Corporate Governance: Turning the Tables on Institutional Investors

By Kevin Smith.

I attended the Asian Corporate Governance Association (ACGA) Annual Conference in a very polluted Beijing last month along with a record number of delegates, 350 in total representing three broad groups; institutional investors, corporates and asset owners.  We normally attend conferences with our peer group of institutional investors while corporates make presentations, this environment was different and refreshing, with the corporates able to provide feedback to investors and asset owners regarding their ever-increasing demands for information.

ACGA Secretary General Jamie Allen set the scene for the conference with his presentation “Mapping the CG Ecosystem”, the ACGA survey of corporate governance in the region has been broadened in 2018 and for the first time includes an assessment of investors.  Scores across the region in the eight categories of assessment were as follows:

I am sure it will be a big surprise to many institutional investors to see themselves with such low scores in relation to governance.  Institutional investors scored poorly for their voting activity and especially the disclosure of their voting at AGMs.

There was a recurring theme throughout the conference, corporates have had enough of seemingly endless demands for governance information from institutional investors, each in different formats and typically required within impossibly tight time deadlines.  At the other end of the scale, there are large numbers of institutional investors acting a free-riders, enjoying the benefits if improved governance without any active participation.

One of my key conclusions from the conference was that the structure for assessing and regulating corporate governance in the Asian region is largely complete.  There are rules in place of a very high standard with Japan, Hong Kong and Singapore leading the way.  We need to see those rules replicated across other countries in the region and then high standards of enforcement applied.

There has been one significant backward step in the past year, competition among exchanges for large new listings has resulted in Hong Kong and Singapore adjusting listing rules allowing companies to list with dual-class shares.  The CFA Institute published a good paper on this subject titled “Dual-Class Shares: The Good, The Bad, and The Ugly” which is worth reading1.  We are strongly opposed to dual-class shares which act to undermine fairness between shareholders.  We agree with the CFA Institute conclusion that “one-share, one-vote remains the fairest and most optimal market practice”.  We also share the CFA Institute’s concern that “allowing dual-class shares structures will lead to an erosion of corporate governance standards” and this trend of competition between regional exchanges could be seen as “a race to the bottom”.

My favourite moment during the conference was a workshop session that posed the question “Is ESG data in Asia fit for purpose?”  The term ESG is used in financial markets to describe the Environmental, Social and Governance behaviours of companies.  The session was facilitated by Charles Yonts, Head of Power and ESG Research, CLSA, Hong Kong.  Charles used the following slide to indicate the lack of agreement or correlation between the various ESG providers, in this case MSCI and FTSE, the random pattern on the chart shows that these two providers rarely agree on the ESG merits of individual companies with Tesla being a prime example; FTSE placed Tesla last and MSCI ranked the same company best in the global auto sector.

1 https://www.cfainstitute.org/-/media/documents/survey/apac-dual-class-shares-survey-report.ashx

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