Expert Column | APAC Proxy Season Review 2022 – ESG Focus

This chapter gives a comprehensive review of the dynamics and trends related to ESG and proxy voting in the Greater China region. Although mainland China, Hong Kong SAR and Taiwan adopt different regulatory policies regarding sustainability and corporate governance, these three regions still share common characteristics and showcase the broader trend of ESG’s increasing importance when analyzing proxy voting agendas.

I.?Background and Introduction

China’s stock market is playing an increasingly important role in its economy. Compared with Hong Kong and other, more-developed markets, oversea investors do not own much of China’s A share market. This is not surprising considering the market’s historic characteristics of ownership concentration and domestic investor domination. However, the past few years have seen cross-border capital flowing into China due to the inclusion of A-share companies in global indices and China’s top-down reforms to open a variety of access channels. Domestic listed companies are motivated to collaborate with international asset managers to better mitigate risks and capitalize on related opportunities in stewardship and ESG fields.

In Hong Kong, changes have been made following the consultation on corporate governance practices last year. With the new listing rules, listed companies will be under pressure to improve board gender diversity in the next three years.

Taiwan’s capital market is also striving to keep up with international trends and best practice standards in sustainable development. Therefore, Taiwan-based regulatory agencies, investors and issuers have begun a joint effort to reinforce ESG information disclosure standards and formalize corporate governance mechanism for listed companies.

This article reviews key regulatory and policy updates in mainland China, Hong Kong and Taiwan. It also discusses investors’ expectations of issuers’ corporate governance and ESG performance in the region. Finally, it highlights some controversial agenda items proposed during the 2022 proxy season by examining selected investor voting rationales in various jurisdictions.

II. Regulatory Policy Updates

In April 2022 the CSRC issued opinions for mainland China on accelerating the high-quality development of the public fund industry to strengthen the supervisory responsibilities of independent directors, supervisors and senior executives. In addition to supervisory oversight within the companies themselves, the CSRC also sought to encourage institutional public funds to actively participate in the corporate governance and stewardship of listed companies. This top-down approach will encourage domestic asset managers in China normally reticent to disagree with issuers’ proposals to act more aggressively in their stewardship practices. In addition, China’s "14th Five-Year Plan for Financial Standardization" accelerated the establishment of environmental information disclosure standards for listed companies and bond-issuing enterprises.?This was done to promote carbon emission accounting standards for financial institutions and to establish a standard system for ESG evaluation. In this context, the China Enterprise Reform and Development Research Association, the Capital University of Economics and Business and multiple corporations jointly launched the "Corporate ESG Disclosure Guidelines" (T/CERDS 2-2022), which is the first corporate standard for ESG information disclosure in China and consists of a total of 118 indicators.

As for the Hong Kong SAR, the HKEx revised the Corporate Governance Code (“CG Code”) for listed companies following a consultation process in December 2021. The revised CG code took effect on 1 January 2022 [1]. The key changes cover the following areas: board diversity, nomination committees, INEDs rotation, board independence, culture expectations, anticorruption/whistleblowing policies, communication with shareholders and ESG reporting timelines. Additionally, the government of Hong Kong announced its Climate Action Plan 2050 last year, which set out the vision to achieve zero carbon emission and sustainable development; clear targets and strategies were laid out accordingly. Key local regulators also released regulatory updates for banks, listed companies and asset managers in response to the action plan.?

The HKEx published guidance on climate disclosures to help listed companies meet TCFD recommendation requirements. Listed companies from relevant sectors are required to meet the requirements no later than 2025. The Hong Kong Monetary Authority (HKMA) also released a circular regarding a two-year plan to integrate climate risks in banking supervision in light of the recent review of their existing processes. Moreover, the Securities & Futures Commission (FSC) published its Agenda for Green and Sustainable Finance, continuing to focus their effort on three key areas including corporate sustainability disclosures, monitoring implementation of sustainable finance measures and regulatory frameworks for carbon markets.

Since the last proxy season in 2021, Taiwan has also been accelerating the adoption of ESG principles in its capital market and is attempting to align it with international best practices in sustainable development. With the intention to implement the “Corporate Governance 3.0 - Sustainable Development Roadmap” (2021-2023) and the “Green Finance Action Plan 2.0” proposed in 2020, Taiwan’s FSC amended its regulations governing information to be published in annual reports of public companies in November 2021. The wording “CSR” (Corporate Social Responsibility) was revised into “Sustainability Development,” which requires enhanced disclosure of ESG information including GHG emissions, waste management, female employee proportion and other topics. Accordingly, the TWSE and TPEx converted the wording “CSR reports” into “Sustainability Reports” in their disclosure regulations, added new filing items and expanded the sustainability report coverage scopes to include more listed companies. For instance, the TWSE expanded the scope to listed companies whose share capital has achieved no less than NT$2 billion and no more than NT$5 billion, making it compulsory for them to file a sustainability report from 2023 [2]. In addition, the FSC officially launched its “Sustainable Development Guidemap for TWSE- and TPEx-Listed Companies” on 3 March 2022, requiring all listed companies to complete greenhouse gas inventories by 2027 and verify them before 2029.

III. Proxy Advisors Dynamics

Major revisions of 2022 voting policies by the proxy advisors ISS and Glass Lewis focused on topics including board diversity, ESG topics, remuneration committee performance, nomination committee performance, initial public offerings, amendments to procedural rules, virtual meetings, equity-based compensation plans, cumulative voting and more.

For mainland China in 2022, ISS mainly added social and environmental issues in its proxy voting guidelines. It will recommend on a case-by-case basis on topics including but not limited to consumer and product safety, environment and energy concerns, labor standards and human rights.

Updates in the ISS guidelines for Hong Kong primarily dealt with dividend distributions, A-share private placement issuances and article amendments. Firstly, ISS removed its minimum 30% payout ratio requirement for distribution items, aligning the policy to its effective current practices. Additionally, ISS revised the policy of A-share private placement issuance requests to align with the language used in the CSRC’s latest revision of the related requirements. Lastly, ISS will now recommend against proposed article amendments if companies failed to provide either a full change comparison table or, minimally, a summary of the proposed amendments.

ISS did not emphasize any updates specifically applicable to Taiwan. However, the general changes and APAC-applicable changes in other ISS guidelines will still apply in Taiwan. This includes, for example, ISS’ updated guidelines on Say On Climate (SoC) proposals.

Another influential proxy advisor, Glass Lewis, made a range of adjustments to its voting guidelines for Chinese securities. Firstly, Glass Lewis believes that there should be at least one female director serving on the board at all mainland Chinese companies. Independence is another topic that Glass Lewis heavily valued in 2022. The new guidelines stipulate against recommendations for chairs and members of audit, remuneration, and nomination committees if these committees are chaired by non-independent directors or if their respective independence levels fail to meet Glass Lewis requirements. With an increasing focus on ESG issues, Glass Lewis has included a separate section on its overall approach to ESG and will examine companies’ direct environmental and social risks, risks due to legislation and regulation, legal and reputational risks and governance risks.

In Hong Kong, Glass Lewis implemented five key changes:

• For board gender diversity, Glass Lewis replaced references in their policies to female directors with “gender diverse directors,” here defined as women and directors that identify with a gender other than male or female.
• For independent director tenure, Glass Lewis will no longer consider directors that have served 12 or more years on board as independent.
• Glass Lewis updated how they evaluate equity-based compensation plans, including a broader explanation of their overarching principles used in their evaluation.
• For the appointment/ratification of an auditor, Glass Lewis enhanced its disclosure requirements. They will oppose proposals if companies fail to provide sufficient information going forward.
• For local environmental and social disclosure practices, Glass Lewis added disclosure requirements for companies on ESG reports in line with HKEx’s Listing Rules and CG code.

In Taiwan, Glass Lewis implemented the following key changes:

• Glass Lewis explained their updated guidelines for the Taiwanese method for electing board directors: cumulative voting. Under cumulative voting, the number of voting shares of each shareholder is multiplied by the number of persons to be elected and shareholders have the right to cast all votes for one candidate or divide the votes among two or more candidates as they see fit.
• Glass Lewis has undertaken a policy to facilitate board gender diversity by recommending investors to vote against the nomination committee chair should all members of the board be the same gender.
• For equity-based compensation plan, Glass Lewis provided a broader explanation of their over-arching principles. For instance, Glass Lewis is against granting performance-linked compensation to supervisory boards to ensure independence and that non-executive directors hold the same type of securities as ordinary shareholders.
• Glass Lewis also emphasized additional clarifications of its expectations for the composition and performance of audit, remuneration and nomination committees. For instance, it may recommend voting against chair or members of those committees due to, for instance, excessive ownership of company stock by audit members, lack of establishment of the remuneration committee, lack of majority independence on nomination committee, etc.

?IV. Voting Trends in the 2022 Proxy Season

For further analysis on voting trends at the most influential companies in the Greater China Region, S&P Global gathered voting results for shareholder meetings held by constituent companies of the FTSE China 50, Hang Seng Index and the FTSE TWSE 50 as of 15 July this year. The resolutions were classified into five categories. Ranked by the average dissent rate, corporate structure-related items received the most investor resistance (6.98%), followed by (re-)election resolutions (3.80%), remuneration proposals (2.73%), committees and reporting resolutions (0.65%) and Environmental & Social (mainly related to charitable contributions) items (0.05%). The overall trends for the 2022 AGM Proxy Season are listed below.

(i).?High Dissent Rate for Equity-Based Plan Proposals

During China’s 2022 proxy season, dissent rates of share option schemes and restricted share awards were 23.74% and 22.78%, respectively. Although the percentage of dissent was substantial, it should be noted that there were only 12 cases regarding the two types of resolutions in these indices, making up 1.71% percent of all voting items. In Hong Kong, up until July 31st, there were five AGM resolutions under Equity Base Plan category, not a statistically significant sample size. However, the dissent rate of this category is noteworthy at 21.28%. The number is driven up by an HKEx-listed pharmaceutical group headquartered in China and its “Approve Grant of Options Under the Share Option Scheme,” proposal, which garnered 46.54% dissent.

Issuances of restricted share awards and share option schemes both refer to some form of compensation plan with vesting requirements. They are used by companies to recognize employees’ past contributions, retain employees, incentivize employees for their contribution in the long run and to align the interests of employees with those of shareholders. Share option schemes provide employees with the opportunity to purchase shares at a fixed price for a set period, while restricted shares awards give the employees the right to receive shares after meeting certain requirements such as working for a specific period of time or hitting specific performance targets.

When investors decide whether to support share schemes, it is important to link vesting conditions to the performance of the company and to be clear about the financial, business and ESG targets. The exercise price of the stock options and/or grant price of the performance shares need to be reasonable compared with the current market price and the dilution resulting from the issued capital should be fair and acceptable to existing investors; usually acceptable dilution is considered 5% for a mature company and up to 10% or even higher for a growth company. Investors are also becoming increasingly critical of companies that grant options or restricted shares to directors who participate in the administration of the scheme, which they assess as a potential conflict of interest.

The following table provides a summary of guidelines on the two types of compensation plans from major institutional investors that have significant influence on markets in the Greater China region. Additional reference can also be made to Case Study 1 at the end of this chapter, which concerns equity-based compensation plans.

(ii). Capital Resolutions Meet with Frequent Shareholder Concerns About Dilution

Capital resolutions had the lowest approval rate in Hong Kong during the 2022 season. This dissent was especially prevalent on resolutions to “Authorize [the] Reissuance of Repurchased Shares.” The sample contained 15 proposals that received significant dissent, together with an overall average of 19.15%. Among the 15 proposals, a leading meat and food processing company received the highest dissent (41.51%) for its repurchase resolution.27 In the Taiwanese market, among FTSE TWSE 50 component issuers, the average dissent rate for eight sampled “Approve Capital Increase” proposals was 12.41% (with 4.06% Against vote and 8.35% Abstain vote), and the average dissenting rate for 18 instances of “Capital Change”/ “Capital Increase”/ “Capital Reduction” proposals was 12.40%. In the case of China, the situation is similar; the average dissent for “Capital Change” was 12.94%, while “Capital Increase” was 13.25%.

Reasons for dissent include dilution to existing shareholders being greater than 10%, a lack of a specified discount limit, aggregate share issuance limits being greater than 10 percent of the relevant class of shares, among others. Please refer to Case Study 2 for additional information regarding these trends.

(iii). ESG Factors Are Incorporated in the Rationale of Dissenting Director Votes?

As of July 2022, there were 129 management proposals for Hang Seng component issuers regarding the (re-) election of directors during the 2022 AGM season. The average approval rates for those proposals were 94.25% with an average dissent rate of 5.74%; 0.06% of the capital presence abstained on average. Among all these 129 (re-)election of directors resolutions, 10 resolutions at nine companies received approval rates lower than 80%. If we look at the whole Hong Kong market, there were 40 resolutions at 31 HKEx-listed companies that received approval rate lower than 80%.

There are some common rationales of these dissent votes:

• There were gender diversity concerns. Investors including RobecoSAM, Wellington Management, UBS Asset Management, Schroders would vote against when the board shows a lack of gender diversity, fails to incorporate basic considerations for gender diversity or has not put in place policies to increase gender diversity on the board, among other concerns.
• There were board Independence concerns. Institutional investors may have different standards for recognizing board independence due to diverse proxy voting guidelines or subscription to different proxy advisors, but in general they expect board to be at least one-third independent.
• Some investors targeted overboarded director or poor time commitments (e.g., poor attendance rate at board meetings).

ESG factors were also cited by investors when casting a dissent vote. While explaining its rationale of voting against on several board director Re/Election proposals, AllianzGI explained that it “encourages the Board to establish an effective oversight of ESG matters that are material to the company's performance and long-term development, and to ensure that the company provides meaningful and comprehensive ESG-related disclosures to investors.” DWS also explained their rationale of voting against a director of an Oil & Gas company: “the candidate is not sufficiently qualified or unsuitable for the position because the company is involved in severe ESG controversies or fails to take climate action: - The company is on the DWS ESG Rating watchlist.”

In the Taiwanese market, due to the mechanism of cumulative voting, a nominee’s election is not determined by the overall proportion of approval voting. There would not be any dissenting votes against a given director nominee in most circumstances.

According to S&P Global Market Intelligence, most of the dissenting votes related to board directors fell within the category of “Non-compete Restrictions for Directors” proposals—the average dissent was 10.57%, most of which were “abstain” votes (with an 8.89% abstain rate on average). For such proposals, Taiwan issuers seek the release of restrictions on competitive activities of directors, usually when these directors’ service on wholly owned or non-wholly owned subsidiaries triggers non-compete restrictions of the Taiwan Company Act. However, some institutional investors may cast dissenting votes, worrying about potential abuse once restrictions have been released, i.e., they believe that it may create a conflict of interest by allowing some directors to concurrently serve on the boards of the company’s competitors without sufficient disclosure. For instance, during the 2022 AGM of a Taiwan-based mobile company (Taiwan Mobile Co., Ltd.), the proposal “Non-compete Restrictions for Directors,” garnered an against rate of 0.07% and an abstain rate of 22.79%.

(iv). Less Common Shareholder Activism than in Other Parts of Asia

Activism has historically been perceived in APAC regions as a foreign market issue, although more activism has been observed in Asia over the past few years; a part of this is certainly because more activist investors have acquired shares in some of the high-profile companies in Asia.

Shareholder activism in the Greater China region is not a common topic in comparison to other APAC regions such as Japan, South Korea and Singapore. Despite foreign investment being less inhibited than in China proper, many listed companies are controlled by founders or their families (or at least dominated by key shareholders), which makes an activist’s job difficult. Up until July 31st, 2022, only two companies in Hong Kong experienced shareholder activism at their AGMs, there were 43 shareholder proposals in total. All 43 of the shareholder proposals concerned director (re-)elections. In Taiwan, until July 31st, only one company among all FTSE TWSE 50 components experienced shareholder activism, and all four shareholder proposals at this AGM were about electing certain shareholder representative as directors. Case Study 3 is one of the recent examples of activism in Hong Kong [3]. Several case studies have been included in reference to the trends mentioned above. They are listed in the paragraphs below.

[Case Study 1]: HK-Listed Biotechnology Firm

A HKEx-listed Chinese biotechnology firm proposed to grant 3.06 million restricted shares to selected directors and subsidiary directors at its AGM on June 10, 2022.

Glass Lewis recommended voting for the resolution although it had concerns regarding the insufficient link between pay and performance. The grant of restricted shares was to independent non-executive directors and the vesting period of one year met Glass Lewis’s requirements. On the contrary, ISS’ requirements were not satisfied; it recommended voting against the resolution and the plan received 23.3% dissent. As per ISS’ calculation methodology, the issue and allotment of the aggregate of 22.01 million restricted shares combined with the 3.06 million connected restricted shares that could be issued would make the dilution level exceed 5%, a cutoff point under its policy.

The major concerns of investors such as AXA Investment Managers highlight perceived inconsistencies between the remuneration policy and long-term shareholder interests besides the major opposing points from ISS. The remuneration policy includes base salary, discretionary bonuses and other benefits such as restricted shares and options. AXA claimed that such grants fail to further encourage shareholders to align their interests with the remuneration policy or devote their efforts to the group’s development.

[Case Study 2] Taiwan-Listed Company in Analog Integrated Circuit Industry?

A Taiwan-listed leading corporation in the analog IC industry put forward its management proposal to approve the issuance of new employee restricted shares during its 2022 annual shareholder meeting. The purpose of the proposal was to attract and retain professionals needed by the company, incentivize employees and augment employee loyalty. The percentage of for votes on this proposal only amounted to 61.05%, while the percentages of against and abstain votes were 25.48% and 13.47%, respectively. Out of 68 institutional investors who disclosed their voting behavior at this resolution, 47 investors casted an against vote. Common rationales for dissenting included:

• There was a lack of a reasonable vesting period for Type A restricted stocks (where the vesting of awards can take place less than three years from the grant date).
• The cumulative equity issuances without subscription rights (historical and across instruments) exceeded the maximum level specified in a respective country’s best practices for corporate governance or 10% of the company’s nominal capital.
• Variable compensation was not geared to medium- and long-term success criteria and a relevant sector comparison over an appropriate medium timescale (i.e. three years).

[Case Study 3]: Global Bank in Hong Kong

One of the largest global banks that is dual listed on the HKEx and London Stock Exchange was subjected to activist demands.

In April 2022, the bank’s largest shareholder, the largest insurer in China, called on the bank to spin off their Asian operations. Some shareholders supported the proposal as they were unimpressed by the cancelled dividend payout of the bank in 2020.

However, not all shareholders supported the spin-off. The bank believed that the breakup would result in a potential long-term hit to the bank’s operation costs, tax efficiency and credit rating. The bank rejected the spin-off proposal but promised that they would restore dividend payouts to pre-Covid-19 levels.

V. Conclusion

Sustainability concerns and ESG issues were increasingly reflected in issuers’ 2022 AGM proxy voting season in the Greater China Area, although there was a disparity between Greater China and the other APAC countries regarding the frequency of shareholder activism as well as the numbers of Environmental & Social-related AGM proposals. Issuers should pay careful attention to institutional investors’ voting behavior and rationales, especially regarding capital issuances, equity-based plans, board diversity, among other concerns. Also advantageous would be strengthening engagement with investors, leveraging appropriate resources such as proxy agents.

ESG and carbon portfolio sensitivity are ever increasing in importance for the top institutional investors with holdings in Greater China. At the same time, regulators in mainland China, Hong Kong and Taiwan have (and will likely continue to) enact top-down ESG-related policy. With this in mind, it is reasonable to predict that ESG topics and voting rationales will play an even more significant role in issuers’ investor relations and proxy agendas going forward.?

[1].“Exchange publishes conclusion on review of corporate governance code. (https://www.hkex.com.hk/ News/Regulatory-Announcements/2021/211210news?sc_lang=en). December2021

[2]. Taiwan Stock Exchange Regulation Directory. (https://twse-regulation.twse.com.tw/m/EN/LawContent.aspx?FID=FL075209) . December2021?

[3].WH Group Ltd. 2022 AGM Proposal 8.(https://www1.hkexnews.hk/listedco/listconews/sehk/2022/0601/2022060103502.pdf)?