The Austrian National Council passed the Shareholders' Rights Amendment Act (Aktionärsrechts-Änderungsgesetz - AktRÄG 2019) on July 2nd, 2019. After approval of the Federal Council on July 11th, 2019, its effective date has been set retroactively to June 10th, 2019 – the implementation deadline set by the EU.

Ms. Siepmann, Dr. Lünstroth, what will be the main impact of the Shareholders' Rights Amendment Act on listed companies in Austria?

Regine Siepmann: The Shareholders' Rights Amendment Act enacts the second EU Shareholder Rights Directive in Austrian national legislation. It intends to encourage long-term shareholder en-gagement. The main issues addressed include new rules on transactions with related and affiliated third parties and compensation for management and supervisory boards, improved identification of shareholders and greater involvement in decision-making by them.
Dr. Pia Lünstroth: Say on pay is new to Austrian companies, and board compensation will be a standing item on AGM (Annual General Meeting) agendas going forward. In fact, there will be two new mandatory items on the agenda: approval of the remuneration policy and adoption of the remuneration report.

But both of these resolutions are advisory and not binding...

Regine Siepmann: Still, this new legislation rings in a new era for Austrian corporate governance, and in particular for remuneration governance. Until now, the shareholders’ ability to get involved in the decision-making process was quite limited. At most, they were able to vote on supervisory board compensation or the transfer of real shares as part of pay packages. That is going to change.
Dr. Pia Lünstroth: Board compensation is going to become a standing item on the AGM agenda. It doesn’t matter whether it’s advisory or binding, what is important here is that no company and no supervisory board can wriggle out of the debate and must respond to shareholders’ feedback.

Remuneration policy is a new concept. What does that mean in practice?

Dr. Pia Lünstroth: Section 78 of the Stock Corporation Act (AktG) sets out a system of manage-ment and supervisory board compensation in a way that can be generally understood. The objective of board compensation is to promote sound strategy and the long-term stability of a company. The remuneration policy must be presented to the AGM in form of a proposal.
Regine Siepmann: The board compensation set by the supervisory board must be conform to the remuneration policy proposed to the AGM. This does not necessarily mean that it has been ap-proved! According to Section 78c AktG, the remuneration report then explains in detail how exactly that remuneration policy has been implemented in the relevant fiscal year. That report needs to be debated and adopted by the AGM.

What do you regard as the biggest change to current practice?

Regine Siepmann: Say on pay will significantly increase the influence of institutional investors and proxy firms on these resolutions. It puts companies’ reporting practice under pressure and current market practice will change profoundly as a result.

Austria already had the Business Enterprise Code and the Austrian Corporate Governance Code ...

Regine Siepmann: ... and with those regulations, requirements for individual disclosure of board compensation were already in place. But that has not yet led to a transparent and consistent report-ing practice. The new Stock Corporation Act is also quite vague about this.

Why are these regulations not sufficient?

Dr. Pia Lünstroth: Investors expect to be able to figure out the pay for performance relation of the pay package. Current reporting practice makes that virtually impossible, which will increase the de-mand for a more standardized and transparent practice. This currently varies greatly and the com-paratively low level of detail makes an external assessment of remuneration systems and amounts difficult.

If we look at the German neighbors and the criticism raised of remuneration schemes and/or reporting there, we can see parallels to current market practice in Austria.

Regine Siepmann: Some DAX companies have had fairly painful experiences from which their Aus-trian counterparts can learn a lot. The points of criticism include insufficient alignment of remunera-tion systems to shareholders’ interests, specifically a lack of ambitious goals, relative comparison with competitors, established equity culture, and of clawback/malus rules.
Dr. Pia Lünstroth: There were also complaints of performance periods being too short and a lack of transparency when it comes to these issues. And then there is the question of discretionary remu-neration elements. Many Anglo-Saxon investors are either unfamiliar with them or whole-heartedly dislike them on principle.

Your studies have shown that the investors themselves have very wide-ranging ideas about remuneration schemes. Is it actually possible to achieve high levels of consensus in the AGMs?

Regine Siepmann: Some of the demands investors make are indeed contradictory. But we can gen-erally say that the level of consensus with regard to board compensation largely depends on the degree of transparency of the remuneration report, and the involvement of institutional investors and proxy firms in the decision-making process – especially if it occurs prior to the last minute before the AGM.
Dr. Pia Lünstroth: Voting results of 95% and higher, which we were seeing in Germany only a few years ago, are no longer realistic. Even results of more than 50% do not translate to acceptance of the remuneration policy. Investors and proxy firms consider results under the 80% mark as a nudge to the company to revise their remuneration policy. What that means in practice is that although a slim majority may suffice formally, the policy actually needs to be completely revised and not just reviewed, as the legislation demands.

What does the timeline look like? When do the new regulations come into force?

Dr. Pia Lünstroth: The first time the remuneration policy has to be debated and voted on by the AGM will be in the fiscal year that starts after the June 10th, 2019 effective date of the Act, i.e. in 2020. After that, the remuneration policy needs to be on the AGM agenda in every fourth fiscal year, and whenever there is a material change. The remuneration report, which is based on the remunera-tion policy put to the vote, will then be prepared and voted on for the first time in the following year, i.e. in 2021 for the fiscal year 2020.
Regine Siepmann: These time frames mean that there is hardly any leeway. There is no time to hesitate. Supervisory boards need to have this item on the agenda at their first opportunity and do a lot of homework so that they are ready to start a conversation with all stakeholders, and especially the major investors, as early as possible.

Thank you very much for this interview.