Organisation name: Hong Kong Monetary Authority (HKMA)

Signatory type: Asset owner

Region of operation: Hong Kong SAR

Assets under management: US$539 billion[1]

Why we monitor proxy voting practices of external managers

As Hong Kong’s central banking institution, manager of the Exchange Fund and a responsible investor, we believe that it is crucial to exercise our shareholder rights for our public equity holdings to help safeguard the long-term value of our investments.

We employ external fund managers to manage our listed equity portfolios. We aim to hire the best investment expertise available in the market to capture sustainable returns, benefit from diverse and complementary investment styles, and gain market insights. We recognise the importance of responsible corporate behaviour in creating long-term shareholder value and have established a mechanism to monitor our managers’ proxy voting practices and follow up with those we have identified as having questionable practices.

How we monitor proxy voting practices of external managers

Figure 1 depicts our process for monitoring external managers’ proxy voting processes. We collect proxy voting records from each external manager to assess whether votes have been cast for all resolutions and make follow-up enquiries if there is a high abstention rate, as we consider it important for the manager to voice its concern to company management using its votes as far as possible.

Even if the external manager has voted for the vast majority of, or all, resolutions, we examine the quality of these voting decisions against two criteria:

First, we check to see if the external manager has put in place guidelines setting out the principles underpinning its voting stance on various corporate governance issues, such as executive remuneration, capital structure-related matters and environmental issues, to ensure consistency of voting stance. We also look at whether it has procedures to deal with potential conflicts of interest, to prevent portfolio managers from voting (or not voting) based solely on short-term profit considerations that override serious ESG concerns.

Second, we assess incidents involving conflicts of interest to examine if they were properly managed by the investment manager. We also review whether there was an overwhelming level of support (in terms of percentage of votes cast) extended by the external manager to the company management when voting on company and shareholders’ resolutions. In assessing individual voting decisions, apart from checking that they are consistent with the manager’s voting principles, we reference the voting decisions of other managers on the same resolutions – effectively creating comparable benchmarks. Any voting decisions that seem to deviate from established policies, majority peer practices or general best practices will form the basis of our follow-up enquiry with the external manager.

Figure 1: HKMA’s process for monitoring external manager proxy voting practices


Examples: Pushing for improvements

Applying our proxy voting monitoring framework, we have been able to uncover questionable practices in some of our external managers and have sought improvements from them. Two examples are set out below:

Case 1

We found that one passive manager had abstained from voting for all resolutions, going against its internal guidelines, which specified that voting was necessary for non-routine resolutions such as merger and acquisition proposals. We followed up with the manager, which disclosed that its abstention was the result of not having an ESG framework. We expressed our disappointment to the manager about its subpar ESG performance and emphasised the importance we attached to active ownership. It conveyed our message to its board to secure greater commitment and resources to ESG practices.

As the manager acknowledged our assessment and demonstrated a willingness to improve, we view this as a positive engagement outcome. Ideally, the manager would properly implement an ESG framework in its portfolio management work – allowing us to verify that it is aiming to improve its ESG practices. However, we understand that it can take a long time for external managers to make substantial changes to their operations.

Case 2 

We found that the voting record of one of our active managers indicated full support for management proposals during the reporting period. We discovered that the manager’s voting stance on capital structure-related resolutions deviated from some of its peers for identical management proposals. The stance it took was also not in line with its voting principles.

In the absence of a reasonable explanation, we brought the matter to the company’s head of ESG. The manager agreed to enhance its company voting policy, with the expectation that this will lead to the possibility of voting against management if material governance issues arise.