Shareholder Rights Directive could have 'unintended consequences'

Forcing pension funds to disclose the main elements of all investment management agreements (IMAs) with asset managers could have unintended consequences that hinder long-term investing, PensionsEurope has warned.

The industry association recommended the European Commission’s revised Shareholder Rights Directive require the disclosure of investment beliefs and how these are implemented through a fund’s investment strategy, rather than details of IMAs.

In a position paper on the Directive, the association suggested that the requirement to identify all of a listed company’s shareholders should be dropped, limiting it to institutions that hold at least 0.5% of share capital.

It said the 0.5% threshold was one already employed in the Netherlands and allowed companies to identify shareholders that owned a “relevant” stake in the firm.

PensionsEurope also raised concerns about engagement policies proposed in the draft Directive, saying the requirement to explain voting behaviour would increase administration costs.

Returning to the issue of investment management agreements, it said: “We consider it inappropriate to require disclosure of specific contractual arrangements between two parties, especially when, for example, the fund in which the institutional investor has invested is not public.”

Additionally, the position paper pointed out that information about an asset manager’s strategy could be commercially sensitive, and argued that it would push pension funds to invest only in vehicles with more easily justifiable fees, rather than ones offering the best fee structure.

“Thus, requiring institutional investors to disclose publicly the main elements of the arrangement with the asset manager would in our view not be the right way of achieving long-term investment, instead giving undue prominence to only a narrow element of the strategy, with potential unintended consequences,” it said.

However, the association did praise a number of the proposals put forward by the Commission.

It said it was “positive” to introduce a vote on remuneration, which, according to the initial proposal, would be binding, and that it would encourage dialogue between shareholders and companies.

It also welcomed the greater focus on transparency, and said further protection for minority shareholders – through the related-party transaction requirements that will require a vote on certain deals – was a positive step.

The association did raise concerns that the Directive was too prescriptive, echoing concerns previously voiced by the International Corporate Governance Network.