Michele Leung, Green Finance Advisor of Friends of the Earth (HK)
Investors are paying more attention to the corporate governance with increasing sophistication in ESG investing. Within the corporate governance, there are different governance themes like board, pay, ownership & control and accounting.
Controlled ownership is one of the key topics, especially in the mainland China and Hong Kong markets where controlled ownership was prevalent. High levels of founder- or family-controlled firms are found in this region, for example, around 74% of mainland China companies and 86% of Hong Kong companies had a shareholder or shareholder group holding 30% or more of voting rights, compared to 46% of the overall constituents of the MSCI ACWI Index, and 71% of the MSCI Emerging Markets (EM) Index. At the same time, Greater China is also seeing higher average director tenure and higher entrenched board ratio. This may suggest a problem with the board skills and diversity. The definition and threshold of entrenched board may vary across different investors, it usually includes the considerations like the board tenure (whether it is over 15 years), the age of board members (whether it is over 70) and the board refreshment rate.
Investors in companies with entrenched boards may face greater governance risks, especially with the lack of a publicly disclosed succession plan. Minority shareholders may also start to call for new board appointments and more independent members on companies’ nomination committees to help protect their long- term interests, especially at firms with high average director age and tenure.
Separately, diversity topic is gaining traction. According to MSCI Emerging Markets IMI, which captures over three thousand large- and mid- and small-cap companies across 24 emerging markets, on average, companies with at least one female director had higher human-capital management performance than those without any female directors, i.e. human capital score is at 4.3 compared with 3.7 on a 0-10 scale. The difference was even greater at companies that had at least three female directors or 30% women on the board, it might be a potential “tipping point.” With APAC region’s regulatory efforts to increase the presence of women on boards, it will be interesting to see if there is any improvement of companies’ human capital management in the long run.
In addition, the average age of newly appointed directors is on track to hit a record high next year, with first-time male directors in developed markets approaching the age of 60. It is also observed the women and emerging-market directors are younger, in the age range of 52 to 54. Amid ongoing global demographic shifts, the nomination committees may consider the potentially significant implications of age for director skill sets, as well as for board continuity and diversity. At the same time, investors may demand to have a better transparency and insight on the corporate governance structure.