Shareholder communications and the company secretary
There is typically an investor relations function dedicated to shareholder communications in listed companies – so where does the company secretary fit in? Do company secretaries have a role to play in shareholder communications and, if so, how can they add most value to companies’ practices and performance in this area?
The fact that investor relations (IR) teams have become a lot more common within listed companies has been a positive development, but company secretaries, even where there is an IR team, have a role to play in shareholder communications.
Firstly, company secretaries need to keep close tabs on shareholder communications issues to fulfil their role as adviser to the board. According to Section E.1 of the Corporate Governance Code, the board should be responsible for maintaining an ongoing dialogue with shareholders. The recent HKICS research report, Shareholder communications for listed issuers – five imperatives to break the monologue, notes that company secretaries are expected to advise boards on governance matters, including the board’s responsibility to maintain an ongoing dialogue with shareholders.
More broadly, communications (whether between the company and shareholders or between management and the board) remain a core part of the company secretarial function. Moreover, many company secretarial tasks (such as, management of the AGM and the annual report process, and maintenance of the company’s share register) mean that the company secretary needs to work closely with the IR team in many different aspects of shareholder communications.
How can the company secretary add value?
Having effective shareholder communications is part of good corporate governance practice, and, as the guardian of good governance within the company, the company secretary should be promoting best practice in this area. The bar has been rising in recent years regarding best practice in shareholder communications. AGMs are, of course, an important opportunity to enhance the relationship and interaction with shareholders, but calendar activities such as AGMs are far from enough these days. Maintaining an effective dialogue and communications with shareholders requires a holistic shareholder communications policy, which guides how different programmes are executed with clear objectives and principles. Institutional investors, in particular, will expect best practice in shareholder engagement to include roadshows, investor conferences, private meetings, tours to company premises and facilities, and constant communications with the company in order to facilitate their analysis of the company’s performance.
Another aspect of best practice is the need for listed companies to make their shareholder communications policies available on their websites (and on the Hong Kong Stock Exchange website), as well as providing feedback channels so that shareholders can contact the company through the company secretary or IR team.
This has been facilitated by electronic communications. Nowadays it is common for listed companies to have a dedicated IR section on their corporate websites, which includes IR contacts, annual reports, stock exchange disclosures, announcements, and even supplementary reports such as CSR, sustainability, etc. Interactive content is also increasingly used, such as slides, webinars, or even live casts or chats, to draw the attention of investors.
In addition to accessing information on the company’s website, shareholders and potential investors now expect the company to respond to their inquiries or requests for information at any time by email, phone or in writing. Therefore, the company secretary and the IR team are expected to answer any enquiry within a certain time-frame. All inquiries, whether answered or not, should also be logged and documented internally.
‘The increased sophistication of shareholders and their demand for more transparency is a result of the more internationalised stock market,’ says Dr Eva Chan FCIS FCS(PE), Head of IR at C C Land Holdings Ltd, who is also a veteran company secretary. ‘Some 20 years ago when I was the CFO of another listed company, the market cap of an average IPO was about HK$1-2 billion. Local retail investors were able to snap up most shares in the public offer tranche.’
Things have changed. Nowadays Hong Kong is regarded by fund managers as an important market in their asset allocation strategy for China and Asia. That compares with years ago when Hong Kong was a relatively insignificant market in some emerging Asia equity funds. ‘As global investors, mutual funds and foreign institutional investors are now heavily involved in Hong Kong’s mega IPOs, a professional IR team is much needed to maintain an effective dialogue and interaction with these discerning investors, while keeping the company’s financial position as transparent as possible.’
Compared with 10 years ago, Dr Chan says that listed companies have devoted more effort and resources to IR in recent years. When she founded the Hong Kong Investor Relations Association in 2008, there were less than 100 listed companies with an independent IR position.
‘Eight years on, I have seen a tremendous change in attitudes towards shareholder communications, in part due to an increased presence of institutional investors, and in part because of improved corporate governance practices,’ Dr Chan says. She observes that companies listed in recent years, including state-owned companies from the Mainland, recognise IR as an important part of their stakeholder management strategy and have therefore formed a separate IR team to handle shareholder communications.
‘After publishing an annual report or making an important announcement, the job of the company secretary may be temporarily over, but it’s just the beginning for the IR team as they will soon handle a huge volume of shareholder inquiries down the line,’ Dr Chan says.
The compliance factor
Another area where the company secretarial role overlaps with shareholder communications is in the area of regulatory compliance, in particular the need to, as soon as reasonable, disclose information which could affect the company’s share price in compliance with Hong Kong’s inside information regime, subject only to limited safe harbours. The principle to be maintained is that disclosures cannot give undue advantage to a particular individual or group of individuals, and extra care must be taken to handle ‘inside information’ in accordance with Part XIVA of the Securities and Futures Ordinance (SFO).
Two HKICS guidance notes (published in March and June 2009) address this challenge in some detail, explaining how to conduct meetings with analysts, how to respond to questions from analysts about future earnings, and reacting to analysts’ draft reports, correcting any forecasts they might have made about the company and its prospects. Part ll of the HKICS guidance notes provides a series of short case studies of potentially price-sensitive situations, the way they were handled, and the reaction of the stock exchange and the market, albeit that these now need to be read in light of the new disclosure regime under Part XIVA of the SFO and supplemented by the SFC’s related guideline.
The guidance notes make it clear that provision of information to all shareholders must be consistent. This is as important for companies as it is shareholders, points out Stella Lo FCIS FCS, Group Company Secretary, Guoco Group, who also oversees the group’s IR function. Consistency of disclosures ensures that the information given to any party is in line with the information released by the company.
‘As a good corporate governance practice, we strive to be as transparent as possible in our financial disclosures. In fact, most fund managers and analysts are already well informed before they come to us. Our role is to draw their attention to the relevant facts and figures in the published reports and information, thereby helping them to get a clearer picture of the company’s financial situation. This is to facilitate their analysis of the company’s financial performance more accurately without compromising the principle of equal communication,’ Ms Lo says.
Looking ahead, it is likely that disclosure of non-financial information will increasingly be a compliance issue for companies. Ms Lo believes that it makes sense for listed companies to share non-financial information, for example relating to the operating environment; market factors affecting the results; a narrative explanation of business performance; corporate policy; sustainability actions; etc. Better information is essential to enhance investors’ understanding and helps maintain their confidence in the company.
‘Apart from reporting past financial information, investors increasingly demand companies to provide more information on future business strategy and development plans, and to link to KPIs wherever possible. This enables shareholders to have a more realistic expectation of the company’s business performance and in turn helps stabilise the company’s stock price,’ Ms Lo says.
In addition to institutional investors, effective communications with retail investors should not be overlooked, but the way to interact with them can be, and should be, carried out differently. A more user-friendly, visually appealing corporate website with all the information they require is the basic requirement.
‘The AGM is also an important occasion to meet and chat with retail investors. Bigger blue-chip companies also organise activities, like visits to their facilities for loyal retail investors. There could also be other social gatherings, meetings or informal opportunities to keep an ongoing relationship with small investors to ensure a thorough understanding of the company and its business strategies,’ Ms Lo notes. ‘This demonstrates management’s efforts to maintain an open dialogue with the investing public, and would be effective in winning shareholders’ trust and long-term support.’
As well as informing investors about developments in the company, the company secretary also needs to inform management about investors, including providing the investor profile (current and potential); shareholding distribution; as well as their expectations, opinions and concerns, etc. Such information is essential for a company to formulate an appropriate shareholder communications policy, and to carry out appropriate actions to communicate and engage with their shareholders,’ Ms Lo says.
When the company secretary hears some false information being spread among the investing public, the issue has to be escalated to the board for discussion and a decision on whether it is necessary to issue a clarification or announcement to debunk the rumours that may result in unusual trading movements.
Know your shareholders
One of the more startling revelations of the recent Shareholder communications research report from HKICS was that a third of respondent companies to the HKICS survey did not know who their shareholders were and did not regularly or routinely monitor their shareholder base.
It is important for any listed company to identify its shareholders regularly as part of good corporate governance and investor relations best practice. Such intelligence can help companies prioritise resources and create a strategic IR programme to assist in the building of strong investor relationships, says Vivek Aranha, CEO at Orient Capital (Asia).
Mr Aranha also mentions that listed companies in Hong Kong can undertake a process to identify their investors accurately, comprehensively and in a timely manner. ‘This is achieved by utilising the provisions of Section 329 of the SFO. While this process may not seem straightforward if a company undertakes it themselves, using the expertise of a specialist ownership analytics provider to identify and monitor their shareholders on an ongoing basis is easy and very cost effective’, says Mr Aranha.
He adds that Orient Capital has developed an investor relations database, which contains global institutional investors’ contacts, their profiles and coverage. This could be a cost-effective channel for listed companies to broadcast their announcements or messages to exactly the right group of institutional shareholders and potential investors.
The HKICS guidance notes – ‘Investor Relations Part I’ (published in March 2009) and ‘Investor Relations Part II’ (published in June 2009) – are available from the publications section of the Institute’s website: www.hkics.org.hk.