Frequently Asked Questions 1. What is the difference in the practice of four interim dividends as opposed to the previous three interim dividends and a final dividend, and what is the reason for the change? Payment of the new fourth interim dividend is one month earlier than the former final dividend which was usually paid after the Company s annual general meeting. In addition, the timing of dividend payments to shareholders will be more evenly spread over the year in June, September, December and March. The total amount of dividends paid to shareholders over any given year in four interim dividends will be the same as it would have been with three interim dividends and a final dividend. The amount of dividends payable is linked to the underlying earnings performance of the business. The Board believes that shareholders will welcome the more even timing of dividend payments over the year and the earlier payment of the fourth dividend. CLP is not the first company in Hong Kong adopting this dividend payment arrangement both HSBC and Hang Seng Bank have already used this approach. Even though this is a positive change for shareholders, the Board would like to consult shareholders at the Annual General Meeting held on 12 May 2011. The Board is pleased to note shareholders endorsement to this practice and will continue to keep the Company s dividend policy and practice under review in the interests of the Company and shareholders. Positive feedback on the new dividend payment arrangement was received from many shareholders who had participated in the 2011 Shareholders Visit Programme. 2. Whether the size of 4th dividend will be same as the previous three for 2010? Or the 4th dividend be a similar proportion of the total annual payment just like the final dividend as of now? The final dividend has always been the largest of our four dividend payments (for example, it represented approximately 37% of our total dividends paid for 2009). The fourth interim dividend will, in effect, replace the final dividend (except it will be paid a month earlier). The total amount of dividend paid to shareholders over the year will be the same with four interim dividends as it would be with three interim dividends and a final dividend.
3. The change is about an evenly distributed timing, not evenly distributed amount of dividend? Yes, the change is only about the timing of dividend payments to shareholders - which will become more evenly spread over the year in March, June, September and December. Shareholders will receive the fourth interim dividend in March as opposed to the final dividend in April (i.e. one month earlier). 4. Any chance for a change to an evenly distributed amount of dividend (i.e. four equal payments, instead of a large payment for the fourth interim dividend) starting from 2011? Our longstanding policy is to provide consistent increases in ordinary dividends, linked to the underlying earnings performance of the business. It would therefore be prudent to fix the amount of the fourth interim dividend (in lieu of final dividend) after the final accounts and earnings of the year have been finalised. 5. Will CLP consider issuing scrip dividend instead of distributing cash dividend? Result of the review shows that a scrip dividend option is uncommon in Hong Kong and the take-up rate by shareholders of the scrip option, as opposed to receiving dividends in cash, is low. It would be difficult to explain to the market why CLP would be providing a scrip dividend option (resulting in the issue of additional new shares) whilst at the same time maintaining a share repurchase programme (involving buying back its shares, including potentially those recently issued through the scrip dividend option, and then canceling those shares). 6. Why would the Board need a general mandate to issue shares? The Listing Rules allow Shareholders to give a general mandate to Directors to issue up to 20% of the shares of the Company in issue. The Directors of the Company believe that it is prudent to ask for a general mandate to issue up to 5% of the shares. Such a general mandate, if being given by Shareholders to Directors at an Annual General Meeting, will lapse at the conclusion of the next Annual General Meeting unless it is renewed by Shareholders then.
It is worth noting that approval from independent Shareholders is required for the second and subsequent refreshments of a general mandate in any one year, and that placement of securities for cash consideration under a general mandate at a discount of 20% or more is only allowed under specified conditions. Directors believe that the general mandate gives the Company the flexibility in raising capital as and when needed and in making use of the share placement as an optimum fund raising opportunity. It would be in the best interests of the Company and its Shareholders if Directors were empowered with the general authority to issue shares so that they can exercise to the benefit of the Company and Shareholders should an opportunity arise, e.g. to raise fund for a particular acquisition or project or to establish and cement a strategic relationship. The Company acknowledges the concern of minority Shareholders with respect to possible dilution of their shareholding interest and would therefore use the mandate sparingly and with consideration for the interest of all our Shareholders. We ask Shareholders to limit the number of shares allotted or to be allotted by the Directors of the Company under a general mandate to 5% (rather than 20% allowed by the Listing Rules) of the total number of shares of the Company in issue as at the date of the resolution passed by Shareholders. Some institutional investors have indicated to us that they would vote against a general mandate to issue shares if no price discount cap is imposed on the mandate. Again, it is worth noting that setting a cap on the price discount of new shares to be issued under the general mandate aligns with international best practice. Accordingly, the Board has proposed that any shares of the Company to be allotted and issued pursuant to the general mandate shall not be at a discount of more than 10% (rather than 20% as limited under the Listing Rules) of the Benchmarked Price (as defined in the Listing Rules) of such shares of the Company unless and until there is a material change in circumstances or market condition. (Updated on 28 March 2014)
7. Why would the Board need a mandate to buy back shares of the Company? Share buy-backs can complement the Company s dividend policy, in terms of enhancing shareholder returns. The Company will consider the use of share buybacks, as and when appropriate, having regard to: The Company s cash position and distributable reserves; Alternative uses of funds including, for example, dividend payment or allocation to new investments; and The Company s share price. The Directors believe that it is in the best interests of the Company and its Shareholders to have a general authority from Shareholders to enable the Directors to buy back shares for the enhancement of long-term shareholder value. Share buybacks would reduce the total number of shares in issue and thus might enhance the value per share in light of a relatively smaller share capital base. Share buy-backs will only be made when the Directors believe that such buy-backs will benefit the Company and its Shareholders, and if the mandate is exercised, it will be exercised in accordance with the Listing Rules and the laws of the HKSAR. For the time being, the Company has no specific plans with respect to share buybacks. Such a mandate will lapse at the conclusion of the next Annual General Meeting unless it is renewed by Shareholders then. (Updated on 28 March 2014) 8. What is your view on quarterly reporting? CLP's reservations about quarterly reporting do not rest on any sensitivity to increased disclosure to shareholders. CLP has for many years been one of the very few Hong Kong listed companies to publish, on a voluntary basis, a quarterly statement, which sets out key financial and business information such as electricity sales, dividends and progress in major activities. (Updated on 15 May 2015) However, for the reasons set out below, we doubt that quarterly reporting is necessary and, on balance, of benefit to shareholders. a. Shareholder Demand The introduction of quarterly reporting would not respond to any clearly identified demand or need expressed by our shareholders. We have never received a request from shareholders to receive quarterly reports, even though our views on this matter
have been placed on our website since 2002, accompanied by a standing invitation to shareholders to let us know if these views differed. In common with other listed companies, we do receive shareholder feedback on our governance and reporting practices - in fact, we actively solicit this through, for example, feedback forms sent out with our Annual Report. In recent years, we have seen a small, but discernible and welcome increase in such feedback. So far, this has centred on issues such as the composition of the board and the exercise of the general mandate to issue additional shares. None of this feedback has revealed any impetus for quarterly reporting from our shareholders - the key constituency whose views and interests must be determinant in any consideration of this issue. b. Cost Preparation of quarterly reports costs money - both in terms of internal cost (including the opportunity cost of board and management time spent on this) and the external costs of printing, distribution etc. These costs are borne by the shareholders - to receive the additional reporting whose cost they will be bearing but who have not yet asked to receive this information. c. Short-Termism Quarterly reporting may be both misleading and encourage a short-term view of a listed company's business performance - like most companies, CLP's activities do not run and should not fall to be disclosed and judged on a three-month cycle. In contrast, a six-month reporting period will tend to smooth out temporary distortions. To give a specific example to which we referred when our views on quarterly reporting were first placed on our website - in the first quarter of 2002 local electricity sales fell by 1.1%, compared with the same quarter in the previous year. This was due to low temperatures and a shorter billing period (by 3 days) in March due to public holidays. If we had reported the figure on that basis this would have been both accurate (as a matter of fact) but misleading. As it happened, the consequences of higher temperatures in April and the make-up of the shorter billing period meant that, local sales for the 4 months to 30 April 2002 were up 3.6%, compared with the corresponding period in the previous year - a quite different picture from that which would have been disclosed as at 31 March and a distortion that would be ironed out over a six-month reporting period.
d. Duplication Quarterly reporting, as frequently contemplated, including in the Hong Kong Stock Exchange's Consultation Paper on Corporate Governance in 2002, does not actually mean quarterly reporting. Over any financial year, the reporting regime will be : 1 January to 31 March First Quarterly Report 1 January to 30 June Interim Report 1 July to 30 September Third Quarterly Report 1 January to 31 December Annual Report meaning that: a shareholder would receive three different types of report with, in the case of financial information, three different levels of checking and control - unaudited (quarterly reports), auditor's review (interim report) and audited (annual report). there is significant overlapping and duplication of information (particularly since the quarterly reports, according to the Exchange's Consultation Paper, should include post-quarter events - which may extend up to the 45-day post-quarter deadline for publishing the quarterly report). The same event and, more importantly, its accounting treatment, may be reported in three different ways over the course of a year (quarterly, interim and annual reports). As a particular example of the previous point, the reporting of an event and its financial implications will vary significantly according to when it occurs in the financial year. For example, assuming a financial year corresponding to the calendar year : o an event occurring on 28 February will be reported three times; in the first quarterly report (unaudited), the interim report (auditor's review) and the annual report (audited); o the same event occurring on 28 November will be reported once; in the annual report (audited). The consequences of the points made above is that the shareholder is not receiving consistent and meaningful information through quarterly reporting. e. Public Disclosure Standards It is often suggested that quarterly reporting should be straightforward, since a competently run company will already be producing the relevant financial information and all that is required is to take the simple step of publishing it. This is not correct. Quarterly reports cannot be 'lifted' straight out of existing internal information :
Information produced and maintained to assist management in monitoring the day to day financial status and performance of the company's business will be very different (format, content, detail, scope etc.) from the disclosure required to be made in a quarterly report. Public disclosure imposes quite different standards, in terms of regulatory compliance, content and liability, as compared with internal management reports. Management reports are not audited or subject to auditor review. Management reports are not prepared to the full extent as required by Statements of Standard Accounting Practice (SSAPs) for disclosure purpose - considerable work is required to represent them to fully conform with SSAPs (an exercise which presently is required to be done every six months and which would now be required on a quarterly basis). f. Accounting Complexities Quarterly reporting is particularly onerous to listed companies with joint venture interests, substantial operating subsidiaries and business outside Hong Kong, such as CLP. In order to produce a consolidated quarterly report, the financial information must be cascaded upwards to the holding company. This will involve preparation of accounts and their review and approval by the respective boards of joint ventures and subsidiaries before those accounts are submitted to the holding company for consolidation, review and approval. This will be extremely challenging if it is to be done on a quarterly basis and completed within 45 days after the quarter end. The undesirable alternative, if deadlines are to be met, will be a sacrifice in the time available for preparation and critical review of the data, with attendant loss of quality. Of course, this work can be done - but the question remains as to whether the cost and effort of doing so is actually worthwhile in terms of the ultimate benefit to shareholders. g. Pro Forma Accounts The statement of financial position and statement of profit or loss in quarterly reports will, absent auditing or audit review, be in essence 'pro forma accounts'. Experience from the US is that pro forma accounts have been the source of misleading information, in the shape of overstatement and subsequent correction. There is no advantage to shareholders if quarterly reporting increases the quantity of information, but reduces its quality. (Updated on 15 May 2015)
h. International Trends Quarterly reporting is not a widespread global norm in terms of corporate governance. The absence of mandatory quarterly reporting does not diminish Hong Kong's standing in governance terms. There is no requirement for quarterly reporting in leading jurisdictions, such as the UK. In the European Union (EU) as a whole, only about 1,100 out of 6,000 publicly traded European companies publish quarterly reports. At their meeting in November 2003, the Finance Ministers of the European Union considered and pushed back proposals for quarterly reporting, whilst harmonising reporting standards around half-year and annual reports. i. Governance Standards There is no evidence that quarterly reporting enhances corporate governance. If a listed company has poor governance, inadequate financial systems and controls and produces inadequate accounts, the requirement to issue quarterly reports changes nothing. US listed companies have disclosed quarterly data since 1946; but this seems to have been of little or no benefit to shareholders in the face of the corporate scandals of recent years. j. Enhanced Disclosure The proposal to introduce mandatory quarterly reporting should be considered in the context of other existing and increasing regulatory requirements. The Hong Kong Listing Rules already provide for issuers to disclose significant events intervening between the interim and annual reports. Moreover, the disclosure requirements for interim and annual reports have increased significantly in recent years. By way of example, and using this as a simple measure, CLP's 1995 Annual Report comprised 68 pages; the 2004 Annual Report has over 170 pages. Our 1995 Half-yearly report was six pages (A5 size), our 2003 Half-yearly report had 44 pages (A4 size). Many other listed companies could report a similar trend. The argument and need for quarterly reporting would be stronger if there were significant weaknesses and gaps in the half-yearly and annual reports - but this is less and less the case. Disclosure should be reviewed in its totality. The increasing scope of the half-yearly and annual reports, coupled with tighter deadlines for their publications must be a relevant consideration in assessing the need for quarterly reports.
The feedback CLP has received from shareholders during the visits which we organise to our facilities in Hong Kong (approximately 3,000 shareholders have accepted an invitation to visit us, between October 2004 and 2005) includes adverse comment on the length of our reports and a suggestion to introduce summary reports - an indication that, rather than demanding quarterly reports, investors already consider they are burdened with more than enough information. Conclusion The motivation behind the suggestion that quarterly reporting should be introduced for Hong Kong's Main Board listed issuers is legitimate. It is also obvious that corporate disclosure exists for, and should be driven by, the benefit of shareholders, not the convenience of boards and management. We consider that, instead of quarterly reports, a better balanced approach would be for continuing critical review of the scope, content and promptness of half-yearly and annual reporting, such that Hong Kong's listed companies produce reports of a quality which exceeds that in other Asia-Pacific jurisdictions and matches wider global standards. It seems highly likely that the politics of corporate law and regulatory reform will propel Hong Kong issuers towards quarterly reporting during the coming years. The HK Stock Exchange's Code on Corporate Governance Practices includes quarterly reporting as a recommended best practice (from which CLP's own Code on Corporate Governance deviates). As this development unfolds, we hope that it will be accompanied by a sensible and balanced discussion of the scope and content of quarterly reports, with a focus on the information that shareholders might genuinely need and reasonably expect. More is not always better when it comes to corporate disclosure - frequency and quantity are not the primary measures of the quality of corporate disclosure. Finally, we appreciate that views on this issue vary. We would review our position if and when there was a clear demand from CLP's shareholders for quarterly reports - since these would be for their benefit and at their cost. In the meantime, CLP's focus remains on enhancing the quality of our reporting to shareholders through existing channels such as our Annual Report, Sustainability Report and our website - all of which exceed regulatory requirements in terms of the extent of disclosure made. (Updated on 15 May 2015)