A passive investor’s guide to active engagement
CSj talks to Pru Bennett, Head of BlackRock Investment Stewardship for Asia Pacific and a speaker at the HKICS CGC 2016, about her approach to engaging with investee companies in Hong Kong and the region.
Could we start by talking about your background and your role at BlackRock?
‘I am part of BlackRock’s Investment Stewardship team. We have teams in the US, the UK and the Asia Pacific, and I am Head of Asia Pacific, with team members in Sydney, Hong Kong and Japan. Our role is to provide oversight of the corporate governance of the companies we invest in. A lot of BlackRock’s investments are passive, in the sense that they are in indexes or iShares. We are a long-term investor because of the nature of passive investing – selling is not an option.’
While your investments are ‘passive’, are you an ‘active’ investor in the sense of engaging with your investee companies?
‘Very much so. We’ve got a fiduciary duty to our clients to look at the issues on their behalf. We believe that a company that is well governed should have a board comprising competent people with a good mix of skills and experience that can provide the oversight of management and contribute to the long-term sustainable growth of the company. So proxy voting is one of things that we do. We try to vote at all meetings of the companies we have invested in. If we are invested in a company that has governance concerns and performance problems, we have a duty on behalf our clients to do something.’
So is the composition of the board the key information you are looking for when monitoring your investee companies?
‘We look closely at who is on the board. Generally there is not enough information disclosed on directors, such as their background, what skills they bring to the board and the process for selecting independent directors. There is a lack of transparency on those issues in the region. However, we don’t push the independence issue – some of the most competent directors that I have met in Hong Kong are not independent and they are often family members. Some of the most incompetent that I have come across are technically independent. So, for us, the important thing is whether the company has competent directors on the board. When you have a family controlling 30% to 40% of the company there is a strong alignment with their interest because they are long-term shareholders like us, so there should be that strong alignment.’
How do you go about assessing the competence of board members?
‘That comes down to face-to-face meetings. On the other hand, if you pick up an annual report and read the chairman’s statement, I think you can tell if it is written by the marketing department or the chairman. You can learn a lot about a company through its disclosure, particularly about its culture and its attitude to shareholders.’
What is your view of the new HKICS research report on shareholder communications?
‘I think it is a really good start and it would be interesting if there is a follow up in a couple of years so we can see how the issue has shifted. The report raises a big issue and shows the shift in the way things are done in Hong Kong. Ten years ago, listed companies were probably not engaging much with their foreign shareholders, or even their local investors, but there is a realisation now that companies need to engage with them to understand what their views are and to address those views.
When we meet with a company it is very much a two-way street. We go into a meeting with a well-prepared agenda raising any concerns we have, but we wait for the company to respond; we don’t go in and say that you have to do this and that. We don’t take a tick-the-box approach.’
What role do you think company secretaries can play in shareholder communications?
‘We have a lot to do with company secretaries; they are the prime source of contact if there is an issue. In Hong Kong, the role of the company secretary is a statutory role – the Companies Ordinance requires all companies to have a company secretary. So it is very different from, let’s say, an investor relations role.
Moreover, company secretaries have regular communication with the board. Previously, engagement of shareholders tended to be with general management, such as the CFO and CEO, but now that we focus on governance issues it is really the board that we want to talk to. That’s where company secretaries, with their relationship with the board, have an extremely important role as a point of contact for engagement with shareholders. Now how companies set up their company secretary function, versus the investor relations function, varies from company to company. I don’t think there is a one size fits all; it really does depend on the company.’
The report makes the point that shareholder engagement is still seen more as a compliance issue rather than as a strategic advantage – does this tally with your own experience of the market?
‘Yes, and I think corporate governance in Hong Kong is often seen as a compliance issue rather than a strategic issue. This again comes back to getting competent directors on the board with a mix of skills and expertise that matches the company’s strategy and business. That’s what is most important and what helps add value to the company in the longer term, so it is a strategic issue.
If you have a board of nine, having three directors that you can technically call ‘independent’ is a compliance issue; having directors on the board which have been selected through a sound process is a strategic issue. We would like to see a shift towards a recognition that this is about adding value to the company and its long-term growth and prospects, rather than just about ticking some boxes.’
The majority of Hong Kong listed companies are closely held and shareholder engagement looks very different from that perspective; the majority shareholder will tend to be highly engaged with the company. Does the issue then become more about the treatment of minority shareholders?
‘One of the good things about Hong Kong is the fact that, with related-party transactions, minority shareholders have quite significant rights. It is therefore in the interests of the block shareholder to ensure they there is a good relationship between the minority shareholders and the company. The block shareholder can’t vote on related-party transactions and there have been some significant examples of minority shareholders voting down such transactions recently, such as the proposed merger of Cheung Kong Infrastructure Holdings and Power Asset Holdings. So it is really important for that relationship to be there and for the board to be transparent and accountable to their shareholders. Minority shareholders are a great source of capital for companies as they grow and continue to require capital to fund that growth.’
Is the trend in Hong Kong towards better engagement with minority shareholders?
‘At the moment, family-controlled companies can be summarised as having three types of approaches to corporate governance and minority shareholders. The first has no interest in minority shareholders. We often see them having businesses outside the listed company that tend to do better than those inside the listed company. Then there is another group of companies where corporate governance is regarded as a compliance issue, in the way we talked about before. The third type of company sees corporate governance from a strategic perspective, is more transparent and tends to have more competent boards. I would like to see the last group increase in size.’
Are you seeing a trend towards that third type of company?
When I look at most CSR reports, they have pictures of the board with white helmets and orange vests on. There is usually a picture of the chairman handing over a cheque to his favourite charity and pictures of staff at a charity run. That doesn’t convey the message of the company, it is not strategic and it’s not talking about what exposure the company has to environmental and social issues.
However, we have seen changes in behaviour of boards through our engagement. An example of that is a company that had a manufacturing facility in China. We engaged with the company about their biggest risk – which was how they managed their human capital. In the meeting, we discussed what had happened to other companies where press reports about the poor treatment of employees had resulted in the loss of big customers, particularly customers in the US or Europe.
A year later when we met up with them, they had completely changed the way they looked at disclosure. They were more transparent about how they were managing human capital. They had started initiatives like the development of an employee’s opinion survey and things like that. They recognised that human capital is a strategic issue that they needed to report on to their shareholders.’
How important is environmental, social and governance (ESG) information for investors?
‘There is a view in the market that sustainability reports are just an extra report and extra cost. From an investor’s perspective, what we are after is information that shows us that the company understands its exposure to environmental and social issues, and informs us about how those issues are being managed. This information, if it is material, should have already been reported to the board via the risk register; the board should have monthly reports from the risk register. So it is really a case of packaging that information in a way that is suitable for shareholders – it is not additional information.’
Do you support integrated reporting?
‘I am a supporter of integrated reporting, but I think for any company that makes the decision to adopt integrated reporting, it probably has a three to five years transition to get there. Prior to being involved in governance, I used to prepare consolidated accounts and annual reports, and what integrated reporting does is it gets the preparer of the reports to look at reporting from the ‘six capitals’ perspective. I think it will change the mindset of people who have that role and provide more information about the long-term sustainable growth of companies.’
So is it the ‘integrated thinking’ that is the most valuable part of the exercise?
‘That’s a very good way of putting it. It really changes your thought processes on reporting and what you are doing.’
We have discussed companies’ responsibilities to engage shareholders, but what about shareholders’ responsibilities in that dialogue? In particular, what is your view of the SFC’s recently published ‘Principles of Responsible Ownership’?
‘We are very supportive of the SFC initiative. We have a dedicated team for investment stewardship and our operations complies with the SFC’s principles, so we actually haven’t had to change our processes. This is a global team and we have consistent operations throughout the regional teams. We report quarterly on our voting and engagement activities and you can find out about our approach to stewardship in the Investment Stewardship section of our website.’
Corporate governance standards in Hong Kong have generally been regulator-led – do you think investor pressure will play a greater role in the future?
‘Absolutely. An environment that relies on regulation to drive reporting won’t work. Regulation and legislation are very, very important, don’t get me wrong. Having a strong regulator with a focus on enforcement is extremely important in any market, but we want companies that go beyond what the regulations require. In this market there are a couple of big investors that are engaging in getting the message to companies that this is not about compliance, it is about strategy and adding value.’
How do you think the issues we have discussed today will develop over the next 10 to 20 years?
‘I think standards will improve in Hong Kong. As shareholders we raise things in a constructive way, we put our views forward and we do take into account the company’s views in our processes. I think as boards come to understand how and why we use the information, rather than the current view that this is just another report we have to produce, and as they start getting the strategic aspects of this in terms of this being good for the company in the longer term, I think things will change in a positive way.’
Pru Bennett was interviewed by Kieran Colvert, Editor, CSj.
More information on BlackRock’s engagement principles is available on its website: www.blackrock.com.
SIDEBAR: VOTING PRIMER
BlackRock recently issued guidelines setting out its approach to corporate governance and proxy voting issues in Hong Kong. The Corporate governance and proxy voting guidelines for Hong Kong securities will be a useful resource for companies seeking to understand BlackRock’s approach to a range of issues relevant to corporate resolutions. The guidelines set out, for example, the minimum information BlackRock expects to be disclosed when a director is seeking election or re-election. This includes a brief biography detailing the directors’ past roles and experience, details of any current dealings with the company and the company’s assessment of the director’s independence. ‘Where this information is not forthcoming, BlackRock may consider voting against the election/re-election of that director,’ the guidelines state.
The guidelines also raise the issue of directors’ time commitment. BlackRock may vote against the election or re-election of a non-executive director where it believes the individual will not be able to commit an appropriate amount of time to board matters. The guidelines also emphasise the need for listed companies to disclose all material risks relating to environmental and social (E&S) issues and how they are managed. BlackRock expects the E&S disclosures to include, but not be limited to:
- identification of E&S risks specific to the company
- clear outline of board and management responsibilities on E&S issues
- policies and processes to manage E&S risks, as well as an explanation of how they are implemented and monitored
- disclosure of key targets and indicators across the whole company, and
- regular reporting on performance against policies and targets.
‘Where BlackRock has concerns regarding the disclosure and management of E&S issues, we may consider voting against the election/re-election of directors, who are ultimately responsible for such issues,’ the guidelines state.
BlackRock’s ‘Corporate governance and proxy voting guidelines for Hong Kong securities’ is available on the BlackRock website: www.blackrock.com.