David Webb has made a career out of pushing for improved corporate governance in Hong Kong, working tirelessly for eight years as an advocate of better laws and best practices in finance in the Chinese territory.
Consider his efforts with regards to proxy voting. To encourage companies to poll shareholders at their annual meetings (rather than just call for a show of hands), Webb bought five shares in each of Hong Kong’s 30 or so biggest companies, distributed those shares among himself and four friends, and went on a mission.
In Hong Kong, polling is not required by regulation—but it can be demanded at the annual meeting by five shareholders. That’s what Webb and his cohorts did, marching into shareholder meetings and insisting on formal polls. As a result, an increasing number of Hong Kong companies are polling their investors to pass resolutions.
Webb
Webb, however, remains skeptical. He doesn’t believe he is witnessing an advance in shareholder relations; rather, he believes the companies were just doing what he forced them to do. “They turned a necessity into a virtue,” he says.
In Asia, it doesn’t get much better than that, according to the Asian Corporate Governance Association. In the first of what the ACGA promises will be an annual report, the association recently ranked major Asian markets by how well companies in those markets handle proxy voting.
Hong Kong, despite the weaknesses in its shareholder-voting regulations and record, received the highest rating, a 67. Singapore and Malaysia followed closely, then came India and the remaining South East Asian nations. Surprisingly, the most developed countries fared the worst. Japan ranked last with a score of 47; Korea and Taiwan were just slightly higher. (China also received a 47, but was not formally part of the study.)
The report, based on a survey sent to 48 institutional investors active in the Asian markets, used the United States, Europe, and Australia as benchmarks to judge the countries in question. Criteria ranged from the amount of advance notice shareholders received ahead of an annual meeting to the manner in which votes were cast and counted.
What the ACGA found was a bit of a mess, and the sins were many.
The ACGA suggests, for example, that 28 days’ advance notice of a shareholder meeting would be the “global best practice.” The norm around Asia is 14 days, with Hong Kong requiring the most notice: 21 days. Thailand only requires seven. The ACGA also believes that the deadline for receiving votes should come a minimum of 14 days after the annual meeting agenda has been issued; in Asian nations, vote deadlines can be as short as seven days. (In theory, the ACGA noted, the gap between issuing agendas and submitting votes could be so tight that shareholders would have no time to vote once mailing deadlines are accounted for.)
SURVEY
An excerpt from the ACGA Asian Proxy Voting Survey 2006 follows.
Recommendations and Action Points
Throughout this report we have made a number of recommendations on which listed companies, institutional investors, regulators and intermediaries could act to bring about better, more efficient and fairer proxy voting systems in Asia. For the sake of convenience, our main recommendations are collected together below and also sorted by sector. Some additional action points are included.
Most of the impediments to effective proxy voting in Asia could be resolved quickly by listed companies acting on their own initiative, or by investors demanding change. Most of the problems do not require regulatory intervention—or, at least, not right away. Where they do, we have recommended this. But our view is that the more the market can resolve these issues on its own, the more efficient and cost-effective these solutions will be. This is the philosophy underlying the following recommendations.
Recommendations by issue
Notice of shareholder meetings
Final and detailed notices/agendas should be published at least 28 calendar days before general meetings.
Time to vote before meetings
There should be at least 14 calendar days between the issuance of full agendas and the average voting deadlines set by global custodians. Governments and stock exchanges should give serious consideration to the establishment of national electronic voting systems.
Information to vote
Issuers need to produce more informative and clearly written meeting agendas, and to
release the final version of these documents at least 28 days in advance of their annual
shareholder meetings. Regulators should consider upgrading their listing rules to require a sufficiently high standard of information is provided in meeting circulars.
Availability of translated material
Listed companies with significant foreign ownership should ensure that all their meeting
notices, agendas and circulars are fully translated into English—and published at the same time as the local-language version. Cross-border institutional investors should develop as much Asian-language capacity as possible. Both groups should see this as a source of competitive advantage, not just a cost.
Confirmation that vote has been received
Intermediaries in the voting process need to develop systems for quickly informing investors that their votes have been received by share registrars and passed on to issuers. If this proves unworkable, the sooner that electronic voting platforms are developed the better.
Recommendations by sector
Listed companies
Publish final and detailed notices/agendas at least 28 calendar days before
general meetings.
Produce more informative and clearly written meeting agendas and circulars.
Ensure that there is at least 14 calendar days between the issuance of full agendas and the average voting deadlines set by global custodians in your market.
If you have significant foreign ownership, ensure that all your meeting notices, agendas and circulars are fully translated into English—and published at the same time as the local-language version.
Institutional investors
Encourage issuers to release their detailed meeting notices and circulars no later
than 28 days before a meeting (and to provide translations, if necessary).
Ask regulators to upgrade listing rules to require a sufficiently high standard of
information is provided in meeting circulars.
Encourage governments and stock exchanges to give serious consideration to the
establishment of national electronic voting systems.
Develop as much Asian-language capacity as possible.
Regulators
Governments and stock exchanges should give serious consideration to establishing
national electronic voting systems that all investors can access.
Upgrade listing rules to require a sufficiently high standard of information is provided
in meeting circulars.
Amend listing rules to make voting by poll mandatory.
Consider how laws could be amended to encourage non-clustering of meetings.
Custodian banks
Support moves to create national electronic voting systems.
If not already done so, outsource the provision of detailed meeting notices and circulars to institutional investors to a specialist proxy advisory/voting service that can deliver the material quickly and efficiently through the Internet. Do away with the manual
inputting of basic or partially detailed meeting information and the sending of such incomplete information to investors.
Until full electronic voting becomes a reality: Work with other intermediaries, such as share registrars, to develop systems for quickly informing investors that their votes have been received and passed on to issuers.
Ask share registrars for a detailed outline of the results of AGM meetings.
Source
Asian Proxy Voting Survey (Asian Corporate Governance Association; 2006)
Each rated area is discussed in detail, with the relevant laws and statutes laid out, scores parsed, and anomalies noted. The report, for example, tells of the 1,420 shareholder meetings held in Japan last June 29—that nation’s infamous and highly effective strategy of “clustering,” theoretically to prevent yakuza mobsters from showing up, but really affecting shareholder access for all—and of companies in Taiwan that would threaten a sub-custodian when it did not vote in agreement with management.
The report also sounds some hopeful notes about progress being made in parts of Asia. Some listed companies in the region voluntarily seek to comply with best practices and will, in certain cases, go beyond the statutory requirements. HSBC and Sun Hung Kai Properties, for example, both give more than 50 day’s notice ahead of their annual general meetings.
“I’d say the report is negative, but not pessimistic,” says Jamie Allen, secretary general of the ACGA and co-author of the report.
Allen believes that while Asia is starting from a very low standard of corporate governance, companies and regulators in the region are gaining an appreciation of the value of better shareholder communication and better- managed annual meetings. He expects no revolution, but sees an opportunity for positive and steady change.
What The Future May Hold
By far, the country attracting the most optimism is Japan. While it ranks poorly in the survey, it is fast making changes that could improve its rating dramatically over the next few years, the ACGA and market observers say. In June 2006, it introduced an electronic proxy system. While adoption of the system has been slow in the first year, the report suggests that online proxies could prove very popular in the future. At the same time, Japanese companies are working to spread out their annual meetings over the calendar year so that more shareholders can actually attend.
“Japan is improving year by year,” says Dean Paatsch, vice president of Asia-Pacific markets for Institutional Shareholder Services, the proxy advisory giant. “The mountain is flattening.”
Observers of Asia’s governance scene say the report has already had an effect. While most investors active in Asia have long believed that all was not right with shareholder voting in the region, quantifying the problems and putting them on paper, all in one place, has helped to focus the attention of those looking for improvement.
“If you don’t have confidence in the way your votes are counted, you can’t have confidence in the market,” Paatsch says.
While proponents of better proxy voting now come armed with a fancy report and a lot of talking points, many impediments remain. Most markets in Asia continue to be places with a high level of shareholder concentration and significant vested interests in maintaining the governance status quo. While the level of foreign and independent local shareholding is rising steadily (The ACGA reports, for example, that foreign ownership of shares in Taiwan has risen from 19.8 percent in 2001 to 31.7 percent in 2005, and in Japan from 18.8 percent in 2000 to 26.7 percent in 2005 ), the traditional owners and their friends and associates remain very much in control and not inclined to support increased transparency.
The recommendations made by the ACGA would from a technical and legal point of view be easy to implement. In addition to calling for 28 days of notice before meetings, the group suggests improvements such as better written and more detailed meeting agendas, 14 days between the issuance of the agenda and vote deadlines, voting by poll, and the immediate publication of annual general meeting results. But reform will take time.
“The problems are pretty easy to solve,” Allen says. “They could solve them tomorrow or solve them next week.”
Some observers are indeed quite relaxed about the state of shareholder voting in the East. While they accept that Asian markets have poorly developed proxy-voting systems and applaud the work of the ACGA, they don’t see matters being desperate—particularly not in Hong Kong, which still acts as a gateway for many Western businesses edging into the region. They see that improvements are being made, that the systems are being refined, and that any shortcomings are not actually destabilizing the markets or rattling investors.
Berry
“In Hong Kong, it is generally working well,” says Simon Berry, a partner at the law firm Allen & Overy and a 14-year resident of Hong Kong. “But there is room for improvement.”
He notes that in all his time practicing as an attorney in the city—through the collapse of the Asian markets in the late 1990s and other crises along the way—he’s never seen the proxy system fail to function the way it should, despite its obvious flaws.
“I have never seen anyone with a problem,” he says.
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