Minority shareholders have consistent concerns relating to governance best practice deviations in Hong Kong. Philip Foo CFA CA, Vice-President, APAC Research and Engagement, Glass Lewis, discusses some of the common triggers for concern and how to reduce the likelihood of protest votes at annual general meetings.

Institutional investors are typically reliant on companies adhering to sound governance principles so that boards act in their interests. Voting at annual general meetings (AGMs) and other meetings of shareholders offer a chance for investors to support proposals that are consistent with these governance principles, and to protest and oppose those proposals that are not.

As many institutional investors will not individually hold a large enough shareholding, common agreements about best practice governance principles assist in the disparate minority shareholders having common concerns that can be a loud voice in aggregate. Regulations and best practice guides from stock exchanges and regulators can help form those commonly agreed best practice principles such as provided by Main Board Listing Rules Appendix 14 Corporate Governance Code (the Code).  Well-read proxy advice from global proxy advisers read by many can also assist in reaching common agreement.

When considering proposals across global equity markets, we find that the common deviations from best practice governance principles differ by jurisdiction. With respect to Hong Kong, we from time to time observe issues under one of four categories:

  1. board independence and director conflicts
  2. board, subcommittee and/or director performance
  3. unclear purpose of equity grants to non-employees, such as contractors, customers or suppliers, and
  4. failure to disclose any limitations of price and discounts when seeking general capital-raising mandates.

We encounter many other bespoke issues worthy of shareholder protest when considering Hong Kong AGMs, however we find the above four categories of issues account for a majority of our concerns. I discuss these categories of issues, which often lead to our recommending against the re-election of directors or against the general mandate, in more depth below.

1. Board independence and director conflicts

The Hong Kong Listing Rules require that issuers must appoint independent non-executive directors (INEDs) representing at least one-third of the board. This threshold is set low enough so that up to two-thirds of the board can be openly subject to competition between their duties to the company and other interests. Notwithstanding that we find this threshold low, we continue to encounter boards where the number of directors we believe to be independent is below the one-third limit.

We protest directors where the independence of at least a third of the directors is not compelling, irrespective of whether the board has designated the director as an INED. Typical circumstances for this difference in independence classification include:

  1. the director is a recent former executive of the company
  2. he/she has a family tie with an interested party, and/or
  3. there have been business transactions between the company and the director, or associates of the director.  

The third circumstance in this list is the most prominent reason for doubting the independence of an INED in Hong Kong.

We may find ourselves in disagreement with the board classification of a director’s independence where the board believes that the risk to independence has been adequately mitigated due to the passage of time between a former relationship with the company, or that the size of related-party business transactions are not material or were in the normal course of business.

We also oppose INEDs performing material professional services for the company, or a director related to someone providing such services, and we have found that some boards do not appropriately consider these matters as giving rise to conflicts of interest.

Boards should consider the thresholds of their shareholders and their proxy advisers for these matters when designating directors as INEDs, rather than relying on a subjective assessment. The INEDs are the only unconflicted stewards of minority shareholder interests and ultimately it is the shareholders, perception that will determine protest votes come AGM time.

A related concern under the topic of board independence is the presence of a dominant Executive Chair/CEO. Under Code Provision A.2.1 of the Code, the roles of the chairman and chief executive should be separate and should not be performed by the same individual. The board is ultimately charged with holding the executive accountable, a difficult duty when the leader of both the board and the executive is the same individual.

For boards that insist on providing one individual with both these roles, we have concerns that the dominance of this individual will undermine a freethinking board’s ability to appropriately hold the CEO and other executives accountable. We require that an INED be designated and empowered to offset some of this concentration of power, with a position such as vice-chair or lead independent director. In cases where a single individual holds the Executive Chair and CEO role, and no independent element among the board has been empowered to unite the board when the Executive Chair/CEO is conflicted, we will recommend against the nomination committee.

We encourage companies to consider this negative view against dominant individuals. In practice, the dominance of such individuals will prevent the board from forming mitigating controls against them. Shareholders can and should be expected to be loud on this when it comes to supporting director elections at the AGM.

2. Board, subcommittee and/or director performance

Boards of Hong Kong listed companies should be expected to comprise a group of people who are dedicated to the companies’ interests. However, we can come across two issues that cause us to doubt whether this is the case. These are: director absenteeism and subcommittees that rarely meet.

We will often recommend voting against directors who fail to attend 75% of board and committee meetings. Companies should take care to spell out strong justification for directors who have missed a number of meetings due to reasonable causes outside their control, for example due to hospitalisation or bereavement. Where no such disclosure is made, shareholders are left to assume negligence of their director duties.

On a similar note, we oppose directors who hold excessive external commitments, particularly on other listed boards. We wish directors to retain capacity to increase their attention to a given company in times of crisis and often find that some directors stretch themselves across too many boards to do this effectively. While sitting on multiple boards may be in the directors’ individual interest, we do not find it is in the interest of a dedicated board.

Another issue is where key subcommittees, such as the audit or risk committees, meet infrequently. These committees are ineffective if they are inactive, and infrequent subcommittee meetings is a question of performance. If an audit committee meets less than four times per year, we will typically recommend voting against the chair or committee chair.

While we can recommend protesting against directors on more complicated issues of performance such as legal disputes, scandals, or misconduct, the particular issues of performance we have chosen to discuss above are both simple and glaring. Companies should be self-regulating these issues or take the time to justify why these issues are not a matter of performance.

3. Equity grants to non-employees

Moving away from issues of the board, we often find ourselves taking issue with equity grant proposals at AGMs. Shareholders typically expect the purpose of equity grants to be one of two things:

  1. a means to incentivise employees with ‘skin in the game’, and/or
  2. a means to raise capital.

However, we find Hong Kong companies often grant equity to customers or suppliers and do not provide a compelling rationale as to why. Without justification, we are left concerned that the company is treating shareholder dilution as cheap financing, and is in effect ‘printing shares’ when the company otherwise has the means to use cash.

Ultimately, the concern is one of shareholder abuse. When issuing equity, companies need to consider the dilutive costs to shareholders as a material issue. By and large, we recommend against equity grants to customers or suppliers unless comprehensive justification is provided.

4. General capital-raising mandates

The final common issue discussed in this article is with respect to general capital-raising mandates. Shareholder approval is needed for certain equity capital raisings under the Hong Kong Listing Rules. This required approval is an important protection for shareholders who are at risk of having their holdings diluted via new share issues.

General capital-raising mandates, if approved by shareholders, allow boards scope to raise equity capital within certain limits. However, we often find that these general mandates do not specify the boundaries around prices or discounts at which shares could be issued. Price and discount are obviously a key detail in whether the capital raising is worth shareholder dilution. Highly discounted placements can disfavour shareholders that are not invited to participate, resulting in inequitable treatment.

Unless companies disclose reasonable maximum discounts within general capital-raising mandates, we will recommend shareholders oppose approval of such mandates. Companies must consider providing shareholders with this disclosure when asking for approval and must consider treating their shareholders equitably when it comes to matters of shareholder dilution.


The above issues are the common triggers for shareholder concern resulting in protest votes at AGMs. At a very high level, many of these concerns simply represent where minority shareholders rely on the installation and facilitation of boards that protect their interests with dedication, while the concerns around equity issuances represent a plea from shareholders to boards to consider the cost of shareholder dilution.

I encourage Hong Kong boards to engage with their individual shareholders, and any proxy advisers who cover their shareholder meetings on these common issues. By only engaging with significant or controlling shareholders, boards are neglecting to hear the interests of the often quiet majority of shareholders and may find themselves surprised by a protest vote at their AGM.

Philip Foo CFA CA, Vice-President, APAC Research and Engagement 

Glass Lewis 

Glass Lewis is a provider of global governance services and proxy advice.