CSj looks at the key conference conclusions relating to shareholders, stakeholders and the latest corporate governance issues facing Mainland China.

Part one of this review focused on the governance players internal to the company – directors and managers, but one of the most noticeable trends over the last decade has been the extent to which players outside the company have been able to assert their legitimate interests in governance outcomes. This second part of the review will focus on the key conference conclusions relating to external shareholders and stakeholders.

In addition, the structure of this year’s CGC departed from the format adopted in previous years with the addition of a second half-day of discussions (this slot previously comprised site visits). The second day of the conference was devoted to corporate governance issues in Mainland China, and the complex interplay of factors between the Mainland and Hong Kong. This review will conclude with a look at the forum’s insights in these areas.

1. Shareholders

As mentioned above, external shareholders have become much more active players in the corporate governance arena in Hong Kong over the last decade. The forum looked at what influence, for example, the increasing presence of institutional investors is having on the Hong Kong market. These investors tend to have a long-term approach to their investments and they also tend to have the resources to be able to engage with investee companies on governance issues.

Speaker Pru Bennett, Head of BlackRock Investment Stewardship for Asia Pacific, pointed out that active engagement with investee companies is a fiduciary duty to an institutional investor’s clients (see the interview with Ms Bennett in this month’s In Profile on pages 28–32).

The SFC recently published its ‘Principles of Responsible Ownership’ which seeks to promote active stewardship by investors in Hong Kong. Speaker Michael Duignan, Senior Director, Corporate Finance Division, Securities and Futures Commission (SFC), noted that some people have dubbed the principles an ‘activist shareholder charter’. ‘The seven principles are actually seven basic and sensible things all investors should be doing,’ he countered.

He added that shareholder engagement also makes a lot of sense for companies. At an AGM shareholders are given a binary vote – yes or no – but that is the worst time to find out that your investors are going to vote no. Companies need to develop a relationship with investors before it gets to that point. ‘If you are only reaching out to them during a crisis, that is too late,’ he said.

Nevertheless, the trend towards more active shareholder engagement with investee companies has not always been welcomed by companies – indeed, they sometimes see active investors as a potential threat rather than an ally. Speaker Cas Sydorowitz, CEO, Georgeson Corporate Advisory Europe, pointed out that active investors fulfill an important governance role as defenders of shareholder value.

He also looked at some of the issues investors are most concerned about in Hong Kong. In particular for example, there has been a high percentage of no votes among institutional investors in Hong Kong relating to director elections and re-elections. Investors often vote these resolutions down due to inadequate disclosure about the director candidates. Mr Sydorowitz therefore reiterated Michael Duignan’s point that companies need to get their message across to shareholders before the AGM if they want to ensure a minimum of resolutions voted down. ‘Manage your shareholder engagement, don’t leave it to chance,’
he said.

2. Stakeholders

As noted above, companies have had to become a lot more inclusive of stakeholder concerns over the last decade and session four looked at the governance role of these ‘noisy neighbours’. Speaker David Graham, Chief Regulatory Officer and Head of Listing, Hong Kong Exchanges and Clearing, looked at the benefits of environmental, social and governance (ESG) reporting for listed issuers and at the Exchange’s initiatives to help listed companies raise their game in this arena (see his article ‘What ESG reporting brings to the table’ in last month’s CSj).

Panellist Melissa Brown, Partner, Daobridge Capital, pointed out that active shareholders and stakeholder groups play an essential governance role, and listed companies need to take a more informed and open approach to the role they play. After all, she pointed out, they are committed to raising the quality of the market. She added that this is a good area for company secretaries to add value to their organisations – making sure that the organisation is aware of the concerns of shareholder and stakeholder groups and the changing environment within which the organisation operates.

3. Mainland China

The second day of the conference addressed the key corporate governance challenges facing Mainland China. Speaker Estella Ng Yi-Kum ACIS ACS, Executive Director, Deputy Chairman, Chief Strategy Officer and Chief Financial Officer, Tse Sui Luen Jewellery (International) Ltd, focused on two areas where corporate governance standards in the Mainland are relatively under-developed compared to Hong Kong – connected transactions and inside information.

The problem here is not, she suggested, the absence of a viable regulatory framework, but rather the low level of awareness among senior managers of the need to maintain the confidentiality of price-sensitive information (PSI). For example, she noted that it is relatively common for senior managers to share PSI on inappropriate communication channels such as ‘we chat’ leading to confidentiality breaches. She recommended providing regular training and updates to board members, management and relevant staff. She also recommended more reliance on the professional advice of company secretaries and consultants, particularly in relation to building better internal controls for the management of inside information and connected transactions.

Another key issue addressed on the second day of the conference was the current convergence of the Mainland and Hong Kong markets. We have seen dramatic examples of closer ties between the two markets in recent years – such as the Stock Connect programme linking Shanghai (and soon Shenzhen) to Hong Kong and the Mutual Recognition of Funds initiative. Many speakers and panellists, however, reminded the conference that significant differences still exist between the two markets.

‘It is an interesting time for us all,’ said speaker Wei Fang, Chief Representative in Hong Kong, PetroChina Company Ltd, ‘but despite the Stock Connect and the trend of convergence between the Mainland and Hong Kong, the two markets are fundamentally different and those differences will remain for some time still.’ He added that this diversity of approaches to governance is no bad thing. ‘Not everyone has to look like Brad Pitt,’ he quipped.

The speakers and panellists also noted that the corporate governance environment in the Mainland differs greatly depending on whether you are looking at private enterprises or state-owned enterprises (SOEs). Panellist Cimi Leung, Risk Assurance Partner, PricewaterhouseCoopers, pointed out that China has produced a number of global brands which have moved fast towards international standards of corporate governance. On the other hand, the SOE sector operates in a very different environment from Hong Kong and the West.

Panellist Paul Chow Man-yiu FCIS FCS, Former Chairman, Hong Kong Cyberport Management Company Ltd, believes that, to avoid false expectations, market participants should bear in mind that SOEs are part of the government machinery in the Mainland. ‘In the Mainland, most major companies are SOEs – this is the biggest distinction to make. Mainland China is a one-party state and companies work in a highly controlled environment,’ he said.

He pointed to the new directive for party secretaries to get more involved with the management of SOEs as an example of the direction in which SOEs are going – not towards privatisation but towards more state control. He believes that those expecting SOEs to be privatised are likely to be disappointed. ‘The state relies on the profits from SOEs,’ he said, ‘most SOEs are there to provide money to the state so the state can use the money for infrastructure development. They will be there for a long time.’

Speaker Edward Chow, Chair, HK Chapter, Institute of Chartered Accountants in England & Wales and Past President, HKICPA, noted the extraordinary pace at which the Mainland environment has been transformed. He also noted, however, some of the challenges going forward – for example the practice of regularly transferring senior managers from one SOE to another. ‘You may be asked to transfer to another company the next day. That may be in the national interests but is it in the interests of shareholders?’ he asked.

He also pointed to the duplication that exists where independent directors coexist with a supervisory board. Speaker David Tam, Joint Company Secretary, China Railway Group Ltd, also raised this point. He pointed out that the agenda of the supervisory board is often 90% the same as that of the audit committee.

Despite the many differences which exist, however, between the Mainland’s corporate governance regime and those in Hong Kong and the West, the opening up of China’s markets has brought benefits for both sides. David Tam mentioned that feedback from overseas investors had provided China Railway Group with a much better sense of international standards of corporate governance.

Speaker Alfred Chan Wing-kin, Managing Director, Hong Kong and China Gas Company Ltd, highlighted the fact that the Mainland has represented a major opportunity for his company. Today, 60% of its profits come from the Mainland.

He also discussed some of the hurdles the company has encountered in this journey. Like Estella Ng, he made the point that there is no lack of good regulations and guidelines on corporate governance matters in the Mainland, but the problems often arise through a lack of implementation and enforcement, he said. He also cited a number of drivers which should lead to better recognition of the importance of good governance in the Mainland, such as the increase in the number of corporate governance courses offered in universities and the increasing emphasis on professional standards.