Responsible ownership: Hong Kong in the global context
With the Securities and Futures Commission recently publishing proposals designed to encourage proactive engagement between investors and publicly listed companies in Hong Kong, Lucy Newcombe, Global Corporate Communications Director at Computershare, looks at the current engagement situation between companies and shareholders, both in Hong Kong and elsewhere around the globe.
Q: What type of companies garner lots of unsolicited engagement from their retail shareholders?
A: Football clubs! With match-day passion surging through their veins, it’s little wonder that shareholding fans are among those that most eagerly engage with the company they have invested in. Whether it’s voting, asking questions at the AGM (as likely to be about half-time substitutions as the finances) or requesting information; retail shareholders in football clubs are absolutely dedicated to the success of their investment, both on and off the pitch.
Outside football, that level of engagement is very rare, but in recent years there has been a growing awareness of the benefits of shareholder engagement globally, as well as a growing commitment by regulators to promote better dialogue between investors and companies. In line with this trend, the Securities and Futures Commission (SFC) in Hong Kong published in March this year its draft investor stewardship principles (Principles of Responsible Ownership – available on the SFC website: www.sfc.hk).
Fundamentally, the SFC wants to encourage responsible investing, whether by institutions holding many shares, often on behalf of funds or companies; or by retail shareholders with small or substantial shareholdings. The SFC consultation on the principles, which concludes this month, states that it believes the engagement of shareholders, irrespective of the size of their shareholdings, will have an impact on the governance of investee companies. Hong Kong’s proposals are different to other stewardship codes and principles in place around the globe, which exclusively apply to institutional investors, as illustrated in the map.
Despite being nominally inclusive of retail investors, however, most of the SFC’s proposed requirements are clearly targeted at, and are applicable to, institutional investors. The SFC’s key proposed requirements for investors are:
1. to establish and report to their stakeholders their policies for discharging their ownership responsibilities
2. to monitor and engage with their investee companies
3. to establish clear policies on when to escalate their engagement activities
4. to have clear policies on voting
5. to be willing to act collectively with other investors when appropriate
6. to report to their stakeholders on how they have discharged their ownership responsibilities, and
7. when investing on behalf of clients, to have policies on managing conflicts of interests.
What currently happens elsewhere?
The UK has had a comprehensively documented approach to best practice investor behaviour longer than many other countries – and with its Stewardship Code, Information Rights for Beneficial Owners and the pending EU Shareholder Rights Directive (which will cover the whole of the European Union) it also has the most structure in place. However, the Stewardship Code only applies to institutional investors – and with both attendance and voting at UK AGMs declining over the past decade, retail investor participation is on the wane. There are likely to be many drivers for this, including the feeling that their vote is insignificant in the wider scheme of things. However, many retail investors also don’t have the capacity to vote because they hold their shares through nominees; who may well not provide a voting service at all or may charge for doing so – a price that some investors are not willing to bear.
The UK Shareholders Association (UKSA), the leading independent organisation representing the interests of private shareholders in the UK, is currently undertaking a drive on rights for beneficial owners. ‘How such investors are treated depends on each nominee’s terms of business, which may mean they are unable to do things such as attend an AGM or vote; and new conditions may be imposed leaving such investors trapped and at financial risk if the nominee fails,’ the UKSA says.
Institutional investors in the UK are, however, well versed in the benefits of engaging – particularly those who are curating investments on behalf of others. Frank Curtiss, Head of Corporate Governance at Railpen Investments (RPMI) and immediate past Vice-President of the Institute of Chartered Secretaries and Administrators (ICSA) in the UK, and his team go to significant lengths to engage with the companies they’re invested in on behalf of their 350,000 beneficiaries.
‘We’re firm supporters of the UK’s Stewardship Code and were one of the first to sign up back in 2010. We saw it as an important way forward for investors and companies to engage with and understand each other,’ Mr Curtiss says. ‘We also have good links with companies outside of the UK. Good engagement doesn’t stop at Dover – even without a Stewardship Code in place currently, Hong Kong is probably already a good example of that.’
Railpen are in their investments for the long term – they’re working on behalf of beneficiaries who will need the proceeds decades hence. This means that they want to see sustained, strong, longterm performance from companies, not quick results this week or month. Their 10 investment beliefs (available on the RPMI website: www.rpmi.co.uk, see under ‘Services/ Investments’) include the view that it is right to ‘manage environmental, social and governance issues as they can have an impact on the long-term performance of investments’ and to that end, Frank’s team have cultivated excellent relationships with the companies RPMI is invested in.
‘The recent support from companies such as BP (and hopefully Royal Dutch Shell) in committing to report on climate change and how they are dealing with it comes as a result of engagement between investors and companies. There was a time a few years ago where companies would have flatly opposed this kind of proposal – and yet now, boards are deciding they will support this type of resolution. Both BP and Shell are taking concerns about climate change seriously, for instance. There was a 98% vote in favour of the resolution on this at BP’s recent AGM. It’s an example of the positive benefit that can come to both investor and company as a result of effective engagement and in the long term, we believe these benefits are worthwhile for our beneficiaries,’ says Mr Curtiss.
Well prior to the notion of stewardship codes, companies in the Netherlands were alive to the power of the investor. Way back in the 1980s, companies such as Aegon, Ahold, Unilever and Heineken had already realised that engaging with their investors both locally and overseas was the right strategy to take.
‘We aim to have a loyal base of long-term investors, to have a fair value of Unilever shares and as little share price volatility as possible,’ Ansgar Luetke-Schelhowe, Director, Investor Relations at Unilever, comments. ‘It’s important that markets understand Unilever, our strategy, our management, our performance. If investors understand the company and are happy with the performance they tend to be more loyal and as a consequence we get less share price volatility. If you engage over a long period of time, your chances of being understood are much higher. If you only do it around a big event such as the AGM it’s much more difficult to reach out to a broad base of investors and get your story understood.’
Mr Luetke-Schelhowe also stresses that it should be a two-way conversation and he has the following advice for investors looking to engage with companies. ‘Being clear on your expectations around engagement makes it easier for us to deliver what you’re looking for. Investors want different types of relationship – some have a big holding but they don’t want much corporate access to investor relations or management. Others think it’s useful to have a bit more access – telling us what you want makes it more likely you’ll get what you need.’
Since 2003, the Netherlands’ corporate governance code has included a section on ‘Responsibility of Shareholders’ which outlines a list of items for institutional investors and also has a paragraph which refers to shareholders in general. This brought the premise of engagement direct to the door of investors as well as companies for the first time.
While Germany doesn’t have documented requirements for investors to behave responsibly, neither does it seem to suffer from a lack of retail shareholder engagement in the way that many other countries seem to. This is dramatically illustrated by the photo above, taken at Deutsche Bank’s 2014 AGM. Thousands of retail investors faithfully show up each year and engage the company with hundreds of questions, which can take all day to answer effectively. Institutional investors usually prefer to engage with companies all year round. Shareholders are genuinely interested in the machinations of a listed entity and are happy to play their part in its governance.
The aim of Japan’s Stewardship Code (finalised in February 2014) is to promote sustainable growth of companies through investment and dialogue. Going forward, institutional investors are expected to incorporate the purpose of the Code into their activities and take proactive measures to further enhance dialogue with their investee companies.
The UK’s RPMI was one of the first to sign up to the code. ‘Japan is a market I’m greatly interested in,’ says Frank Curtiss. ‘At the time we signed, we were the only pension fund to sign up to both the UK and Japanese codes and were one of the first two overseas pension funds to sign up to the Japanese Code, which is very similar to the UK Code. There’s nothing in it, however, about collective consultation and it’s a comply or explain model imposed by the Japanese government. We use a local engagement service in Tokyo to talk to companies there – increasingly though, companies are coming to London and visiting us. I see 30-40 Japanese companies a year.’
An observer in the Japanese market commented on the effect of the Code as follows. ‘Since full implementation of the Stewardship Code was made [only] last August, it is still premature to judge the outcome. As of end of February this year, 184 institutional investors and related parties had signed up to the Stewardship Code, including most of the major Japanese institutional investors. I hear many investors are seriously trying to enhance their engagement activities with listed companies. I expect that constructive dialogue between listed companies and institutional investors will contribute to enhance mid- to long-term corporate value of listed companies, and also bring fruitful results for the institutional investors.’
Many markets are forging ahead with variations on the UK’s stewardship guidelines, putting pressure on institutional investors to engage; in turn there is growing pushback from the institutions who want to be able to receive confirmation that their vote has been received by an issuer and recorded into the final vote tally. The EU Shareholder Rights Directive is looking to mandate this across all EU markets. In April 2015, a pilot was run between the Netherlands and UK for a small number of issuers. The US and Spain have also been involved in trials. A discussion paper on vote confirmation can be found online at: cpu.vg/i2s72.
Another approach to encouraging responsible stewardship can be seen in the French market where shareholders who have been registered for more than two years are automatically granted double voting rights unless two-thirds of a company’s investors opt out. Italy recently introduced a law allowing shareholders in the Italian market to also access double voting rights after a period of ownership, as long as there has been affirmative shareholder agreement to introduce the benefit.
The double voting rights approach remains controversial, however. It was harnessed to significant effect by entrepreneur Vincent Bolloré at Vivendi’s annual meeting in April when he used double-voting rights to tighten his grip on the group. The French government recently increased its stake in Renault to 20% in order to prevent the car-maker from using the ‘two-thirds’ clause to opt out of a double-voting scheme. The International Corporate Governance Network and several large institutional investors are known to be against this type of scheme as they don’t believe it works for a broad spectrum of investor types, all of whom have different timescales and priorities in terms of growth and who they believe deserve equal treatment.
Closer to home – can Hong Kong’s retail dragon be woken?
With average voting levels at AGMs declining year on year in Hong Kong and elsewhere around the world, it’s hard to see retail investors being suddenly reinvigorated via a stewardship code into diligently reviewing a company’s practices and responsibly engaging with management. Computershare asked 261 retail investors visiting its Wanchai office during one week in early April whether they planned to vote during this year’s AGM season, either in person or online. Of course, those attending the office must have a propensity to be active in relation to their shares – however, 70.5% of the investors surveyed said they would not vote in this year’s AGM season.
David Webb, Founder of Webb-site.com (http://webb-site.com) and Hong Kong’s best-known activist investor, devotes much of his time to advocating solutions for better corporate and economic governance in Hong Kong. In 2009, six years after he started a campaign to require one-share-one-vote poll voting at AGMs instead of a show of hands, the Listing Rules were amended to make this mandatory. Webb is dismissive of the SFC’s proposed principles.
‘It’s ironic that the SFC is asking retail investors to become more active in the companies they’re invested in when the regulator has refused to require intermediaries – brokers and banks – to seek voting instructions from the retail shareholders for whom they act as custodians. If intermediaries are not required to seek voting instructions then retail investors are largely shut out of the system. This means that the turnout rate at AGMs is low and that pretty bad proposals get passed easily because management has friendly or family shareholders hidden in the public float. The SFC could solve the engagement issue at a stroke by requiring intermediaries to seek retail shareholders’ voting instructions. It’s a bit rich asking retail shareholders to get more active when they have so little power,’ Mr Webb says.
He adds however that, in the absence of requirements being imposed on intermediaries, there is more that companies can do to help retail shareholders get engaged. ‘Live web casts where questions can be asked online and which are then archived so investors can review them would be a good start. Making sure that media are invited to observe and report on the meetings instead of being shut out would also make things more transparent for the retail investor.’
So, while the SFC’s proposals seem to be a step in the right direction for institutional investors, much as they have been for other countries that have already introduced similar stewardship principles, the same cannot be said for the effect that the proposals will have on the ability or inclination of retail shareholders to participate more effectively in the governance process.
Director, Global Corporate Communications, Computershare
The SFC’s ‘Principles of Responsible Ownership’ – available on the SFC website: www.sfc.hk – were reviewed in the April edition of CSj.
SIDEBAR: Principles of Responsible Regulation
David Webb, Founder of Webb-site.com, recently published his submission to the SFC’s Consultation Paper on the Principles of Responsible Ownership on his website. He points out that minority shareholders in Hong Kong wishing to engage with investee companies face significant obstacles. More effective than a set of responsible ownership principles, Mr Webb argues, would be the removal of those obstacles. His submission calls on the SFC, government and Hong Kong Exchanges and Clearing to adopt the six ‘Principles of Responsible Regulation’ set out below.
1. Independent directors should be elected by independent shareholders; any shareholder or the board can nominate candidates, but controlling shareholders must abstain from voting.
2. Investors’ rights to information should be addressed by requiring three quarterly sets of full but unaudited financial statements within 45 days of the quarterend and one annual audited set within 90 days of the year-end; and by requiring full disclosure of the identities of counterparties to notifiable transactions, option grants and placements of shares or convertible securities.
3. Investors’ ownership rights should be protected from dilution by reducing the general mandate’s maximum size to 5% per year at a maximum discount of 5%.
4. Voting should be facilitated by requiring all regulated intermediaries who hold shares for clients to seek their voting instructions for each shareholder meeting.
5. Investors’ access to justice and legal remedies should be facilitated by the introduction of class action rights and the legalisation of champerty and maintenance and contingent legal fees.
6. A safe harbour in the Takeover Code should be created for mutually independent shareholders to act together to change a board when such intervention is needed.
More information is available at: http://webb-site.com, see ‘Principles of Responsible Regulation’ (26 May 2015).