Gilly Lord Head of Regulatory Affairs, PwC UK

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1 Memorandum

2 shareholders and the responsibilities they Gilly Lord Head of Regulatory Affairs, PwC UK Ms Lord said that the purpose of an audit is to give shareholders an opinion on the truth and fairness of a set of financial statements. Shareholders should therefore be incredibly important, but Ms Lord often observes that little time is devoted to talking to shareholders. A standard audit report is usually submitted to the shareholders with no opportunity for them to comment. She called for every member of the capital markets ecosystem to play their full role: not just equity shareholders but employees and local communities: It is important that everyone optimises their role in this ecosystem so that the capital marketswork in the best possible way. This involves exploring the rightsof take, as well as what sort ofoversight and governance they should be maintaining and how might they do that. Ms Lord believes that consideration needs to be given to larger shareholders as well as smaller ones, and she recognises that the old adage of maximising shareholder value may sometimes harm other elements in the ecosystem. She asked how we can balance the pursuit of shareholder value with responsible corporate behaviour. Ms Lord mentioned PwC s latest global investor survey, which compares the views of shareholders with those of CEOs contained in the 19th CEO Annual survey. Whilst there were some differences there was an alignment between CEO and investor concerns. Memorandum QED Conference on The role of shareholders 2

3 worked intensively on an impact Jeroen Hooijer Acting Director, Dir A Civil Justice, DG JUST, European Commission Mr Hooijer gave an update of the status of the Shareholder Rights Directive, which he pointed out is a concrete follow-up to the financial crisis. He said that its underlying objective is to increase transparency, in particular in the investment chain, and to set out a better framework for greater engagement between companies and their shareholders. The Directive is currently subject to trialogs in the Council, Commission and Parliament. Last year the Parliament introduced an amendment on the important issue of country-bycountry reporting and the Commission assessment on this issue, and came up with a proposal to modify the Accounting Directive. Mr Hooijer hopes this will lead to a decoupling of the Shareholder Rights Directive and the country-bycountry reporting discussions. He said a lot of technical work has been done on the Shareholder Rights Directive covering the scope, definition, identification of shareholders, etc., but political issues still need to be addressed. A key area is to address greater oversight on directors pay, including whether a company can make exceptions to its remuneration policy, how can certain safeguards be built in, and should there be a policy indication of the maximum amounts that can be paid out. The chapter on engagement policy is also important and is open to further discussions. It concerns the requirement for institutional investors and asset managers to develop a policy on shareholder engagement to enable investments to be better monitored. Memorandum QED Conference on The role of shareholders 3

4 more transparent and to show where Graham Precey Head of CSR and Ethics, Legal & General Mr Precey said that there should be meaningful dialogue with companies on anything that impacts long-term financial returns, and that creating value is achieved by considering all risks and opportunities. Mr Precey spoke at length about the leading approach L&G took as a large global asset manager and investor both directly and on behalf of our customers. He described barcode consumerism the ability to use a device to scan a financial service and discover a company s tax and remuneration policies, corporate governance, voting behaviour etc. Another trend is the Bloomberg Effect which makes company structures balance sheets are invested in financial institutions. Real-time monitoring of company performance is also increasing, such as Sigwatch, with the data feeding into investment systems. Unfortunately, corporate crises are still getting missed, such as Deepwater Horizon and Libor. He also pointed out that investors are increasingly looking at management culture: an organisation s purpose, strategy and behavioural boundaries, and the data that proves these are working. Mr Precey said that financial institutions need to tell people what they stand for, and present their opinions to consumers about key matters in the economy, and there are various ways to do this, including social media. 4 Memorandum QED Conference on The role of shareholders

5 voting their shares cross-border, with Guillaume Prache Managing Director, Better Finance For All Mr Prache pointed out that the individual share ownership of EU listed companies equity has significantly decreased over the last 40 years. However, he believes that individual shareholders are important: they are typically long-term investors in listed companies in Europe, they are less risk averse than institutional investors, and they improve market liquidity. According to Mr Prache, major barriers to shareholder engagement in the EU single market exist: Cross-border voting within the EU is the most antiquated, fragmented and ineffective process in the financial services industry. For example, shareholders are often deprived from often no provision of necessary voting information and materials in time, and often have to pay a fee. Moreover, too many shareholders are deprived of their voting rights as their holdings are lodged in nominee or omnibus accounts. He believes that shareholder associations in the EU are not sufficiently recognised and supported as an effective way to facilitate small shareholder engagement. Mr Prache would like to see the Shareholder Rights Directive eliminating the barriers to shareholder engagement. He presented key areas for improvement: cost-free voting to all EU individual shareholders; no discrimination in exercising shareholders rights across borders; voting rights to beneficial owners for the shares in Nominee Accounts; introduction of a harmonised record date throughout Europe; confirmation of ownership at record date as sufficient proof to attend and vote at a general meeting; and the ability of shareholder associations to easily collect and exercise proxy votes. 5 Memorandum QED Conference on The role of shareholders

6 to reflect on the growing relevance of Olivier Boutellis-Taft Chief Executive, FEE Federation of European Accountants Mr Boutellis-Taft said that information (narrative as well as numbers) is critical to enable shareholders to play a full role in a company, and in this respect corporate reporting is essential and needs to evolve. Commenting on a project of the Federation of European accountants, he noted that technology has a key role to play here, and space needs to be given to promote innovation in reporting. At the same time, this information needs to be credible and reliable. Investors are therefore looking for more information from auditors. One welcome development is the enhancement of the audit report. With this growing demand for information, Mr Boutellis-Taft considers there is a need Environment Social and Governance (ESG) information and in particular how it can be assured to leverage the addedvalue for business and investors of this type of reporting. Strategic and long-term information, financial and narrative reporting, and ESG information, all contribute to giving a better understanding of where a company stands and where it is heading to. He noted the added-value of integrated reporting from this perspective that he saw as the most promising innovation in this field. It should therefore be encouraged. With big data and enhanced data analytics, the ecosystem of the audit is changing too. Regulation should avoid stifling innovation. 6 Memorandum QED Conference on The role of shareholders

7 He pointed out that investors are much more diverse than in the past. However, it s still a very fragmented community and for everybody it is a constituency that is very difficult to engage with. He personally believes that the Board should remain in its role, to focus on strategy, to provide advice to managers and to fulfil its overseeing role. It should not be seen as a regulatory watchdog just in charge of compliance. Mr Boutellis-Taft believes the audit committee is playing a critical role as a kind of hub between management, the auditor and investors. It is essential to review carefully the information provided to investors, the assurance provided by the auditor and his or her selection. Panel discussion A delegate asked if there is still a role for short-termism, and if so, should there be a cap on how much of a company s stake is geared towards short-term investment? Mr Hooijer said that there should be a role for short-termism, but does not see how a cap could help as it could lead to undesired effects. He suggested that incentives for more long termism could be the way forward. Mr Boutellis-Taft cast doubt on the significance of a strict division between short- and long-term, because for something to happen in the long-term means starting today. He believes that the collective responsibility is to make sure there are as few conflicts as possible between the short- and the long-term. In this respect he said that integrated reporting is a promising way forward to integrate the short- with the long-term. Mr Precey pointed out that ShareAction does outstanding work to take ESG issues into account regarding responsible investment that moves away from short-term profit as the only definition of value. 7 Memorandum QED Conference on The role of shareholders

8 The moderator pointed out that the Shareholder Rights Directive focuses on institutional shareholders, and asked if there is a need to provide balance by taking greater consideration of the view of retail shareholders? Mr Prache thinks the Commission is not doing enough, because he believes a vibrant community of direct, individual investors in the economy is essential, and needs to be protected. He remarked that equity ownership needs to be put back on the table. Mr Precey agrees that enough is not being done for retail shareholders. At the same time, he sees a decline in the number of consumers doing more than simply making a complaint and actually deciding to get involved, go to the AGM and influence the Board. The question was raised as to whether a different legal model should be explored, which better acknowledges the needs of other, smaller stakeholders. Mr Hooijer said that the EC has tried twice to set up a new legal entity for SMEs but each time other problems came up, for instance related to the risk of misuse for reasons of tax-evasion, terrorist financing ormoneylaundering. 8 Memorandum QED Conference on The role of shareholders

9 He does still see the need for a new legal entity for SME s but realises how difficult this is becoming. At the same time, he believes that the Shareholder Rights Directive and other instruments can be used to give shareholders and stakeholders greater influence on a company s overall direction. Mr Boutellis- Taft added that he would like to see more interaction and dialogue between shareholders and stakeholders; it may be more productive to think about incentivising Boards to focus on the longterm rather than shareholders; stakeholders also call for more reliable andunderstandable information. Mr Prache remarked that when itcomes to small investors and shareholders, their rights particularly voting need to be protected and favoured, and there is a great need to harmonise between Member States and lower cross-border regulatory barriers. 9 Memorandum QED Conference on The role of shareholders