://www.pwc.co.uk/eng/publications/executive_compensation_review_of_the_year_2009.html.
[304]       See also the Impact assessment on Shareholder votes on
executive remuneration made by the United Kingdom, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31374/12-648-shareholder-votes-executive-remuneration-impact-assessment.pdf

[305]            In Member States with a two tier system the supervisory
board sets the remuneration for the members of the management board and
shareholders oversee the remuneration of the members of the supervisory board.
Granting shareholders the right to vote on remuneration policy and report might
be seen as depriving the supervisory board, in which employees may be
represented (e.g. Germany and Austria), of an important prerogative. However,
it would still be the (supervisory) board that would propose shareholders the
policy and, most important, it would, on the basis of the policy, decide on the
actual remuneration to be paid. In line with the general system of a two-tier
system the supervisory would subsequently be accountable to shareholders. It is
also noted that data on directors’ remuneration from Austria quoted in the
problem definition, do not show a link between pay and performance.
[306]            Such threshold could be put on 1% of total assets of the company. See the Statement of the
European Corporate Governance Forum on related party transactions for listed
companies, available at
http://ec.europa.eu/internal_market/company/docs/ecgforum/ecgf_related_party_transactions_en.pdf
[307]            Such threshold could be put on 5% of total assets of the company. See the Statement of the
European Corporate Governance Forum on related party transactions for listed
companies, available at http://ec.europa.eu/internal_market/company/docs/ecgforum/ecgf_related_party_transactions_en.pdf

[308]            See also Annex III.
[309]            See Statement of the European Corporate Governance
Forum, cited above.
[310]            Accounting Directive 2013/34
[311] http://www.oecd.org/corporate/ca/corporategovernanceprinciples/relatedpartytransactionsandminorityshareholderrights.htm
[312]            See Annex VII, figure 2.
[313]            For instance ISS in established in Europe in London, Paris and Brussels and Glass Lewis in Limerick.
[314]            ISS, Glass Lewis, PIRC, Proxinvest, ECGS and
Computershare.
[315]            Spain, Finland, Germany, United Kingdom, Estonia, Portugal, Latvia, Austria and France.
[316]            Sweden, Denmark, Lithuania, Czech
republic.
[317]  See http://ec.europa.eu/internal_market/financial-markets/docs/code/code_en.pdf
[318]    The Code of Conduct on Clearing and Settlement:
Three Years of Experience,
Commission Services Report to ECOFIN, 6.11.2009, p. 4, concludes that
"… price comparability remains difficult in view of underlying differences
of business models" and that "the reasons for this are broadly
historical, as each CSD has developed its own business model in isolation, and
as a result label their services differently. Full comparability would
accordingly require a significant simplification and harmonisation of the way
infrastructures present their services in their fee schedules. This is
difficult to achieve in view of the fundamental differences in infrastructures'
business model".
[319]  5th Implementation Progress Report on The Market
Standards for Corporate Actions Processing & General Meetings, February 2012
[320]  The Market Standards for Corporate Actions
Processing were endorsed in summer 2009 and are in the process of
implementation. They cover the most common and complex corporate actions, on
stocks (e.g. dividend payments, early redemptions, stock splits) and on flows
(e.g. transformations).
[321]  The Market Standards for General Meetings
were endorsed in summer 2010 and are currently subject to a thorough gap
analysis to assess them against the market practices and the legal and
regulatory requirements that exist in the different EU countries.
[322]  The European Banking Federation (EBF), the
European Association of Cooperative Banks (EACB), the European Savings Banks
Group (ESBG), the Association for Financial Markets in Europe (AFME), the
European Central Securities Depositaries Association (ECSDA), EuropeanIssuers,
the Federation of European Stock Exchanges (FESE), the European Association of
Clearing Houses (EACH).
[323]  4th Implementation Progress Report on The
Market Standards for Corporate Actions Processing & General Meetings, March 2012, http://www.ebf-fbe.eu/uploads/D0325B-2012-%20BSG-implementation-progress-report-March-2012.pdf
[324]    T2S Taskforce on Shareholder Transparency, Market Analysis of
Shareholder Transparency Regimes in Europe, version: 21.2.2011, p. 7:
"Do issuers have access to information to the holding of (a) the first
layer of holders; (b) the final layer of holders? Only first layer: Austria,
Germany, Spain, Estonia, Finland, Sweden, Slovenia; Both first and final:
Bulgaria, Switzerland, Cyprus, Germany, Denmark, Estonia, Finland, France,
Greece, Hungary, Ireland, Italy, Lithuania, Latvia, Malta, Norway, Poland,
Portugal, Romania, Sweden, Slovakia, UK;∙None: Belgium, Germany, Netherlands.
The majority of countries have information going as far as the final layer for
domestic participant. But in the case of foreign intermediaries, it is
generally the case that only the first layer information is available. ".
Nb.: In the study an 'investor' is called the 'final layer holder'.
[325]            See footnote 280.
[326]    T2S Taskforce on Shareholder Transparency, Market
Analysis of Shareholder Transparency Regimes in Europe, version: 21.2.2011,
p. 12: "Do most issuers ask for shareholder information on a regular
basis or do they usually limit these requests at the time of general meetings
or corporate actions? Daily/regularly: Switzerland, Cyprus, Germany, Denmark, Greece, Malta (frequency varies), Norway, Portugal, UK (frequency varies). Once a
month/quarterly/ad hoc (including for AGMs and CAs): Finland, France, Hungary, Ireland, Sweden, Slovakia (ad hoc), Italy (ad hoc at issuer request and mandatory
for AGM and CAs), Latvia. Only AGMs and CAs: Bulgaria, Estonia, France, Lithuania, Poland, Romania (and mandatory 2x year), Slovenia. Only AGMs: Spain (but would prefer much more frequently, e.g. quarterly or even daily). Not
applicable: Belgium, Netherlands. Summary: There is no set frequency. Some
issuers have daily updates, while others only obtain data on a monthly/quarter
basis or at AGMs or for CAs. However, it is possible that if an efficient
solution were available, most issuers would ask for a high frequency".
[327]  Public consultation: The EU corporate governance framework,
July 2011
[328]  Summary of responses to the Commission Green Paper on the
EU corporate governance framework, 15.11.2011.
[329]    The review of the operation of Directive 2004/109/EC: emerging
issues, SEC(2009) 611, p. 94 on the ground of figures gathered by
International Investor Relations Federation, 2005, p. 12.
[330]    T2S Taskforce on Shareholder Transparency, Market
Analysis of Shareholder Transparency Regimes in Europe, version: 21.2.2011,
p. 14: "Please describe how CSDs/registars/issuer agents are remunerated
for the work that they perform in providing shareholder information issuers? Is
all or part of this remuneration retro-ceded to intermediaries or paid directly
to intermediaries (i.e. banks)? Issuer
pays CSD: Belgium, Bulgaria, Cyprus, Denmark, Estonia, Spain, Finland, France (and CSD in turn pays intermediaries), Greece, Malta, Norway, Poland, Sweden, Slovenia; Banks and issuers pay CSD: Switzerland, Germany; Issuer pays
issuer agent: UK and Ireland; paid for through contract with issuer agent; Not
applicable: Austria, Hungary, Italy, Lithuania, Latvia, Netherland, Portugal, Romania, Slovakia. Summary: In general, the CSD is remunerated for providing the data to
issuers. The actual level of fees was not provided (except in the case of Spain and Germany)".
[331]    T2S Taskforce on Shareholder Transparency, Market
Analysis of Shareholder Transparency Regimes in Europe, version: 21.2.2011,
p. 50, evidencing that the actual level of fees is hardly comparable, e.g.
between Germany ("Every transaction that is recorded in the share register
is remunerated to Clearstream Banking AG. The remuneration is paid one half by
the issuer and the other half by the bank. Additionally every transaction that
is recorded in the share register is remunerated to banks and custodians by the
issuer using the Gebührenverordnungfee-table. In case a disclosure request is
issued, the issuer is obliged to reimburse the bank for its necessary cost in
connection with the gathering of the necessary data. The banks get 12 or 10
cent per data set / Clearstream gets 50 cent from the bank, 50 cent from the
issuer for forwarding the data and providing a platform for the data
transferring. There are no different fees. The Clearstream fee is levied upon
any transaction only once") and, p. 69, Spain ("Notifications on
transactions in their shares to issuers whose securities must by law be
registered at the final beneficiary level will be subject to a fee of
EUR 100 each plus VAT and when they are provided with the tallied list of
buyers and sellers, an annual fee of EUR 426 plus VAT will apply, plus
EUR 5 plus VAT for each daily report of this information").
[332]  Examples provided by UniCredit in response to second public
consultation.
[333]  German Verordnung über den Ersatz von Aufwendungen der
Kreditinstitute. in aggregate, EUR 2 per forwarded letter by more than 30
and up to 100 letters in aggregate, EUR 0.95 per forwarded letter by more
than 100 and up to 5 000 letters in aggregate, EUR 0.55 per forwarded
letter by more than 5 000 and up to 50 000 letters in aggregate,
EUR 0.45 per forwarded letter by more than 50000 letters in aggregate.
Electronic forwarding EUR 3 per forwarded mail by up to 30 mails in
aggregate, EUR 1 per forwarded mail by more than 30 and up to 100 mails in
aggregate, EUR 0.40 per forwarded mail by more than 100 and up to 5 000
mails in aggregate, EUR 0.25 per forwarded mail by more than 5 000 and up to
50 000 mails in aggregate, EUR 0.20 per forwarded mail letter by more
than 50 000 mails on aggregate.
[334]  German Verordnung über den Ersatz von Aufwendungen der
Kreditinstitute.
[335]            Directive 2013/34/EU.
[336]            More details on the impact on competitiveness are
provided in Annex IX.
[337]            Moreover, it is noted that the non-financial reporting
proposal also cover risk management arrangements and diversity that are part of
corporate governance.
[338]            See Elroy Dimson, Active Ownership). 
[339]         Abnormal return is calculated as the monthly stock return,
minus the value-weighted market return. Buy and hold return is calculated as
the return of a portfolio that buys the stock of the target company at the
month of the initial engagement and sells it at the month when the company
implements change in its governance (1year).
[340] Shareholder activism (including both successful and non-successful
engagements) on environmental, social and governance matters put together
generate a one-year abnormal return of +1.8%, comprising +4.4% for successful
and 0% for unsuccessful engagements.
[341] This data however do not separate the effects generated by
corporate governance engagements from social and environmental engagements. 
[342]            More details on the impact on administrative burden are
provided in Annexes VIII.
[343]            Article 8 and 52 Charter of Fundamental rights of the EU
[344]            The European Corporate Governance Codes Network is an
informal network for exchange of information and good practices between
national bodies in charge of monitoring the application of corporate governance
codes, see http://www.ecgcn.org/Home.aspx
[345]            COM(2010) 284 final,
ttp://ec.europa.eu/internal_market/company/docs/modern/com2010_284_en.pdf 
[346]            COM(2011) 164 final,
http://ec.europa.eu/internal_market/company/docs/modern/com2011-164_en.pdf#page=2
[347] Statement of the European Corporate Governance Forum on Related
Party Transactions for Listed Entities  (10 March 2011).
[348]            Study on Monitoring and Enforcement Practices in
Corporate Governance in the Member States, available at http://ec.europa.eu/internal_market/company/docs/ecgforum/studies/comply-or-explain-090923_en.pdf

[349]            Page 83 of the study 
[350]            Page 155
[351]            Page 153, 174
[352]            Page 164 of the study 
[353]            See
http://cgfinland.fi/files/2012/01/Guideline_comply-or-explain_en.pdf
[354]            See http://www.corporategovernancecommittee.be/en/tools/explain/
[355]            See http://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx
[356]            See http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Stewardship-Code-September-2012.aspx
[357]            See AMF Recommendation No. 2011-06 of 18 March 2011 on
proxy advisory firms (EN version), at:
http://www.amf-france.org/documents/general/9915_1.pdf
[358]            See http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Stewardship-Code-September-2012.aspx
[359]            See
http://www.ap3.se/sites/english/SiteCollectionDocuments/About_us/ENG_Pension_Funds_Act.pdf
[360]            See http://fondbolagen.episerverhosting.com/en/Regulations/Guidelines/Code-of-conduct/
[361]            See
http://www.bvi.de/fileadmin/user_upload/Regulierung/Wohlverhaltensregeln.pdf
[362]            See
http://www.finlex.fi/en/laki/kaannokset/1999/en19990048.pdf
[363]            See Finnish Federation of Financial Services website:
www.fkl.fi
[364]            See Finnish Pension Alliance (TELA) website:
www.tela.fi.
[365]            See http://commissiecorporategovernance.nl/dutch-corporate-governance-code
[366]            See Article 314-100 of the General Regulation of the
Autorité des Marchés Financiers, at: http://www.amf-france.org/documents/general/7553_1.pdf
[367]            See http://www.afg.asso.fr/index.php?option=com_content&view=article&id=98&Itemid=87&lang=en
[368] See http://wdi.worldbank.org/table/5.4#.
[369]             Observatoire de l’epargne
européenne- OEE, INSEAD OEE Data services, Who owns the European economy?
Evolution of the ownership of EU-listed companies between 1970 and 2012, August
2012, page 7.
[370]            See Annex III and IV.
[371]            See to this effect CRD IV Impact Assessment,
Administrative burden for credit institutions and supervisors,
http://ec.europa.eu/internal_market/bank/docs/regcapital/CRD4_reform/IA_directive_en.pdf
[372]            For more details on different markets, see Annex VI.
[373]            By comparison, a detailed publication requirement, such
as in the US could imply considerable costs. In the US the voting records are
to be filed with the SEC according to specific templates and disclosed to
shareholders of portfolio companies (Disclosure of Proxy Voting Policies and
Proxy Voting Records by Registered Management Investment Companies, 68 Fed.
Reg. 6564, Feb. 7, 2003). One of the biggest international asset managers
estimates that their filing to the US SEC, which has very specific formats and
fund groupings, costs them about $300,000 a year. About $250,000 of this is
data collection and website hosting; about $50,000 of this cost is for the
formatting to SEC requirements and legal sign off by a specialist external
firm.
[374]            Data from end 2011, according to EFAMA , Asset
Management in Europe, Facts and Figures 5th Annual Review, 2012, at: http://www.efama.org/Publications/Statistics/Asset%20Management%20Report/Asset%20Management%20Report%202012.pdf,
page 2.
[375]            According to InsuranceEurope, in 2011 there were 5456
insurance companies registered in the EU, see:
http://www.insuranceeurope.eu/uploads/Modules/Publications/eif-2013-final.pdf
[376]            According to PensionsEurope, in 2010 there were 265 368
pension funds registered in Europe. However, a large number of these are
pension funds having less than 100 members, to which Member States may choose
not to apply the rules of the IORP directive and that would also not be subject
to the rules envisaged in this package. Taking into account the funds having
over 100 members, there are currently over 7400 pension funds. See :
http://www.efrp.org/Statistics.aspx
[377]            "Corporate Governance Report 2011 - Challenging
board performance", Heidrick & Struggles, 2011, p. 37
[378]            See to this effect CRD IV Impact Assessment,
Administrative burden for credit institutions and supervisors,
http://ec.europa.eu/internal_market/bank/docs/regcapital/CRD4_reform/IA_directive_en.pdf

[379]            See Art. 17 (1) (d) of the Accounting Directive 2013/34/EU.
The Directive allows however Member States not to apply this requirements when
the information makes it possible to identify the position of a specific member
of such a body.
[380] See also the Impact assessment on Shareholder votes on executive
remuneration made by the United Kingdom government, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31374/12-648-shareholder-votes-executive-remuneration-impact-assessment.pdf

[381] 4th Company Law Directive and IFRS for SMEs, Final Report
http://ec.europa.eu/internal_market/accounting/docs/studies/2010_cses_4th_company_law_directve_en.pdf
[382]        Impact assessment Accompanying the document Proposal for a
Directive of the European Parliament and of the Council amending Directive
2006/43/EC on statutory audits of annual accounts and consolidated accounts and
a Proposal for a Regulation of the European Parliament and of the Council on
specific requirements regarding statutory audit of public-interest
entitieshttp://ec.europa.eu/internal_market/auditing/docs/reform/impact_assesment_en.pdf
[383]            See  the Statement of the
European Corporate Governance Forum on related party transactions for listed
companies, available at http://ec.europa.eu/internal_market/company/docs/ecgforum/ecgf_related_party_transactions_en.pdf
[384] Related Party Transactions and Minority Shareholder Rights, OECD,
2012
http://www.oecd.org/corporate/ca/corporategovernanceprinciples/50089215.pdf
[385]These hourly wages are based on standardised ESTAT data (the
four-yearly Labour cost survey and the annual updates of labour cost (ALC)
statistics) reflecting 2010 figures. They already contain the standard 25%
overhead costs, as required by the Standard Cost Model for administrative
burden measurement. 
[386]            Fourth Council Directive 78/660/EEC of 25 July 1978
based on Article 54 (3) (g) of the Treaty on the annual accounts of certain
types of companies, as amended by the Directive 2006/46/EC.
[387] EU project on baseline measurement and reduction of administrative
costs
http://ec.europa.eu/dgs/secretariat_general/admin_burden/docs/enterprise/files/abst09_cl_data_annex_en.pdf
[388] Study on Monitoring and Enforcement Practices in Corporate
Governance in the Member States, page 82 http://ec.europa.eu/internal_market/company/docs/ecgforum/studies/comply-or-explain-090923_en.pdf
[389]            Directive 2002/83/EC of the
European Parliament and of the Council of 5 November 2002 concerning life
assurance.
[390]            Directive 2009/138/EC of the
European Parliament and of the Council of 25 November 2009 on the taking-up and
pursuit of the business of Insurance and Reinsurance . OJ 2009, L1.
[391]            Directive 2003/41/EC.
[392]            Directive 2009/65/EC.
[393]            COM(2012) 350 final.
[394]            Directive 2011/61/EU.
[395]            Directive 2004/39/EC.
[396]            COM(2011) 656 final and COM(2011) 652 final.
[397] Article 22 of UCITS implementing Directive 2010/43.
[398]            Article 19 of MIFID.
[399]            Article 33 of Commission Directive 2006/73/EC.
[400]            Article 23 of the AIFM Directive.
[401]            Article 75 of Directive 2009/65.