28 October 2016
Some believe that with the SFC's new initiatives on responsible ownership, there will be more activist investors like David Webb, but so far the response from both listed firms and fund managers is lukewarm. Photo: HKEJ
Some believe that with the SFC's new initiatives on responsible ownership, there will be more activist investors like David Webb, but so far the response from both listed firms and fund managers is lukewarm. Photo: HKEJ

SFC calls for proactive investors: Will more David Webbs emerge?

Financial circles have mixed perceptions about activist investors like David Webb. Individual players hail him as their hero, as he is always there to press corporate management to share profits with minority shareholders.

Surely corporate decision makers and major stakeholders find him annoying. Who would like to have a “troublemaker” like Webb meddling in their business?

But a consultation paper from the Securities and Futures Commission on the Principles of Responsible Ownership is encouraging more Webb-like shareholders, especially institutional ones, to take part in and supervise the day-to-day operations of the firms they invest in.

It won’t be surprising if no listed firm finds the paper heartening; I have heard many executives complain in private. But what is interesting is that initial feedback from fund managers, who represent institutional investors, has also been largely negative.

The government watchdog notes in the paper that other key markets like the United States, the United Kingdom and Australia have all been asking institutional investors to be more proactive in engaging with listed companies based on codes and guidelines issued.

The paper calls for institutional investors to abide by seven principles of responsible ownership, namely, 1) to establish and report to their stakeholders their policies for discharging their ownership responsibilities; 2) to monitor and engage with their investee companies; 3) to establish clear policies on when to escalate their engagement activities; 4) to have clear policies on voting; 5) to be willing to act collectively with other investors when appropriate; 6) to report to their stakeholders on how they have discharged their ownership responsibilities; and 7) when investing on behalf of clients, to have policies on managing conflicts of interest.

Even though the commission states that these rules are “non-binding and voluntary” in nature, institutions acknowledged, licensed and regulated by the Hong Kong Monetary Authority, Mandatory Provident Fund Schemes Authority, Office of the Commissioner of Insurance and the SFC must “sign up” to and go by these principles, or otherwise they need to explain their rationale for not doing so and why some or all of the principles do not, or cannot, apply.

This is the so-called “comply or explain” provision. (The public is invited to submit their comments to the SFC on or before June 2.)

Activist investors are not uncommon in Europe or the US but they are rare in Hong Kong, making Webb one of a kind.

Unlike Muddy Waters or Citron Research which takes profit through short selling, activist investors regard themselves as owners of the firms they invest in. But they tend to behave more radically than individual shareholders.

Usually, they raise strong and aggressive requests and press the management to implement them, threatening to block the passage of certain bills with their combined voting power or even depose a director from the board.

Webb, for instance, tends to buy shares of profitable firms that pay very little dividends. He will then request the management to share profit with shareholders or even liquidate assets.

Webb is now an idol of many individual investors, and more often than not, the management yields to their pressure. So to many individuals, Webb is seen as having the Midas Touch — share prices of companies he invests in typically show notable gains.

Most listed firms, however, don’t welcome activist shareholders. Some tend to see the company’s money as their own. Others find Webb and his followers too short-sighted as paying fat dividends may sometimes compromise a company’s long-term development.

One thing to be clear about is that the SFC is not pushing all institutional shareholders to act like Webb. The watchdog is simply trying to encourage fund managers to participate more in the running of listed firms, which can certainly be done using a more moderate approach.

I welcome the SFC document as there are indeed firms run by misers who have ignored individual investors for years. But I guess most fund managers still prefer to keep a distance. For them, as long as stable return is ensured, how the firm is run is not their concern.

Also, the cost of small fund operators may soar if they have to monitor their investments in a more proactive manner. The same holds true for many small and medium-sized listed firms as they may need to deal with more external “supervision”, and ultimately, I fear it is the shareholders who will have to shoulder all the extra costs.

The SFC’s new move is out of goodwill and Hong Kong does need to catch up with international regulatory trends, but there are always pros and cons if the initiative is actually implemented.

The consultation period will end next month, and fund managers will soon know if they have to play this new role, and to what extent.

This article appeared in the Hong Kong Economic Journal on May 22.

Translation by Frank Chen

[Chinese version 中文版]

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