Corporate Governance in Asia: Regulatory Landscape Urges Better Shareowner Communications
Board directors to some degree have control over the types of investors who invest in their companies simply based on how they communicate with their shareholders. Indeed, a recent study by Harvard Business School found that firms which focus on the short term in their communications with investors likewise have short-term investor bases. At the same time, such companies have higher rates of stock-price volatility, higher betas, and a higher cost of capital.
Similarly, in yet another study by academics at Harvard Business School, the authors noted companies that are more likely to have organized procedures for stakeholder engagement also are more long term oriented, exhibit more measurement and disclosure of nonfinancial information, and significantly outperform their counterparts over the long term, both in stock market and accounting performance.
Obviously, shareholders who have an interest in a longer-term horizon require a specific communication approach. It is exactly these investors who would benefit most from a “Visionary Board” style of leadership.
A “Visionary Board”, as described in the recent CFA Institute report called Visionary Board Leadership: Stewardship for the Long Term establishes and maintains a two-way communication channel between board members and shareowners. On one hand, it uses it to communicate its long-term vision and strategy to its investors. On the other hand, it employs the communication channel to listen to what shareholders have to say, including their concerns. Companies with Visionary Board leadership do this by taking a variety of approaches, including:
- Ensuring that the company has processes and mechanisms in place to allow investors to share their input with the board
- Fostering a “constant conversation” between the company and key shareholders
- Designating an appropriate director to communicate with shareholders
- Understanding the concerns of shareholders, employees, customers, and other stakeholders
Recent regulatory changes in various jurisdictions suggest that more boards at listed companies will perform as Visionary Boards. The listing rules at the Hong Kong Stock Exchange (HKEx), for instance, contain a Code on Corporate Governance Practices, including provisions which emphasize the necessity of sound communication with shareholders. It stipulates, for example, that the board should endeavor to maintain an ongoing dialogue with shareholders and, in particular, use annual general meetings (AGMs) or other general meetings to communicate with shareholders and encourage their participation. The chairman of the board should attend the AGMs and arrange for the chairmen of the audit, remuneration, and nomination committees (as appropriate) to be available to answer questions at the meetings.
In line with the joint response by the Hong Kong Society of Financial Analysts (HKSFA) and CFA Institute to a consultation paper issued by HKEx, this code was recently revised, resulting in a number of improvements. Starting 1 April 2012, the code specifies, for example, that corporate issuers should establish a shareholder communication policy. This, by the way, is exactly what is recommended in the Visionary Board Leadership report published by CFA Institute. Unsurprisingly, HKEx sees this as an enhancement over communication only through interim and annual reports, as it shares the view that it is important for a board to have proper mechanisms in place to communicate with investors effectively.
Hong Kong, however, is not the only financial market where shareholder communication has been receiving increased attention. In Singapore the situation is very similar. There, the Monetary Authority of Singapore (MAS) recently revised its Code of Corporate Governance. The updated Code was introduced in May 2012 following a consultation to which CFA Singapore and CFA Institute jointly responded. MAS is of the understanding that shareholder inputs on governance matters are useful to strengthen the overall environment for good governance policies and practices, and convey shareholders’ expectations to the board. By constructively engaging with the board, shareholders can help to set the tone and expectation for governance of the company. Obviously, this requires a board where directors have an open ear for issues pertaining to shareholders, and this is facilitated by establishing a well-working communication channel.
Reflecting the CFA Institute position, Singapore’s corporate governance code holds that companies should actively engage their shareholders and put in place an investor relations policy to promote regular, effective, and fair communication with shareholders. Furthermore, the board should establish and maintain a regular dialogue with shareholders to gather views or inputs, and to address shareholders’ concerns.
Given these promising regulatory improvements, one may wonder if there are Asian companies which have benefitted from taking a positive approach toward shareholder communications. Well, one does not have to look far to find such firms. Take Japan, for example, where research conducted by the Japan Investor Relations Association (JIRA) suggests that firms that invest in robust investor relations functions and take investor input seriously may be rewarded with relatively high share performance.
Given the regulatory improvements in Asia, there is hope that more listed companies in the region will put additional priority on shareholder communication going forward. And as a result, more boards of Asian companies might be of the “visionary” kind, with a long-term investor base to reflect that strategy.