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Vote with your feet, but also with your hands
Activism investing is on the way
In the context of the rapid popularization of ESG investment concepts, as more active forms of ESG investment strategies, “shareholder activism” and “due diligence management” investment strategies have received more and more attention in recent years, and a considerable number of institutions are actively exercising Shareholder or creditor rights, urge company management to make strategic and operational adjustments, and then promote positive changes in the invested company.
◎Reporter Huang Shuhui He Yi
It is necessary to vote with both feet and hands. Institutional investors, including public funds, are actively making their voices heard on major decisions of listed companies.
In the context of the rapid popularization of ESG investment concepts, as more active forms of ESG investment strategies, “shareholder activism” and “due diligence management” investment strategies have received more and more attention in recent years, and a considerable number of institutions are actively exercising Shareholder or creditor rights, urge company management to make strategic and operational adjustments, and then promote positive changes in the invested company.
Recently, relevant cases of fund companies such as Nanfang, Harvest, E Fund, and China AMC have been selected into the United Nations Principles for Responsible Investment (UN-PRI) “Participation in Corporate Governance” case study database (Engagement Case Study). Through these cases, the outside world can see the exploration and efforts of Chinese local asset management institutions to actively participate in corporate governance.
Actively participate in a win-win investment practice
In 2017, a researcher from the Fixed Income Research Department of Southern Asset Management investigated a listed aquaculture company, and has been tracking the company’s operating conditions since then. In August 2018, African swine fever broke out. The researcher has a keen hunch that the impact of the swine fever epidemic will soon spread to domestic listed companies.
The researcher clearly remembered that there were frequent reports of African swine fever at that time, and the year-on-year data of the Ministry of Agriculture and Rural Affairs showed signs of accelerated decline in the year-on-year pig inventory at the end of 2018, indicating that the impact of swine fever far exceeded expectations. Credit spreads on existing bonds of the public company tracked by the Southern Fund team have soared, liquidity has plummeted and new bond issuance has become difficult.
After the researcher learned about the situation of listed companies, and after discussions in the ESG group of Southern Asset Management, Southern Asset Management realized that it should be more actively involved in company management at this time. Therefore, Tao Shuo, general manager of the Fixed Income Research Department of Southern Asset Management, led the team to strengthen communication with the management of listed companies, inquired about the current status of cleanliness and environmental protection of pig houses and epidemic prevention and control in the farms, urged the company to continuously improve green agricultural production, and innovate environmental protection technologies. Plans have been made to improve the pig house environment, adjust the feed formula, and control the breeding density.
“I am gratified that most of the suggestions we put forward have been adopted.” Tao Shun recalled that the listed breeding company has studied various biosafety prevention and control measures, and paid close attention to the implementation of measures related to the prevention and control of swine fever. Avoid some seemingly simple but more harmful epidemic prevention methods.
“During that time, we basically maintained the frequency of surveying the company every quarter, and closely tracked the progress of the company’s African swine fever prevention and control.” Tao Shuo said.
After more than a year of adjustment, this listed breeding company took the lead in getting out of the impact of the swine fever epidemic, and the number of live pigs to slaughter first stabilized and then increased. After confirming that the company has effectively improved its epidemic prevention work and is operating steadily, the fixed income investment arm of Southern Asset Management increased its bond investment in 2019 to support its expansion plans. The operation of this aquaculture listed company also quickly reversed the decline. Since then, its net profit has achieved a compound annual growth rate of more than 50% for three consecutive years, maintaining a leading position in the industry.
This successful ESG investment practice has made Southern Asset Management one of the explorers of the strategy of active bond holders. The case was finally selected into the PRI “Participation in Corporate Governance” case study library, and China Southern Asset Management became the only fund company in China to be selected into this case library by virtue of its active participation in corporate governance in the fixed income field.
Emerging activism cases continue to expand
Compared with active participation and due diligence management in the fixed income field, institutions, as stock investors, can exercise shareholder rights such as voting rights, inquiry rights, and suggestions rights, and have more leverage. Therefore, they are more frequently involved in corporate governance. .
As early as around 2010, the investment trend of “shareholder activism” emerged in the A-share market. In recent years, institutional investors represented by public funds have added more new footnotes to this new investment model.
In 2013, Harvest Fund started investing in a solar PV company that was a small player in its field at the time. Through engagement with the company’s management, Harvest Fund provides the company with insights and support in many aspects such as long-term management strategy, operational efficiency, capital allocation, governance and other sustainable development. This active participation has paid off. The photovoltaic company achieved a compound annual growth rate of 57% between 2013 and 2020, making it the world‘s largest producer of photovoltaic wafers and modules. While contributing to a sustainable future, Harvest Fund has also achieved more than 100 times returns for its clients in recent years.
E Fund Fund, from the standpoint of minority shareholders, proposed amendments to a listed company’s related-party transaction plan. At that time, an A-share listed agrochemical company proposed a related party acquisition plan to acquire two agricultural enterprises owned by another company under the company’s holding group. After carefully studying the details of the M&A proposal, E Fund Fund believes that the profit guarantee agreement in the related party transaction plan can be further improved.
“We arranged to meet with the company’s senior management to share our thoughts and advise the company to consider amending the profit guarantee agreement. During the meeting, the company’s management shared their considerations and welcomed our proposal. Within two weeks, the company responded We made recommendations and introduced improvements, and we voted to support them,” E Fund wrote in the case.
In fact, in the history of the development of public funds in my country, there have been many times when funds took the initiative to promote the improvement of corporate governance of listed companies. The more representative events include the collective veto of the Shuanghui development proposal in March 2010, and the May 2012 Penghua Fund and Yale University, which is a QFII, jointly elected the directors of Gree Electric Appliances.
Tao Shuo said that in the US market, institutional investors can become major shareholders of listed companies, and they can completely change the way companies operate by entering the board of directors. Domestic institutional investors are minority shareholders of the company and mainly influence the company’s decision-making through professional competence and active communication. “Under the advocacy of the policy, the domestic recognition of ESG concepts has been continuously improved, and the influence of institutional investors has also increased.”
Professor Qiu Ciguan, a professor at Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, said that institutional investors can change from the role of passive shareholding to the role of active participation, and change the behavior of holding companies through communication and interaction. When this changing role of institutional investors meets ESG issues, it will give new meaning to “shareholder activism” and even usher in a new era.
Regulation pushes industry to look forward to joint efforts to expand influence
At the end of April, the China Securities Regulatory Commission issued the “Opinions on Accelerating the High-quality Development of the Public Fund Industry”. It clearly stated that to promote professional institutional investors such as public funds to actively participate in the governance of listed companies, it is necessary to vote with both feet and hands, so as to help the high-quality development of listed companies.
The clear statement of the regulators to encourage institutional investors to actively participate in the governance of listed companies has aroused great concern in the industry. From the perspective of industry insiders, with the vigorous promotion of regulatory agencies and the continuous awakening of institutional investors’ awareness, active investment in the A-share market is expected to take on a new look.
At the same time, many industry insiders also admitted that under the current environment, institutional investors still face some challenges in participating in the governance of listed companies.
The challenge first comes from the relatively high equity concentration of domestic listed companies, and the large shareholders have greater control, which makes the power that institutional investors can exert relatively limited.
“Given the current shareholder structure in China’s capital market, public funds are often minority shareholders of many large-cap companies. If public fund companies act alone, their influence is relatively limited. We need to develop more cooperation in the industry.” Harvest The Fund stated in the case statement.
The good news is that with the acceleration of the institutionalization process in recent years, institutional investors, including public funds, are gradually increasing their voice in the A-share market.
The data shows that the proportion of the market value of tradable stocks held by professional institutional investors has risen from 18% at the beginning of 2019 to 24.6% by the end of 2021, an increase of 6.6 percentage points in three years; among them, the proportion of market capitalization held by various asset management products has increased from 9.3%. rose to 14.2%.
In addition, the cost of participation is also an issue to be faced. An investment researcher of a fund company admitted that the cost and benefits of active investment sometimes do not match, which makes institutions lack the motivation to track and participate in the governance of listed companies for a long time.
It is worth noting that a number of institutions have expressed the hope that regulators will release the ESG information disclosure standards for listed companies as soon as possible, and provide clearer guidance on the active participation of institutional investors in the management of listed companies.
The industry expects that with the awakening of institutional investors’ awareness of responsible investment and the deepening of ESG awareness, as well as the improvement of regulatory rules, the optimization of investor structure, and the reform and development of the capital market, activist investment will continue to perform a wonderful chapter.