CSj takes a look at a new HKICS research report which promotes five imperatives listed companies should consider to improve their shareholder communications practices in Hong Kong.

The theory is relatively simple – the owners of a business appoint directors to manage the undertaking on their behalf and the directors report to the owners regularly based on their stewardship. That, according to Professor Bob Tricker, author of a new HKICS research report on shareholder communications in Hong Kong, was the way things were originally conceived at the time the first limited liability companies opened for business back in the mid-19th century. Of course, things have become somewhat more complicated over the intervening 160 years. Large corporate groups bear little resemblance to those early limited liability companies, with their management and operations in a single jurisdiction and answering to cohesive and stable group of shareholders. Public listed companies are typically large, complex groups with several layers of subsidiaries and associated companies around the world, and owned by a diverse group of shareholders encompassing a range from long-term investors to short-term speculators – often with conflicting expectations of the dialogue they would like to have with the company. These trends did and do not favour the maintenance of that close and regular dialogue between companies and shareholders envisaged at the birth of limited liability company. Up until the last decade, companies increasingly lost touch with their shareholders and often lacked a comprehensive knowledge of who those shareholders were, and what concerns they may have about the governance and other aspects of the company. Was that such a bad thing? In recent years, increasing numbers of market participants are answering that question with a resounding yes. For starters, there are some fairly obvious advantages to having a loyal and long-term shareholder base – this translates into a lower cost of capital and less share price volatility, for example. On the risk side, in this social media age, discontent among shareholders can very rapidly escalate into a reputational apocalypse for the company. There is, however, another reason which reaches back to the original concept of how the dialogue between companies and their owners would work – well-informed and actively engaged shareholders can provide a constructive challenge to the way companies are run. Shareholders are supposed to be an integral part of the system of independent checks and balances which form the basis of corporate governance. Indeed, they have been written into many disclosure-based regulatory regimes around the world, such as the one in Hong Kong, since such a regime only works if investors read, understand and act on the mandatory disclosures.

The new HKICS report

In recent years, there has been a movement to recapture that original concept of the company/shareholder relationship. Shareholder engagement has risen up the agenda for listed issuers, shareholders and regulators over the last decade, focusing on the need for companies to be responsive to investors’ concerns and to facilitate the engagement process, and for investors to take their ownership responsibilities seriously. In this context, HKICS has published a new research report: Shareholder communications for listed issuers – five imperatives to break the monologue. The report, available on the HKICS website: www.hkics.org.hk, highlights the strategic advantages of better shareholder communications. 'Effective communication leads to satisfied investors, interested potential investors, and enhanced corporate value. But if investor relations are not handled well, the market knows, a company's reputation suffers, and corporate value is lost,’ the report states. The report also highlights the greater opportunities for a close and interactive dialogue with shareholders provided by technology. 'Historically, communication with shareholders has used print. However in recent years, opportunities for communication have, clearly, expanded dramatically. No longer reliant on the printed word alone, companies have access to the internet, using corporate websites, dedicated investor relations websites, the stock exchange website, email, and social media, such as Facebook and Twitter,’ the report states. Given the benefits of good shareholder relations and the greater technological opportunities for an interactive dialogue with shareholders, why does the disconnect between companies and their owners persist? The survey on which the new Shareholder communications report is based, for example, found that a third of respondent companies did not know who their shareholders were and did not regularly or routinely monitor their shareholder base. As the report points out – 'if you do not know your audience or what they want, how can you frame your message?’ As mentioned at the beginning of this article, changes in the business environment have resulted in some significant obstacles to a better dialogue – the diversity of shareholder groups with potentially conflicting agendas and the difficulty of identifying beneficial shareholders, for example. The HKICS report points to another reason, however, for the disconnect. The survey results indicate that, for many listed companies, shareholder communications is treated as a matter of compliance rather than a strategic advantage. 'It is reactively driven by rules and regulation, rather than proactively driven by a choice to communicate and engage with shareholders,’ the report states. The report assesses the implications of these results, but also attempts to provide a way forward for improving shareholder communications in Hong Kong. The good news is that the obstacles to better engagement are not insurmountable, and the report makes specific recommendations on the way forward for listed issuers and shareholders – the two parties to the dialogue – but also for regulators whose role can have a significant influence on achieving better outcomes.

Recommendations

For listed issuers

The message for the main audience of the HKICS report – listed companies in Hong Kong – is the need to address 'five imperatives’ as a way to improve shareholder communications. These are to:

1. develop an investor relations strategy within the corporate strategy
2. know and regularly review your shareholder base
3. formulate and regularly review shareholder communications policies
4. formulate and regularly review shareholder engagement policies, and
5. review the responsibility and accountability for investor relations.

For shareholders

The new HKICS report makes it clear that a shareholder relationship, like any relationship, can only function through the efforts of both sides. 'Thus, shareholders need to express their needs and expectations regarding investor relations to listed companies, and to provide feedback, positive and negative, on the information they receive,’ the report states. The report also makes the point that investors should have access to a sufficiently senior level in the company. These approaches are consistent with the Securities and Futures Commission's (SFC) voluntary Principles of Responsible Ownership. The Principles, published in March 2016, seek to promote greater understanding among investors of their share ownership responsibilities. The growing presence of institutional investors in the Hong Kong market has meant a growing investor lobby with the incentives and resources to monitor their investee companies’ performance, decisions and corporate actions. The SFC sees its new investor code as complementary to the existing legal framework for promoting corporate governance, which has historically been focused on corporate and directors’ obligations.

For regulators

The new HKICS report has been well received by regulators in Hong Kong. The benefits for the market as a whole of improving shareholder communications has not been lost on both the SFC and the stock exchange. The survey findings on which the report is based will therefore be of interest to all parties hoping to understand the level of importance given to shareholder communications by both listed companies and investors. Moreover, given the apparent shortcomings in the underlying commitment by a sizeable proportion of listed companies to shareholder communications, the report argues in favour of a switch of emphasis away from ever-increasing disclosure requirements and towards the need for an effective dialogue with investors. ‘[Regulators] might consider less emphasis, perhaps a pause, on regulating the volume and scope of reporting, and place greater weight on quality, requiring listed companies to explain how they realise their commitment to shareholder communications. This would include listed companies specifically reporting on their performance and progress in regards to the five imperatives suggested above,’ the report states. Kieran Colvert, Editor, CSj  

SIDEBAR: Online resources

The Hong Kong Institute of Chartered Secretaries (www.hkics.org.hk) In addition to the newly published Shareholder communications research report reviewed in this article, HKICS published two guidance notes – Investor Relations Part I and Investor Relations Part II – in March 2009 and June 2009 respectively. Readers can also consult the '10-point guide to the company secretary's role in shareholder engagement’ authored by Philip Armstrong, Senior Advisor, Corporate Governance, International Finance Corporation, published in the June 2015 edition of CSj (see pages 18-19). The Corporate Secretaries International Association (www.csia.org) In 2015, CSIA published its guidance on international best practice in shareholder engagement for corporate secretaries – Shareholder Engagement: Practical Steps for Corporate Secretaries. The Hong Kong Securities and Futures Commission (www.sfc.org) The SFC recently published Hong Kong's first investor's stewardship code – Principles of Responsible Ownership.