Four days a week, David Webb, a retired financial advisor, manages his personal portfolio from the comfort of his Happy Valley home. One day a week he takes on Hong Kong business and government in a one-man battle for better corporate governance.
Since 1998, as editor of Webb-site.com, this soft-spoken Brit has catalogued the worst violations of the rights of minority shareholders and turned the spotlight on those responsible. His articles have proved a powerful slingshot against many of Hong Kong’s seemingly unassailable behemoths. They make for chilling reading but this, claims Webb, is the side of the story that investment banking analysts won’t tell for fear of offending important clients.
While Webb has undoubtedly made a few corporate enemies along the way, he has tapped into a vein of support from shareholders, fund managers and even analysts. In March his efforts culminated in the launch of a campaign for a Hong Kong Association for Minority Shareholders (Hams). By bringing together enough investors, he aims to finally give voice to the silent minority.
Under the proposal, Hams has three main objectives: to represent minority shareholders in the regulatory reform of corporate governance; to put in place a corporate governance rating system; and to give existing legislation teeth through enforcement.
No complacency
The obvious question is why Webb bothers. Hong Kong, along with Singapore, is ahead of most Asian countries when it comes to corporate governance. Unlike other markets in the region, it emerged from the Asian financial crisis relatively unscathed. But Webb sees no room for complacency. The cost of bad governance is high in Asia and it is the shareholders and the few well- governed companies that pay the price. Webb believes that good Asian governance is the exception not the rule. High risk repels long-term investors and attracts speculative traders who treat the market as a casino. Western investors discount Asian stocks to reflect bad governance, and poor quality markets result in a higher cost of capital.
Though there is no precise figure available for the cost of bad corporate governance, Webb, an Oxford University mathematics graduate, estimates that it costs investors upwards of 2.5 percent of their investment per year.
Asia’s poor governance stems largely from the structure of it’s companies, many of which have large controlling shareholders. ‘In western markets, ownership is diverse and managers are focused on maximizing returns for all shareholders,’ explains Webb. But in Hong Kong, management often pursue policies that further the interests of the controlling shareholder at the expense of minority investors. Though this is not a uniquely Asian phenomenon, recent research by Chinese University of Hong Kong professor Larry Lang shows that elsewhere it’s offset by strong rights for minority shareholders. ‘Hong Kong is out of balance because there is concentrated ownership but no rights to protect the minorities,’ confirms Webb.
Through Hams, Webb hopes to redress that balance and fill the void of shareholder activism. With weak rights for minority shareholders, there’s little that can be done from the bottom up. ‘We need top-down change through regulatory and legislative reform,’ he avows. ‘If we have 50,000 members representing 20 percent of the free float, they would be authoritative.’
Webb is critical of the current level of regulatory control. When Hong Kong’s Stock Exchange, Futures Exchange and Securities Clearing company were merged and privatized as Hong Kong Exchanges, the market regulating listing division was left inside the profit-making company rather than being transferred to the Securities and Futures Commission (SFC). ‘The consequence of that,’ says Webb, ‘is that the exchange has been very slow to innovate its regulations and tends toward weaker regulation.’
Hams would press for regulation to strengthen the role of independent directors, who are usually weak because controlling shareholders are allowed to vote on their appointment. ‘If you get one that asks too many questions, they would be asked to resign or be removed by the controlling shareholder.’ At the same time Hams would push for greater disclosure, quarterly reporting on the main board and proper voting procedure and accessibility.
Ratings game
Another Hams initiative would be to produce regular corporate governance ratings, reviewing companies for board independence and structure, quality, frequency and punctuality of disclosure and the extent of transactions with related parties. ‘Companies that are well-governed or aspire to good governance have got nothing to worry about and will benefit from a good rating. Those that are badly governed are going to be branded accordingly,’ warns Webb. ‘It would instill quite a lot of discipline without any litigious action.’
Hams would also seek to enforce existing legislation. There are laws against oppression of minority shareholders but because of prohibitive costs, it’s rare to have a shareholder that can afford to take action. Indeed, when investors get stung, there is little recourse. ‘Normally shareholders just say, Well I gambled, I lost, perhaps I’ll win another day. It’s like putting a bet on a horse, they’re not going to turn round and sue the company for HK$50,000.’
Webb believes that the SFC, which is responsible for overseeing the markets, is doing a poor job. ‘The SFC has had long enough to prove itself, but it’s shown itself to be very slow to enforce action against directors of listed companies except on trivial offenses.’ He suggests the regulator lacks accountability to shareholders. ‘It’s accountable to the government which is ultimately accountable to the public but only through a tortuous, quasi-democratic system.’
While the SFC is unable to enforce civil actions, this path would be open to Hams’ democratically-elected governing body. In the worst cases of abuse, Hams would take the findings of a SFC investigation and use them in a civil action to claim for damages. This wouldn’t require any fundamental changes to the law but it would create an effective deterrent out of the current rules. ‘If the laws were utilized sufficiently and it was known that they could be utilized, then the mere threat would encourage companies to behave better.’
It’s an ambitious plan, and Hams will need a full-time staff of accountants, lawyers, solicitors and market analysts, though Webb is aware good people don’t come cheap. He proposes funding it partly through a membership fee (around HK$100 for individual members and HK$1,000 for institutions) and partly by investors through a good governance levy of 0.005 percent on every market transaction. The cost will be more than paid back by an improvement in corporate governance. ‘If Hams can prevent just 10 percent of losses by incentivizing better governance, then the payback ratio for investors will be 0.25 percent per annum – 25 times the good governance levy,’ writes Webb in the Hams proposal.
However convincing the arguments behind Hams are, its success will depend on the extent to which Webb is able to goad the government into action. Politically, the winds of change are blowing. While the government waxes lyrical on Hong Kong’s future as Asia’s leading financial centre, there is growing concern over competition from other regional markets. Some, such as China and Malaysia, are making conspicuous efforts to improve corporate governance.
Media attention has recently focused on corporate governance with the slow progress of the SFC bill through Hong Kong’s Legislative Council (LegCo) and the reform of the standing committee on company law. Meanwhile, Hong Kong’s new mandatory pension scheme has given every working adult a vested interest in the performance of the stock markets.
Still, the political playing field remains divided. ‘Donald Tsang [financial secretary] is on the right side,’ says Webb. ‘In two successive budget speeches he emphasized the importance of improved corporate governance.’ On the other hand, chief executive Tung Chee-hwa dismissed the Growth Enterprise Market (Gem) bubble by saying, ‘You can’t pour a beer without a bit of froth.’ ‘That’s rather a casual attitude to take to a serious issue,’ says Webb, adding his concern for the laissez-faire attitude of Gem chairman KS Lo, who believes in caveat emptor – once companies have disclosed, they should be free to do what they like.
Webb disapproves. ‘The government has rules against guns, explosives and heroin. They don’t say, Let’s deregulate and warn people that they’re dangerous. There’s a point at which you do have to protect the public in order to maintain the quality of the market. They’ve gone too far.’
With Hams, Webb has thrown down a gauntlet that the government ignores at its peril. The proposal is sound, the timing is right and Webb is a respected and reputable advocate. Failure to respond will be a potentially embarrassing public statement that the government is not serious about improving corporate governance or protecting shareholders’ rights. In short, it’s time for the government to put up or shut up.
