Undue short-term pressure on corporations from the financial sector - PowerPoint Presentation

1. Undue short-term pressure on corporations from the financial sectorSession 4: Institutional Investors’ Engagement16/09/2019| ParisESMA30-22-723

2. AgendaContextEvidence from literature review and outreachPreliminary ESMA staff analysisQuestions for participants216/09/2019| Paris

3. ContextEffective and sustainable shareholder engagement is one of the cornerstones of the corporate governance model of listed companies. Greater involvement of shareholders and especially institutional investors in corporate governance is also one of the levers that may help improve the financial and non-financial performance of companies, including as regards environmental, social and governance factors.The revised Shareholder Rights Directive (SRDII) provides strengthened tools to encourage long-term shareholder engagement, spanning from the possibility to vote on remuneration and related party transactions to smoother shareholder identification, communication and voting. The relevant regulatory framework for institutional investors engagement also includes other pieces of law such as the Takeover Bid Directive (TBD).ESMA looked for evidence of existing short-term behaviours in this area and whether any improvements to the regulatory regime can be conceived.316/09/2019| Paris

4. Evidence from literature review and outreach (1 of 3)Literature reviewEmpirical evidence finds that shareholder engagement is increasingly widespreadTrends in terms of how engagement is done:AGM vs. behind the scenesBilateral vs. collectiveEngagement topics Use of litigation Free riding problems remain, with large active funds generally engaging more, bearing the relevant costs of intervention, whereas the potential benefits are spread among all shareholders416/09/2019| Paris

5. Evidence from literature review and outreach (2 of 3)Public consultationOverall, respondents indicated a predominantly active investment strategy (82%) and a tendency to invest with a long-term horizon (71%). In addition, more than 50% of respondents mentioned that they integrate either to a great or to a large extent long-term value considerations for the purpose of setting their investment strategy and engagement policy.As to how investors engage, around a third of respondents stated that they vote at the annual general shareholder meeting and broadly 25% of respondents mentioned that they use private engagement and / or collective engagement strategies. ESG / sustainability related factors and the remuneration of directors were seen as the main topics for engagement, followed by board appointments (including board diversity, independency and tenure) and decisions on pay-out policy. More than 80% of respondents mentioned that they either do not use proxy advisors for the purpose of deciding how to vote in order to mitigate potential short-term pressures or that they rely on their input only to a small or some extent.516/09/2019| Paris

6. Evidence from literature review and outreach (3 of 3)As engagement is costly, collective engagement was seen as an effective solution but regulatory risks coming from cooperation were also highlighted (such as those under the Takeover Bids Directive and MAR). Complex voting, especially at cross-border level, was still seen as an obstacle to engagement.Less than 30% of respondents believed that the revised Shareholder Rights Directive (SRDII) is going to increase the extent to which institutional investors take into account long-term value considerations for the purpose of setting its investment strategy and engagement policy.Input from ESMA’s SMSGWhile the effect of the SRDII remains to be seen, increased disclosure of institutional investors’ investment strategy and its alignment with their liabilities is an important first step.Further steps to avoid proxy advisors’ conflicts of interest should be considered. 616/09/2019| Paris

7. Preliminary ESMA staff analysisFacilitating shareholders’ monitoring role - and in particular that of institutional investors which may have a long-term horizon and the resources to afford engagement activities - can help mitigating undue short-termism in financial markets.Engagement increasingly address sustainability related topics.The SRDII provides for a number of new tools to facilitate engagement and make it more effective. As such, there might be merit in observing its impact before considering any potential need for revision.However ESMA consultation shows that:The SRDII is seen generally as a first step and further steps might be needed;Other parts of the regulatory framework are also relevant to facilitate engagement, including e.g. TBD or MAR and national CG provisions.716/09/2019| Paris

8. Questions for participantsWhat are your views on the actual ability of institutional investors’ engagement to impact on the investee company in order to mitigate any potential sources of undue short-termism?How do you think the regulatory framework could be improved to facilitate engagement, taking into consideration the very recent adoption of the SRDII? Do you believe that engagement on sustainability-related topics should be facilitated? If yes how?816/09/2019| Paris

9. DisclaimerPlease note that this presentation has been prepared for the purpose of the ESMA workshop on short-termism. The content of the presentation is based on current staff considerations. It has not been formally approved by ESMA’s Chair or Board of Supervisors and does not reflect official ESMA positions.916/09/2019| Paris

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