Ms Sabha Green:

I am grateful for the opportunity to update the committee on the progress that has been made on this draft directive since we furnished the Oireachtas scrutiny notes several months ago. As the committee will be aware, the proposal was adopted by the Commission last April and it went straight away to the European Council and the European Parliament at the same time.

On the Council side, there have been three meetings of the working party, which is the technical level, and matters are still at an early stage, with member states looking for clarification. The plan from the Presidency's point of view is to get member states to agree their general approach by the Competitiveness Council, which takes place on 4 December. At the same time, the European Parliament has selected its Committee on Legal Affairs to take the lead on the file but, as far as I could tell from the Internet yesterday, the rapporteur has not yet been appointed, probably for obvious reasons. Three other committees will be asked to give their opinions as part of the preparation of the final report, namely, the Committees on Economic and Monetary Affairs, the Internal Market and Consumer Protection, and Civil Liberties, Justice and Home Affairs.

Meanwhile, back at home, our company law section in the Department held a public consultation during May and June. We received only nine submissions, which we intend to publish as they came in on the Department's website in the coming week or so. There was a slight delay, partly because I have been out of the office but also because, although I made it very clear that my intention was to publish them, I asked people to let me know if there was anything confidential in them and there is a certain amount of checking whether certain items can be published. As far as I am concerned, there is nothing confidential. The Department is assessing all those submissions with a view to refining our negotiating position to be settled with the Minister.
I will recall the main features of the proposed directive. The main aim is to encourage shareholders to engage more with the companies they own in order that they and those companies take a longer-term view of success and build sustainable businesses. The proposal does this in two ways in particular. First, it gives the shareholders new rights of oversight of company business. Second, it obliges others in the investment chain to provide new types of information to the shareholders. Once adopted, the directive will affect several groups of people, namely, asset managers; institutional investors, which are not, in this case, banks but life assurance companies and pension funds; investment intermediaries; companies that are listed on the main market, in our case Dublin; proxy advisers; and shareholders.
The proposal will introduce three new categories of provisions, namely, new rights for shareholders to oversee remuneration and related party transactions; provisions on disclosure that will oblige institutional investors, asset managers and proxy advisers to provide more information to companies, each other, shareholders and, in some cases, the public; and procedures to improve the identification of shareholders by the companies they own and to facilitate the exercise by those shareholders of their rights in the companies.
The new rights for shareholders relate to oversight of the remuneration policy and of related party transactions. On pay, the text provides that shareholders will have the right to vote on the company's remuneration policy for directors at least every three years. The directive lists the main elements that should be included in the policy, which include maximum levels of pay for directors and the main contractual terms. While the policy is binding on the company, there is provision for the company to exceed those maximums, for example if there is either prior or post approval from the shareholders. The company will also have to prepare an annual remuneration report for the shareholders, which will have to include information on the total remuneration paid over the past year to the directors, how those packages were made up and how they fit in with the overall three-year policy. The report is submitted to the AGM and shareholders vote on it. If they reject it, the company must explain in the remuneration report of the following year whether - and, if so, how - the rejecting vote was taken into account.
Alongside the so-called say on pay provisions, the directive will oblige companies to report to their shareholders on related party transactions that represent more than 1% of the company's assets. For larger transactions, where they represent more than 5% of the company's assets, the company must submit the transaction to the shareholders for a vote. In both cases, the company must also arrange for an independent third party to assess whether the transaction is on market terms and confirm that it is fair and reasonable from the perspective of the shareholders, including minority shareholders.
The draft directive will provide that institutional investors and asset managers must develop and publish shareholder engagement policies. They will then have to report annually on the implementation of the policies. It is open to institutional investors and asset managers to fulfil this provision on a so-called comply or explain basis. Institutional investors will have other new disclosure obligations. They will be required to make public how their equity investment strategy contributes to the medium to long-term performance of their assets and they will have to publish certain elements of their mandates to their asset managers. Asset managers will have to disclose certain information to the institutional investor. At the same time, proxy advisers will be required to take measures to ensure their voting recommendations are accurate and reliable; to disclose information on the preparation of those recommendations; and to identify and disclose to their clients and the company concerned any actual or potential conflict of interest.
Shareholder engagement is a two-way street between the shareholders and the companies. The Commission has proposed measures to help companies identify and better engage with their shareholders. There will be obligations on investment intermediaries to provide names and contact details of shareholders to a company following a request from the company. The investment intermediaries will also have a role in exchanging other information between the company and its shareholders and in facilitating shareholders in exercising their rights.
Negotiations within the Council in Brussels have begun and we have had public consultation here, and I will summarise some of the issues that have arisen. In Brussels, there is general overall support for the objective of this proposal, but there is disagreement on the means to achieve it. While most member states have supported the draft directive's provisions for binding measures, some would prefer to introduce so-called soft law, such as a non-binding recommendation. There have been calls for more flexibility in the proposal to allow companies and others more freedom to devise policies as they see fit.
Another argument has been the concern that some of the new provisions could introduce unnecessary administrative burdens. If so, it could put EU companies at a competitive disadvantage vis-à-vistheir non-EU competitors. It could also motivate companies to de-list from stock exchanges, which would mean we would have even less information on them. Another concern has been about how the provisions on shareholder identification and exchanges of information will work in practice. There is a possibility of having several intermediaries in a single investment chain, some of which may be based outside the EU and, therefore, not covered by the directive. What will happen in the event of such a gap in the chain is a concern.
The submissions to the Department reflected general support for the objectives of the proposed directive and most of the comments received related to the practical implementation of those objectives. Regarding the identification of shareholders and facilitation of their rights, it is probable that the directive here could reduce the current powers of companies under Irish law to identify their shareholders as, for example, it introduces intermediaries into the process and places time limits on the period for which the information may be retained by companies. This is a little different from current Irish law and we must examine it as we do not want a diminution of our protections. Another issue is that the requirement on companies to confirm to shareholders that they have received votes could impose significant costs on the issuers of the shares as it does not take into account the reality of the voting process. For example, one submission pointed out that given that shareholders are free to change their vote at any time up to the date of the relevant meeting, one might need to confirm to a shareholder several times that one had received his or her vote, which could be costly.
Regarding engagement policies for institutional investors and asset managers, there was a concern that, by encouraging and emphasising long-term investment, the legislation runs the risk of forgetting the importance of short-term strategy. Companies will have legitimate needs for funding in the short term. The requirements for disclosure on asset managers may be onerous and costly for smaller management firms. Asking asset managers to disclose how their strategy contributes to the medium to long-term performance of an investor's assets may not be achievable as that investor may have more than one asset manager, each of whom has only part of the picture.
On the transparency of proxy advisers, one submission suggested that it would be difficult for a proxy adviser to "guarantee" that its voting recommendation is accurate and reliable, which is a high standard to require. The shareholder oversight of remuneration provision was welcomed generally. There was a view that the text could be clearer on the fact that it is ultimately a role for the board and remuneration committee rather than shareholders to set and agree directors' remuneration. There was a call for more clarity on how a company can go beyond the remuneration policy and the consequences if the shareholders do not subsequently approve that particular pay package.

It was said that the directive was silent on that situation.

Third, some expressed a concern for the provision to explain a ratio. The directive speaks on remuneration policy of giving a ratio between the average employee salary and the pay packages of the directors. Some people consider that would be a meaningless figure. If a company has bases in many different EU member states, it will have different levels of pay and that does not give a proper feel for what is the average pay. There was also a concern that making this publicly available could engender a reputational risk. Finally, there was a concern on the remuneration that the status of existing contracts would not be recognised and there was a need to grandfather those arrangements.

The final group of submissions related to shareholder oversight of related party transactions. There was a worry that it would be impossible for an independent third party to make the type of assessment that the text requires here. As an alternative, therefore, it was suggested that the requirement should be just to disclose details of the transactions rather than to give any opinion on its reasonableness. Second, it was suggested that there may be a conflict with existing Irish law, which sets a lower threshold for transactions that need shareholder approval. Again, that is something that needs further assessment.

The Department is assessing all these submissions and we will more than likely have to go back to some of the organisations for further information or clarity. Some of the submissions threw out issues and did not give us a steer as to what might be a suitable solution or whether they were serious problems. All the views will be considered in the refining of the Irish position over the coming weeks. We will post them on our website and we can let the committee know immediately when that happens.

The Italian Presidency is looking towards getting a general approach at the Competitiveness Council in December. The Presidency is about to schedule another technical working group later this month - there is no date yet - and another in September.