Make boards conflict-free, AllianzGI official tells Hong Kong firms

Eugenia Unanyants-Jackson, head of ESG research at Allianz Global Investors, which has €498 bn ($613 bn) in assets under management, talks about Hong Kong companies with IR Magazine.

You’ve talked recently about a lack of independence on Hong Kong boards. What are the key issues here and what do you want to see from Hong Kong-listed companies?

As investors, one element we look at is how we can ensure our interests as minority shareholders are well protected. These protections come from a number of sources, but the first and most important is the board of directors. When we look at the board, we look at a number of things: we want board members to be people with the right experience, the right background and, importantly, we want to see a critical mass of directors who are unquestionably independent. 

We recognize that in Hong Kong, in most emerging markets and more broadly across Asia, there are a lot of companies with a large or controlling shareholder, which is something we accept when we invest in these companies. But having a controlling stake or a large stake should be balanced by a very strong, independent presence. We think having one third of the board independent gives that critical mass where the independent voice will be heard very strongly. And we define independence as being free of conflicts that could overshadow judgment in some specific cases. 

Very few companies meet that [standard]. Most companies have independent directors – or what they call independent directors. But when you start looking into their background, affiliations, tenure and relationships with controlling shareholders or other companies that are part of the same group of companies, you realize there are circumstances where conflicts could arise. So we wouldn’t consider those directors to be independent from a conflict-of-interest point of view. 

Are Hong Kong companies happy to discuss issues around board independence?

Increasingly, they are more open [to this discussion]. What we are seeing, at least within Allianz Global Investors, is that there is a very strong interest among our portfolio managers, research analysts and local analysts in Hong Kong to engage with companies on this topic. Previously, it was a bit harder to have these conversations because we had to do a lot of explaining. But now the message is getting through to many of our listed companies and the discussions are getting easier and the companies are more open to actually making changes. We’re certainly having higher-quality conversations with companies now. 

What we are also doing – and I think this could be helpful for other investors – is bringing these conversations up at a very senior level. It can still be hard to meet board members of Hong Kong companies, so while most discussions are still at the IR level, we are bringing the discussion to our meetings with CEOs and CFOs. That is making a big difference. It’s much better to talk about these issues with the primary decision-makers at the companies, such as the chief executive officer or chief financial officer.

That’s why, to us, the integration of ESG into our fundamental investment analysis, into our investment decision-making, is so important. Engagement is not a separate activity; it is part of our day-to-day investment activity, so we are able to bring these issues to the attention of company management directly, through our portfolio managers. That’s where it makes a difference. 

It’s not a separate ESG team raising ESG questions: it’s the portfolio managers and the fundamental analysts covering the company, invested in the company, who are bringing these issues to the management of our invested companies. 

When did this shift from a separate ESG team to the individual portfolio managers take place? 

We have a strong, dedicated ESG team and strong ESG expertise, and we’ve always had a very good understanding of ESG issues – and governance in particular. What has happened in the last couple of years is that we’ve had a really strong, focused effort on making ESG a part of the day-to-day activity of our portfolio managers and investment analysts, both on the equity and the fixed income side. 

Now, raising ESG issues and engaging with companies is the responsibility of all active portfolio managers and fundamental analysts, not the sole responsibility of the ESG research team. To us, ESG integration is a core focus and we don’t believe it can be achieved if there is only a separate team focusing on these issues. That has made a very big difference to our approach and to the success of our engagement efforts – and also to our voting behavior.  

What are the other top governance concerns for you among Hong Kong companies at the moment?

The other top concern for us is capital issuances. Hong Kong companies are asking shareholders on a routine basis for quite large authorizations to issue capital without pre-emptive rights. This is a major problem and Hong Kong companies are not as disciplined with equity capital as we think they should be. 

Another topic where we would like to see improvement is the approval of related-party transactions – we want any major related-party transactions to be approved by minority shareholders as they are not always in our interest.

Also, there has been a consultation on weighted voting rights in Hong Kong, which we came out strongly against: we really want companies to adhere to the one vote, one share principle. We don’t think weighted voting rights is a good thing; we think it is very detrimental to governance standards and the protection of minority shareholders. 

How do you handle engagement at firms you’re invested in? What steps do you take before considering voting against a firm?

The way we approach voting has been changing a little. We did a wholesale review of our corporate governance and proxy voting policy in 2016. It took nine months to review the policy fully because we held a company-wide debate about voting points and about certain policy positions in which a vote against can occur. Now we have a cutting-edge, in-house policy where portfolio managers and analysts have a real say on what our guidelines look like and how we are going to vote. 

The review resulted in us taking a much more conservative position on certain topics: we tightened up our policy in some areas as there was such a strong feeling among our investors that we shouldn’t just approve certain practices because they are common in a certain market. There was a strong feeling we should approve company management proposals only where we agreed [they constitute] good standards and good practice.

We use our policy recommendations as a starting point. At the moment, unfortunately, we see many instances where company practices fall short of our standards so our policy recommendations direct us to vote against. What would happen then is that we would look at the company and see whether there are any mitigating circumstances, examine our discussions with management, our engagement, our understanding of what the board is doing or is planning to do to improve its governance practices and then we can, if we want to, make a decision to depart from the policy. 

But we do not hesitate to vote against where we think company practices are not up to our standards and where we don’t have any indication from management or the board that things are going to get better and improvements are in the pipeline. 

Finally, what do you want to see in terms of communication from companies on corporate governance issues? What specific role should the IRO be playing here?

Speaking specifically about Hong Kong and Asia, we would like to see more connection between IR and other functions within the companies themselves that are responsible for governance and social or environmental issues. Since the Hong Kong Stock Exchange introduced requirements for non-financial reporting, we have seen an improvement in communication on ‘E’ and ‘S’ issues but things are still very far from what we want and what we need to be able to analyze ‘E’ and ‘S’ risks at our listed companies. What we want is for companies to connect the dots internally, so that when IROs come to speak to us on the financial performance, they can also address material ESG issues. That would be very helpful. 

We would also like to have more communication with the board at listed companies – it is still very new at Asian companies to allow the non-executive chairman or directors to talk to investors. Very few companies do that, and I think they really need to think about doing it more. There’s a lot of value in those conversations for both companies and investors. That type of communication and having annual governance or ESG roadshows with the board, the chairman or the non-executive directors would be very helpful. 

[Finally], improving the disclosure in the annual report around material ESG issues would be extremely helpful. It doesn’t have to be all good news – it’s not about philanthropy, it’s not about corporate citizenship or social responsibility. To us as investors it’s about how the company is handling the material ESG risks the company is exposed to. What are these risks, how is the firm managing them and what does it anticipate happening? This is extremely important for us and this is the sort of information we are not getting yet.