International initiatives will strengthen investor confidence

Two recent offshore governance initiatives have emphasised the value of voluntary stewardship principles and highlighted the importance of governance in strengthening investor confidence.

The Hong Kong Securities and Futures Commission (SFC) in March released its conclusions regarding the widely anticipated Principles for Responsible Ownership after years of public consultation. The Principles are Hong Kong’s first step towards a stewardship code and are intended to apply to investors who invest money or hold shares on behalf of clients or stakeholders to whom they are accountable.

The new code is an important development. Hong Kong consistently ranks highly in Asia for its relatively stronger governance and regulatory oversight and there is a perception that Hong Kong-listed equities are a safer way to gain exposure to China’s economy than investing in the more volatile, unpredictably governed Shanghai Stock Exchange.

But proxy adviser Glass Lewis says Hong Kong has “lost some ground due to the lack of general best practice standards in investor engagement initiatives”.

1. Seven core principles

Glass Lewis says Hong Kong, one of the world’s most business-friendly jurisdictions, will benefit from the code’s seven core principles, which follow global norms. The voluntary Principles, based on an “apply or explain model”, suggest investors:

1. Establish and report on their responsible investment (RI) policies;


2. Monitor and engage investee companies;


3. Establish clear policies on escalation of engagement;


4. Have clear policies on voting;


5. Be willing to act collectively;


6. Report to stakeholders on RI activities; and


7. When investing, have policies to manage conflicts of interest.

Jamie Allen, Secretary General of the Asian Corporate Governance Association, and Melissa Brown, a leading Asian RI analyst and partner at China-focused adviser Daobridge Capital, say the Hong Kong stewardship code “marks only a first step in a gradual journey towards stronger investor commitment to corporate governance”.

They wrote in March: “The good news is that the SFC has held the line on the spirit of the initiative and will proceed with the Principles largely intact, despite robust lobbying against from some of Hong Kong’s more traditional business associations... The SFC largely dismissed complaints about higher costs and the inconvenience of more investor engagement, and countered with a firm statement of principle about its goals, saying it ‘believes strong corporate governance requires listed companies and their directors to be proactive, as well as shareholders to be both reactive and proactive’.”

2. South African governance changes

The release of the draft King IV Report on Corporate Governance in South Africa in mid-March is another key governance development. The King Report is considered among the more authoritative, influential governance codes by global standards.

Deloitte describes King IV as “bolder than ever”. It says the new version of the King Report provides an even more practical, principles-based approach to good governance and global public sentiment and international regulatory change than King III, which was released in 2009.

Deloitte says King IV aims to establish a better balance between conformance and performance – an issue on the minds of Australian boards that believe excessive regulation is forcing them to spend more time on compliance issues and less on strategy etc.

Key changes in King IV include the application of a principle-and-outcome approach instead of a tick-the-box approach. Seventy-five King IV Principles have been consolidated into sixteen, each linked to distinct outcomes. As in Australia, King IV Principles are designed to lead to identified outcomes and each Principle is supported by recommended practices.

Executive pay is emphasised in King IV. The Principles recommend a remuneration policy and an implementation plan, which links pay to performance, be tabled for a non-binding advisory vote. If at least 75 per cent of shareholders do not approve the remuneration policy or implementation plan, the remuneration committee must consult shareholders and disclose the nature and outcomes of those consultations.

King IV also builds on King III’s good work to introduce IT governance to corporate governance in South Africa. It separates technology and information and requires directors to have greater IT risk awareness. “King IV recognises information … as a corporate asset and confirms the need for governance structures to protect and enhance this asset,” says Deloitte. That is a relevant development for Australian boards given their growing focus on cybersecurity and other technology risks and opportunities.

King IV also recommends that listed South African companies establish social and ethics committees to consider issues relating to ethical behaviour and ethics management. The Principles suggest greater integration between this committee and other board sub-committees to ensure ethics are considered more widely in boardroom deliberations.

Formal recognition of the role of stakeholders is another important addition in King IV. It says active stakeholders are required to hold the Board and company accountable for their actions and disclosures – an interesting development as shareholder activism worldwide grows. King IV appears to go further than other governance codes, including the ASX Corporate Governance Principles & Recommendations, in emphasising the critical role of stakeholders in the governance process.

King IV’s changes around technology, ethics and on the disclosure of investor consultations when executive remuneration proposals do not meet sufficient hurdles, provide food for thought in the next iteration of the ASX Corporate Governance Principles & Recommendations.