Shareholder communications: strategy and practice
The practice of shareholder communications, which is an important part of the board secretary function, has been evolving rapidly in recent years. Li Zhidong FCIS FCS, Company Secretary of CSSC Offshore & Marine Engineering (Group) Company Ltd, shares some best practice recommendations based on his experience working for a dual-listed A+H share company.
There have been many recent developments with significant implications for the strategy and practice of shareholder communications. With the continuous development of corporate governance practice globally, increasing numbers of shareholders are asking for extraordinary general meetings to be held. They consider that annual general meetings do not allow enough time for them to express their concerns. Moreover, the latest studies on shareholder engagement show that about 87% of securities issuers, 70% of asset managers and 62% of asset owners attend at least one shareholder communication activity every year.
The legislative and regulatory environment relating to shareholder communications has also been evolving rapidly in recent years. The Dodd-Frank Act, promulgated in the US in 2010, the Guidance on the Strategic Report, published in the UK in 2014, and the Principles of Responsible Ownership, issued in Hong Kong in 2016, all aim to enhance transparency and strengthen investor protection and shareholder communications. There have also been new provisions related to shareholder communications in the Hong Kong Corporate Governance Code (the Code). These include requirements for the chairman to ensure that “appropriate steps are taken to provide effective communication with shareholders” and for the board to be responsible for maintaining an ongoing dialogue with shareholders, and in particular to use general meetings to communicate with them and encourage their participation. The Code also requires the board to establish a shareholders’ communication policy and review it on a regular basis to ensure its effectiveness.
As a company listed for over 20 years, CSSC Offshore & Marine Engineering (Group) Company Ltd (COMEC) has practical experience in shareholder communications. COMEC – previously known as Guangzhou Shipyard International Company Ltd (GSI) – was listed in 1993 on the Shanghai Stock Exchange and the Hong Kong Stock Exchange and was the first shipbuilding company in China to go public. It is an A+H military concept stock. In 2014 and 2015, GSI acquired CSSC Guangzhou Longxue Shipbuilding Company Ltd, CSSC Huangpu Wenchong Shipbuilding Company Ltd and Yangzhou Kejin Shipyard Co Ltd, and completed the integration of the core shipbuilding resources of its controlling shareholder, China State Shipbuilding Corporation (CSSC), in South China. It was renamed COMEC in May 2015.
Over the years COMEC has won many awards for its corporate governance and investor relations performance. This article shares some best practice recommendations based on the author’s experiences of working for COMEC.
Have a proactive shareholder communication strategy
Listed companies need to proactively engage and communicate with shareholders and investors. Disclosure of corporate information should be equitable, fair and open, complemented by the confidentiality system of the company. This approach has helped COMEC to raise the market value of the company, maintaining and enhancing the value of the assets of all shareholders, including the state-owned shareholder.
In practice, the positive attitude of management and the company spokesperson and the importance they attach to shareholders are of the utmost importance. No matter whether the company is making or losing money, the attitude of management determines the overall level of trust of shareholders in the company.
Hence the management team of the company, including the directors, general manager, chief accountant, company secretary and securities affairs representative, should attach great importance to shareholder affairs. They should personally participate in the various shareholder communication activities, answering questions patiently, and shareholders should be able to direct their enquiries to the appropriate person at any time.
Know your shareholders
1. Maintaining separate shareholder registers in Mainland China and Hong Kong. As an A+H share listed company, COMEC has to maintain separate registers of shareholders in Shanghai and Hong Kong for the purpose of monitoring the shareholder structure. Shanghai adopts a real name registration system, which means that the company can get information on its shareholders directly. In Hong Kong, some shares are held by nominees such as Hong Kong Securities Clearing Company Ltd. The company therefore has to contact nominee companies from time to time to obtain accurate information on beneficial shareholders for the purpose of distributing annual reports, circulars and dividends.
2. Daily administration of shareholder registers. COMEC engages dedicated personnel to attend to the administration of its shareholder registers and filing-related matters, including the maintenance and updating of the shareholder registers. Upon listing in 1993, the company maintained a register in hard copy format. With the development of new storage media, magnetic disks, compact disks and hard disks have been used to maintain the shareholder registers to facilitate shareholders’ enquiries on their own shareholding. COMEC takes care to protect the personal data of shareholders and prevent any negative impact of information leakage on shareholders.
3. Half-monthly analysis of shareholder registers. COMEC has put in place a mechanism for analysing the shareholder registers every half month. Data on the top 10 shareholders, changes in shareholding and recent changes in share prices are analysed, so that changes in shareholding structure are closely monitored and relevant information is reported to the board of directors and the management in a timely manner.
Maintain channels of communication
1. Daily communication. COMEC communicates with shareholders through results press conferences, letters, reception of investors, sharing sessions, and participation in strategy seminars of securities dealers, etc. Depending on circumstances, COMEC also communicates with shareholders and potential shareholders through telephone conferences, online Q&As and email communications in order to spread timely messages on the operations and developments of the company and build a positive image of the company in the capital market.
2. Communication in respect of capital operations. In 2015, COMEC completed a major restructuring of its assets and acquired CSSC Huangpu Wenchong Shipbuilding Company Ltd through the issue of shares and payment of cash. During the capital operation, COMEC communicated with shareholders through roadshows and reverse roadshows; press conferences for financial reporters; active participation in analyst forums; one-on-one or one-on-many sessions with institutional investors; and Q&As on online platforms. COMEC secured the positive support of Institutional Shareholder Services (ISS), and the capital operation was completed smoothly.
ISS works in the interest of minority shareholders, including institutional and individual investors. Transactions connected with majority shareholders, deposits with finance companies and dilution of shareholders’ rights are of particular concern to ISS. Through targeted briefing sessions, COMEC convinced ISS that the capital operation would enhance the interests of minority shareholders, securing positive reports by ISS on the transactions.
The difference in the preferences of holders of A+H shares adds to the difficulties in shareholder communications. For example, holders of A shares tend to look for generous bonus shares and share placements and frequent capital operations, while holders of H shares are more concerned with dividend payments and whether capital operations would enhance earnings. In view of these differences, COMEC has to adopt different strategies. For example, COMEC has to hold more frequent results press conferences in Hong Kong.
Balance communication and confidentiality
In preparing materials for shareholder communications, COMEC emphasises the proactive sharing of information while strictly adhering to the requirements of the state regarding confidentiality. COMEC produces a corporate video to promote investors’ understanding of the company; publishes regular reports to disseminate timely information on the operations and developments of the company; issues circulars on general meetings to invite shareholders to participate in important decisions; and regularly updates investor Q&As and actively analyses issues of concern to shareholders, passing on important information on industry background and outlook, cost structure of products, dividend policy, development strategy and future trends in capital operation.
As a large manufacturer of military products with operations worldwide, COMEC attaches great importance to shareholder communications. All relevant parties in the company, from the chairman of the board to staff responsible for shareholder matters, are involved in shareholder communications, as this is a crucial factor for the long-term success of a listed company. Effective practices of shareholder communications are an important component of good corporate governance. Shareholder engagement and shareholder suggestions are positive factors that can improve the governance and the management of the company. Proper handling of shareholder communications by the management of a listed company adds to the market value of the company.
For listed companies, shareholder communications is both a science and an art. To evolve from one-way communication to two-way communication, the concerted efforts of the listed company, its shareholders and the regulators are necessary. Promoting shareholder communications is not only a compliance matter but also a commitment and duty to the market.
Li Zhidong FCIS FCS, Company Secretary
CSSC Offshore & Marine Engineering (Group) Company Ltd
2. 资本运作时期沟通形式。中船防务2015年完成重大资产重组，以发行股票及支付现金的形式收购了中船黄埔文冲船舶有限公司。资本运作期间，公司通过多次路演及反向路演、召开财经记者招待会、积极参与分析员会议、开展机构投资者一对一或一对多、组织网上平台交流问答等形式进行股东沟通，同时争取到了Institutional Shareholder Services (ISS)的正面支持，使公司资本运作顺利完成。