Policy briefing: Unlocking the Potential of Shareholder Voting in China

Why shareholder voting is important in China?  

With the Chinese capital market having rapidly developed into one of the world’s largest in the last decade, the effective use of voting power to influence investee companies to maximise their overall value, including by addressing system-level ESG risks, is now more relevant than ever. Accordingly, voting is a crucial way for institutional investors to fulfil their duties to their clients and beneficiaries. Where they fail to do so, they might arguably be breaching their fiduciary duty or equivalent obligations towards clients or beneficiaries. 

However, although voting has been explicitly encouraged by Chinese financial regulators, with the exception of insurance companies, there are currently no explicit requirements for investors to manage investor rights, including voting rights, as part of their duties to serve the best interests of their clients or beneficiaries. Compared to other large capital markets, practical infrastructure and guidance to support effective shareholder voting is also limited. 

Recent research has shown that despite some positive improvement in active ownership in China, Chinese investors are less active and transparent in exercising their voting rights than their offshore peers. Through desktop research and an investor survey, this briefing examines the challenges limiting institutional investors’ ability to serve the best interests of their clients or beneficiaries through effective and responsible voting.  

What are the key challenges?    

Challenges to the practical effectiveness of shareholder voting  

Currently, a range of market and regulatory features present practical limitations on investors’ effective use of voting powers. First, concentrated ownership structures and portfolio diversification limit minority shareholders’ voting power. At the same time, investee companies’ insufficient accountability to minority shareholders and legal uncertainties regarding investor collaboration hinder collective influence. Compared to their overseas peers, Chinese institutional investors also face challenges from insufficient internal governance, including limitations related to capacity, voting policies and performance assessment frameworks. On the investee side, insufficient information disclosure and short voting timeframes may deter effective shareholder voting.

Challenges to ensuring accountability in institutional investors’ voting practices  

Alongside practical challenges, existing policy and regulatory features may also limit incentives and accountability for investors attempting to exercise their voting powers. In this respect, the current lack of clarity on investor duties creates ambiguity about the extent to which voting rights should be managed in line with client interests. This confusion can challenge the fulfilment of duties throughout the investment chain. Insufficient corporate disclosure and mismatched performance assessment mechanisms may also hinder institutional investors’ efforts to incorporate long-term client interests into voting decisions. 

Recommendations for policy makers  

In order to address the identified challenges, this briefing suggests a number of areas for policy reform to support Chinese institutional investors’ effective exercise of their voting power. More specifically, three recommendations are proposed for China’s key financial regulators to consider. They will be relevant for the National Financial Regulatory Administration (NFRA),1 China’s Securities Regulatory Commission (CSRC), the Ministry of Finance (MoF) and the Ministry of Human Resources and Social Security (MoHRSS).

Clarification of investor duties in relation to voting 

To guide institutional investors in making voting decisions in the best interests of clients or beneficiaries, financial regulators should clarify the scope of investors’ duties to carry out stewardship. Additionally, they should provide guidance on key issues related to voting, including the creation and publication of a voting policy, capacity building, streamlining the voting process, disclosing voting records, establishing governance structures to enhance accountability and incorporating ESG factors and client preferences into voting decisions.

Creation of an enabling environment for effective voting 

Financial regulators should create an environment that better facilitates effective investor voting by enhancing corporate accountability towards minority shareholders. They should also facilitate appropriate investor collaboration by clarifying existing legal uncertainties about the extent to which such collaboration is permitted and supporting the development of collaboration platforms. Further, action should be taken to better enable informed shareholder voting decisions by enhancing the quality of corporate ESG reporting and facilitating investor engagement.

Establishment of a robust implementation and monitoring mechanism 

Financial regulators should establish a robust implementation and monitoring mechanism that supports and incentivises outcomes-focused investor stewardship and avoids mechanical compliance. This process could be achieved by launching mechanisms to monitor disclosure, assess outcomes and provide guidance for best practices in the market.