INVESTMENT STEWARDSHIP:ASIA- PACIFIC REGION INCLUDING JAPAN. BUILDING CONNECTIONS for the long term

Transcription

1 Q INVESTMENT STEWARDSHIP:ASIA- PACIFIC REGION INCLUDING JAPAN BUILDING CONNECTIONS for the long term

2 Q2 QUARTERLY REPORT 2016 JUNE 30, 2016 Table of Contents Engagement with Issuers and Statistics Voting Highlights and Statistics Active Ownership and Responsible Leadership Market Development and Trends BUILDING CONNECTIONS for the long term

3 Engagement with Issuers¹ and Statistics Japan Engagement Statistics² Level of Engagement³ Topics Discussed Number of engagements Basic Moderate Extensive Environmental Social Governance APAC ex Japan Engagement Statistics² Number of engagements Basic Moderate Extensive Environmental Social Governance The following examples from the past quarter demonstrate the wide range of issues our engagements cover and highlight our efforts to protect the value of client s assets invested in these and similarly situated issuers. The below examples reflect engagements that merited particular focus on environmental, social and governance ( ESG ) considerations. We aim to frame our engagements in the context of long-term value creation. 1 China / Hong Kong BlackRock engaged with a Chinese copper producer that is dual-listed on the Shanghai and Hong Kong Stock Exchanges. The engagement was focused on the company s environmental protection practice. One of the company s major copper mine, which began operations in the later part of the Qing Dynasty (circa ), has proved to be discharging excess waste water generated during ore washing/dressing into the local river and has resulted in soil and watershed contamination. The local community is reported to have an abnormally high occurrence of cancer and deteriorating health in general, which appears to be linked to the water and soil contamination. The company, while acknowledging the negative impact its copper mine on the local community, disagreed with the scope of the issue as quoted by the media. Instead of 420,000 villagers, the company concluded that around 8,000 to 10,000 ¹ The companies referred to are for illustrative purposes only and not as a recommendation of any particular securities. ² The Asia Pacific including Japan Engagement Statistic Report is a reflection of 2nd Quarter ³ Basic engagement is generally a single conversation on a routine matter; Moderate engagement is technically more complex and generally involves more than one meeting; Extensive engagement is technically complex, high profile and involves numerous meetings over a longer time frame. 3

4 2 BlackRock are affected according its own investigation conducted by a third party. It is the company s intention to close the case and settle with affected villagers. However, the company cannot deal directly with the villagers. Instead, the local government is responsible for the issue and the progress is out of the company s control. That said, the company recognizes the reputational damage that has resulted from the incident and is committed to resolving the issue. It will collaborate more proactively with the local government and will also be more transparent with respect to the progress. BlackRock agreed to meet with the Company at least once a year to monitor the matter. engaged with an executive director of a listed regional bank in Hong Kong to discuss issues we had identified with regards to the board composition and practice, such as the prevalence of long-tenured directors, certain directors sitting on an excessive number of boards concurrently, and the low number of board meetings (four per year). The executive director expressed understanding to our concerns and indicated that the bank is committed to addressing these issues. A few steps that the bank has taken include the nomination of younger candidates to the board and gradually retiring long-tenured board members. Directors identified as serving on too many boards will gradually reduce their number of directorships. The company is also receptive to our suggestion to conduct a formal and comprehensive review of board structure and performance, possibly with the help of an external consultant. It was agreed to continue a dialogue. 3 4 Australia BlackRock engaged with the Chairman and senior executives of one of the world s largest natural resources producers as part of an annual dialogue with the company. The discussion focused on updating BlackRock in relation to the joint venture tragedy that occurred in Brazil in late This included the establishment of a dedicated operational team based on the ground and the formation of a subcommittee of the board to address specific issues as they arise. The company also committed to making public the findings of an external investigation. The Company will also continue working with the Brazilian government to finalize outstanding legal claims. The discussion then moved on to board composition with the Chairman/Board explaining the specific skills they are seeking given the likelihood that two long serving NEDs will step off the board next year. The impact of the tragedy relating to the CEO s short term incentive was also raised with the Chairman. The dialogue will continue. Japan Confidence in the auto industry was publicly shaken after an auto maker revealed it had, for more than two decades, been manipulating fuel mileage testing data for its vehicles sold in Japan. The market was soon again surprised by the announcement from another auto maker which revealed that, while the results were unaffected, the fuel mileage testing had been conducted using a different methodology from the one designated by the Japan Ministry of Land, Infrastructure, Transport and 4

5 Tourism. While the root causes, the scope and impact of each case are yet to be determined, BlackRock believes the two cases are quite distinct with different motives and implications. Given the significance of these two cases, BlackRock decided to engage with other auto manufacturing companies to confirm how their fuel mileage data testing was conducted. In those meetings we also discussed the potential impact of industry rules and regulations including the debate around the establishment of a global standard for fuel mileage testing which is currently different in each jurisdiction. We will continue to monitor the situation. 5

6 Voting Highlights and Statistics APAC Region Voting Statistics 4 Country Number of meetings voted Number of proposals % of meetings voted against one or more management recommendations % of proposals voted against management recommendation Australia and New Zealand APAC ex Japan, Australia and New Zealand % 2% 2,192 23,172 42% 8% Japan 1,720 19,206 49% 8% APAC Region Total 3,974 42,692 44% 8% 1 Hong Kong BlackRock engaged with a financial company in Hong Kong to gain a better understanding of the recent changes to the nomination rules and to discuss a few concerns including over-boarding and the structure of executive remuneration. The company clarified that the newly added cap on the absolute tenure of directors is only a nomination committee guide and can be overridden by the board should the board come to the conclusion that the continued service of the director in question is of value to the company. It acknowledged the concern of BlackRock over certain directors sitting on what we believed was an excessive number of boards and indicated that the issue has been well communicated to the directors. The company also agreed with BlackRock that independent directors should be encouraged to hold a certain amount of shares in the company so that they have more skin in the game. However, it also pointed out that it is still something rather uncommon in this market and it is likely to be an evolving process. The last issue raised related to disclosure of executive remuneration. One of the performance hurdles was simply stated as revenue. We highlighted our concerns regarding such a performance metric given that just increasing revenue does not necessarily result in increased value for shareholders. The chairman acknowledged our concerns and it was agreed that the board would take a closer look at disclosure for The Asia Pacific Region Voting Statistic Report is a reflection of 2 nd Quarter 2016 and sourced from ISS Proxy Exchange on July 5,

7 Japan An investment fund submitted a proposal requesting an IT company to increase shareholder returns by increasing dividend payout and conducting share buy-backs and also exiting from a non-core, unprofitable business. The investment fund also noted that the company had failed to disclose a clear strategy and did not conduct quarterly earnings calls for shareholders. BlackRock engaged with the company on the issues raised by the proponent. While BlackRock generally considers the board and management to be in the best position to consider the range of businesses a company should be involved in, we felt in this case that the proponent s concerns were valid and accordingly supported the shareholder proposal based on the lack of disclosure and a convincing rationale offered in response to the proponent`s arguments. A food product wholesale company disclosed that a former employee in charge of accounting of its wholly owned subsidiary had been embezzling from the subsidiary. Furthermore, as a result of a follow up investigation on internal controls it was revealed that the same subsidiary had also engaged in several accounting irregularities. As a result the company was forced to recognize losses equivalent to the company s annual profit. Blackrock decided to vote against the reappointment of several directors who we felt were accountable for the lack of appropriate internal control structure. Australia The independent board committee members of an Australian Real Estate Investment Trust (REIT) initiated a meeting with BlackRock to discuss the upcoming scheme of arrangement to approve the acquisition of the fund by another Australian listed REIT. Based on the conversation it was clear the Independent Director Committee had undertaken a rigorous process before agreeing to the sale. Based on the disclosure documentation and the engagement meeting BlackRock supported the transaction. BlackRock initiated an engagement with a large global construction and engineering company to discuss concerns with the structure of executive pay and in particular the way the CEO was remunerated. The company has a 70% shareholder and the CEO was paid solely by the ultimate holding company. The remuneration report failed to explain how the CEO was incentivised to act for all shareholders. We were also concerned about the equity grant to the CEO which had no performance hurdles and a short vesting period. Based on these issues we were unable to support the remuneration report and agreed to further engagement with the company. 7

8 Active Ownership and Responsible Leadership Hong Kong 30% Club Investor Committee Sydney, Steering Committee Hong Kong A BlackRock representative is a member of the Hong Kong 30% Steering Committee. The Committee held an event for independent directors on The Role of the Nomination Committee in Asia. The discussion focused on transparency around the nomination process, high performing boards and the current state of health of Asian boards. Engagement with Regulators and/or other bodies A member of BlackRock continues to participate in the Council of Experts to review the impact of and consider further improvements to the Japan Stewardship Code and Corporate Governance Code. The council is hosted by The Financial Service Agency (FSA) jointly with the Tokyo Stock Exchange (TSE). A member of BlackRock continues to participate in various working groups organized by the Ministry of Economy, Trade and Industry (METI) including, The Management Investor Forum, Corporate Reporting Laboratory. 8

9 Active Ownership and Responsible Leadership Speaking Events Members of the team spoke at a number of events over the past quarter, with the objectives of furthering the public policy debate on matters deemed important to investors, and/or promoting an increased understanding of BlackRock s approach to corporate governance. We target events that enable us to connect with key stakeholders and thought leaders, including corporate directors, senior members of management teams, and other shareholders. The following is a list of select speaking events from the quarter, and subject matter covered: Hong Kong Institute of Certified Public Accountants (HKICPA) session on Annual General Meetings - Hong Kong BlackRock was asked to present and participate in a round table discussion on issues relating to annual general meetings. BlackRock s presentation focused on disclosing information to assist shareholders make an informed decision about a voting proposal. Attendees were members of HKICPA. Women in Finance Asia and the Securities and Futures Commission of Hong Kong Hong Kong BlackRock participated in a panel discussion on corporate governance with a focus on the strategic value of diversity. The session attracted senior executive women in financial services in Hong Kong. Chinese University of Hong Kong, MBA Program - Hong Kong BlackRock was asked to deliver a key note address on corporate governance in Hong Kong to MBA Alumni from the CUHK. Attendees included regulators and academics as well as alumni. BlackRock Asian Media Symposium - Hong Kong BlackRock ran an event for journalists as part of the annual BlackRock Asian Wealth Symposium. A member of the BlackRock Stewardship team presented to an audience of journalists on The Development of Stewardship in Asia. OECD Southeast Asia Corporate Governance Initiative - Vientiane, Lao PDR BlackRock was invited to speak on Improving access to finance in CLMV (Cambodia, Lao, Myanmar and Vietnam) Perspectives on capital market development. The audience comprised regulators, advisors, industry bodies and investors. 9

10 Active Ownership and Responsible Leadership Corporate Governance in Japan Seminar Tokyo and Osaka BlackRock participated in a seminar hosted by Investor Communications Japan, an electronic voting platform provider, to present our views on stewardship activities and the recent developments in corporate governance in Japan. The seminar was hosted in two cities and attracted representatives from a number of issuer companies from both regions. The Japan Academic Society of Investor Relations Annual Conference - Tokyo BlackRock participated in a panel to discuss the development and implementation of the Corporate Governance and Stewardship Codes in Japan. The panel session attracted a large group of academics, investment and investor relations professionals. 10

11 Market Developments and Trends Malaysia On April 18, 2016, the Securities Commission Malaysia (SC) released the proposed draft Malaysian Code on Corporate Governance 2016 (MCCG 2016) for public consultation. The first Malaysian Code on Corporate Governance (Code) was introduced in the year The Code was revised twice in 2007 and 2012 to ensure that its principles and recommendations were aligned with business practices and market development. The MCCG 2016 streams corporate governance practices into two categories Core and Core+. Companies are expected to disclose their adherence to the Core practices on an apply or explain an alternative basis, which encourages greater thought process in undertaking the practices, and in making disclosures. While Core+ practices are voluntary, companies are strongly encouraged to adopt them and disclose in the annual report how these practices are being undertaken or implemented. BlackRock submitted an on-line response to the SC. Our response can be found at: public-consultation-blk-response.pdf Singapore On June 20, the Singapore Stock Exchange (SGX) introduced sustainability reporting on a comply or explain basis. SGX consulted on the sustainability reporting requirement at the start of 2016 and received strong support for the comply or explain framework. After carefully considering the feedback received, some changes to the Sustainability Reporting Guide and the requirement were made. 11

12 Market Developments and Trends The main changes are as follows: Giving companies up to 12 months from the end of the financial year to publish their first report. This takes effect for any financial year ending on, or after, 31 December The materiality principle will be applied when determining whether an ESG factor should be reported on. Factors like corruption and diversity, if assessed to be immaterial by companies, may be excluded. Companies are however advised to present information on these factors on their websites to satisfy stakeholder interest. Hong Kong On June 17, the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Limited (HKEX) jointly issued a consultation paper (Joint Consultation) on proposed enhancements to the way in which listing regulation is carried out and listing policy amendments are proposed. Under the proposal, two new committees will be established, namely the Listing Policy Committee and the Listing Regulatory Committee. The SFC and HKEX will be equally represented on both committees. The two committees will decide listing policy and policy-related listing matters with non-binding advice from the existing Listing Committee of the HKEX. The proposed enhancements are structural and procedural and will not affect the SFC s powers and functions in relation to listing matters. However, it will enable the SFC to have earlier and more direct input on matters relating to listing policy and regulation. The proposal may have been driven or at least catalyzed by the public dispute between the SFC and HKEX over the issue of weighted voting rights last year. Korea On April 18, the Korea Exchange (KRX) and Corporate Governance Services (CGS) jointly held a public hearing and policy forum in Korea for the amendment of Corporate Governance Code (CG Code). The current version of the CG Code was published in According to a corporate governance organization that participated in the hearing, some key revisions being considered include: Adopting electronic voting at AGMs; Urging companies to release AGM circulars at least four weeks before the meeting date as opposed to the current two-week requirement; Promoting full disclosure of voting results The revised CG Code is said to be released by June. 12

13 Market Developments and Trends Japan In April 2016, the Ministry of Economy, Trade and Industry created a study group on promoting the use of technology to enhance processes for shareholder meetings, The group has published a report suggesting a set of proposals. These encourage a constructive dialogue between investors and companies by enhancing information disclosure by companies and ensuring sufficient time for shareholders to deliberate on meeting agendas. The proposals encourage electronic provision of notices of shareholder meetings and other materials, further use of the electronic voting process, and dispersion of shareholder meeting dates. The outline of the report can be found here: Currently in Japan, approximately 70% of shareholder meetings are concentrated in June. The proposed reforms should result in a greater spread of meetings and give institutional investors and advisors more time to review meeting materials. 13

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