Demystifying shareholder engagement
Christine Chow, Associate Director, Hermes EOS, Hermes Investment Management, answers questions on shareholder engagement raised by attendees at the recent HKICS Corporate Governance Conference 2016.
At the 10th biennial Corporate Governance Conference (CGC 2016) hosted by The Hong Kong Institute of Chartered Secretaries (HKICS) in September 2016, a number of questions were posted to panel speakers on shareholder engagement. As one of those panel speakers, I am glad to have been offered an opportunity to ‘demystify’ shareholder engagement. The purpose of this article is to share my answers to some of the questions raised at the CGC 2016 with the readers of CSj.
How does Hermes adjust yourself between the ideal stage you want the company to achieve and the never-ending stage the company can achieve? Is it a better solution to push the regulators for a better standardised framework than to push companies?
‘May I ask if any of you in the audience enjoy playing music or participate in sports training? A good golf practice in the morning perhaps, or on the weekend? [About half of the audience raised their hands]. At Hermes, we do not believe that there is an ideal stage of a company and we do not expect companies to fit into any particular ‘ideal’ form of governance. I asked if you like music or sports because I wanted to highlight the point that there is no ideal form but only principles in what we do, in anything we do, as in any practices that aim to improve skills and understanding.
Companies have different shareholding structures, and different markets and sectors that they operate in. What matters is what works, and that we want to understand why it works. We are always trying to improve ourselves – as individuals and as teams, are we not? The perception of never-ending demand, if considered through a different lens, provides insights into the upcoming trends of stakeholder interests. For some companies that I engage with, we discuss issues on cybersecurity, digital solutions, access to finance and information, as ways to encourage an integrated approach towards sustainable value creation. If you ask them, they see us as a free resource for information and advice.
You might argue that many global investors and western asset owners are accustomed to a particular type of governance, which might be the reason why you think there is an “ideal” type of company. It is precisely this potential misconception which makes shareholder communications and engagement important in Asia, including Hong Kong, where there are many family-controlled and state-controlled companies that seem to deviate from the ‘widely held institutional’ ownership model. The HKICS shareholder communications survey report (see end note) has made a case for board-level engagement and dialogue. It is a way to make ourselves better understood – and when I say ourselves, I mean global investors as well as companies. Global investors have much to learn about the different family-business culture. Many of them have dealt with European family businesses, but they are different too. What we seek is the opportunity to have a dialogue so we can better understand each other.
On the matter of whether it is better to engage with regulators for a standardised framework – I agree with you that it is an important pillar in engagement. In fact, both compliance and proactivity allow us to differentiate the better managed companies from others. We do have regular conversations with the regulators – both the Securities and Futures Commission (SFC) and the Stock Exchange – on investor concerns and global ESG (environmental, social and governance) issues. Most recently, we have been discussing matters such as capital efficiency, directors’ remuneration, the definition of independence, human and labour rights practices and supply chain management. It is an ongoing process. Our objective on public policy engagement is to support the regulators in improving the quality of the funding platform.’
Do institutional investors care about wealth/income disparity? If so, what do they want investee companies to do besides making charitable donations?
‘As Dr Kelvin Wong, Executive Director and Deputy Managing Director, COSCO SHIPPING Ports Ltd [also a panellist at the CGC 2016], articulated very well in his speech at this corporate governance conference, investors encourage the integration of material ESG issues into the core business model rather than CSR (corporate social responsibility) as a standalone effort. I will give you an example. An Asian insurance company initially developed a health insurance product bundled with gym membership and discounts on health food as a CSR initiative. Over time, they realised that the product enabled them to gain a better understanding of the lifestyle of their customers, and therefore to tailor-make more suitable individual policies. The product is now a mainstream business offering. I understand that in other markets, such as in South Africa, these products are also popular. Global investors appreciate the innovative thinking that goes into sustainable and responsible product offering.
Charitable donations is a discretionary effort for companies to establish their “licence to operate” within a community, over and beyond that objective, shareholders should have the discretion to decide which organisation to support.’
In some markets, institutional investors who collaborate on engagement are deterred by the accusation of ‘acting in concert’. What is your view?
‘In 2013, the European Securities and Markets Authority (ESMA) published a statement which clarifies the extent to which investors may cooperate on corporate governance issues without being regarded as “acting in concert” and therefore running the risk of triggering an obligation to make a mandatory offer under the Takeover Directive. In Japan and Korea, the matter is currently being discussed by regulators and investors, especially under the Japan Stewardship Code and the draft Korean Stewardship Code.
In Hong Kong, the Takeovers Code provides that shareholders collectively voting together on a particular resolution would not normally lead to an offer obligation although that circumstance may be taken into account as an indication that the shareholders are acting in concert. The SFC has published a Practice Note (PN21) to provide further information on this matter.
In markets where there isn’t an explicit list of tasks that are considered acceptable, investors tend to follow the “white list” put forward by ESMA:
- entering into discussions with each other about possible matters to be raised with the company’s board
- making representations to the company’s board about company policies, practices or particular actions
- other than in relation to board appointments, exercising shareholders’ statutory rights in relation to general meetings, for example the right to call a general meeting, adding items to the agenda and tabling draft resolutions, and
- other than in relation to board appointments, and insofar as such a resolution is provided for under national company law, agreeing to vote the same way on a resolution put to a general meeting, for example to approve/reject a
- proposal relating to directors’ remuneration or rejecting a related-party transaction.
These investors must, however, be able to defend that they have no intention of acquiring or exercising control over the company, otherwise they could be considered as acting in concert.’
What should companies be doing to enhance communications with shareholders and understand shareholders’ needs?
‘Review your shareholder base and try to identify who the ultimate asset owners are – beyond their appointed investment managers – so that you have a complete understanding of who you should be engaging with. Many pension funds have engagement representatives. Hermes’ engagement team – Hermes Equity Ownership Services – is one example. We speak on behalf of long-term investors and asset owners who have entrusted us to engage with companies on material ESG issues that have an impact on long-term shareholder value creation. Our engagement programme, the themes we engage on – from climate change, human and labour rights practices, accounting and tax, to cybersecurity, waste and pollution and shareholder rights protection – are themes developed based on intensive feedback and guidance from long-term asset owners.
Associate Director, Hermes EOS, Hermes Investment Management
The HKICS research report ‘Shareholder Communications for Listed Issuers – Five Imperatives to Break the Monologue’ is available on the HKICS website: www.hkics.org.hk