What hope for better investor ‘stewardship’ in Asia?

Why the ability of management to articulate their approach to governance and the environment is very revealing.

A 450-page offer document from an Asian company hoping to list recently landed on the desk of Asian investors. A cursory glance revealed a number of worrying corporate governance issues. The owners had previously been banned by the regulator from accessing the stock market for two years because of stock price manipulation. The company had 172 outstanding litigation cases covering 31 pages. There were significant conflicts of interest. There had been three different auditors in the past three years and, to cap it all, there were several serious environmental issues outstanding. In terms of corporate governance, it would have been hard to give it more than one out of ten. Yet far from scaring off investors, the offer was oversubscribed 39 times. For now at least, corporate governance is firmly off the radar screen of many Asian investors. The contrast between East and West is noticeable. In the UK, the debate over corporate governance, the ownerless corporation and engagement has recently reached a crescendo. All institutional investors are to be subject to a ‘Stewardship Code,’ which aims to improve the quality of engagement between shareholders and the companies they own. Unlike their Western counterparts, Asian markets are not dominated by ownerless corporations. Nonetheless, better stewardship is desperately needed in Asia too.Good stewardship requires three simple guidelines. Most importantly, investors need to open their eyes. Too many still hide behind the excuse that information on governance, environmental or social performance is not available. This is not true. The information is there, albeit not always in the places one might expect to find it. As a useful rule of thumb, the greater the number of pictures of smiling children in the sustainability report, the greater the problems lurking beneath. Yet by far the best source remains the companies themselves. The ability of management teams, to articulate convincingly their approach to corporate governance or environmental management, is very revealing. They can also be a rich source of both positive and negative information on their peers. Reputation checks on owners, independent directors and auditors are usually easily done, while local NGOs provide invaluable insights. Elsewhere, there are often plenty of clues in the notes to the accounts, while flotation documents offer a once-in-a-corporate-lifetime glimpse at what are usually well-hidden skeletons. A second useful guideline is to recognise that there is no such thing as the perfect company. Having started to look, it is easy to get overwhelmed by the number of issues that appear, particularly where companies have multiple business divisions.

India’s largest solar panel company still depends for most of its profits on coal-fired power generation. It also happens to manufacture the Pinaka multi barrel rocket launcher system and the Akash medium range surface-to-air missile launcher.

“Too many still hide behind the excuse that information on governance, environmental or social performance is not available.”

Another Indian company recently released an annual report that stretched to over 1200 pages. The Company employs 75,000 people across 98 different business divisions. Even the CEO could be forgiven for not being able to name them all! In such cases, investors will never know the environmental performance of each division. They can, however, make a decent stab at assessing the corporate culture and senior management’s willingness and ability to address the most important sustainability challenges across the group. Stewardship comes in shades of grey. There needs to be tangible evidence of an improving trend, even if it is of the ‘two steps forward, one step back’ variety. Corporate culture matters. Management teams must be willing to admit their weaknesses and mistakes, and learn from them. Incentivisation schemes need to encourage a long-term mindset and focus on risks as well as rewards. Above all, when investors come across issues, they must engage with management.
The third important guideline is to ensure this engagement is constructive, not destructive. Aggressive letters rarely, if ever, work. Nor do demands or ultimatums. Fortunately Asian companies are remarkably open to suggestions. In the past month the CEOs of two different Asian banks have approached investors directly for suggestions on how corporate governance can be improved. Work hard to build rapport.This can be as simple as writing thank you letters after meetings. The longer the time spent on the shareholder register the more productive the engagement becomes. Investors need to lean much more on independent directors for support. If confidence is lost in management’s ability to address the problem, agitate behind the scenes for a change in personnel. This is usually much more effective than waiting for a confrontational showdown at the next AGM.Would an Asian stewardship code encourage investors to follow these simple guidelines? It seems unlikely. Over the past few years investors have been asked to sign up to a proliferation of stewardship initiatives and their accompanying acronyms; ACGA, ASRIA, CDP, EITI, EMDP, FDI, ICGA, IGCA, WDP, UNPRI and so on. Their impact has been limited to date. Signing up is usually a fairly painless process and requires little follow through. For example, the Carbon Disclosure Project has 475 investors as signatories representing a combined $55 trillion of assets. Yet many responding Asian companies complain that they have yet to receive one question from investors on their carbon positioning.
Some investors have wondered if the introduction of policies such as delayed dividends, deferred voting rights and short-term capital gains taxes might not be more effective? A financial version of the Hippocratic Oath has even been suggested.
Above all good stewardship requires the right mindset. Buying a share means buying not only a piece of paper or electronic ticker, but part of a real business with all the rights and responsibilities that go with this. Get this right and everything else follows. Get this wrong and investment becomes little more than an elaborate game of speculation. And speculation and stewardship are not natural bedfellows.
David Gait is a fund manager with First State Investments. The author has written the above in their personal capacity, and their views do not reflect the views of their company.