Enhancing Effective Engagement in Corporate Governance
Investors, particularly institutional ones, are increasingly pressured to act as stewards of capital and assets through governance risk evaluation and incorporating ESG factors. This presentation by the Asian Corporate Governance Association delves into best practices for engagement and reporting, emphasizing the evolution of investor stewardship.
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www.acga-asia.org Asian Corporate Governance Association (ACGA) "How to Enhance Effective Engagement - Best Practices in Asia and Around the World" Jamie Allen, Secretary General Benjamin McCarron, Specialist Consultant Asian Corporate Governance Association (ACGA) Securities and Exchange Commission, Thailand Roundtable Discussion, Bangkok, July 17, 2018 1 ACGA Presentation SEC, July 17, 2018
Agenda 1. Investor stewardship meaning and evolution 2. Best practices in engagement corporate reporting 3. Best practices in engagement investor dialogue 2 ACGA Presentation SEC, July 17, 2018
1. Investor stewardship meaning Institutional investors around the world (pension funds and investment managers) have been under increasing pressure to act as stewards of the capital they invest and of the assets/companies they invest in. What does this mean in practice? Investors need to look more closely at governance risk and take environmental, social, and governance (ESG) factors into account. They need to be proactive and engage in a purposeful dialogue with company management/directors, not just vote shares. The Global Financial Crisis (GFC) was the turning point. Institutions in the UK, Europe and US criticised for asking for unsustainably high returns, especially from banks, and ignoring burgeoning risk in the system. These basic concepts were not new . ACGA Presentation SEC, July 17, 2018 3
Stewardship before stewardship codes 1980s/1990s: State pension funds in the US began to develop policies and strategies on corporate governance. Voting shares, highlighting poor performers (CalPERS). 1990s/2000s: Pension funds and asset managers in the UK started to follow suit, with voting/CG policies and active voting. 2000s: Superannuation (pension) funds in Australia became actively involved in corporate governance issues and voting. 2005: National Pension Service in Korea revised its voting policies. Mid-2000s: ACGA members actively voting in this region. 2010: Employees Provident Fund, Malaysia, published its internal CG Principles and Voting Guidelines. Voting gradually led to engagement 4 ACGA Presentation SEC, July 17, 2018
How global investors have engaged Comment Passive Only invest in companies, passive as shareholder Some shareholder responsibilities, institutions starting to vote, but somewhat automatically Automatic voters Evolution over time Investors who take a focussed and risk-based approach as shareholder (e.g. voting on all or selected parts of their shareholdings) Informed voters Investors starting to exercise their rights and responsibilities as shareholders (e.g. undertake or participate in letter campaigns or conference calls with companies) Light touch engagement Active owners (Stewards) Act as owners of the company (e.g. building long term relationship, engagement strategy, advising etc.) ACGA Presentation SEC, July 17, 2018 5
Stewardship codes in Asia today Market (order) Date of Adoption Comply or explain? Lead investor(s)? FSC Code 2017. ACSI code 2018. Selected super funds, asset managers Australia - China - - - Hong Kong (3rd) March 2016 Voluntary HKMA? India (8th) March 2017 (for insurers only) Yes LIC? Indonesia - - - Japan (1st) February 2014 (revised 2017) Yes GPIF Korea (6th) December 2016 Yes NPS? Malaysia (2nd) June 2014 Yes KWAP, EPF Philippines - - - Singapore (5th) November 2016 Voluntary - Taiwan (4th) June 2016 Yes BLF, Chunghwa Post Thailand (7th) February 2017 Yes GPF Source: ACGA research 6 ACGA Presentation SEC, July 17, 2018
Investor stewardship in practice Engagement typically starts with and/or is weighted towards governance : Source: Norges Bank Investment Management 2017 7 ACGA Presentation SEC, July 17, 2018
Questions for investors 1. Directors are the primary stewards of a company. How should shareholders exercise their stewardship function most effectively? What is the right relationship between the two groups? 2. How do institutions manage and disclose the conflicts of interest they face? 3. How do state pension/investment institutions manage the political interference they face? 4. Should pension funds ( asset owners ) drive stewardship, with investment funds ( asset managers ) playing a secondary role? ACGA Presentation SEC, July 17, 2018 8
2. Best practices in engagement reporting Information is the foundation of good engagement and the reason investors seek to meet companies. Therefore: the more you anticipate, the more questions your reporting answers, the more confidence investors will have in your company, and the more efficient and productive communication will be. Reporting categories: 1. Financial 2. Corporate governance 3. ESG/sustainability ACGA Presentation SEC, July 17, 2018 9
Common reporting flaws Financial reporting: Flexible interpretation of IFRS accounting standards (eg, aggregating operating expenses) Lack of narrative in Notes to the accounts / quarterly reports Corporate governance: Boilerplate board and committee reports Lack of narrative around director selection/skills ESG/sustainability Lack of stakeholder consultation prior to reporting: What matters? Voluminous data, lack of clear prioritisation of material ESG risks. ACGA Presentation SEC, July 17, 2018 10
ESG / sustainability reporting China: CSR reporting since 2006. Emphasis moving towards higher quality reporting. Hong Kong: ESG Reporting Guide now comply/explain. Japan:Large number of integrated reports /ESG reports. Singapore: New SGX Sustainability Reporting Guide. Taiwan: Strong push on GRI reporting. Thailand: Strong push on CSR reporting. Interesting feature: Markets in Asia with fewest hard ESG reporting rules (Australia and Japan) have some of the most extensive reporting. 11 ACGA Presentation SEC, July 17, 2018
Questions for companies Who leads your report writing process: A senior executive/CFO or a middle/lower manager? 1. Do you benchmark your annual report against the best- in-class locally and internationally in your sector? 2. Do you invest sufficiently in accounting and internal auditing systems and staff? 3. Are you investing sufficiently in information technology? 4. ACGA Presentation SEC, July 17, 2018 12
3. Best practices in engagement Dialogue Think carefully about who you put in front of institutional investors: IR, PR, CFO, director? 1. Allow your directors, including independent directors, to meet investors. 2. Allow your independent directors to meet investors on their own. 3. Allow your audit committee to meet investors. 4. Allow your chairman to meet investors. 5. Encourage meetings with groups/delegations. 6. Respond efficiently to meeting requests. Say No quickly if you need to do so. 7. Recognise the role played by non-profits/NGOs. 8. ACGA Presentation SEC, July 17, 2018 13
Best practices in engagement Japan The Ministry of Economy, Trade and Industry (METI) in Japan has organised working groups on ESG disclosure and company investor dialogue in recent years. May 2017: Guidance on Integrated Corporate Disclosure and Company-Investor Dialogue . Four principles: Understand the meaning of purposeful dialogue 1. Make use of a shared language (that evolves) 2. Promote dialogue within companies 3. Encourage investors to explain their evaluation processes (of companies) 4. ACGA Presentation SEC, July 17, 2018 14
CG Watch 2016 Market rankings CG Watch report: Market scores 2010 to 2016 2016 (%) 2010 2012 2014 Change 2014 vs 2016 (ppt) - Direction of CG reform 78 Australia - - - 67 1. Singapore 67 69 64 (+3) Mostly sunny, but storms ahead? 2. Hong Kong 65 66 65 65 - Action, reaction: the cycle of Hong Kong life 63 60 58 56 55 52 43 38 36 3. Japan 4. Taiwan 57 55 55 53 60 56 (+3) (+4) Cultural change occurring, but rules still weak The form is in, now need the substance 5. Thailand 6. Malaysia 7. India 8. Korea 55 52 49 45 58 55 51 49 58 58 54 49 - Could be on the verge of something great, if Regulation improving, public governance failing Forward movement impeded by vested interests Forward movement impeded by vested interests (-2) (+1) (+3) 9. China 10. Philippines 49 37 45 41 45 40 (-2) (-2) Falling further behind, but enforcement better New policy initiatives, but regulatory strategy weak 11. Indonesia 40 37 39 (-3) Losing momentum after progress in past survey Source: Asian Corporate Governance Association. *CG Watch is a joint publication between ACGA and CLSA. ACGA carries out the market ranking survey. 15 ACGA Presentation SEC, July 17, 2018
CG spring in Korea In late April 2018, ACGA led a delegation of members to meet major Korean companies (and met with): Samsung Electronics: New chairman Hyundai Glovis: New independent director ( shareholder representative director ) Hyundai Motor Group: Senior executives of HMC and group companies, plus a banker SK Holdings: Chief Financial Officer Amore Pacific: Executive Director & Head of IR Point: Korea does not rank well in our survey. Yet its leading companies have the courage to meet investors. 16 ACGA Presentation SEC, July 17, 2018
ACGA Korea Delegation, April 23-25, 2018 17 ACGA Presentation SEC, July 17, 2018
7. Concluding remarks 1. Investor stewardship is here to stay, driven as much by local as by international factors. 2. Corporate reporting is a foundation of effective dialogue. 3. Intelligent dialogue with investors generates goodwill and understanding. 4. Dialogue can be a source of new ideas and perspectives for companies. It is not a one-way channel of communication. 18 ACGA Presentation SEC, July 17, 2018
Contact details Jamie Allen Secretary General Asian Corporate Governance Association Ltd Room 1801, 18th Floor, Wilson House 19-27 Wyndham Street, Central, Hong Kong Tel: (852) 2160 1789 (D) Fax: (852) 2147 3818 Email: jamie@acga-asia.org Website: www.acga-asia.org 19
