Hong Kong launches consultation on seven-point Principles of Responsible Ownership

A new ‘stewardship code’ is unveiled by Securities and Futures Commission

Hong Kong’s Securities and Futures Commission (SFC) has become that latest financial regulator to look at launching a UK-style stewardship code.

The SFC has launched a consultation on a new non-binding, comply-or-explain, set of Principles of Responsible Ownership (see below). Hong Kong has been somewhat conspicuous by its absence as stewardship codes have sprung up worldwide, including at regional rivals such as Malaysia and Japan.

“Responsible shareholders,” the SFC says, “carry out a function that is essential for effective capital allocation.” And it was important for Hong Kong to “play our part as a world citizen” and “encourage proactive ownership engagement” between listed firms and investors.

“Whilst the primary responsibility for a company’s success rests with the company’s board, investors in a company also play a significant role by holding the board to account,” said SFC Chief Executive Ashley Alder. “Recognising the importance of responsible ownership benefits the company, its investors and the economy as a whole,” he added.

The SFC wants investors to recognise that by using their rights as shareholders and “behaving in a responsible manner” towards companies, they can create “positive financial returns and market growth”. But it adds it is not seeking to impose any obligations on shareholders.

It’s a stated policy objective to establish “an investment culture where conscious engagement with investee companies is seen as paramount and fundamental”. A willingness to “act collectively” with other investors is one of the principles.One aspect of the guidance is that clients should hold asset managers accountable for how they fulfil their ownership responsibilities.

“Responsible shareholders are essential for effective capital allocation.”

While the SFC is stressing the voluntary nature of the principles, it says there may be “certain categories” of investors, i.e. those regulated by the SFC itself and the territory’s other watchdogs (the Hong Kong Monetary Authority, the Mandatory Provident Fund Schemes Authority (MPFA) and Office of the Commissioner of Insurance) where there “should be a requirement” to comply or explain. The MPFA, for example, oversees Hong Kong’s mandatory provident fund (MPF) and occupational retirement (ORSO) schemes.

In formulating the principles, Hong Kong has looked in particular at the UK and Australian models. The deadline for submissions is June 2.

The seven principles of responsible ownership:
• establish and report to stakeholders policies on ownership responsibilities;
• monitor and engage investee companies;
• establish clear policies on escalating engagement;
• clear voting policies;
• willingness to act collectively with other investors;
• report to stakeholders how ownership responsibilities discharged
• have policies on managing conflicts of interests.