Allianz GI Votes ‘Against’ a Third of Management Proposals in HK

• Climate change,
• Planet boundaries (such as issues related the nature and biodiversity), and
• Inclusive capitalism (including issues of community, human, and labor rights)

In segmented markets like Asia, Liu also considers criteria like the funds’ absolute holding value in a certain investee, the percentage represented in an investee, an investee’s carbon intensity, continuity of engagement program as well as external ESG ratings and trends. With these, Liu has come up with a list of 50-100 focused companies and reviews it every year.

Here are some of his focus areas.

Board Independence and Diversity

Board independence is one of the bedrocks of good corporate governance, which forms one of the crucial pillars of sustainable investing (also called environmental, social and governance, or ‘ESG’ investing).

In Asia, board formation and diversity is something that, has been following closely, and he has observed some positive signs. “An increasing number of female directors have stood for election to boards of Hong Kong companies. A few Japanese and Taiwanese companies, with all-male boards previously, have introduced female directors to the boards,” he said.

A company’s board of directors has a vital role to play in shaping corporate governance practices, embedding culture and values within daily operations, and bringing judgment to bear on issues of accountability and conduct. An independent majority on the board is often associated with a better alignment of shareowners' interests and mitigation of conflicts of interest that may arise from the decision-making process. A diverse board is likely to provide a diversity of thoughts to generate longer-term value for company stakeholders.

Diverse Board Is As Important As Clear Pathways

While the direction of travel is positive, Liu believes that Asian companies still lag behind the U.S. and Europe on board gender diversity ratios. In Hong Kong, women’s representation in decision-making roles, such as in the management team and the board, is less than 15%.

Liu’s team is advocating and working toward a 30% ratio for women on the boards and management teams in the company he covers. To do this, his team uses engagement and proxy voting tools. “There are no excuses [to not have a diverse board]. While inviting women to sit on company boards is a critical effort to introduce diversity, what is important too is seeing companies grooming young women and setting up pathways for them to senior roles, right from entry-level positions and onwards.”

Board independence is another pivotal focus for Liu. “The board and key committees’ independence level in China and Japan are still yet to improve. In Hong Kong and Taiwan markets, prolonged tenure of independent directors and the combination of the chairman and CEO roles are some common practices that we do not support. These could sacrifice board independence and result in ineffective management oversight.”

The firm’s proxy voting statistics reveal that, in 2022, the proxy voting team was against between 26% and 36% of director appointments across Hong Kong, China, Japan, and Taiwan. This is above the 25% average of 14 markets globally. In particular, the against-vote rate for Hong Kong companies is 36%, second only to Italy’s 56%.

Say on Pay: Compensation Packages in Hong Kong

Another issue Liu’s team has been focusing on is executive compensation. With improvements, Allianz Global’s ‘against’ votes for Hong Kong companies came down to 56% from 95%, and the number for mainland companies reduced to 37% from 48%.

“The fewer against votes are in accordance with our observations on investee companies’ increased transparency in more granular indicators inside their remuneration proposals, including detailed performance hurdles and vesting conditions. Our standards haven’t not been less stringent but instead, the bar has been pushed higher. We have observed that the governance conditions of our investees have notably improved,” Liu adds.

However, the proportion of voted-down proposals remains large. To push for a more transparent compensation package while balancing shareholders’ interest, Liu’s team typically votes against packages that “were not supported by robust and challenging targets or when key performance indicators and actual targets were not sufficiently transparent.”

He adds: “We are concerned when remuneration plans disclosed in the second half of the year still include the first half’s already-achieved numbers as part of performance targets, board directors who’re recipients of incentive schemes being not excluded from the scheme’s administrative body, as well as a lack of a formal clawback policy. Additional efforts are in need to tackle the above common practices.”

His team also compares a company’s remuneration and incentive package with the market average and examines whether performance targets are granular enough and are appropriately set against the operating environment. Liu says: “For instance, in light of the current economic conditions, in particular high inflation rates in many countries, the team evaluates generous pay packages taking into account how they relate to pay increases of the wider workforce and consider whether companies underwent significant layoffs, restructuring or cut dividends.

Other Governance Issues in Asia

Liu also identifies some market-specific issues to fix. For example, Japanese firms own shares between a pair of firms, or called “cross-shareholding”. These pairs are commonly found closely associated, for instance between supplier and customers and between borrowers and creditors.

“We encourage companies to unwind their cross-shareholding positions and would vote against the election of an executive director of companies with more than 20% net assets invested in closely-related companies.”

In Taiwan, Liu also advocates a higher degree of transparency through more standardized English disclosures on ESG metrics.