There is a vexed uncertainty about Hong Kong’s future as a financial centre. And not merely because of its reversion to Chinese rule next year after more than a century as a British colony.
The juxtaposition of eastern and western cultures helps explain what is at the heart of Hong Kong’s corporate view: Hong Kong companies display the Chinese traditions of hereditary management and nepotism; but they have also taken on board many of the Anglo-Saxon principles of corporate governance. Finding an equilibrium between the two approaches has become essential in Hong Kong’s quest to maintain a competitive edge in the international market.
‘You can’t just take Anglo-Saxon business practices and apply them to a Hong Kong context willy-nilly,’ says Peter Johansen, finance director of Swire Pacific, one of the colony’s larger cap companies. ‘Hong Kong is still a developing economy and family interests have not been diluted in the way they have in the west. This will not change overnight just because some official body tells companies that’s not the right way to run themselves.’
That comment is typical of the local response to a survey of family-dominated boards conducted by the Hong Kong Society of Accountants (HKSA) last year. The report resulting from the study recommended that, in order to avoid the possibility of family dominance at board level, members of the same family should be restricted to less than 50 per cent control of the board. This limitation was deemed suitable to create a checks and balances system so that no one interest group could take control of the board.
‘People were furious about the report’s conclusions because it seemed to contravene the whole concept of majority rule,’ says Edward Chow, chairman of the HKSA’s committee on corporate governance. ‘We weren’t taking a legal viewpoint but were just making suggestions as to what constituted best business practice. The frenzy that the press managed to whip up suggested that it opened up a whole argument over culture.’
In response to the widespread outrage over the report, the HKSA embarked on further research into the corporate governance practices of 500 Hong Kong companies. ‘We didn’t take a sample, we went through every listed company to look at the problems they were encountering,’ says Chow. ‘We found that the number of companies which did have more than 50 per cent of their board controlled by the family was only 20 per cent so the whole affair was a bit of a storm in a teacup.’
The report did, however, make other recommendations. One of the key proposals was that directors’ attendance records at board meetings should be publicised so investors could see how hard management was working.
Other potentially contentious suggestions include a requirement that interim results should be revealed by auditors; and companies’ balance sheets should be made publicly available.
To date, one of the most concrete outcomes of the survey is that it has led to the stock exchange creating a working committee on corporate governance. The committee consists of representatives from the HKSA as well as other organisations such as the Law Society, the Institute of Company Secretaries, the Hong Kong Investment Funds Association and the Securities and Futures Commission.
It is the fourth working party of its kind to be established by the stock exchange. The first was set up in 1992 and based its discussions around the UK’s Cadbury Report. The result of this first committee on corporate governance was that a code of best practice was drawn up and certain changes were made to the listing requirements. Two further working parties carried the work forward: they went so far as to suggest the appointment of remuneration committees but none of their recommendations were taken up. The fourth working party committee will continue to focus on family domination of company boards and will examine the standards of disclosure and levels of directors’ remuneration.
‘The stock exchange has always tried to take a proactive stand in improving corporate governance practices in Hong Kong but with the fast approach of 1997 the issue has become more important,’ says Henry Law, head of public and commercial services at the stock exchange.’Although there is already a good standard of disclosure we still have a long way to go before attaining the standards of the west.’
The exchange is certainly displaying a willingness to re-examine what have hitherto been regarded as sacred cows within Hong Kong’s financial circles. While accepting that its work may upset many traditionalists who have a vested interest in maintaining the status quo, the exchange nonetheless is firmly convinced of the stark choice to be made: modernisation or being left on the international sidelines.
One of its key proposals is to create a centralised disclosure system. Under the current scheme of things, companies are obliged to announce their results in both Chinese and English language newspapers. A centralised system would mean that such announcements would henceforth be disseminated electronically, under the auspices of the exchange.
Another important project which will doubtless shake up current systems of trading is designed to improve lines of communication between companies and their non-registered shareholders. The idea is that, by introducing a central clearing and settlement system, non-registered shareholders will be provided with access to the same information about their holdings as their chosen intermediaries.
The jury is still out on both proposals. ‘There is no consensus on the needs of the market at the moment so we are just putting the feelers out to find out what companies want,’ says Law. ‘Once we know what their views are we can start really building up our role.’
One of the areas of most concern to the stock exchange in its drive towards achieving international confidence lies with the Chinese – or H-share – companies listed in Hong Kong. In the past, for Chinese companies the idea of communicating with shareholders has been both alien and incomprehensible. Now that they are having to learn to compete in the international markets for capital all that has been changing. But are they changing quickly enough to satisfy Hong Kong’s regulators?
In January of this year the stock exchange conducted a review to monitor H-share companies’ compliance with the financial disclosure requirements of listing rules. The review suggested that H-share firms give additional voluntary disclosures in seven areas including credit control policy, foreign exchange gains and losses and details of capital commitments. Indeed, apart from two notable exceptions, the companies’ levels and range of disclosure were found to be ‘very encouraging’. All companies met the requirement for publicising final results by the end of April and all, bar two which omitted the dividend per share, met the financial disclosure requirements.
That does not accurately reflect the true situation though, says Chow of the HKSA. ‘With every approved Chinese listing there are an inevitable number rejected. A lot of nannying still has to be done to get these companies up to scratch. The rules have to be more firmly established if they are going to be able to compete internationally.’
As with many other organisations within Hong Kong, including the stock exchange, the HKSA is already selling Hong Kong as the premier financial centre of post-1997 China. Hong Kong, continues Chow, is ideally placed, literally and metaphorically, to push for improvements in Chinese companies’ corporate governance. ‘We share the same language and the same cultural background so can act as a bridge between China and the rest of the global marketplace.’
In addition to trying to ensure that Chinese companies are internationally competitive so that foreign investors will not lose confidence in the market come 1997, the exchange has a secondary objective. Casting a glance over its shoulder to Shenzen, Shanghai and other exchanges in the region, Hong Kong’s exchange wants to assert itself as the main centre for China-related securities. ‘Hong Kong is ideally suited to take the lead over other markets in the region,’ says Law.
As well as introducing new products to the market, and a possible second board for smaller companies, the exchange has already embarked on a promotion programme with the securities watchdog, the Securities and Futures Commission. It has also been increasing its involvement with other exchanges in the region and running regional seminars and meetings.
With the widespread changes that 1997 will undoubtedly bring, it is not surprising that so many institutions are endeavouring to stake their claims now. By reinventing themselves they hope to ensure Hong Kong’s primacy as the leading financial centre within the region. For many, 1997 is seen as an opportunity rather than a threat to their existence, particularly given Beijing’s more conciliatory recent overtures.
From this perspective the real challenge is to continue to adapt to international standards before the switch to Chinese rule. That, it is hoped, will help ensure Hong Kong’s future as the gateway to capital for the region. And will also make it harder for the Chinese to bolt the gate shut.
