BlackRock takes an activist stance on voting rights in Hong Kong to foster corporate governance

Asset manager wants companies to split the roles of chairman from CEO, and will oust directors who attend fewer than 75 per cent of board meetings for two straight years

PUBLISHED : Sunday, 21 August, 2016, 5:32pm
UPDATED : Sunday, 21 August, 2016, 10:59pm

BlackRock Inc, with US$4.8 trillion of global assets under management, said it plans to use its clout to improve corporate governance among the Hong Kong-listed companies in which it owns shares, to foster the principles of accountability, transparency, fairness and responsibility.

The world’s largest asset manager, which owns shares in 850 companies in Hong Kong, said it aims to vote in 100 per cent of the shareholders’ meetings that it’s entitled to attend, according to a set of guidelines in May setting out how it would exercise its rights.

“We want to use the guidelines to communicate with companies about our expectations of their corporate governance,” said BlackRock Asset Management North Asia’s director Pru Bennett, in an interview with the South China Morning Post.

The Hong Kong guidelines follow those issued in 2011 for Australia by the New York-based fund. Next on the list will be guidelines for mainland China companies by the end of 2016, followed by Singapore, South Korea and Taiwan.

BlackRock’s activist move is also consistent with the Hong Kong securities watchdog’s push for fund managers and institutional investors to adopt “responsible ownership” of publicly traded companies.

Up to US$2.2 trillion of BlackRock’s assets under management are passive funds, which are benchmarked against key equity indexes. That compares to another US$276 billion that’s actively managed by BlackRock.

“Since passive fund managers can’t freely sell shares, they can only exercise their voting rights” to have their views heard on how companies should be managed, Bennett said.

BlackRock voted against 3,415, or 8 per cent, of the 42,692 corporate proposals by companies in which it owns stakes in the Asia-Pacific region in the second quarter, according to the fund’s data.

That’s consistent with its US voting record, where it voted against 8 per cent of 36,100 board recommendations in the same period, and 7 per cent of the 28,694 proposals received in Europe, Middle East and Africa, BlackRock said.

“Our aim is not voting against corporate proposals” per se, Bennett said. “We just want to communicate our expectations on corporate governance.”

Hong Kong-traded stocks that BlackRock has invested in include Cheung Kong Infrastructure Holdings., NWS Holdings Ltd., Yue Yuen Industrial Holdings Ltd., Cosco Pacific Ltd., Tencent Holdings Ltd. China Life Insurance Co., PetroChina Co., CK Hutchison Holdings Ltd and Bank of East Asia Ltd, according to data by Bloomberg and Thomson Reuters.

“We welcome better communication with shareholders, and we will listen to constructive recommendations by them,” said Mike Wong, chief executive of the Chamber of Hong Kong Listed Companies.

BlackRock wants to separate the roles of chairman and chief executive officer in publicly traded companies, or have the board’s leadership augmented by a lead independent director.

Exceptions can be made where a non-independent chairman is associated with the majority shareholder or the chairman is the founder of the company, BlackRock said.

“The key is not to allow anyone to be too powerful on the board,” Bennett said. “There needs to be checks and balances.”

Any director who attends fewer than 75 per cent of a board meeting for two straight years without a compelling reason shouldn’t be re-elected, according to BlackRock’s guidelines. Directors who take on too many roles in other boards, or full-time chief executives split their time with other non-executive roles, should also be discouraged, Bennett said.

“When a full-time chief executive has a non-executive director role, there is a risk that their ability to fully serve in either role could be compromised,” she said.

While responsible ownership is laudable, it shouldn’t be confused with hostility, said Wong of the Chamber of Hong Kong Listed Companies, an industry guild.

“We hope they understand that major shareholders have the same goal as minority shareholders in achieving the same benefits for the entire company”, he said.

The fund is also concerned about the general mandate under Hong Kong’s listing rules, which empowers companies to issue up to 20 per cent of their equity with a discount of up to 20 per cent, subject to shareholder approval.

“While BlackRock recognises the listed companies’ need for flexibility to raise funds quickly at times, we consider the dilution risk as potentially excessive,” Bennett said. “We will consider voting against a general mandate” unless a cogent explanation has been provided, she said.