Shareholders may find that engaging with Asian companies on their material ESG issues is tricky. Some companies respond slowly to emails or letters, they may not provide meaningful explanations on ESG-related matters, and access to board members can be difficult. Why is this?
In the first of two blogs about engagement in Asia, we look at some of the hurdles investors may face and explore the reasons behind them. In part two we will look at ways investors can overcome these obstacles.
1. Stewardship is just beginning
Local asset owner support for stewardship can help drive engagement with companies. However, institutional investor participation in stewardship is fairly new in Asia. Japan and Malaysia led the way in 2014 by introducing principles for responsible investment and a stewardship code respectively, followed by Hong Kong, Taiwan, Singapore, South Korea, Thailand and India. No stewardship code has been launched in China.
On the positive side, local asset owners have begun supporting stewardship codes in recent years. In Malaysia, two local investors adopted the local code in 2015. In Japan in September 2016, the Government Pension Investment Fund, the world’s largest pension fund and Japan’s largest institutional investor, held an inaugural Business and Asset Owners’ Forum to discuss common issues of governance and stewardship. It is now one of the key players shaping the active ownership trend in Asia.
South Korea’s National Pension Service, the world’s third-largest pension fund and South Korea’s largest institutional investor, adopted the local code in July 2018. And in China, key asset owners such as China Asset Management, E Fund Management and Harvest Fund Management are some of the early movers in the local market signing up to the Principles for Responsible Investment (PRI).
2. Company mistrust
Some Asian companies are reluctant to engage with shareholders, partly due to the aggressive nature of activist investors in the past. In 2007, Yoshiaki Murakami, one of the most prominent activist investors in Japan, used his role as a majority shareholder to receive inside information and committed insider trading. In 2008, the former vice minister of Japan’s Ministry of Economy, Trade and Industry openly criticised foreign shareholders for their short-termism and greed for dividend payments. This has engendered some company mistrust towards foreign investors.
3. Legal challenges
There are also legal constraints that may hinder collaborative shareholder engagement. In Japan and South Korea, there is a “5% rule”, a specific regime for shareholders holding over 5% of a company’s issued capital. The rule requires a breach of the 5% threshold to be disclosed, with a statement of shareholding intent about influencing the company.
It is unclear whether writing a letter to the company about capital mismanagement or another form of company engagement constitutes “influencing the company”. However, trying to influence company management without filing is a criminal offence. This makes collaborative engagement difficult, as shareholders who collectively hold over 5% and make suggestions about governance or business strategy may find themselves in breach of the regulation.
4. Influence of family and state
In Asian markets such as China, Hong Kong and India, family-controlled companies are quite common. These present their own corporate governance challenges such as entrenched boards, inadequate board independence, and/or a lack of diversity. In South Korea, where such companies are known as chaebols, there is often a circular and interlocking ownership structure controlled by the founding families. The fact that founding families may run companies unopposed for generations also partly explains some companies’ unresponsiveness to investor requests, as they are still getting used to engagement with shareholders.
The state can also play a key role in company management. In China, approximately 150,000 companies are state-owned enterprises. Questions arise as to the state’s role and the extent of its involvement in the company’s decision-making process, and whether this may potentially hurt minority shareholder interests.
5. ESG is at an early stage
A lot of Asian companies have a compliance-driven attitude towards ESG. Instead of aspiring to leadership in ESG, companies may just view it as a box-ticking exercise. This can lead to companies resorting to boilerplate explanations in their ESG, sustainability or integrated reports, without demonstrating that the board and senior management have had meaningful discussions. This, coupled with the fact that Asian companies are laggards in some ESG issues such as financial transparency, gender diversity, pollution and corporate governance, makes it even more challenging to engage with Asian companies.
In my next blog, I will look at ways to tackle these challenges.