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Signs of spring

5 October 2015 By Peter Thal Larsen

Institutional investors are finally standing up to corporate China. Two recent shareholder votes in Hong Kong suggest money managers are becoming less tolerant of sloppy governance. Though there’s a long way to go, Chinese companies used to silent acquiescence from foreign investors may be in for a surprise.

China Merchants Bank is the latest victim of the newly belligerent mood. Just over a week ago, the country’s sixth-largest lender asked shareholders to endorse changes to its employee share ownership scheme. The bank said it had tweaked the scheme after China’s securities regulator asked big investors in local companies to help stabilise the stock market by increasing their shareholdings.

The request looked a formality: investors had overwhelmingly approved CMB’s original plan in June. But almost 42 percent of Hong Kong shareholders objected to the revised version, which would have allowed the bank’s chairman and non-executive directors to buy shares at a big discount. As a result, the proposal did not get the two-thirds majority it needed to pass.

A month earlier, a large minority of Hong Kong shareholders in CITIC Securities objected to the Chinese broker’s plan to issue shares worth HK$11.5 billion ($1.49 billion) to China’s state-owned social security fund. Though the plan passed, investors representing more than a quarter of the shares voted against it.

Investor rebellions are common in Europe and the United States, but remain rare in Asia, where governments and families keep a firm grip on listed companies. Even in relatively sophisticated Hong Kong, shareholders routinely grant companies a so-called “general mandate” which allows them to issue large chunks of equity without further approval.

Doubtless China’s stock market collapse has fuelled fund managers’ unease. Increased scrutiny from professional agencies may also be playing a role. Institutional Shareholder Services, the influential proxy adviser, recommended its clients vote against CMB’s revised scheme because the bank had “not provided a compelling reason” for allowing non-executives to buy shares.

None of this alters the realities of Chinese corporate ownership. Control still lies overwhelmingly with state-backed shareholders. But if institutional investors start using the limited powers at their disposal, big Chinese companies will no longer be able to take the support of foreign shareholders for granted.

 

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