A guide of Proxy Voting in China: growing awareness but not straight forward

Updated: Sep 1, 2020



Summary

With the rising attention to the China A-share market and the recent removal of QFII/RQFII quota restriction, investors' willingness to enter the Chinese capital market continues to increase. For institutional investors, active ownership contributes to the increase in long-term shareholdings value and desirable investment performance. Institutional investors who include A-shares in their portfolio understand their fiduciary duty to vote proxies and maximize stakeholders' rights and benefits. China's laws and regulations grant the rights for shareholder participation, including QFII/RQFII. Voting proxies could affect the value of shareholdings. However, proxy voting procedures in the China market could be confusing, and investors may overlook its importance.  

Foreign institutional investors in the China A-Share market 

The QFII and RQFII programs were respectively established in 2001 and 2011. As of May 2020, a total of 292 QFIIs have been approved the US $ 114.6 billion of investment quota, and 262 RQFIIs were approved with an investment quota of RMB 713.092 billion, according to Oriental Fortune Choice. The trend of onshore foreign capital management will further increase as the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) issued a new policy, the Provisions on Administration of Securities and Futures Investment Funds of Foreign Institutional Investors (May 7, 2020). The new regulations abolish the QFII/RQFII investment quota and allow qualified investors to choose the currency and timing of remittance freely. The new rules also simplify the repatriation procedures and relax the management requirements for domestic securities and futures investment funds of foreign institutional investors, further facilitating foreign investors' participation in the China A-Share market. 

The Provisions on Administration of Securities and Futures Investment Funds of Foreign Institutional Investors allows foreign institutional investors to enter China's market, advancing the internationalization of the renminbi (RMB) and capital account convertibility. "Measures announced to open up China's financial sector will continue," said Yi Gang, governor of the People's Bank of China.

In the medium and long run, foreign investors' willingness to participate in China's capital market will continue to increase. The low valuation of the domestic A-share market is attractive for long-term funds growth potential. A growing number of index providers are adding China stocks and increasing their inclusion factors into their benchmarks, indicating a rising global market significance of the A-share bonds. According to Funds Europe 2020 China Investor Sentiment Survey's preliminary results, 47% of respondents said their institutions (or their investor clients) would increase their investment in China. A further 11% said they would invest in China for the first time. With a considerable amount of foreign capital flow into the China market, investors pay more attention to the active ownership of their A-share investments.

China Proxy Voting Regulation 

Proxy voting is a measure of active ownership. Chinese laws have made relevant provisions on the delegation of voting rights and corporate governance actions. Institutional investors should pay attention to these regulations because of proxy voting's integral role in corporate governance. According to the "The Company Law of the People's Republic of China," Article 106 stated that a shareholder might appoint a proxy to attend a general meeting on his behalf. The proxy shall submit the shareholder's power of attorney to the company and exercise voting rights within the scope of authorization. The "Code of Corporate Governance for Listed Companies" issued by China Securities Regulatory Commission (CSRC) provides in Article 15 that "... Shareholders should be able to vote in person or by proxy according to the laws. The equal effect should be given to votes, whether cast in person or by proxy." The two articles above provide that proxy voting in China is permitted and protected by law. If corporate shareholders or directors are unable to attend the AGMs / EGMs, they may entrust others to vote on their behalf. If the investors own more than 5% of the listed companies' shares, then voting in person is a must.

As an essential part of stewardship, proxy voting plays a vital role where institutional investors are obliged to maximize their stakeholders' benefits. Article 78 of the Code of Corporate Governance for Listed Companies states that: institutional investors under the supervisory and regulatory remits of national financial regulatory authorities are encouraged to engage in corporate governance reasonably by exercising their shareholder rights such as voting rights, inquiry rights, and advisory rights bylaws. Institutional investors, regardless of their contribution of shares, have the right to vote. CSRC states that companies shall not impose restrictions on the minimum shareholding ratio for the solicitation of voting rights in "Guidelines for Articles of Association of Listed Companies."

The board of directors, independent directors, and qualified shareholders of a listed company may solicit shareholders' votes in the general shareholder meetings. Article 79 of the Code of Corporate Governance for Listed Companies lays out specific roles that institutional investors may play in corporate governance: by participating in decision-making on major issues, recommending candidates for directors and supervisors, and supervising the performance of directors or supervisors in accordance with laws and regulations, as well as the company's articles of association. Article 80 states that institutional investors are encouraged to disclose the objectives and principles of their participation in the governance of listed companies, the strategies for exercising voting rights, the outcome and effect of the exercise of shareholder rights. 

QFII / RQFII voting is based on legally permitted investment authorization scope. According to "Rules for the Implementation of Online Voting at the General Meeting of Shareholders of Listed Companies on the Shanghai Stock Exchange (上海证券交易所上市公司股东大会网络投票实施细则)," QFII can entrust information companies to collect voting opinions from actual holders on matters to be considered by the shareholders meeting. Similar rules apply to "Detailed Rules for the Implementation of Online Voting at Shareholders' Meetings of Listed Companies (上市公司股东大会网上投票实施细则)" issued by the Shenzhen Stock Exchange. 


The emphasis on stewardship and ESG

Good corporate governance increases long-term shareholder value, and proxy voting is a key element of sustainable investment. Voting proxies is not only a fiduciary responsibility of shareholders but a way to convey institutional investors' views to the Boards. Referring to the Principles for Responsible Investment (UN PRI) to make decisions is in line with ESG standards and the companies' long-term interests. Organizations that uphold ESG principles are more likely to create long-term value with lower risks. Institutional investors shall incorporate ESG factors into decision-making analysis of key voting issues, which will ultimately create long-term returns with better stewardship.

It is crucial for investors to consider companies' potential environmental, social and governance (ESG) consequences in proxy evaluation, which are material to investing funds' investment objectives and strategies. China's "Code of Corporate Governance for Listed Companies" Articles 3 establishes ESG requirements, including green development, targeted poverty alleviation, innovation, and other social responsibilities according to the regulation. ESG and stewardship are all key elements in active investment management and strengthen long-term shareholder value. 

Voting procedures: how to vote online? 

However, proxy voting in China is not a one-step process. The Code of Corporate Governance for Listed Companies issued by CSRC provides in Article 15 states that "The general shareholder meeting should convene at a designated venue, and allow both in-person participation and online voting(s). The time and location of the onsite meeting should be convenient for the shareholders' participation." However, in reality, investors will always find that the time and place of onsite voting are not convenient for everyone, especially foreign institutional investors. Therefore, most investors choose to use the online voting systems of the Shanghai/Shenzhen Stock Exchange. 

To vote on the A-share AGMs/EGMs, shareholders of a listed company must log in to the online voting platforms of Shanghai/Shenzhen Stock Exchange and verify their shareholder identities. Take "Shanghai Stock Exchange Online Voting Platform for Shareholder Meetings" for example; shareholders need to confirm whether EKey's drivers and management tools (EKey的驱动程序和管理工具) have been installed, which are mandatory for logging in. Voters can apply for EKey from SSE Information Company (上交所信息公司) to manage online voting. Application paperwork includes "Ekey Authorization Application Form", "CnSCA Digital Certificate Application Form (Organization)", "Digital Certificate Application Responsibility Form". Investors need to fill in these forms as required and affix the company stamp, then fax and mail it to SSE Information Network Co., Ltd.

The difficulties of voting online

Many world-leading institutional investors have made the voting process and decision transparent to their stakeholders. However, it's not always easy to conduct voting, especially in China, as the voting process for institutional investors has language and systematic barriers. Voting proxies in Mainland China markets could be different from the institutional investors' standard proxy voting process. There are several confusions or barriers to voting. 

1. Systematic barriers

The EKey application and instructions could be confusing. To set up the internal infrastructure for exercising voting rights would be costly and inefficient. The paperwork for application has no translation on the SSE official website, which may cause some inconvenience for foreign institutional investors.  

2. Language barriers

It is not easy to navigate through the voting system / platform. Many of the AGMs / EGMs meeting agendas and voting items do not have corresponding translations on their website.

3. Timing & Urgency

Most of the AGMs/EGMs in China happen at the same time. It is difficult for institutional investors to analyze the agenda of all investee companies thoroughly in a pressing period. EGMs are often announced one or two days in advance and the voting window only lasts for one day, which is the same day as the on-site meeting. It's also common to find 20 EGMs of different listed companies happening in one day and make it impossible to join the onsite or even online meetings at the same time.

4. Meeting updates

Institutional investors, especially passive fund investors, have challenges to keep up with the meeting agendas, voting content, and cast the votes. Lack of upcoming AGMs / EGMs, agenda, and voting items. 

5. Conflicts of interest

They also need to manage potential conflicts of interest effectively they may encounter in the transnational relationships. 

6. China-specific market regulations

There are some China-specific regulations from CSRC and China's regulations on topics such as Independent Director's proportion, provision of guarantees, related-party transactions, loan financing requests, and group finance companies. Market and policy analysis of the Chinese bond market is necessary prior to decision-making. 

Written by Suchen Huang, Edited by Yiwen He


References:


1. Xu, Shujun. Boss & Young. Entrustment of Voting Rights in Corporate Governance.

https://mp.weixin.qq.com/s/OZNlC5xywm8v5C_GhDOk8Q

  

2. China to resolutely deepen opening-up of financial sector: Central bank governor

http://www.china.org.cn/business/2020-08/10/content_76581033.htm (China.org.cn)  


3. New regulations! QFII and RQFII "purchase restrictions" are cancelled  

https://baijiahao.baidu.com/s?id=1666088234972424543&wfr=spider&for=pc 

 

4. Lexology. Will Quota Removal Put R/QFII Back in the Game

https://www.lexology.com/library/detail.aspx?g=d9a76ead-bd66-40a9-b6b6-e3616c14300d 


5. Company Law of the People's Republic of China (Revised in 2013) 

http://www.fdi.gov.cn/1800000121_39_4814_0_7.html 


6. Funds Europe. Surveyed investors expect China to lead global economic recovery: What say you? 

https://www.funds-europe.com/digital-advertorials/surveyed-investors-expect-china-to-lead-global-economic-recovery-what-say-you  


7. CSRC. Code of Corporate Governance for Listed Companies  

http://www.csrc.gov.cn/zjhpublic/zjh/201809/P020180930584077967335.pdf  

http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/DepartmentRules/201904/P020190415336431477120.pdf  


8. CSRC. Guidelines for Articles of Association of Listed Companies(2019)

http://pkulaw.cn/fulltext_form.aspx?Db=chl&Gid=092e1825037e73f6bdfb&keyword=&EncodingName=&Search_Mode=&Search_IsTitle=0 


9. CPP Investment. Proxy Voting Guidelines

https://www.cppinvestments.com/the-fund/sustainable-investing/proxy-voting


10. ISS. Voting Policies.

https://www.issgovernance.com/policy-gateway/voting-policies/ 


11. Voting Platforms

https://vote.sseinfo.com/org/login/?number=1

http://wltp.cninfo.com.cn/gddh_vote/vote/index.do

 



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