Hong Kong is not, like some Asian territories, trying to create a new system from the ground up. Laura Cha’s task as deputy chairman and executive director of Hong Kong’s Securities and Futures Commission is rather to fine tune an already well-established system while the context around it shifts – if not dramatically then at least sharply and uncomfortably.
Asked what challenges she and the SFC are facing, Cha zeroes in on the constant battle for regulators to be in accord with the market they are seeking to regulate. ‘It is true throughout the world that regulators will always try to catch up,’ she muses. ‘If we were ahead of the market, that would be unusual. And we’re not in the business to innovate and develop but to keep up-to-date. While we are upholding our knowledge in terms of the market, the challenge is how we adapt ourselves to face change. We need to look at things from new angles – and soon.’
Cha’s remarks suggest a cautious individual, well aware of what needs to be done but not offering any facile or quick solutions. In short, it’s a typical civil service-style response. But there is a curious twist: while Cha is very much a civil servant, a large part of her background has been spent in the private sector as a corporate lawyer.
She joined the commission in January 1991 as an assistant director. Her previous experience had been in private practice in San Francisco with Pillsbury Madison & Sutro; later she moved to Hong Kong with Coudert Brothers, specializing in areas of commercial and corporate law and cross-border transactions by multi-national companies. Significantly, she represented major US clients in developing business in mainland China.
A year after Cha joined the SFC, China’s then paramount leader, Deng Xiaoping, urged speedier reform and the opening up of the Chinese economy was accelerated. One strand of this was the then-revolutionary suggestion that Chinese companies should be allowed to list on overseas bourses.
Cha found herself as the SFC representative in negotiating with the Chinese authorities in 1992-93 for the listing of state-owned enterprises in Hong Kong – so-called Red Chips. Soon she was promoted to senior director, then executive director in 1994 and deputy chairman at the beginning of 1998.
Investor education
Clearly hers is a taxing, demanding job. As chief operating officer, Cha is responsible for co-coordinating policy development for all the SFC’s operating divisions. She also heads the corporate resources division, which includes areas like corporate communications and investor education.
Cha brands investor education as ‘one of the SFC’s most important initiatives.’
‘There can be no investor protection without investor education,’ she declares. Indeed, a note of grandeur and mission enters her voice as she describes how the SFC regularly places columns in the Chinese press, has visited some fifty high schools, and now boasts 95 hotlines. ‘Investors had a lot of questions and nowhere to go,’ she says.
As befits a former British colony, Hong Kong is a common law jurisdiction. The US-educated Cha was admitted to the California bar in 1983. In other words, she is an American-trained lawyer working in a British system – useful but perhaps not the best combination. Still, an awareness of both the US and UK systems of corporate governance will serve Cha well in her role at the SFC. ‘Corporate governance is an area we’ve always been very concerned about,’ says Cha. ‘In the past couple of years we’ve focused on market reform and structural reform to equip ourselves to face the future. Now this year’s and next year’s focus will be on corporate governance, with a major initiative to bring us up-to-date.’
A recurring Cha theme is the need for more and better disclosure from listed companies. And one proposal under discussion is amending current regulations to require quarterly rather than six-monthly reports from companies, although all Cha will say is that the issue ‘needs to be considered better.’ She is more garrulous on enforcement against shoddy disclosure. ‘You must,’ she says without any relish, ‘have sufficient sanction.’
Cha continues: ‘We will introduce legislation to criminalize any intended false reporting or the provision of false and misleading information to regulators.’ There are two caveats here: the purely accidental provision of misleading information is not to be penalized, the SFC being aware that mistakes are made. The second is that the new rules apply only to misleading regulators, not the broader investing public. Still, the SFC clearly wants to see fraudsters face serious repercussions, not just a rap on the knuckles.
The new legislation is due out any time, with a three-month public comment and consultation period which it is hoped will garner a great deal of constructive criticism. For her part, Cha says the SFC would ‘very much like institutional investors to respond.’
Tech war
For some observers, the rise of the internet proves new technologies don’t necessarily save work, they just shift it around. While the SFC has an internet surveillance unit, it is impossible for it to watch every relevant site. ‘We cannot regulate everything,’ admits Cha, pointing out that online chat rooms are very hard to monitor. For now, though, the situation in Hong Kong is easier than in other centers as online trading activity is still limited.
The regulation of high-tech and dot-com stocks is another sticky challenge. The Stock Exchange of Hong Kong recently set up a second board – the Gem, or growth enterprise market – where the hope is that lighter regulation will help capital raising for firms in the technology sector. Such companies have long been the poor cousins of the banks and property stocks that dominate the main Hang Seng index.
The problem here revolves around whether separate rules can be applied to one segment of the market. It’s a familiar problem for Cha, hearkening back to the heyday of the Red Chips. Her view is that despite being in vogue, the current high flyers must maintain certain basic principles of investor relations. ‘We cannot cater our rules to specific types of industry, different sectors,’ she says when asked if there are any plans to change rules and procedures to account for the popularity of high-techs and dot-coms.
Meanwhile, the SFC has been tackling its annual review of listing rules. ‘It’s not such a big deal,’ says Cha of this ‘continuous process’ that sees the entire listing system reviewed incrementally from year to year. During the year 2000 the areas up for review are connected transactions and share options.
Other topics of debate this year are cross-listing and a possible Asian exchange, raising issues such as cross-listing versus cross-trading, quoted companies not being fully-listed, and the problems of harmonizing standards. Cha points to hurdles like these faced by Europe’s consolidating exchanges, and indicates her own position is one of wait and see. ‘Alliances are definitely a way for the future,’ she says, while cautioning, ‘Many times the company might not see any benefit’ in cross-listing.
On the subject of stability funds such as those recently set up by Taiwan’s government to buoy a failing market, Cha is adamant. ‘Hong Kong truly believes in a free market,’ she comments. She rejects the idea of stability funds for Hong Kong, although more generally the evidence is that despite Cha’s assertion, the territory still steps into the market when it deems it necessary.
Clearly Cha knows her stuff and is a consummate interviewee. She is also on the cutting edge of the global movement to improve corporate governance and disclosure. In this area she is far-sighted as well as frank. ‘The falseness of information might not come to light until much later, but if investors are misled and this has an impact on the market, then the people providing that information should be subject to liability,’ she announces. With Cha at the SFC, dissemblers should watch out.
