SFC reaches conclusion on adopting the Principles of Responsible Ownership

On 7 March 2016, the Securities and Futures Commission (SFC) released its conclusion on the Principles of Responsible Ownership (Principles), following its consultation launched last year. The introduction of the Principles is aimed at providing guidance on how investors should fulfil their ownership responsibilities in relation to investments in Hong Kong listed companies.

Voluntary in nature

The Principles are open for investors to adopt on a voluntary basis.

Scope of “investors” to be captured by the Principles

The SFC envisages “investors” to include those who invest money, or hold shares, on behalf of clients and other stakeholders and are accountable to such clients and other stakeholders. Accordingly, the Principles should not include investors who are accountable only to themselves for their investments (or are accountable only to family members pursuant to a personal relationship, with no intention to create a client or business relationship), such as individual and retail investors. 

The seven Principles

The seven Principles ask the investors to:

• establish and report to their stakeholders their policies for discharging their ownership responsibilities;
• monitor and engage with their investee companies;
• establish clear policies on when to escalate their engagement activities;
• have clear policies on voting;
• be willing to act collectively with other investors when appropriate;
• report to their stakeholders on how they have discharged their ownership responsibilities; and
• when investing on behalf of clients, have policies on managing conflicts of interests.

Application of the Principles

Investors are encouraged to:

• adopt the Principles by disclosing to their stakeholders that they have done so; and 
• either apply the Principles in their entirety and disclose how they have done so, or explain why aspects of the Principles do not, or cannot, apply to them.

Investors who do not think that the Principles are relevant to or suitable for them at the outset are encouraged to:

• provide their stakeholders with disclosure which clearly explains why the Principles have not been adopted; and
• if applicable, explain what alternative measures they have in place.

The consultation conclusions set out examples of how the following types of investors might choose to adopt the Principles:

Next steps

After the introduction of the Principles, the SFC will review the following:

• should there be requirements for specified institutions to disclose whether they have adopted the Principles and, if not, explain why;
• should the disclosure of a fund manager’s engagement policy be mandated, whether by adoption of the Principles or an equivalent overseas stewardship code and, if so, how it should be disclosed; and
• if intermediaries hold investments on behalf of individual investors, should intermediaries explain, if appropriate, in writing whether ownership responsibilities rest with the intermediaries or individuals and, if the latter, whether the individuals should be advised on how they can exercise their ownership responsibilities.