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Governance is one of the three core pillars of the Environmental, Social and Governance (ESG) framework.
At a company level, corporate governance is the collection of mechanisms, processes and relations by which corporations are controlled and operated. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the Board of Directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and include the rules and procedures for making decisions in corporate affairs. Corporate governance is necessary because of the possibility of conflicts of interest between stakeholders, primarily between shareholders and upper management or among shareholders.
Institutional investors or shareholders, although one step removed from the day to day governance of a company, do have a responsibility to scrutinise the activities of the management of the company around this and other related ESG factors. Exercise of that responsibility can come through ensuring that they vote at important shareholder meetings, etc. In the context of securities lending, it is important that any investor has a clear policy around governance and in particular recalling securities to vote at AGM and other EGM meetings.
The Shareholders Rights Directive II (2017/828/EC) is an amendment to SRD I (2007/36/EC) that entered into force in 2007 post the financial crisis. Both SRD I and SRD II together form part of the European Commission’s Corporate Governance Action Plan 2012, to promote longevity and stability and to prevent short termism. The directive amendment intends to improve shareholders ability to exercise their rights across multiple markets whilst utilising technology to enhance communication between firms, intermediaries and the shareholders. The directive amendment will be transitioned into EU Member States national law.
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