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The EU Shareholders’ Rights Directive – disclosures are coming, are you ready?

An update halfway through the journey and investor views

Financial, Executive and Professional Risks (FINEX)

By Ralph Lange and Sven Slavenburg | August 13, 2018

The EU Shareholders’ Rights Directive (SRD) has been in force since June 2017– this article summarises what’s next, what’s next and what companies need to know.

The EU Shareholders’ Rights Directive (SRD) has been in force for about a year now, and member countries have another year to adapt it to local law (if they have not already done so) (Figure 1).

Figure 1. SRD timeline
SRD timeline

The SRD formally introduced a European-wide “say on pay” as well as a number of prescriptive disclosure requirements summarised in our earlier article.

The SRD provides some flexibility, and different countries will implement it differently. Indeed, the SRD is not always fully explicit, providing member states with choices in a number of areas. In some instances, a consistent approach would be beneficial and the Guidance from the European Commission on standardised presentation of remuneration reports should provide an easier read across between companies across countries. Figure 2 highlights some of the areas where the directive provides flexibility or is not specific. The guidance will likely address a number of these areas for the remuneration report.

Figure 2. SRD areas that offer flexibility/lack specificity
Icon of government building

Remuneration Policy

Policy: Pay elements:
  • Frequency of voting
  • Binding or advisory
  • How should benefits be valued?
  • Should the relative weight be shown for different scenarios?
Exceptional derogations: New joiners:
  • Some countries allow generic derogations: will that remain possible?
  • The directive does not explicitly require inclusion of policy for new joiners
Service contracts: Broader context:
  • Indicate main terms of employment contracts: how detailed; what about treatment of share awards on departure?
  • Explain how employees' pay and employment conditions were taken into account: how to go beyond boiler plate statements?
Icon of a report

Remuneration Report

Total remuneration: New and former directors:
  • How is remuneration defined? Will it include value of shares: Awarded (e.g., accounting value)? Vested during the year? To vest in respect of the year (including impact of share price change and dividend payment)?
  • How will benefits be valued, notably pensions?
  • What remuneration should be shown for former directors?
  • Details of vested shares at time of vesting or disclosure at time of termination?
Broader context: Variable pay:
  • Annual change in directors' remuneration; average other employee remuneration: percent changes or absolute amounts? How is remuneration defined for this purpose? Same as for total remuneration above? All employees or subset?
  • Company performance over the last 5 years: which measure(s)? TSR, profit, flexibility?
  • How performance criteria were applied: statement of principles or disclosure of targets, achievements and outcomes per performance measure? Carve out of commercially sensitive information?
  • The directive does not explicitly refer to loss of office payments and treatment of outstanding share awards on leaving

The investor view

In addition to introducing say on pay across Europe, the SRD also includes new requirements for asset managers and proxy advisors, the combination of these will trigger a review of shareholders and proxy voting guidelines and engagement approaches. To gather early insights, we reached out to a number of investors across Europe to get their views on the SRD’s likely impact, particularly with respect to a focus and expectations on an improved level of disclosure.

As may be expected, views differ. For example, the SRD requirements are seen as too complex and too far-reaching in some jurisdictions that currently have a relatively low level of disclosure. For instance, in Sweden, large shareholders typically hold positions on remuneration committees through nominated directors. As they can directly shape the pay practice, they do not see the need to increase the influence of external stakeholders. However, many other investors are seeking expanded disclosure, in line with the U.K., where regulation similar to the SRD was introduced in 2013, and where we observed that external stakeholders are increasingly focusing on pay levels, pay-for-performance alignment and pay design.

In particular, investors regard detailed disclosure on performance measures as positive, as it allows them to assess the relationship between pay and performance. They are already focused on that topic in current say-on-pay votes, although companies in most jurisdictions are currently not obliged to disclose performance measures and targets. The U.K. and France have very detailed levels of disclosure, with disclosure of performance measures and target ranges. We expect that investors holding shares in companies across multiple countries (as well as large proxy voting agencies) will likely push for increased disclosure in other countries. Consultation with shareholders and proxy voting agencies and clear rationale regarding the choice of pay structure, performance measures and justification of payouts will become increasingly important.

Investors have different views on the design of compensation schemes, although there are some commonalities:

  • Focus on sustainable long-term performance
  • Support the company strategy
  • Limit discretion on ad hoc arrangements whilst using discretion to amend outcome where warranted
  • Simple
  • Clear and transparent disclosure

SRD preparation starts now

The first SRD disclosures will apply to 2019 pay arrangements, so companies should start planning now. Figure 3 outlines key steps:

Figure 3. Step-by-step SRD preparation
Step-by-step SRD preparation
  • Review all elements of pay, service contracts, share ownership and holding requirements, clawback provisions against market and best practices
  • Review variable pay performance measures
  • Assess potential outcomes under different performance scenarios
  • Review target setting approach
  • Understand views of shareholders and proxy advisors and assess appetite for change
  • Review EU remuneration disclosure guidance
  • Make any changes to the directors' remuneration where appropriate
  • Draft the remuneration policy in compliance with the new guidelines
  • Draft the remuneration report in accordance with the new guidelines
  • Consult with the key shareholders on the remuneration policy and remuneration report
  • Assess suitability of early disclosure
  • Preparation of the AGM documentation for the remuneration policy vote
  • Maintain enagement with shareholders and proxy advisors
  • AGM at 2020 vote on remuneration policy
  • Preparation of the 2020 remuneration report in the new format

How Willis Towers Watson can help

Willis Towers Watson provides a depth of resources and expertise available from the world’s largest executive compensation consulting practice. We have consultants on the ground in countries across Europe who can guide you through the impact of the SRD. Our experts are well-connected to each other, and in particular, have deep expertise working with clients in similar projects in the U.K. and U.S. We can help you through all stages of the SRD, including preparation, implementation and ongoing support. 

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