THEY MAY BE DIRECTORS BUT THEY AIN'T INDEPENDENT
Stephen Vines
Date : APR 03, 2001
The words 'independent non-executive directors' are pretty much meaningless when applied to Hong Kong listed companies for the simple reason that most of the many non-executive directors sitting on company boards are far from independent.
On the contrary they tend to be strongly tied to the majority shareholders. Last year I published a book containing the claim that it had not been possible to find a single instance of so called independent non-executive directors challenging the views or actions of majority shareholders. I asked readers to contact me if they could identify any contrary information. The sound of silence has been deafening.
In theory independent directors have a duty to protect the interests of minority shareholders and to ensure that companies comply with the best standards of corporate governance. They are also expected to contribute their experience, insights and business connections for the company's benefit.
However the overwhelming evidence suggests that non-executive directors are scandalously negligent, especially when it comes to protecting the interests of minority shareholders. The most successful independent directors are those who shout 'yes' most loudly whenever the majority shareholder asks them to do so. The rewards for shouting 'yes' can be considerable in terms of director fees, share options and, of course, the prospect of appointment to other company boards where a tame spirit is much appreciated.
Barely a day passes without an announcement of some shonky connected transaction between the majority shareholders and their listed companies. Routinely these announcements carry the 'reassurance' that the transaction has the full support of the independent directors.
Cable & Wireless HKT was effectively handed over to the control of Pacific Century CyberWorks by the independent directors of the company who worked to block a rival bid from Singapore Telecommunications. It is hard to see how they were looking after the interests of minority shareholders. The hapless minorities are now tied into a company which has been transformed from being a profit making machine into a loss maker and a company which has diminished the value of their shareholdings to less than nothing because shareholder's equity is now negative.
As for the independent directors, they have all been rewarded with seats on the board of the merged company and to this day have shown not a single public sign that they are doing anything to protect shareholder's interests. David Li, one of these directors, recently issued a statement saying that all was well at the company and there was no cause for concern. Presumably that is his interpretation of his duty as a non-executive director.
On a far more minor scale, an example picked at random for no other reason than that it is something which happened the other day, is one concerning the affairs of Pico Far East Holdings. On 2 April it was forced by the Stock Exchange to make a public statement about three connected transactions between the listed company and its majority shareholders. These transactions relate to the supply of services by Pico to the connected companies. The excuse given for not disclosing them is that it was due to an 'internal reporting oversight'. Pico assures its shareholders that its directors, including the so called independent directors, consider these transactions to be 'fair and reasonable'.
Maybe so but is there any indication that the independent directors looked into these transactions before they were agreed or that they asked the company to demonstrate the basis on which its transactions with connected companies were made at commercially competitive rates?
Maybe they did these things, if so, shareholders know nothing about them. All they do know is that it is the responsibility of independent directors to ensure compliance with corporate governance rules. Clearly they failed to carry out this task.
Perhaps, however, the most startling recent display of willful disrespect towards minority shareholders is the decision by Vtech Holdings to retain the services of Philip Tose as an independent director. Mr Tose, you will recall, was the chairman of the spectacularly failed Peregrine Group. A recent government-ordered inquiry into the group's affairs directly blamed Mr Tose for neglect and bad management, which led to the company's collapse. It recommended that he should be banned from exercising the directorship of a company.
None of this appears to have swayed Vtech which is keeping Mr Tose on board and allowing him to retain a position on its audit committee. Is Mr Tose the kind of person who will provide comfort to minority shareholders? Is he likely to be the best monitor of the company's affairs? The answers to these two questions should not be to hard to find.
What is more worrying is the thought that Mr Tose might be no worse as a minority shareholder's guardian than most of the others who serve in this capacity.
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