Cleared from scrutiny; drawn to the attention of the Business, Energy and Industrial Strategy Committee
Proposal for a Directive amending Directive 2007/36 as regards the encouragement of long-term shareholder engagement and Directive 2013/34 as regards certain elements of the corporate governance statement
Articles 50 and 114 TFEU; ordinary legislative procedure; QMV
Business, Energy and Industrial Strategy
(35957), 8847/14 + ADDs 1–3, COM(14) 213
12.1This proposal amends the existing Shareholders’ Rights Directive by introducing new provisions intended to facilitate the exercise of shareholders’ rights, give shareholders a greater say over directors’ remuneration and increase transparency in respect of: the strategies of institutional investors and asset managers; the activities of proxy advisors; directors’ remuneration; and related party transactions. Further details are set out below.
12.2We last reported on this proposal in September 2015 when we gave the Minister a scrutiny waiver to agree the General Approach of the Council to trilogue negotiations with the European Parliament. This was subject to the conditions that (a) the general approach remained within the bounds of the UK’s corporate governance framework and (b) the provisions for EU subordinate legislation did not change from the latest compromise text.
12.3The previous Minister (Baroness Neville-Rolfe) provided helpful updates of the negotiations with the European Parliament and the current Minister (Margot James) now provides details of the outcome of those negotiations and seeks clearance of the document from scrutiny in order that the Government may vote in favour.
12.4She indicates that the European Parliament dropped its demand for country-by- country tax reporting and the outcome is “broadly consistent both with the UK’s existing framework as well as the Prime Minister’s focus on corporate governance reform”.
12.5We are grateful for the update from the Minister and are now content to clear this proposal from scrutiny. In view of the sensitivity of the provisions on Director’s remuneration we set out the current version of the text in full below. We draw this Report to the attention of the Business, Energy and Industrial Strategy Committee.
Proposal for a Directive 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: (35957), + ADDs 1–3, COM(14) 213.
12.6The proposal from the Commission covered:
12.7In the course of negotiations with the European Parliament the Committee were informed that the most difficult matter outstanding was the European Parliament insistence on using this proposal as a vehicle for county-by-country reporting on tax. Other outstanding matters of a political nature involved (by reference to the amendments proposed to Directive 2007/36):
“1. Member States shall ensure that companies establish a remuneration policy as regards directors and that shareholders have the right to vote on the remuneration policy at the general meeting.
“1a. Member States shall ensure that the vote by the shareholders at the general meeting on the remuneration policy is binding. Companies shall only pay remuneration to their directors in accordance with a remuneration policy that has been approved by the general meeting.
“In case where no remuneration policy has yet been approved and the general meeting does not approve the proposed policy, the company may continue to pay remuneration to its directors in accordance with its existing practices and shall submit a revised policy for approval at the next general meeting.
“In case where an approved remuneration policy exists and the general meeting does not approve the proposed new policy, the company shall continue to pay remuneration to its directors in accordance with the existing approved policy and shall submit a revised policy for approval at the next general meeting.
“1b. However Member States may provide that the vote at the general meeting on the remuneration policy is advisory. In that case, companies shall only pay remuneration to their directors in accordance with a remuneration policy that has been submitted to such a vote at the general meeting. Where the general meeting rejects the proposed remuneration policy, the company shall submit a revised policy to a vote at the next general meeting.
“1c. Member States may allow companies, in exceptional circumstances, to temporarily derogate from the remuneration policy, provided that the policy includes the procedural conditions under which the derogation can be applied and specifies which elements of the policy may be derogated from.
“Exceptional circumstances shall only cover situations where the derogation from the remuneration policy is necessary to serve the long-term interests and sustainability of the company as a whole or to assure its viability.
“1d. Member States shall ensure that companies submit the remuneration policy to a vote by the general meeting at every material change and in any case at least every four years.
“3. The policy shall contribute to the business strategy, long-term interests and sustainability of the company and explain how it does so. It shall be clear and understandable and describe the different components of fixed and variable remuneration, including all bonuses and other benefits in whatever form, which can be awarded to directors and indicate their relative proportion.
“The policy shall explain how the pay and employment conditions of employees of the company were taken into account when setting the remuneration policy .
“When the company awards variable remuneration, the policy shall set clear, comprehensive and varied criteria for the award of the variable remuneration. It shall indicate the financial and non-financial performance criteria including, where appropriate, criteria relating to corporate social responsibility and explain how they contribute to the objectives set out in subparagraph 1, and the methods to be applied to determine to which extent the performance criteria have been fulfilled. It shall specify information on any deferral periods and on the possibility for the company to reclaim variable remuneration.
“When the company awards share-based remuneration, the policy shall specify vesting periods and where applicable retention of shares after vesting and explain how the share based remuneration contributes to the objective set out in subparagraph 1.
“The policy shall indicate the duration of the contracts or arrangements with directors and the applicable notice periods, the main characteristics of supplementary pension or early retirement schemes and the terms of the termination and payments linked to termination.
“The policy shall explain the decision-making process followed for its determination, review and implementation, including, measures to avoid or manage conflicts of interests and, where applicable, the role of the remuneration committee or other committees concerned. Where the policy is revised, it shall describe and explain all significant changes and how it takes into account the votes and views of shareholders on the policy and reports since the last vote on the remuneration policy by the general meeting of shareholders.
“4. Member States shall ensure that after the vote on the remuneration policy at the general meeting the policy together with the date and the results of the vote is made public without delay on the website of the company and remains publicly available, free of charge, at least as long as it is applicable.”
The text of the new Article 9b entitled “Information to be provided in the remuneration report and right to vote on the remuneration report” will similarly provide as follows:
“1. Member States shall ensure that the company draws up a clear and understandable remuneration report, providing a comprehensive overview of the remuneration, including all benefits in whatever form, awarded or due over the last financial year to individual directors, including to newly recruited and to former directors, in accordance with the remuneration policy referred to in Article 9a. Where applicable, the remuneration report shall contain the following information regarding each individual director’s remuneration:
“(a) the total remuneration split out by component, the relative proportion of fixed and variable remuneration, an explanation how the total remuneration complies with the adopted remuneration policy, including how it contributes to the long-term performance of the company, and information on how the performance criteria were applied;
“(b) the annual change of the remuneration over at least the last five financial years, the evolution of the performance of the company and of the average remuneration on a full-time equivalent basis of employees of the company other than directors during that period, presented together in a manner which permits comparison;
“(c) any remuneration from any undertaking belonging to the same group as defined in point (11) of Article 2 of Directive 2013/34/EU of the European Parliament and of the Council ;
“(d) the number of shares and share options granted or offered, and the main conditions for the exercise of the rights including the exercise price and date and any change thereof;
“(e) information on the use of the possibility to reclaim variable remuneration;
“(f) information on any deviations from the procedure for the implementation of the remuneration policy referred to in article 9a(3) and on any derogations applied in accordance with Article 9a(1c), including the explanation of the nature of the exceptional circumstances and the indication of the specific elements derogated from.
“2. Member States shall ensure that companies do not include in the remuneration report special categories of personal data of individual directors within the meaning of Article 9(1) of Regulation (EU) 2016/679 or personal data which refer to the family situation of an individual director.
“2a. Pursuant to this Article companies shall process personal data of directors included in the remuneration report for the purpose of increasing corporate transparency as regards directors’ remuneration with the view to enhancing directors’ accountability and shareholder oversight over directors’ remuneration.
“2ab. Without prejudice to any longer period laid down by EU sectorial legislation, Member States shall ensure that companies no longer make publicly available pursuant to paragraph 3a of this Article personal data of directors included in the remuneration report in accordance with this Article after 10 years from the publication of the remuneration report.
“2c. Member States may provide by law for processing of personal data of directors for other purposes.
“3. Member States shall ensure that the annual general meeting has the right to hold an advisory vote on the remuneration report of the past financial year. The company shall explain in the next remuneration report how the vote by the general meeting has been taken into account.
“However, for small and medium-sized companies as defined in Article 3(2) and (3) of Directive 2013/34/EU, Member States may provide, as an alternative to the vote, that the remuneration report of the last financial year is submitted for discussion in the annual general meeting as a separate item of the agenda. The company shall explain in the next remuneration report how the discussion in the general meeting has been taken into account.
“3a. Without prejudice to Article 5(4) of this Directive, after the general meeting the companies shall make the remuneration report publicly available on their website, free of charge, for a period of 10 years, and may choose to keep it available for a longer period provided it does no longer contain personal data of directors. The statutory auditor or audit firm shall check that the information required by this Article has been provided.
“Member States shall ensure that the directors of the company, acting within the competences assigned to them by national law, have collective responsibility for ensuring that the remuneration report is drawn up and published in accordance with the requirements of this Directive. Member States shall ensure that their laws, regulations and administrative provisions on liability, at least towards the company, apply to the directors of the company for breach of the duties referred to in this paragraph.
“4. In order to ensure consistent harmonisation in relation to this Article, the Commission shall adopt guidelines to specify the standardised presentation of the information laid down in paragraph 1 of this Article.”
12.8In her letter the Minister informs the Committee that trilogue negotiations ended on 7 December 2016 with agreement. Notably the European Parliament has dropped its claim for country-by-country tax reporting. It is expected that the proposal will be adopted in March by the Council following formal agreement by the European Parliament in plenary.
12.9She provides the following assessment of the outcome:
“While at this stage I am not able to anticipate the impact of Brexit on the transposition of EU proposals, the measures proposed by this Directive are broadly consistent both with the UK’s existing framework as well as with the Prime Minister’s focus on corporate governance reform.
“Following two years of negotiations, all the UK Government’s objectives have been achieved. While we welcomed the proposal for an EU wide framework, which would facilitate investors’ stewardship activities and enhance transparency across Member States, we have been mindful not to accept unhelpful and burdensome compliance exercises.
“The main changes, which the Government has consistently supported, are limited to measures aimed at increasing transparency amongst institutional investors and asset managers. The impact of the new requirements is moderated by a ‘comply or explain’ approach. With regards to the transparency measures for proxy advisers, these are less prescriptive than originally envisaged in the Commission proposal and have been generally welcomed by stakeholders.
“In areas such as: facilitation of shareholders’ rights, executive remuneration and related party transactions, the provisional agreement enables the UK to retain its current regime.
“We have also succeeded in ensuring the Directive would not introduce delegated acts. The scope for the Commission to adopt implementing acts is subject to ‘comitology’ procedure, therefore still allowing EU member states representatives to take part in their development. In this particular instance, such acts will also be limited to identifying technical standards, in order to facilitate the transmission of information and exercise of shareholders’ rights.
“In line with previous correspondence with both you and Lord Boswell, I am satisfied that this minimum harmonisation directive leaves Member States appropriate levels of flexibility and will have a low impact on our current corporate governance framework. I attach the latest compromise text for your information.”
Third Report HC 342-iii (2015–16), (9 September 2015); Thirty-seventh Report HC 219-xxxvi (2014–15), (18 March 2015); Thirtieth Report HC 219-xxix (2014–15), (21 January 2015); First Report HC 219-i (2014–15), , (4 June 2014).
79 Directive 2007/36.
80 Intermediaries would be defined as a company resident in the EU which maintains securities accounts for clients.
81 Assets managers are providing portfolio management services to institutional investors.
82 Proxy advisors provide recommendations to shareholders on the exercise of their voting rights.
83 Letter of 14 July 2016.
3 March 2017