Investors may face certain obstacles when attempting to engage with companies in Asia - how can these be overcome?
In our first blog about engagement in Asia, we looked at challenges such as the influence of family and state, and the fact that stewardship is still in its early stages. In part two we explain our approach and suggest ways to ensure engagements progress.
1. Be persistent and patient
It is not yet the norm in Asia for board members to meet shareholders directly, so investors need to be persistent and patient. Change does not happen in a day. It takes time to build a trusted relationship with companies, providing constructive feedback on the material ESG issues, and for companies to obtain internal buy-in to investor recommendations.
An example is KB Financial Group in South Korea. This is one of the country’s largest banks and is 10% owned by the National Pension Service. We have been engaging with the company on its governance, capital structure and environmental issues since 2010. After years of constructive dialogue, the company launched an annual shareholder roundtable in 2015. In April 2016, we were the first international investor representative to meet the chair of the board. Further information can be found in the company’s case study.
In Singapore, since 2009 we have been engaging with Golden Agri Resources, the world’s second-largest palm oil plantation company, on sustainable palm oil. After several rounds of robust discussion with the investor relations and sustainability directors we met the company’s lead independent director in 2012 and urged the board to publish a time-bound action plan for implementing its sustainability strategy. Further information can be found in the company’s case study.
2. Respect cultural differences
Respecting cultural differences is also key to building trust. We have 19 country corporate governance principles, which set out our expectations on companies in different contexts. For example, on gender diversity, while we expect 30% board diversity in the UK, we have a lower target in the shorter term for companies in Asia as this is more realistic.
To facilitate ongoing discussions with companies we sometimes translate documents into the local language, as we did with our corporate governance principles in Greater China and Japan, so they can be shared with a company’s wider team.
3. Share international best practice
In Japan, we have been engaging with Panasonic for more than a decade on ESG issues, particularly corporate governance. At the beginning of our engagement, the company had 20 board directors, none of whom was genuinely independent. The company’s board also introduced a poison pill, a takeover defence scheme that is not international best practice.
With patience and persistence, we communicated our expectations on board composition and independence, and in 2012 the company reduced the size of its board. In 2016, Panasonic appointed a second independent director and in 2017 it abolished the poison pill. Further information can be found in the company’s case study.
4. Work with regulators and policymakers
Given the compliance-driven mentality of some Asian companies, it is important to work with regulators and policymakers to help shape policy direction. For instance, we shared our thoughts with the Securities and Futures Commission of Hong Kong and the Hong Kong Stock Exchange (HKEX) on ESG reporting guidelines. Regarding the 5% rule, a legal constraint highlighted in our previous blog, we have been seeking clarification from Japan's Financial Services Agency as to whether investor collaboration on ESG issues would be viewed as acting in concert.
5. Education and capacity building
We have also encouraged local asset owners to improve their stewardship. In March 2017 we were invited by the HKEX to participate in filming for an online directors’ training programme. We spoke about issues related to risk management, including the use of ESG data, its integration into company analysis by investors, and the appropriate level of disclosure for global investors.
In January 2019 we spoke to 20 Hong Kong asset owners at a Sustainable Finance Initiative event and explained active ownership. We also delivered the first full-day ESG education seminar to over 200 members of the Asset Management Association of China in February, focusing on the importance of ESG investment analysis pre-investment and stewardship post-investment across a number of asset classes.
Education and knowledge-sharing with peers are equally important. On climate change, we are one of 10 financial institution members of the China-UK Task Force on Climate-related Financial Disclosures (TCFD) Pilot Working Group, which is supported by the Bank of England and the People’s Bank of China. We shared our integrated compliance with the TCFD recommendations with the group, as well as our approach to engaging with companies on this topic.
Our engagement journey does not end here. We strive for ongoing dialogue with companies, working together for a better future. Our latest initiative is to share our knowledge as part of the OECD Myanmar Corporate Governance Advisory Group, which is supported by the current government. Acknowledged as a shareholder representative leading global best practice for corporate governance, we are working on the first corporate governance code for Myanmar, an important country in the global supply chain.