How investors are agitating for better governance in Hong Kong

Jul 14, 2022

Efforts are focusing on shareholder resolutions and access to independent directors

How investors are agitating for better governance in Hong Kong

Investors and asset managers in Hong Kong are agitating for greater shareholder powers to influence how listed companies are run, saying there needed to be better communication between boards, management and shareholders.

Despite the current challenges, however, some are positive about the prospects for change.

“I want it to be easier than it is now in Hong Kong to table a shareholder resolution,” Yoo-Kyung Park, Asia head for sustainable investing and governance for APG, told AsianInvestor. “It’s only going to happen if the regulator acts.

“A lot of companies might [fear] direct proxy fights. But if a company is run relatively well, they don’t need to worry. It’s not like we have a lot of time [for this]: we only work on [tabling motions] when there is no other choice.”

Jerry Goh, investment manager for Asian Equities, at abrdn, told AsianInvestor he was positive about the prospects for better engagement between boards and senior management, and investors. “I’m optimistic that we will get there,” he said.

Felix Lam, head of investment stewardship for Asia ex-Japan, at JP Morgan Asset Management pointed to the improving governance of Hong Kong-listed companies in recent years.

“There has been a steady decline in the share of companies with single-gender boards,” he told AsianInvestor. He stressed that challenges around shareholder resolutions were not peculiar to Hong Kong, noting in most Asian countries, the threshold for shareholders to file resolutions was high compared to developed markets.

Only Taiwan, South Korea and China A-share markets had lower barriers for shareholders to file resolutions than Hong Kong, he said.

Susanne Harris, a partner in the Hong Kong office of Mayer Brown, told AsianInvestor that the proclivities of family-owned and -run companies in Hong Kong had shaped both the structure and behaviour of boards, noting that until recently there were no formal requirements of boards in this area.

COMPLY OR EXPLAIN

Since April 2021, the Hong Kong-based Asian Corporate Governance Association (ACGA), has been lobbying the Hong Kong stock exchange, HKEX, to require listed companies to explain what actions they will take to consult shareholders, in cases where 20% or more of shareholder votes are cast against the board recommendation for a resolution.

“Despite shareholder opposition regarding proposed directors, companies still go ahead with [their] appointments,” Jane Moir, research director of ACGA told AsianInvestor. She pointed to an instance last year where 23% of HKEX shareholders voted against the board re-appointment of director Zhang Yichen. “He’s still there,” she said.

“It would be informative for the markets to understand the rationale behind the company’s non-compliance with a particular resolution that has substantial shareholder support,” said Goh, who supports the change.

Ben Colton, global head of asset stewardship at SSGA told AsianInvestor that the tendency of family-owned and -run companies to have concentrated share ownership in Hong Kong means that reaching such a threshold meant such resolutions would often represent views of “the majority of the minority”, making them an especially strong and cohesive message to a company.

“It’s incredibly important. It alerts [the company] to material risks and to opportunities, and helps thinking on overall strategic decisions and risk oversight,” he said.

However, Colton declined to comment on whether the specific rule change proposed by the ACGA would create the progress he was seeking and said SSGA would need to consider specific proscriptions such as new rules designed to achieve change in this area.

SHAREHOLDERS UNAVAILABLE

Park also expressed frustration at the reluctance of independent directors of Hong Kong companies to meet with shareholders.

“In Hong Kong this is very rare. Independent directors are not open to meeting. So instead, I have to rely on [meeting] the investor relations team, the CFO and the CEO.” she said, contrasting this with easily available directors on boards of large companies in South Korea such as Samsung and SK.

“It’s not that the directors don’t want to [meet], it’s the companies that are hesitating to set up a dialogue with investors. They don’t understand why we want to meet the board members.”

“But [the board members] are there to represent us, the shareholders of the companies. Without meeting them we don’t understand how they do this, the quality of the board members, how they engage and meet and so on.”

Lam said he was keen to see improvements in the currently poor access to independent directors of Hong Kong companies.

“Although public companies generally actively engage with investors and minority shareholders, they provide limited access to independent directors,” he said.

“Direct communications with independent directors would help avoid errors or misinterpretation of our messages to the company via investor relations and other company representatives outside of the board. Independent directors have responsibilities and rights to hear the feedback from minority shareholders.”

“We see room for improvement in terms of access to the independent directors of Hong Kong companies. [It] allows investors to better understand the longer-term direction of the board, and shareholders to better administer checks and balances within the board,” said Goh.

This article has been edited to reflect that it is the HKEX that is being lobbied by the ACGA. Ben Colton's quote has also been edited to reflect accurately his point that the SSGA would need to consider specific proscriptions such as new rules designed to achieve change in this area.