When Harmonization is not Enough: Shareholder Stewardship in the European Union

Abstract

On 10 June 2019 the transposition and implementation deadline for the shareholder engagement rules imposed upon institutional investors and asset managers by the revised Shareholder Rights Directive (SRD II) was expired. This article carries out an original account of the rationale, the dynamics and the evolution of this EU-driven policy aiming to promote long-term institutional shareholder engagement within (or in the absence of) nationally embedded frameworks. We place the SRD II shareholder engagement rules within what we see as a multi-layered regulatory landscape consisted in some Member States of soft-law stewardship codes or similar principles, and we find – perhaps surprising – that the SRD II stewardship-related provisions were transposed in a literal and minimalistic fashion without any customization to divergent national specifications and despite the fact that the SRD II is only a minimum harmonization directive. We search for explanations for this transposition pattern by pointing to three key issues: the policy and institutional misfit between the harmonized rules and national regimes, the lack of strong market demand for shareholder stewardship, and the better fitness of soft, flexible and mostly bottom-up norms – rather than (semi)hard top-down rules – in inculcating good shareholder stewardship practices. Against this background of minimalist intervention (both at the EU and national levels), we find that pre-SRD II soft stewardship codes have had two key positive effects. First, they increased market actors’ familiarity and preparedness with the SRD II transposed rules, advancing thereby the likelihood of effective compliance with good shareholder stewardship standards whilst maintaining national idiosyncrasies. Second, soft-law stewardship codes, despite their own weaknesses, are vital mechanisms of innovative norm-generation and can expand or adjust the SRD II stewardship-related rules to provide tailored shareholder stewardship frameworks and serve a signalling function to key market actors. From this it follows that the uniform, but minimalistic, transposition of the SRD II stewardship-related rules across the EU, although welcome in shaping the minimum standards, needs to be supported by tailored, soft-law stewardship codes or principles. Such a symbiosis of the harmonized SRD II shareholder engagement rules and supporting soft-law stewardship developments will allow the tailoring of shareholder stewardship norms to local conditions and the provision of guidance and meaning to the SRD II rules, while a minimum harmonization of shareholder stewardship is already secured.

Keywords: Revised Shareholder Rights Directive, Institutional Investors, Shareholder Engagement, Shareholder Stewardship, Minimum Harmonization, Soft Law

JEL Classification: K20