ISS Offers 2019 Hong Kong Proxy Season Review

In early 2019, the government of Hong Kong proposed a bill that would allow for the transfer of criminal suspects to jurisdictions with which it does not have an extradition agreement, including Mainland China. The proposed extradition bill triggered an intense public backlash as opponents believed the bill would expose Hong Kong to China’s legal system, jeopardizing the city’s autonomy and status as a financial hub. Millions of demonstrators took to the streets in June, clashing with law enforcement and demanding withdrawal of the extradition bill. The ongoing protests have taken a heavy toll on Hong Kong’s economy. Industries, including retail, property, tourism and transportation were affected by months of demonstrations across several districts. While the Hong Kong stock market remained stable during the first quarter, it soon reported a decline with the Hang Seng Index dropping as much as 13 percent since May 2019.

Hong Kong regulators continue to focus on strengthening rules and regulations in 2019. The Stock Exchange of Hong Kong Ltd. (SEHK) disclosed that it reviewed environmental, social, and governance (ESG) reporting done by companies and introduced initiatives to improve ESG disclosure. Upon the initial review of the ESG reports, the SEHK identified a general lack of ESG governance structures and insufficient discussion about how the process of materiality assessments were carried out.

Accordingly, the SEHK began a consultation process in May 2019 to address proposed changes to the ESG reporting guide and related listing rules. To improve ESG performance and reporting, the SEHK proposed to emphasize the importance of the governance structure of ESG through the introduction of mandatory disclosure requirements. The consultation period ended July 19, 2019, and the SEHK has not released final results. Along with the consultation, the SEHK launched an e-training course explaining the board’s leadership role in ESG matters. ESG reporting in Hong Kong was initially implemented on a voluntary basis in 2013 and became mandatory in 2016.

Several listed companies continue to be targeted by short sellers in 2019 because of concerns regarding

financial reporting practices. In the reports, short sellers often provide the basis to support their claims such as government filings, the issuers’ filings, and site visits to offices and factories of the companies. While short seller attacks so far this year triggered material stock volatility, a handful of companies recovered shortly after such attacks with investors showing support to the companies’ arguments regarding such concerns.

During the first half of 2019, the ISS Hong Kong Research team published 1,744 reports compared with 1,695 reports for the first half of 2018, a 2.9 percent increase. For the 2019 Hong Kong proxy season, consistent with historical trends, annual general meetings (AGMs) were held primarily between April and June with the majority of meetings occurring in May.

Key developments in 2019:

  • Mass demonstrations and political uncertainty raise concerns regarding future earnings: The ongoing political unrest occurring in Hong Kong has influenced economic development as local demonstrations are contributing to a decline in retail performance and transportation use. Tourism is also being affected as several countries issued travel advisories in response to the protests. DBS Bank Ltd. assessed the pressure of the U.S.-China trade war and the impact of the recent unrest by forecasting that Hong Kong will not record any growth in its gross domestic product in 2019, assuming tensions do not significantly escalate.
  • Dilutive capitalization proposals remained on the rise in 2019: Despite amendments to the relevant listing rules to restrict highly dilutive capital increases in 2018, general issuance requests were still supported by shareholders in 2019. ISS benchmark policy generally supports an aggregate share issuance limit (inclusive of share reissuance limit, if any) of no more than 10 percent and a discount limit not exceeding 10 percent. Relevant listing rules allow issuance requests of up to 20 percent and do not require companies to disclose the discount of general issuances. During the first half of 2019 ISS reviewed 1,113 resolutions in Hong Kong requesting approval of a general issuance mandate, and only a fraction of 1 percent adhered to ISS policy guidelines.
  • Contentious meetings, short-selling activity and censured directors: Companies continue to operate under increased scrutiny and open criticism from short sellers and Hong Kong regulators. Short seller attacks, in particular, are increasingly common in the market. Anta Sports Products Ltd. was a target of three high-profile short sellers in the span of 12 months. The sportswear giant faces allegations that it falsified data and maintained improper accounting practices.
  • Retirement of Hong Kong’s wealthiest investors: Succession planning among Hong Kong’s major conglomerates is opening the doors to a new generation of corporate leaders. Specifically, the offspring of Hong Kong’s richest tycoons Li Ka-shing and Lee Shau Kee have taken the reigns of their respective empires. New leadership of these major family-run conglomorates might spur large-scale organizational transformation. While the stock performance of the flagship companies have steadily declined since the leaders announcement their retirement, Li’s CK Hutchison Holdings Ltd. and CK Asset Holdings Ltd. and Lee’s Henderson Land Development Co. Ltd. remain financially strong. All three reported net profits for the first half of 2019.
  • Amendments to environmental, social and governance (ESG) reporting: Changes are continually being made to rules and regulations predominantly in areas such as ESG, gender diversity and backdoor listings. In particular, the Stock Exchange of Hong Kong Ltd. introduced mandatory disclosure requirements and specific changes to the ESG guide to improve ESG performance and reporting. Some of the key proposals include shortening the timeframe for the publication of the company’s ESG report, mandatory disclosure of a statement from the board when outlining considerations of ESG issues and the revision and upgrading of key performance indicators. The proposed changes take effect Jan. 1, 2020.

This post comes to us from Institutional Shareholder Services. It is based on the firm’s publication, “2019 Hong Kong Proxy Season Review,” dated January 23, 2020.