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CHINA: Investor Stewardship An examination of voting and engagement activities in China

Report Authors: Jun Frank ([email protected]) Rui Deng ([email protected]) Faye Mo ([email protected])

Published: Nov. 3, 2014

mailto:[email protected]:[email protected]:[email protected]

Investor Stewardship in China

© 2014 ISS | Institutional Shareholder Services 2 of 41

Table of Contents

Key Takeaways ....................................................................................................................................................................................................................... 3

1. Introduction ........................................................................................................................................................................................................................ 3

2. Voting at Shareholder Meetings ................................................................................................................................................................................ 4

2.1. Methodology ............................................................................................................................................................................................................. 4

2.2. Disclosure of Voter Turnout and Voting Results ......................................................................................................................................... 4

2.3. Voter Turnout ............................................................................................................................................................................................................ 5

2.4. Voting Results ............................................................................................................................................................................................................ 8

2.4.1. Levels of Consent ............................................................................................................................................................................................. 8

2.4.2. Levels of Consent by Subject .................................................................................................................................................................... 12

2.5. Shareholder Proposals ......................................................................................................................................................................................... 18

3. Survey of Investor Engagement in China.............................................................................................................................................................. 20

3.1. Qualitative Assessment of Institutional Investors' Attitudes................................................................................................................. 20

3.2. General Perceptions of Corporate Governance in China ....................................................................................................................... 21

3.3. Key Concerns ........................................................................................................................................................................................................... 22

3.4. Voting Practices in China .................................................................................................................................................................................... 24

3.5. Engagement ............................................................................................................................................................................................................. 26

3.5.1. Engagement Frequency ............................................................................................................................................................................... 26

3.5.2. Reasons for Engaging Chinese Companies ......................................................................................................................................... 28

3.5.3. Impediments to Successful Engagement with Chinese Companies .......................................................................................... 28

4. Conclusion and Implications ...................................................................................................................................................................................... 30

Appendices ............................................................................................................................................................................................................................ 32

1. Voter Turnout .............................................................................................................................................................................................................. 32

2. Description of Voting Item Subjects .................................................................................................................................................................. 33

3. Level of Consent by Subject .................................................................................................................................................................................. 35

4. ISS China Investor Stewardship Survey ............................................................................................................................................................. 38



Key Takeaways

› There is concern among foreign investors about corporate governance practices in China. In an ISS study, governance concerns were cited as the main reason for not investing in China. Transparency and abusive related-party transactions were cited as the top corporate governance concerns by overseas institutional investors.

› The level of engagement between Chinese companies and foreign investors is low compared to U.S. companies, and engagement is usually initiated by investors.

› Philosophical, cultural, and language differences are significant barriers to constructive dialogue between Chinese issuers and investors.

› Voter turnout at mainland-listed Chinese companies is approximately 55 percent, the lowest among the markets studied.

› Investors of mainland-listed companies are more concerned with related-party transactions and share issuances without preemptive rights than other common voting agendas, and are more vocal about these issues through their votes.

› Nearly 50 percent of all proposals at mainland-listed companies are approved unanimously, while such unanimous consent is much less frequent in other markets studied.

› While shareholder proposals are not uncommon in China, nearly all are presented by controlling shareholders, and typically receive more than 95 percent support.

1. Introduction

China’s capital market is relatively young but has attracted a growing level of international investor attention. Over the past two decades, China has gradually developed its legal and regulatory frameworks to facilitate investors’ participation in corporate decisions. The Code of Corporate Governance, issued in 2002, explicitly states that institutional investors shall play a role in the appointment of company directors, the compensation and supervision of management, and major decision-making processes. The Company Law, revised in 2006, provides that a controlling shareholder should not take advantage of its position and includes provisions for minority shareholder protection. Since 2012, companies have been required to make online voting a viable option to shareholders for voting on important corporate matters such as equity-based compensation plans, major assets restructuring, and issuance of new shares.

The participation of institutional investors in the Chinese market has increased in recent years, as both a gradual increase in the investment quota of Qualified Foreign Institutional Investors (QFII), and relaxation of the requirements for foreign institutional investors to be qualified, have lowered barriers to investment. Although institutional investors have become a major force in promoting good corporate governance in Chinese companies, the concentrated ownership structures of many Chinese companies and operational hurdles in the voting process, including language barriers, late or insufficient disclosure of meeting materials, and an overall lack of transparency, may act as impediments for institutional investors in exercising their rights and influence.

This study explores investors' participation in the corporate decision-making process in China by looking at investors’ voting practices at shareholder meetings and level of engagement with Chinese issuers. We first examine voting practices and results at shareholder meetings of Chinese companies and compare them with more mature markets: Hong Kong, France, the U.K., and the U.S. In the second section of this paper, we examine the results of a survey of global asset managers and asset owners to gain further insight into how global investors view corporate governance issues in China and engage with Chinese companies.



2. Voting at Shareholder Meetings

2.1. Methodology

In this study we examine voting disclosure, voter turnout, and level of dissent at shareholder meetings of Chinese companies and compare them to those of companies in other markets. Four relatively mature markets were selected for the cross-country comparison in this voting study: the U.K. and the U.S. as references of developed markets; Hong Kong for its close relation to the China market; and France for its sometimes contentious related-party transactions (RPTs) that resemble those in China. Also, the shareholder meeting result disclosure in these markets provides detailed information on voter turnout and voting results, thus allowing for meaningful comparisons. Constituents of the main index in each of these markets were selected as the sample for purposes of this study, as summarized in the table below.

Table 1. Main Market Indices

› Country › Index › Notes

› China › CSI 3001

› Consists of 300 companies on the Shanghai and Shenzhen stock exchanges and constitutes about 60 percent of the current market cap of the aforementioned exchanges. Some of the constituent companies are dual-listed in Hong Kong and are thus divided into a sub-sample of dual-listed companies.

› Hong Kong › HSI › Consists of 50 companies that represent about 60 percent of the market cap of the Hong Kong

stock exchange.

› France › SBF 120 › Consists of all 40 stocks in the CAC 40 index plus a selection of 80 additional stocks listed on

the premier Marche and second Marche under Euronext Paris.

› U.K. › FTSE 350 › Consists of the 350 largest companies by market capitalization with a primary listing on the

London Stock Exchange. It represents approximately 98 percent of the U.K. market capitalization.

› U.S. › S&P 500 › A stock market index based on the market capitalizations of 500 leading companies publicly

traded in the U.S. stock market, as determined by Standard & Poor's. It captures approximately 80 percent coverage of available market cap.

The data was gathered using public filings of shareholder meeting results disclosed by companies, and voting results were collected for all the annual shareholder meetings (AGMs) and a sub-sample of extraordinary shareholder meetings (EGMs) held between January 1, 2010, and December 31, 2013. On average, Mainland-listed companies hold two EGMs every year. Due to time and resource constraints, we only collected voter turnout and voting results for one AGM and a subset of EGMs, if any, per year during the 2010-2012 period. Voting results used in this study were collected in ISS' Voting Analytics database beginning in 2013.

2.2. Disclosure of Voter Turnout and Voting Results

The China Securities Regulatory Commission (CSRC) requires that disclosure of voter turnout and voting results be made in full and in a timely manner. Companies are required to obtain a legal opinion publicly attesting to the validity and veracity of the voting result and voter turnout disclosure. Voting result disclosure for a Chinese company will generally include:

1. The number of shareholders and proxies present at the meeting;

1 CSI 300 constituents as of October 2013 were used as the sample.



2. The number and percentage of shares voted at the meeting and online (when online voting is provided); 3. The number and percentage of shares cast FOR, AGAINST, and ABSTAIN on each item and the vote requirement and

outcome of each resolution.

Although the Rules on Shareholder Meetings of Listed Companies2 promulgated by the CSRC in 2006 (the Rules) do not include rules

for the timing of vote result disclosure, most companies covered in the study disclosed vote results on the first business day following the meeting. As the following table shows, the quality of disclosure by Chinese companies is on par with that observed in other markets and results are generally disclosed in a more timely manner.

Table 1: Required Disclosure of Voter Turnout and Voting Results

Time

frameª

Voter

Turn-

out

Outcome

#Shares voted

For/AGAINST/

ABSTAIN

Notes

CN Timely* Yes Yes Yes *Most companies disclose the day after the meeting

HK 1 day Yes Yes Yes

U.K. 16 days Yes Yes Yes

France 15 days Yes Yes Yes

U.S. 4 days* Yes Yes Yes *Many companies disclose the day after the meeting

ªDays after meeting: business days for HK and US and calendar days for CN, UK, and France.

2.3. Voter Turnout

Voting at shareholder meetings and engaging with investee companies can be seen as methods of exercising shareholders' ownership rights. A study of shareholders' voting patterns can shed light into how investors are exercising one of the most fundamental ownership rights of a shareholder, and the level of engagement (which is covered in Section 3 of this paper) can provide further insights into whether an investor would go beyond casting a vote to engage in dialogue with listed companies to protect his/her investments and maximize returns, and what obstacles may exist in asserting such ownership rights.

Voter turnout is defined as the proportion of a company's issued shares that are actually voted at a shareholder meeting, and reflects the degree of investor participation. The make-up of the investor population, such as the share of market ownership by retail investors, domestic institutional investors, and foreign institutional investors, differs from exchange to exchange, and different groups of investors often exhibit different behaviors with respect to voting and engagement patterns. Also, their willingness to vote can be greatly influenced by the regulatory framework in each jurisdiction. As such, we have further divided our sample Chinese companies and sample Hong Kong companies into those listed only on the mainland, those listed only in Hong Kong, and those listed in both

3.

2上市公司股东大会规则

3 For purposes of this paper, those listed on the mainland only are referred to as Mainland-listed companies, those listed only in Hong Kong as HK-

listed, and those listed in both the mainland and Hong Kong as Dual-listed.



As shown in Chart 1, average voter turnout at mainland-listed companies' shareholder meetings has held steady over the past four years. Average voter turnout at AGMs has increased gradually over the study period and, since 2011, has exceeded average turnout at EGMs.

Within CSI 300 constituent companies, those with a second listing in Hong Kong enjoy greater shareholder participation at meetings than those listed only on the mainland (see Chart 2). The average voter turnout of the dual-listed firms is at or above 62 percent, 7 to 12 percentage points higher than Mainland-listed companies. Even higher voter turnout is observed among the HK-listed companies included in the Hang Seng Index (see Chart 3). Average voter turnout at these firms is close to 70 percent or higher, suggesting a much more actively engaged investor base. The gap in voter turnout between AGMs and EGMs is not as evident at dual-listed firms, but is pronounced at HK-listed firms, with the average voter turnout at AGMs greater by a margin as high as 25 percent. This may be attributable to investors at Hong Kong companies preferring to vote at AGMs over EGMs, the nature of voting items at EGMs, or hurdles that may exist in voting at EGMs. Agendas at EGMs often vary significantly, and items such as mergers and acquisitions, related-party transactions, director elections, and operational items are typically voted. Further, meeting notices and circulars are generally disclosed much closer to the meeting date for EGMs compared to AGMs, which may make it harder for investors to vote at an EGM.

2010 2011 2012 2013

AGM 54.9% 56.1% 56.3% 56.6%

EGM 55.6% 54.1% 55.5% 53.6%

Overall 55.3% 55.2% 55.9% 54.7%

55.3% 55.2%

55.9%

54.7%

52%

53%

54%

55%

56%

57%

Chart 1: Voter Turnout at Mainland-listed Companies



A comparison of turnout at Chinese companies to that of U.K., French, and U.S. companies (Chart 4) shows clear differences in voter turnout. Shareholder participation in the U.S. is the highest by a considerable margin, followed by the U.K. and its former colony Hong Kong. Voter turnout in France trails levels observed for the U.K. and Hong Kong by a nominal amount. The mainland-listed companies, however, reported considerably lower voter turnout than the other markets. Average voter turnout is nearly 30 percentage points lower than that in the U.S. for each year observed.

2010 2011 2012 2013

AGM 65.5% 66.3% 66.5% 63.7%

EGM 65.9% 69.0% 66.2% 61.2%

Overall 65.6% 67.5% 66.4% 62.3%

65.6%

67.5% 66.4%

62.3%

54%

56%

58%

60%

62%

64%

66%

68%

70%

Chart 2: Voter Turnout at Dual-listed Companies

2010 2011 2012 2013

AGM 73.0% 74.7% 75.9% 75.8%

EGM 58.2% 50.2% 58.4% 66.0%

Overall 68.8% 70.1% 74.3% 74.4%

68.8% 70.1%

74.3% 74.4%

40%

45%

50%

55%

60%

65%

70%

75%

80%

Chart 3: Voter Turnout at HK-listed Companies



A variety of factors may be contributing to the low investor participation level in Mainland China. China’s capital market is relatively new and shares are largely held by domestic investors. Foreign investors' ownership of Chinese companies accounts for less than 5 percent of the total market capitalization. The higher rates of voter turnout at dual-listed companies compared to Mainland-listed companies, and at HK-listed companies compared to dual-listed companies, suggest that foreign investors exercise their voting rights to a greater extent than Chinese domestic investors; and so the comparative lack of a foreign investor presence on the mainland is one likely reason for the lower voter turnout. Moreover, those overseas investors who do hold shares in mainland-listed companies face hurdles, including language barriers, late or insufficient disclosure of meeting materials, and a lack of transparency in the voting process. An additional factor is the high percentage of shares held by retail investors, especially when compared to markets such as the U.S. and U.K. Chinese retail investors, like their counterparts elsewhere in the world, tend not to make the effort to vote at shareholder meetings, because they do not believe their votes will matter. Because of the controlling stakes held by the state in many Chinese companies, particularly the large-cap companies studied in this paper, Chinese institutional investors may likewise feel that their votes will not affect the outcome, and therefore that voting is not worth the cost.

2.4. Voting Results

Voting results can indicate areas of shareholder concern or where shareholders' views may diverge from those of the board. In this section, voting results, specifically the levels of consent and the incidences of rejected board proposals by subject matter category are examined to better understand shareholder alignment with management and which areas are of concern to investors.

2.4.1. Levels of Consent

Levels of consent show the extent to which shareholders agree with management. We examined the levels of consent using two metrics: 1) The average percentage of shares voted in favor of a management proposal over the shares voted at the meeting (the

2010 2011 2012 2013

Mainland-listed 55.3% 55.2% 55.9% 54.7%

Dual-listed 65.6% 67.5% 66.4% 62.3%

HK-listed 68.8% 70.1% 74.3% 74.4%

France 66.1% 68.8% 71.1% 69.6%

UK 68.1% 70.9% 73.1% 73.5%

US 85.2% 85.6% 86.4% 86.5%

55.3% 55.2% 55.9% 54.7%

85.2% 85.6% 86.4% 86.5%

40%45%50%55%60%65%70%75%80%85%90%

Chart 4: Cross-country Comparison of Voter Turnout



approval rate); and 2) the percentage of proposals with an approval rate at or above a certain threshold. The thresholds are set at 90 percent, 95 percent, 99 percent, and 100 percent (unanimous approval

4).

During the four-year period studied, the approval rate of management proposals at Mainland-listed companies was resoundingly high: on average, resolutions were approved with 99 percent or more of shares voted in favor. As shown in Chart 5, even in 2013 when the average approval rate was the lowest, more than 40 percent of all management proposals were approved unanimously, almost 90 percent were approved with more than 99 percent of shares voted in favor, and more than 98 percent were approved with 90 percent or more shares voted FOR.

4 Unanimous support indicates that no dissenting vote was cast.

2010 2011 2012 2013

%FOR below 90 1.9% 1.6% 1.3% 1.7%

%FOR between 90 and 95 0.9% 1.4% 0.4% 2.1%

%FOR between 95 and 99 4.4% 6.7% 3.8% 6.8%

%FOR between 99 and 100 33.3% 36.0% 34.1% 48.0%

%FOR=100 59.5% 54.4% 60.4% 41.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chart 5: Level of Consent - Mainland-listed companies



Compared to the other four jurisdictions studied, the level of consent at Mainland-listed companies is significantly higher. The average approval rate for proposals in the non-Chinese jurisdictions was approximately 95 percent, while that of the Mainland-listed companies never fell below 99 percent (Chart 6) during the period under study. Interestingly, while most resolutions at HK-listed companies received 99 percent support or greater, HK-listed companies had the highest proportion of resolutions receiving less than 90 percent support (Chart 7). This is due in part to the prevalence of proposals seeking authority to issue shares, which typically receive a significant number of AGAINST votes, as shown in Chart 10 in the following section of this paper. For Hong Kong, this type of proposal is the second most numerous behind director elections, accounting for 15.6 percent of all resolutions sampled at HK-listed companies with an average approval rate of 80.4 percent.

2010 2011 2012 2013

Mainland-listed 99.2% 99.3% 99.5% 99.1%

Dual-listed 99.0% 98.2% 98.2% 98.5%

HK-listed 95.9% 94.8% 94.9% 93.3%

FR 93.2% 93.8% 93.1% 94.6%

UK 96.8% 96.9% 96.6% 96.8%

US 94.5% 94.4% 95.0% 95.5%

90%91%92%93%94%95%96%97%98%99%

100%

Chart 6: Cross-country Comparison of Avg. Approval Rate



As demonstrated in Chart 7, a staggering 41.3 percent of management proposals at Mainland-listed companies obtained unanimous approval in 2013, whereas the unanimous approval rates in Hong Kong, France, the U.K., and the U.S. were below 6 percent for the same year, with the U.S. reporting zero cases of unanimous consent. One possible explanation for the high level of unanimous consent among Mainland-listed companies is that Chinese companies are often closely held by a small group of owners. At most Chinese companies, the shareholder base is highly concentrated and there is a controlling shareholder who holds a majority of the voting power.

However, concentration of share ownership does not fully explain the level of unanimous consent, as both dual-listed companies and HK-listed companies have similarly concentrated shareholder bases. While shareholder bases are often highly concentrated in China and Hong Kong, one factor differentiating Mainland-listed companies is limited foreign ownership. The QFII quota accounts for less than 2 percent of the A share market, meaning that foreign investors account for a small minority of the shareholder base among Mainland-listed companies.

Significantly higher unanimous approval rates at Mainland-listed companies and much lower rates at dual-listed companies therefore could be a result of different shareholder bases and different voting behavior between domestic investors and foreign investors. As observed in the previous section of this paper, voter turnout among Mainland-listed companies is relatively low, at approximately 55 percent. Given the prevalence of controlling shareholders, it appears that minority shareholders exercise their voting rights infrequently, and, as the levels of consent indicate, when they do exercise, they tend to vote in line with management. By comparison, at dual-listed companies the level of foreign ownership is higher, as is voter turnout, and the rate of unanimous consent is lower. This suggests that domestic investors exercise their voting rights less frequently than foreign investors, and are more likely to support management than their foreign counterparts. The voting behavior of different types of investors presents opportunities for further study.

One unique practice in China that may be impacting voting results is the practice of companies rejecting shareholders' votes. It is not uncommon for investors' votes on A shares, which are listed on the Shanghai or Shenzhen stock exchange, to be rejected by Chinese companies without any explanation. In China, listed companies are not required to accept an investor's authorization and execute

Mainland-listed

Dual-listed HK-listed France UK US

% FOR below 90 1.7% 4.0% 26.9% 19.9% 7.0% 11.2%

% FOR between 90 and 95 2.1% 2.4% 4.0% 9.6% 8.3% 9.6%

% FOR between 95 and 99 6.8% 9.7% 11.0% 22.8% 31.8% 49.4%

% FOR between 99 and 100 48.0% 76.5% 52.3% 45.6% 51.8% 29.7%

% FOR = 100 41.3% 7.4% 5.7% 2.0% 1.0% 0.0%

0%10%20%30%40%50%60%70%80%90%

100%

Chart 7: Cross-country Comparison (2013)



voting on behalf of the investors at the meeting. Some Chinese issuers have simply rejected votes against management and argued that investors should not oppose management without first initiating a dialogue with the firm to discuss the issue. Often, vote confirmation cannot be obtained, leaving investors unsure as to whether their votes have been counted at the meeting. This concerning practice hinders investors in exercising their voting rights and may partly explain the remarkably high occurrences of unanimous consent at Mainland-listed companies.

5 It could also frustrate some investors who have taken the time and effort to

make informed voting decisions. China could improve the integrity of the voting process by requiring companies to count every vote cast, and could further improve its level of transparency by implementing a vote confirmation regime.

2.4.2. Levels of Consent by Subject

Certain ballot resolutions are often non-controversial and regularly garner substantial shareholder support. However, some resolutions receive notable levels of opposition, often reflecting differences in the interests – and views – of company representatives and shareholders. For example, some resolutions at Mainland-listed companies regularly average support of 99 percent, while other resolutions routinely receive higher levels of investor opposition. We therefore calculated average support levels for common ballot items

6 and compared them in order to see if areas of greater divergence of views between management

and shareholders could be inferred.

For purposes of this paper, shareholder proposals are excluded from the sample as they are uncommon in most of these markets, and the presence of controlling shareholders in markets such as China could skew the data.

5 ISS has been made aware of several cases where the votes were rejected. In most cases, votes are rejected without any reason

given. In some cases, issuers have rejected against votes due to disagreements over the reason for the opposition, while in others issuers have rejected and stated that investors should consult the company ahead of the meeting instead of opposing a resolution. As vote confirmation is not provided, there is no way of knowing how often votes are rejected by issuing companies. 6 For the full list of meeting agendas by subject and explanation of each, see Appendix 2.

Against Votes

Abstain Votes



*The dotted line depicts the average level of consent of all resolutions across the four years which is 99.3 percent.

Chart 8 displays the average percentage of votes in favor of some of the resolutions routinely proposed by management at Mainland-listed companies during the period of 2010 to 2014.

7 The high support levels suggest that shareholders of Mainland-listed

companies do not appear to have significant concerns with many of the resolutions, including board and executive remuneration, bylaw amendments, and equity-based incentive schemes. Shareholders may be viewing these resolutions as routine matters with little impact to shareholder value, or that such matters should be left to the discretion of the board and management. Limited instances of dissenting votes on compensation-related proposals are in stark contrast with the vote results at French, U.K., and U.S. companies (see Charts 11, 12, and 13). In comparison, the data indicate that shareholders at Mainland-listed companies apply a greater level of scrutiny over director and supervisor elections, M&A transactions, and related-party transactions (RPTs). The approval rate for RPTs, which are considered one of the most problematic issues in this market, has been consistently below the average approval rate. Also, investors appear to have greater concern for share issuances when preemptive rights are not granted, although the difference between those with preemptive rights and those without is not as significant as that at dual-listed companies.

Charts 9 to 13 in following pages illustrate the average level of consent by subject matter at dual-listed companies and the four other markets. Similarly with those of Mainland-listed companies, shareholders of dual-listed companies appear to have more concern with issues such as RPTs and share issuances without preemptive rights. However, the spread between those receiving above-average support and those not is much more pronounced at dual-listed companies compared to Mainland-listed ones. This may be an indication that domestic and foreign investors share similar concerns, but foreign investors are more likely to vote in opposition to such resolutions.

7 Charts 8 to 13 include only resolutions that are common in all markets studied. For the complete list of different subjects and vote

results for each, see appendix 3.

Board &Executive Rem.

Director Election Equity Comp. M&A RPTsShare Issue w/o

PreemptiveRights

ApprovalRate

99.9% 99.1% 99.5% 97.1% 98.3% 98.2%

96%

97%

98%

99%

100%

Chart 8: Level of Consent by Subject - Mainland-listed Companies







PreemptiveRights

ApprovalRate

99.6% 98.6% 99.3% 98.6% 93.9% 93.6%

92%

93%

94%

95%

96%

97%

98%

99%

100%

Chart 9: Level of Consent by Subject - Dual-listed Companies



PreemptiveRights

ApprovalRate

99.9% 95.8% 85.4% 95.6% 91.6% 80.4%

80%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

Chart 10: Level of Consent by Subject - HK-listed Companies



HK-listed companies have fewer varieties of resolutions and the vote results indicate that shareholders have significant concern with share issuances without preemptive rights, commonly known in Hong Kong as “general mandates.” As shown in Chart 10, the average level of support during the four-year period was 80.4 percent, and the approval level has been decreasing year over year, from 85.5 percent support in 2010 to 76.9 percent support in 2013. The level of opposition to this type of resolution is much higher at HK-listed companies than in other markets, and this high level of dissent could be attributed to broad flexibility granted to the board under the mandate. In Hong Kong, typically companies ask for a share issuance limit of 20 percent of outstanding shares with a maximum discount of 20 percent, which many investors find excessive.

Another resolution type that received significant opposition was proposals to approve equity-based compensation plans, with an average approval rate of 85.4 percent. Such high level of dissent may be due to concerns over potentially excessive dilution, lack of disclosure on performance metrics and vesting schedules, as well as the grant of awards to executives who already hold a substantial equity position in the company. However, unlike the general mandate proposal, the approval rate on equity-based compensation plans has been increasing, from 74.2 percent support in 2010 to 91.9 percent support in 2013.

As with mainland-listed companies and dual-listed companies, the approval rate for RPT proposals was lower than the average approval rate of routine proposals. There were a total of 32 RPT proposals within the sample of HK-listed companies, and two resolutions at Kunlun Energy Company Ltd. in 2010 and another two resolutions at this company in 2011 received 59.8 percent and 47.8 percent against votes, respectively. All four involved financial services arrangements with so-called group finance companies (GFCs). Also in 2010, a resolution seeking shareholder approval on master lending agreements at China Resources Enterprises Ltd. received 49.2 percent against votes, likely due to concerns about exposing the company to unnecessary financial risks. Excluding these five resolutions, the average approval rate was 99.8 percent.

Investors in China and Hong Kong often express concerns with transactions involving GFCs. GFCs are non-banking financial organizations serving as banking institutions. GFCs are generally owned by the non-listed state-owned group holding company, and provide loan, deposit, settlement, and other related financial services exclusively to member companies within the same group. While a GFC may provide expedited services and sometimes offer favorable loan or deposit terms to the listed arm of a group, it could also be used by a group to channel funds from investors of a listed company to its potentially less creditworthy unlisted affiliates. Also, unlike independent financial institutions where risks are diversified, counter-party risks at a GFC generally are concentrated within one industry or one group of companies. One out of four rejected RPT proposals at Mainland-listed companies and one out of three at dual-listed companies involved such transactions with a GFC.

Table 2: Rejected GFC proposals during 2010-2013

› Company name › Yunnan Copper Co., Ltd. › Kunlun Energy Co., Ltd.

Listing Mainland-listed HK-listed

Ticker 000878.SZ 0135.HK

Meeting date 3/5/2013 28/1/2010

%FOR 15.8% 40.3%

%AGAINST 84.2% 59.8%

%ABSTAIN



with it. Most RPTs require approval by a majority of minority shareholders. Further, there is no quorum requirement in China, and the outcome of an RPT proposal could be determined by a small minority of shareholders. Secondly, RPTs are often viewed by investors as problematic given the potential for material conflicts of interest inherent in these transactions. For some RPTs, the controlling shareholder stands to benefit economically at the expense of minority shareholders, and there have been cases in both China and Hong Kong where the listed company purchased assets from the controlling shareholder only to report impairment a few years later. Investors in the Chinese market may be scrutinizing these resolutions more carefully than others, and find them to be disadvantageous to minority shareholders.

The French market resembles the Chinese market in terms of the types of resolutions. Not only are related-party transactions common voting items, the election of supervisors is also present. Voting results suggest less alignment between investors and management compared to those of the other markets under study as evidenced by the lowest average approval rate of 93.6 percent. Resolutions such as board and executive remuneration, director elections, equity-based compensation plans, related-party transactions, share capital increases, and share issuances without preemptive rights, and proposals affecting shareholder rights such as granting the board authority to use all outstanding capital issuance authorities in the event of a hostile offer, have met with consistently higher shareholder dissent for the period observed.




PreemptiveRights

ApprovalRate

89.9% 91.9% 86.9% 99.2% 93.0% 84.7%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

Chart 11: Level of Consent by Subject - French Companies




Many resolutions commonly seen in the U.K. market are similar to those at companies in its former colony, Hong Kong. A notable exception is advisory votes on executive compensation, which appear in the U.K., but not Hong Kong (though Hong Kong does have binding votes on director compensation). Interestingly, shareholders of U.K. companies appear to be more supportive of share issuances without preemptive rights than those at other markets where similar proposals are common. This could be due to the common practice in the U.K. of capping the general mandate limit at 5 percent in any given year and maintaining a rolling three-year cap of 7.5 percent on issuances for cash, and hence these proposals are considered less problematic than the general mandate in Hong Kong which allows companies to issue up to 20 percent of equity without shareholder approval.



PreemptiveRights

ApprovalRate

90.2% 97.3% 95.1% 88.8% 84.2% 97.6%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%Chart 12: Level of Consent by Subject - UK Companies




Finally, U.S. companies generally are not required to seek shareholder approval of certain items for which companies in the other markets in this study generally are required to seek a shareholder vote. However, almost every type of resolution that is put to shareholder vote, with the exception of ratifying auditors and uncontested director elections, receives considerable shareholder scrutiny. Compensation issues, including both say-on-pay and equity-based compensation plans, are among the issues of dissent for investors in U.S. companies. Shareholders of U.S. companies also tend to cast negative votes on matters that would alter their rights and/or board dynamics, as well as on mergers and acquisitions.

2.5. Shareholder Proposals

In addition to voting against management proposals they deem unfavorable to their interests, shareholders may also exercise their rights as owners by submitting their own proposals for a vote at shareholder meetings. Chart 14 presents the frequency of shareholder proposals seen in each market, measured by the percentage of total proposals.

Board & Executive Rem. Director Election Equity Comp. M&A

ApprovalRate

89.6% 95.9% 87.8% 80.5%

80%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%Chart 13: Level of Consent by Subject - US Companies



Given the low level of voter turnout and the high degree of shareholder consent at Chinese companies, it may appear contradictory that shareholder proposals are common at these same firms. However, the relatively high frequency of shareholder proposals does not necessarily reflect activism on the part of the broad swath of shareholders. Instead, these shareholder proposals are often submitted by the controlling shareholder. Chinese companies are not allowed to amend or add additional proposals once a meeting notice has been made public. Controlling shareholders often help companies to add to or amend a shareholder meeting agenda by submitting a shareholder proposal. Given that controlling shareholders generally have substantial board representation at these companies, these proposals more than likely reflect the agenda of company insiders as opposed to unaffiliated shareholders. By contrast, shareholder proposals in most markets tend to reflect the views of an unaffiliated shareholder or shareholders. This management-friendly nature of shareholder proposals by a controlling shareholder is evidenced by the fact that none of these proposals competes against management proposals, and management does not recommend that shareholders oppose them.

Chart 15, which shows the average level of support for shareholder proposals by country, further attests to the nature of the shareholder proposals at Chinese companies. Shareholder proposals at Chinese companies receive extremely high levels of consent comparable to management proposals. While the average support for a shareholder proposal at a U.S. firm is around 30 percent, shareholder proposals at Chinese companies typically are approved with 98 percent support.

8

Shareholder proposals by retail or institutional investors are almost non-existent in China, though further study is required to examine which proposals, if any, were proposed by a minority shareholder and how such proposals differ from those submitted by the controlling shareholder.

8 As the frequency of shareholder proposals in France and the U.K. is low, the average level of consent of shareholder proposals in

these two markets fluctuates significantly and is skewed by outliers. For example, there were only three shareholder proposals among U.K. companies in 2012, and two of them received less than 1.5 percent support.

Mainland-listed Dual-listed HK-listed FR UK US

2010 0.6% 5.3% 0.0% 0.5% 0.3% 8.8%

2011 5.3% 8.0% 0.0% 0.2% 0.2% 6.3%

2012 5.6% 4.5% 0.0% 1.1% 0.1% 6.7%

2013 3.5% 5.5% 0.0% 0.6% 0.6% 6.9%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Fre

qu

en

cy o

f sh

are

ho

lde

r p

rop

osa

ls

Chart 14: Frequency of Shareholder Proposals



3. Survey of Investor Engagement in China

3.1. Qualitative Assessment of Institutional Investors' Attitudes

This section of the paper is based on the ISS China Investor Stewardship Survey, which was an anonymous online questionnaire open from March 2, 2014, to March 31, 2014.

9 The survey targeted institutional investors domiciled outside of China, and respondents

included some of the world’s largest asset owners and asset managers as measured by their assets under management (AUM). We surveyed both those that have been granted QFII/RQFII status and have exposure to China’s equity market as well as those that do not.

The survey was designed to explore the role, both existing and potential, of engagement between issuers and institutional investors in China. Comprising 12 questions, the survey was intended to capture foreign institutional investors’ voting practices in China, their opinions on China’s corporate governance, and their engagements with Chinese issuers. For these purposes, references to Chinese companies or issuers in the survey referred only to those that are listed and only listed on either the Shanghai or Shenzhen Stock Exchanges.

In this survey, “engagement” was defined as "direct contact with company employees or directors in connection with your equity investment, by telephone, email, postal mail or in-person meetings." Specifically, the survey differentiated engagement by the initiator, investigated the reasons for engagement in China, and collected views on impediments to successful engagement with Chinese companies.

9 See Appendix 4 for a copy of the survey

Mainland-listed Dual-listed FR UK US

2010 95.9% 99.0% 12.4% 42.0% 33.1%

2011 98.4% 98.6% 42.8% 53.9% 33.5%

2012 98.4% 98.4% 71.2% 8.9% 33.8%

2013 96.9% 97.2% 28.7% 43.8% 31.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ap

pro

val R

ate

Chart 15: Level of Consent of Shareholder Proposals



We invited institutional investors who do not have investment in China's equity market to answer Question 12 and those who do to answer Questions 5 to 11.

The survey is intended for research and evaluation purposes. To encourage participation and candid responses, identities of participants are kept strictly confidential.

The survey was answered by 26 institutional investors, among whom 18 were asset managers, four were asset owners, and the remaining four chose not to provide a designation. Among the respondents were some of the world’s largest asset owners and asset managers, some of whom have exposure to China's equity market while others do not. Nine of the 26 survey participants (34.6 percent) said they do not have investment in China and the remaining 17 participants (65.4 percent) said they have investment in the market.

Chart 16: Are you an asset owner or asset manager?

Answer Options Response Percent Response Count

A. Asset owner 15.4% 4

B. Asset manager 69.2% 18

C. Not identified 15.4% 4

answered question 26

Given the limited number of respondents, survey responses should not necessarily be taken as representative of the views of global investors as a whole. However, it is logical to think that institutions who choose not to invest in China would be less likely to answer the survey than those who do invest there, and therefore had the survey covered a broader population of investors, responses would likely still have reflected concerns about corporate governance in China. Given the collective assets under management of these institutional investors in the global financial market, the survey responses provide valuable insights into foreign investors' perception of the market, as well as their level of voting and engagement activities.

3.2. General Perceptions of Corporate Governance in China

We asked respondents to rate corporate governance practices in China, to gain insights into their overall impression of corporate governance risks in China. The survey results show that respondents generally share a pessimistic view of corporate governance practices in China. Nearly 75 percent of the respondents rated the practices as poor or very poor, while the remainder considered the practices to be fair. None of the institutional investor respondents viewed corporate governance in China favorably.



This result is in agreement with the CG Watch 2014, a joint research study by the Asian Corporate Governance Association (ACGA) and CLSA Asia-Pacific Markets which scored 11 Asian markets

10 according to their corporate governance practices

11. With a score of

45, China was ranked ninth, followed only by the Philippines and Indonesia.12

It was considered as a market with a "weak corporate culture," and saw its corporate governance standards slipping relative to other markets in the region. As a comparison, Hong Kong and Singapore ranked first with scores of 65 and 64, respectively. Japan ranked third with a score of 60, and Korea ranked eighth with a score of 49.

3.3. Key Concerns

Institutional investors who do not have investments in China were asked to specify their reasons. A substantial majority (77.8 percent) of the respondents said that concerns about corporate governance practices in China have held them back from investing in that market. More than half of the respondents (55.6 percent) cited limited market access, the lack of shareholder protection, and an ineffective legal system as some of the reasons for not investing in China. 22.2 percent of the respondents chose political and social risks.

13 Corporate governance has overshadowed other conventional investment concerns for the China market, and has been

cited as the most remarkable obstacle.

10 The markets are: China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand.

11 The corporate governance score is based on evaluation of discipline, transparency, independence, responsibility, and fairness.

12 Amar Gill, Jamie Allen, Charles Yonts, Irina Bevza, CG Watch 2014 – Dark shades of grey, CLSA and ACGA, September 17, 2014.

13 A total of 10 participants answered this question, and 9 of them do not have investment in China. Additional comments we

received from the participants include: 1. We do not apply for any GFII quota; 2. No international focus in our portfolios. Mostly domestic stocks; 3. Questionable accounting / audit practices.

A. Very good 0%

B. Good 0%

C. Fair 26%

D. Poor 61%

E. Very poor 13%

Chart 17: How would you rate corporate governance practices in China?



We also invited all respondents to select their top corporate governance concern. An overwhelming 68.2 percent of all respondents ranked the lack of transparency as the overriding corporate governance concern. Abusive related-party transactions were the most significant corporate governance concern to 13.6 percent of the respondents. The lack of board independence and the prevalence of a powerful and self-serving controlling shareholder were each cited by 9.1 percent of respondents.

Although none of the institutional investors selected the lack of recourse actions in this single-choice question, it does not necessarily mean that they do not regard this item as a corporate governance concern. The result from the previous survey question suggests that the lack of shareholder protections is a significant reason for institutional investors to not invest in China. However, it appears that the concern of transparency overshadows other concerns and likely permeates across other issues, including the lack of recourse actions, as indicated by a response from one of the respondents, who made an additional note that, "All of the above are our valid concerns regarding corporate governance in China. Our biggest concern on abusive related-party transactions is made worse by the lack of transparency in Chinese companies."

55.6%

77.8%

22.2%

55.6% 55.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

A. Limited marketaccess

B. Corporategovernance concerns

C. Political/social risks D. Lack of shareholderprotection

E. Ineffective legalsystem

Chart 18: What are the reasons that you are not investing in this market? (check all that apply)



We also explored the respondents' perspective toward impediments to corporate governance improvement in China on several fronts, namely the government, investors, and the market-oriented non-governmental organizations. The responses were split evenly among the three options. One investor also made an observation that the impediments due to the government are not necessarily the lack of policy, but the failure to effectively enforce the implementation of laws and regulations.

14 Another

commented that the lack of proper channels for recourse to counter abuses sets back corporate governance improvement, which reinforces our previous analysis that shareholder protection or lack thereof stands as a prominent concern for institutional investors. The trisection of opinions might suggest that our respondents believe that the promotion of corporate governance cannot be easily achieved through either a top-down or a bottom-up approach. Instead, the improvement of corporate governance practices in China requires the effort from the government and the market, as well as cross-sectorial cooperation among regulators, investors, and non-governmental organizations.

3.4. Voting Practices in China

When asked to what extent they vote their shares at Chinese companies, the institutional investors in our survey said that they either voted all their shares with respect to all agenda items at all meetings, or did not vote at all, instead of partially executing their

14 The anonymous note stated "(The impediment is) not government policy per se but enforcement." It further identified the lack of

domestic investor focus and will, as well as the power and the power structure related to state-owned enterprises, as notable impediments to corporate governance improvements.

A. Lack of transparency

68%

B. Abusive related party transactions

14%

C. Lack of board independence

9%

D. Lack of recourse actions such as

derivative lawsuits 0%

E. The prevalence of a powerful and self-serving controlling

shareholder 9%

Chart 19: What is your biggest corporate governance concern when (considering) investing in China?



voting rights. It appears that the propensity to vote among our survey participants who have investments in China is remarkably high, with 75 percent saying that they vote all their shares with respect to all agenda items at all meetings. These responses appear to be in distinct contrast with the voting practice of shareholders of Mainland-listed companies in general, as the voter turnout at such companies was only 54.7 percent in 2013.

15 This might be an indication that domestic investors are less likely to vote, but

further study is needed to confirm this assertion. The remaining 25 percent of interviewees stated that they do not vote any of their shares with respect to any of the agenda items at any of the meetings at Chinese companies.

Nearly half (46.7 percent) of all respondents, regardless of their voting practice, believed that the biggest obstacle to voting their Chinese holdings is the insufficient disclosure that makes it difficult to make an informed decision on voting items. One-fifth (20.0 percent) of the respondents flagged that they do not have enough time to review the meeting agenda due to the untimely disclosure. Currently in China, it is required that issuers disclose meeting circulars 20 days before AGMs and 15 days before EGMs. However, these meeting circulars do not always contain sufficient details to make an informed voting decision, and full details of an agenda item may not be disclosed until as late as five days before the meeting date. As the cut-off date for many of the overseas shareholders voting by proxy to submit their voting instructions can be 10 days or more before the meeting date, often investors must cast their votes with limited information.

The difficulty to sort out voting logistics was the second most common answer, with one-third (33.3 percent) of institutional investor respondents raising it as the most significant impediment to exercising their voting rights in China. The logistical barriers include, but are not limited to, complicated formalities required of custodians, aggressive cut-off dates, the lack of an English version of the online voting channel, and the yet-to-be improved online voting system.

16 Facing these obstacles, none of the respondents opted for

companies’ rejection of their votes without an explanation as the single largest stumbling block to their voting in China. It appears

15 See Chart 1, Section 2.3

16 Currently, there are three e-voting platforms provided by the two exchanges and the China Securities Depository and Clearing Co.

(SD&C), Ltd. Both the Shenzhen Stock Exchange (SZSE) and SD&C offer web-based platforms for shareholders to cast their votes. Shareholders need to find the specific meeting and then log in using their shareholder account and password to deliver votes. If the issuer chooses the Shanghai Stock Exchange's (SSE) electronic voting platform, shareholders need to go to securities companies' branches located across the nation to exercise votes using the trading system. There is no web-based platform provided by the SSE.

20 days before the meeting: disclosure of meeting circulars for

AGMs is required

15 days before the meeting: disclosure of meeting circulars for

EGMs is required

10 days before the meeting: cut-off day

for some shareholders to submit voting

recommendations

5 days before the meeting: full

disclosure should be provided by issuers no

later than this day

The meeting day

Disclosure Timeline



that many of the respondents are willing to navigate through the complex mechanisms of voting and cast their votes even if their votes may not be counted, indicating that voting is an important right and responsibility for them.

No other issues were specifically identified as obstacles to voting in China.

3.5. Engagement

3.5.1. Engagement Frequency

The survey distinguished engagements by the initiating party, namely investors and issuers. During the past fiscal year, one-third of the respondents (33.3 percent) reported that they did not take any initiatives to engage Chinese companies. Meanwhile, 20.0 percent of the respondents said that they made more than 10 efforts to engage with issuers. The overall engagement frequency of institutional investors in the China market is low compared to that in the U.S. market, where only 19 percent of the institutional investor respondents said they did not initiate engagements at all and 55 percent said they initiated more than 10 engagements with companies.

17

17 Marc Goldstein, Defining Engagement: An Update on the Evolving Relationship between Shareholders, Directors and Executives,

IRRC Institute and ISS, p. 11, April 10, 2014.

A. The disclosure is not sufficient to make an

informed decision 47%

B. The disclosure is not timely enough to

review the meeting agenda

20%

C. Voting logistics are difficult to sort out

33%

D. Companies reject my votes without giving

any explanations 0%

Chart 20: What is the biggest obstacle when voting your Chinese holdings?



Source: Institutional Shareholder Services

According to our investor respondents, 66.7 percent of them have never encountered an engagement initiated by the Chinese companies they invested in. One investor (6.7 percent) reported that they were engaged by an issuer once, three investors (20.0 percent) were approached in this regard between two and five times, and one investor took part in engagements initiated by their portfolio companies more than 10 times. None of the frequency category saw more engagements initiated by the issuers than those initiated by the investors. This is in stark contrast to the frequency pattern amongst U.S. issuers, only 22 percent of whom had not

33.3%

13.3%

20.0%

13.3%

20.0%

66.7%

6.7%

20.0%

0.0%

6.7%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%

None

1

2-5

6-10

>10

Chart 21: Engagement Frequency in China

Engagements initiated byChinese companies

Engagements initiated byinstitutional investors

19.0%

2.0%

16.0%

8.0%

55.0%

22.0%

2.5%

18.5%

19.0%

38.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

None

1

2-5

6-10

>10

Chart 22: Engagement Frequency in the United States

Engagementsinitiated by issuers

Engagementsinitiated byinstitutionalinvestors



initiated any engagements in the previous year while more than 36 percent had initiated more than 25 engagements with institutional investors.

18

3.5.2. Reasons for Engaging Chinese Companies

Our next survey question explores the intended goals for the engagement requests. As the chart below suggests, foreign institutional investors engage with Chinese issuers for a variety of reasons. Similar to the United States, the most common reason for investors to initiate engagement is to discuss issues with regard to financial results, business strategies, and other risk factors, according to our survey results. More than three-quarters of the respondents (77.8 percent) would engage with issuers for routine business discussions, while nearly half of the respondents (44.4 percent) believe that it is worth the effort to initiate an engagement with a Chinese company for corporate governance discussions. Corporate governance issues appear to be more of a motivator of engagement initiatives than other business related topics, such as economic transactions and capital structure. However, in comparison, more than 70 percent of U.S. investors proactively engage with U.S. issuers on corporate governance issues, particularly on executive compensation programs.

19

3.5.3. Impediments to Successful Engagement with Chinese Companies

Our survey participants were asked to identify the significant impediments to successful engagement with Chinese companies. Philosophical differences or differing expectations gained the most agreement among the respondents (43.8 percent). Investors and

18 Ibid., p. 12.

19 Ibid., p. 32.

77.8%

22.2%

33.3% 33.3%

44.4%

33.3%

22.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

A. To discussfinancial

results/businessstrategy/risk

factors

B. To discussaccounting oraudit issues

C. To discusseconomic

transactions(e.g. mergers,related partytransactions,

dividends)

D. To discusscapital structure,

includingissuances of

shares orconvertible

bonds

E. To discusscorporate

governanceissues (e.g.

boardcomposition,

executivecompensation)

F. To discussenvironmentalor social issues

G. To seekadditional

informationdisclosure onproxy voting

items

Chart 23: What were the reasons for the engagement requests? (check all that apply)



issuers often have diverging concerns. This is true in the United States as well, where more than half of issuer respondents think that financial results, transactions, and corporate strategy matter the most as engagement subjects, while more than half of investor respondents raise environmental and social issues as an engagement subject, and more than 70 percent of investors initiate an engagement with the intent to discuss executive compensation issues and other corporate governance issues. Also, it is possible that management of a Chinese company may have a different view on who owns the company and to whom they are accountable, compared to foreign institutional investors who may have stronger views on shareholder primacy. These differences in views and priorities could become an impediment to establishing a constructive dialogue.

Other often-cited impediments are language and cultural barriers, distance and time differences, insufficient resources, lack of willingness to engage, and the presence of a controlling shareholder. Some of the barriers are comparatively logistical (language barriers, insufficient staffing, and time differences), as opposed to other subjective reasons (willingness and philosophical differences), and structural reasons (presence of controlling shareholder). It is interesting to note that only 6.3 percent of investors say that they are unwilling to engage with Chinese issuers, although 33.3 percent of them made zero attempted engagements in the past year. While more than two-thirds of investors received no engagement requests from Chinese issuers in the past year, only a quarter regard the issuers' unwillingness to engage as an impediment to successful engagement with Chinese companies.

37.5%

25.0%

31.3%

25.0%

6.3%

25.0%

43.8%

31.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

A.Language/cultural

barriers

B. Distance/timedifference

C. Insufficientstaffing/resources

on the part ofinvestors

D. Insufficientstaffing/resources

on the part ofissuers

E. Lack ofwillingness to

engage on the partof investors

F. Lack ofwillingness to

engage on the partof issuers

G. Philosophicaldifferences or

differingexpectations

H. Presence ofcontrolling

shareholderensuring that all

agenda items willbe approved

irrespective ofminority

shareholders

Chart 24: What factors do you consider to be significant impediments to successful engagement with Chinese

companies? (check all that apply)



4. Conclusion and Implications

In China, corporate governance is a relatively new concept yet to take firm root in the market. This is evidenced by the level of voting participation at Mainland-listed companies' shareholder meetings, which is considerably lower than the level in more developed markets. Our study suggests that foreign investors more actively participate in the voting process than domestic investors in China, which in turn suggests that domestic investors, both institutional and retail, may be disengaged from the corporate decision making process. Their reluctance to vote cannot be explained solely by operational hurdles in voting, as many foreign investors seem to be able to find a solution to cast their votes.

Further, managers of Mainland-listed companies enjoy little or no opposition to their proposals. The level of consent at Mainland-listed companies remains the highest amongst all markets in this study, with an average approval rate of 99 percent or more. Although shareholders in China are more vocal over certain agenda items, such as M&A transactions and related-party transactions, the overall level of dissent is minimal and there seems to be less focus on issues such as board and executive remuneration and equity-based compensation plans, which are items that trigger the most dispute in markets such as the U.K., U.S., and France.

Such muted opposition should not be taken as a sign that investors have little or no concern with the way companies are managed and governed in China. Our survey respondents consistently indicated significant concerns over corporate governance practices in China, particularly the lack of transparency. Many view shareholder protections to be not robust enough, leaving minority shareholders few options to safeguard their interests and rights. Coupled with the prevalence of abusive related-party transactions, minority shareholders are at further risk from the fact that controlling shareholders can maximize gains at the expense of minority holders. Many respondents do attempt to engage with their investee companies, but logistical challenges and cultural and language barriers, as well as limited foreign shareholding at Chinese companies, may limit the level of impact such engagement could have. With all these corporate governance concerns, some institutional investors are even scared away, and have decided to “wait and see,” at best, before investing in China.

Chinese companies have attracted significant amounts of capital from overseas investors over the last two decades, thanks to the strong growth of individual companies and the economy as a whole. However, as the economy matures and growth rates inevitably slow, investors will be more likely to compare China to other developed markets, and their tolerance for opacity and poor governance is likely to diminish. A perception that Chinese companies are unwilling to engage in dialogue with shareholders, or that profits are being diverted away from public shareholders through related-party transactions, could inhibit the country's ability to continue to attract foreign investment, and could raise the cost of capital for companies seeking to carry out secondary offerings.

However, there are multiple encouraging signs emerging in the market. The quality of disclosure of meeting circulars has improved significantly over the years, and the disclosure of voting results, with the breakdown of the votes from small and medium shareholders, is at a level comparable to many other markets. Companies are also abiding by the legal requirements to yield higher cash dividends, which could help nurture the maturity of the market and encourage more long-term investment. Ownership by institutional shareholders is increasing, and could become a powerful force in addressing some of the fundamental corporate governance issues. Chinese regulators also recognize the lack of transparency and its negative impact on the healthy development of China’s equity market, and are taking a number of regulatory measures to address the issue. The State Council, in its Opinions on Promoting the Healthy Development of the Capital Markets published in May 2014, envisioned a multilayer capital market, to take shape in China by 2020, that is structured properly and functions fully, featuring transparency, efficiency, and openness.

While such signs are encouraging, much needs to be done to improve corporate governance practices in China as indicated by the level of voter turnout, lack of dissent despite concerns, and survey respondents' view of governance practices in China. Our survey respondents believe that regulators, investors, and issuers all share responsibility for addressing this challenge. Issuers should facilitate the procedures for investors to vote, provide sufficient information in a timely manner, and engage with investors. Institutional investors should not be content with taking a backseat, as indicated in the survey, and should act to protect and assert their interests, including voting at shareholder meetings. If domestic investors vote in line with objective guidelines, it could help asset managers and asset owners fulfill their fiduciary duties to their underlying clients and beneficiaries. Regulators could ensure



the effective implementation of current policies and implement new regulations to address investor concerns. Further, duties owed to minority shareholders of listed companies by controlling shareholders and boards should be emphasized. When the controlling shareholder does not heed the needs of minority shareholders, boards are accountable only to controlling shareholders, and there is limited recourse available for investors, there is little incentive for shareholders to vote or even to invest in Chinese companies. Moreover, many of the world's largest investors have signed onto stewardship codes in markets such as the U.K. and Japan, and become signatories to the United Nations Principles on Responsible Investment (UNPRI). These govern investment activities worldwide and not just in an institution's home market. An inability to constructively engage with portfolio companies in China, or an inability to verify that one's votes have been counted, will impair these investors' ability to fulfill their UNPRI and stewardship code obligations, and could lead to a reallocation of assets in favor of markets where meeting those obligations is easier. Issuers, investors, regulators, and controlling shareholders all have a role to play in improving corporate governance practices if the Chinese capital market is to sustain its growth and mature.



Appendices

1. Voter Turnout

Mainland-listed

Year # of meetings Mean Min Max StdDev

2010 350 55.3% 11.1% 96.3% 16.5%

2011 381 55.2% 3.1% 92.3% 17.4%

2012 426 55.9% 9.8% 93.0% 16.6%

2013 637 54.7% 4.9% 88.6% 16.9%

Dual-listed


2010 70 65.6% 91.6% 86.8% 14.5%

2011 74 67.5% 27.2% 99.9% 16.5%

2012 77 66.4% 27.3% 91.8% 14.7%

2013 87 62.3% 0.5% 91.9% 20.7%

HK-listed


2010 53 68.8% 30.5% 90.8% 14.4%

2011 48 70.1% 13.9% 94.4% 17.2%

2012 43 74.3% 26.4% 93.3% 13.3%

2013 45 74.4% 30.4% 93.0% 12.9%

US


2010 516 85.2% 3.2% 100.0% 7.1%

2011 527 85.6% 24.7% 98.6% 5.7%

2012 526 86.4% 48.6% 100.0% 5.5%

2013 507 86.5% 62.3% 100.0% 4.9%



2. Description of Voting Item Subjects

Subjects Description

Audit Audit related resolutions including ratifying the appointment of the auditor, approving a change of the auditor, setting auditor compensation, or authorizing the board to fix auditor remuneration.

Board & Executive Remuneration

Resolutions related to board and executive compensation. These include proposals to set director or supervisor fees, and approval of the remuneration of members of the board of directors and supervisory board, executive bonus plans, deferred compensation plans, golden parachute or retirement allowance plans, as well as advisory votes on executive remuneration and approval of remuneration reports.

Board-related Various proposals related to board structure and authorities, including proposals to declassify the board, adopt majority voting, fix the number of directors, approve director or supervisor liability insurance, discharge directors, change board structure, and acknowledge resignation of a board member.

Bylaw Amendments

Amendments to articles of association, bylaws, procedural rules or other governing articles of a company. Some examples of amendments include updates to articles to reflect changes in regulation and changes of business scope, dividend policy, voting procedures, or board related amendments. Often these changes are bundled under one voting item. Some of these resolutions are classified under other categories such as board-related proposals and shareholder rights, depending on the nature of the proposal.

Debt Issue Proposals related to debt, including issuance of debt financing instruments such as short-term financing bills, corporate bonds, medium-term notes, authority to issue debt, pledge assets for debt, and increase borrowing.

Director Election Non-contested elections of directors to the board using majority voting, cumulative voting, or plurality voting.

Dividend Distribution of cash dividend, stock dividend, or capitalization of capital reserves, and approval of dividend or profit distribution policy and allocation of income.

Equity-based Comp.

Proposals related to equity-based or equity-linked compensation plans including stock options, restricted stock plans, and stock purchase plans.

Loan & Guarantee

Proposals related to loans and guarantees including:

The company or its subsidiaries seeking loan financing from banks, financial institutions, or controlling shareholders;

Provision of funding by the company or its subsidiaries to subsidiaries, affiliates, or related parties; or

Loan guarantee provisions by the company or its subsidiaries to subsidiaries, affiliates, or sometimes unrelated parties.

Merger & Acquisition (M&A)

Including purchase or sale of assets, absorption merger, share issuance in relation to an asset purchase, waiver of mandatory tender-bid requirement, establishment of a joint-venture, investment in another company or a project as well as reorganization/ restructuring plans. Asset purchases and disposals involving related-parties are generally categorized under Merger & Acquisition instead of related-party transactions.

Related-party Transactions (RPTs)

Ongoing business transactions as well as ad-hoc transactions with interested parties such as parent or sister companies. Commonly seen RPTs include but are not limited to:

Sale or purchase of goods, property, or assets;

Provision or receipt of services or leases;

Provision, receipt, or guarantee of financial services (including loans and deposit services with group finance companies);

Assumption of financial/operating obligations;

Subscription for debt or equity issuances; and

Establishment of joint venture entities.

Shareholder Rights Proposals affecting shareholder rights, including proposals related to quorum requirements, proxy access,



right to act by written consent, supermajority vote requirement, right to call special meeting, authority to call meeting with short notice, and poison pills.

Share Issuance with Preemptive Rights

Proposals related to issuance of equity or equity-linked securities with preemptive rights, such as rights issues and authorizing the board to conduct right issues. Preemptive rights permit shareholders to share proportionately in the issuance of new stock. These rights guarantee existing shareholders the first opportunity to purchase shares of new issuances of stock in the class they own in proportion to the percentage of the class they already own.

Share Issuance w/o Preemptive Rights

Proposals related to issuance of equity or equity-linked securities without preemptive rights. It can be a specific issuance, such as a public offering or private placement, or a general issuance request allowing a company to issue shares to raise funds for various purposes. This category also includes authority to issue repurchased shares and setting of a price range for an issuance without preemptive rights.

Statutory Report Approval of statutory reports including but not limited to annual reports, financial statements, auditors' reports, reports of the board of directors, reports of the board of supervisors, internal control procedures, and reports of the general manager.

Supervisor Election Election of supervisors to the supervisory board via majority voting or cumulative voting for companies adopting a two-tiered board structure.

Share Capital Increase

Approval to increase authorized shares or to grant the board authority to increase authorized capital.

Share Repurchase Proposals seeking approval of a specific share repurchase plan or to grant the board authority to repurchase shares.

Other Various other proposals including election of management nominees under contested elections, reincorporation of a company, change in company name, a stock split or bonus share issue, approval of administrative formalities, and approval of political donations and expenditures.



3. Level of Consent by Subject

Mainland-listed

Audit

Board & Executive Rem.

Board-related

Bylaw amend.

Debt Issue

Director Election Dividend

Equity Comp.

Loan & Guarantee M&A RPTs




Share Repurchase

Statutory Report

Supervisor Election Other

Grand Total

2010 n 201 56 13 176 53 230 207 44 58 65 195 7 149 46

869 83 320 2772

Mean 99.88% 99.97% 99.89% 99.21% 99.63% 99.36% 98.88% 99.91% 99.39% 92.62% 98.58% 99.74% 98.87% 99.12%

99.80% 97.56% 99.10% 99.19%

StdDev 1.29% 0.12% 0.25% 7.69% 0.41% 6.65% 9.69% 0.05% 2.74% 10.88% 5.82% 0.67% 1.79% 0.64%

2.11% 14.67% 4.05% 5.56%

2011 n 200 67 11 217 85 577 221 107 140 57 265 4 241 59 15 952 146 333 3697

Mean 99.92% 99.96% 99.96% 99.81% 99.88% 98.84% 99.90% 99.79% 99.75% 99.14% 98.61% 99.84% 97.90% 99.59% 99.81% 99.87% 98.99% 98.83% 99.34%

StdDev 0.45% 0.13% 0.06% 0.78% 0.47% 6.12% 0.48% 0.32% 0.92% 2.08% 4.05% 0.32% 4.13% 0.28% 0.01% 1.07% 5.17% 2.73% 3.27%

2012 n 249 65 8 229 174 336 263 119 174 103 243 3 119 21 9 956 97 189 3357

Mean 99.90% 99.91% 95.32% 99.92% 99.93% 98.83% 99.86% 99.92% 99.69% 99.08% 98.51% 99.99% 98.35% 99.17% 99.20% 99.90% 98.90% 99.67% 99.54%

StdDev 0.85% 0.45% 8.59% 0.48% 0.22% 4.77% 0.89% 0.10% 3.08% 3.61% 8.09% 0.01% 3.84% 0.73% 0.10% 0.86% 10.15% 1.72% 3.51%

2013 n 298 87 14 329 337 585 264 123 372 115 364 6 411 46 27 1057 154 446 5035

Mean 99.89% 99.76% 99.81% 99.77% 99.92% 99.33% 99.30% 98.81% 99.34% 96.83% 97.73% 99.91% 97.99% 98.78% 99.57% 99.87% 99.49% 97.06% 99.06%

StdDev 0.61% 1.25% 0.50% 1.44% 0.17% 2.23% 6.44% 2.12% 5.81% 8.06% 8.48% 0.09% 5.55% 0.99% 0.35% 0.66% 2.03% 11.73% 5.30%

Total n

948 275 46 951 649 1728 955 393 744 340 1067 20 920 172 51 3834 480 1288 14861

Total Mean 99.90% 99.89% 99.09% 99.71% 99.89% 99.07% 99.50% 99.54% 99.50% 97.09% 98.28% 99.85% 98.15% 99.20% 99.57% 99.86% 98.89% 98.40% 99.26%

Total StdDev 0.84% 0.74% 3.82% 3.44% 0.28% 4.95% 5.67% 1.29% 4.45% 7.39% 7.05% 0.41% 4.55% 0.74% 0.33% 1.27% 8.20% 7.42% 4.56%

Dual-listed

Audit

Board & Executive Rem.

Board-related

Bylaw amend.

Debt Issue

Director Election Dividend

Equity Comp.

Loan & Guarantee M&A RPTs




Share Repurchase

Statutory Report

Supervisor Election Other

Grand Total

2010 n 49 22 4 41 69 139 55 4 10 16 44 1 102 18 3 165 44 87 873

Mean 99.89% 99.81% 91.02% 99.87% 99.88% 98.88% 99.93% 94.15% 98.55% 98.09% 98.96% 99.98% 95.18% 99.92% 99.68% 99.77% 99.87% 99.67% 98.97%

StdDev 0.22% 0.39% 7.89% 0.27% 0.15% 7.64% 0.18% 9.45% 2.76% 4.86% 3.60% N/A 6.28% 0.02% 0.45% 0.52% 0.15% 1.60% 4.28%

2011 n 55 19 8 55 63 113 51 14 21 9 20 2 36 59 3 170 35 47 780

Mean 99.29% 98.89% 94.32% 99.34% 99.44% 99.44% 97.76% 99.51% 97.61% 98.16% 88.20% 98.75% 89.53% 98.33% 99.99% 99.42% 99.23% 97.60% 98.23%

StdDev 3.03% 3.98% 7.51% 2.30% 0.68% 0.76% 12.76% 1.07% 4.31% 5.38% 18.14% 1.72% 8.22% 1.02% 0.01% 3.14% 1.14% 6.42% 6.02%

2012 n 50 23 8 68 67 204 50 20 29 9 19 2 76

4 163 53 48 893

Mean 99.57% 99.90% 94.22% 99.60% 98.55% 98.23% 97.85% 99.86% 98.07% 99.75% 85.58% 93.76% 95.50%

99.91% 99.74% 97.15% 98.85% 98.21%

StdDev 1.61% 0.15% 6.84% 1.39% 2.06% 6.67% 13.43% 0.45% 3.87% 0.72% 25.57% 0.31% 6.75%

0.16% 1.23% 13.89% 3.15% 7.46%

2013 n 54 21 5 43 84 201 47 29 49 16 38 1 50

4 154 42 55 893

Mean 99.76% 99.79% 93.

securities class action services · the 2010-2012 period. voting results used in this study were...

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