Funds industry weighs the implications of SFC proposal on ‘responsible ownership’
A popular talking point among listed company executives these days is a new proposal by our securities watchdog on share ownership engagement.
The issue got rolling back in March, when the Securities and Futures Commission released its Consultation Paper on the Principles of Responsible Ownership. Those consultation discussions were completed in June, but so far the regulator has yet to announce its conclusions on how to proceed with this controversial reform.
A close read of the details of the proposal reveals why it has touched a nerve. The SFC proposal requires fund managers or other institutional investors to be more aggressive in their ownership responsibilities.
“We strongly encourage investors to recognise that by utilising their rights as shareholders and behaving in a responsible manner towards their investee companies they can create positive financial returns and market growth. However, we are not seeking to impose any obligations on shareholders,” the SFC said in an introductory note in the consultation paper.
The idea is to urge fund managers and institutional investors to monitor the companies so as to enhance corporate governance in Hong Kong. Britain has similar rules, but the United States and many other markets do not yet have such requirements.
The proposal requires institutional investors to have direct dialogue with management of the companies on how they run their business. This may well be seen by management as an unwelcome intervention into their daily work. But what is more important is whether such direct communication would be meaningful.
If the company management conveys to fund managers information that has not yet been announced publicly, both may be found in breach of insider trading rules, a crime in Hong Kong punishable by a maximum penalty of seven years in jail and a fine of HK$10 million.
To prevent themselves from criminal prosecution, company executives are likely stick to what has been announced publicly in these dialogues with fund managers. If that is the case, what is the point of such direct communication, if they merely repeat what has been published on the HKEx website?
Another concern is whether fund managers will somehow influence company management against making strategic long-term investments that might benefit shareholders in the long term.
Fund managers are often more focused on short-term gains. The SFC proposal also spelled out seven principles to guide investors. One of the principles urges investors “be willing to act collectively with other investors when appropriate.” Presumably this could mean exerting pressure on the executive management in instances of disagreement over certain decisions. This may lead to lawsuits and add up to excessive legal fees as company management defend their actions.
Fund managers, on the other hand, worry that investors who buy their funds will expect them to be more assertive in affecting change in the companies they invest in. If they don’t take a more aggressive role with management, they may have some explaining to do with their investors and stakeholders. The local fund industry worry the new proposal would add to their compliance burden.
With so many concerns about this proposal, the SFC should think twice before pushing ahead.