On 2 March 2015, the SFC published its Consultation Paper on the Principles of Responsible Ownership. This is a three-month consultation on a set of seven proposed principles of responsible ownership aimed at providing guidance for investors on how to fulfil their responsibilities as owners of a listed company. While it is acknowledged that the primary responsibility for a company’s success lies with the board, investors also play a role in holding the board to account for the fulfilment of its responsibilities.
Alongside the seven principles, the Consultation Paper provides guidance to help investors determine how best to meet their ownership responsibilities. The principles aim to encourage investors to recognise how responsible ownership can affect the company, its investors and the economy as a whole. These principles are non-binding and operate on a “comply-or-explain” basis, and investors are encouraged to disclose that they have signed up to them, or explain the reasons why some of the principles do not, or cannot, apply to them.
While drafting the principles, the SFC looked to other jurisdictions where shareholder engagement is promoted. However, as the shareholder base in Hong Kong differs to other major markets, such as the UK and Australia where a significant portion of listed companies in those jurisdictions have a dispersed shareholder base, Hong Kong’s listed companies are dominated by family and state-controlled ownership. In such a market, there is evidence to support the view that investors will find it more productive to engage directly with the controlling shareholder rather than engage with the board of directors as a whole using the usual voting channels.
Share ownership is attached with a number of responsibilities, including the right to speak and vote on matters that could potentially affect the way a business is run. This means that share owners should discharge their responsibilities appropriately and do not blindly delegate those responsibilities.
The seven principles of responsible ownership ask investors:
- to establish and report to their stakeholders their policies for discharging their ownership responsibilities;
- to monitor and engage with their investee companies;
- to establish clear policies on when to escalate their engagement activities;
- to have clear policies on voting;
- to be willing to act collectively with other investors when appropriate;
- to report to their stakeholders on how they have discharged their ownership responsibilities; and
- when investing on behalf of clients, to have policies on managing conflicts of interests.
The SFC also believes that there is merit in reviewing the extent to which any set of principles governing share ownership should be codified and these will be addressed as part of a separate consultation. It believes that eventually, for Hong Kong institutional investors of a listed company, a “comply-or-explain” code similar to those implemented in other jurisdictions will be implemented. This would encourage institutional shareholders to act responsibly not only towards the company they have invested in but in general would support the health and stability of the Hong Kong financial market as a whole.
The consultation period will end on 2 June 2015.
For further information, please contact:
Jamie Barr, Partner, Hogan Lovells
jamie.barr@hoganlovells.com
Tim Fletcher, Partner, Hogan Lovells
tim.fletcher@hoganlovells.com
Terence Lau, Partner, Hogan Lovells
terence.lau@hoganlovells.com
Mark Parsons, Partner, Hogan Lovells
mark.parsons@hoganlovells.com
Nelson Tang, Partner, Hogan Lovells
nelson.tang@hoganlovells.com
Thomas Tarala, Partner, Hogan Lovells
thomas.tarala@hoganlovells.com
Steven Tran, Partner, Hogan Lovells
steven.tran@hoganlovells.com
