Minnows urged to stand up for rights; Campaign aims to give small investors louder voice keep corporates above board
2001-04-26
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Investors need to make their voices heard when it comes to corporate governance if Hong Kong is to achieve higher standards and retain its competitive edge.
A CLSA report on corporate governance issued last week hails efforts to create an association of minority shareholders in Hong Kong.
The Hong Kong Association of Minority Shareholders (Hams) is the brainchild of David Webb, editor of Webb-site.com and a long-time crusader for better corporate governance.
Mr Webb is campaigning for the creation of a statutory body to fight for minority interests, with divisions concentrating on policy, ratings and enforcement.
Mr Webb argues that the cost of legal action for individual investors makes a mockery of their shareholder rights.
Hong Kong people do not have the same access to class-action lawsuits as in the United States, where lawyers charge on a contingent fee basis depending on the outcome of a case.
His plan is that Hams be funded by a "corporate governance levy" of 0.005 per cent, much like the Securities and Futures Commission (SFC) and stock exchange levies that investors pay.
This would give it pockets deep enough to pursue legal action against companies and their directors on behalf of its members, similar to the way in which a group of US investors has teamed up in a class-action suit against Pacific Century CyberWorks chairman Richard Li Tzar-kai and other executives of Nasdaq-listed Rediff.com. Cyberworks holds a 5 per cent stake in Rediff.
Mr Webb believes Hong Kong can only maintain its regional status and economic competitiveness if the "void of shareholder activism" is filled.
More than 90 per cent of local companies have a controlling shareholder who appoints "so-called independent directors", undermining the ability of minority shareholders to raise objections in company meetings.
Most companies in the US and Britain do not have controlling shareholders, giving retail or institutional investors the power to change company policies.
Donald Skinner, CLSA's head of Hong Kong research, said: "We believe (the Hams proposal) is a good start to what can soon become a key issue for both Hong Kong companies and regulators in the coming months and quarters."
He said a "more aware (and noisy) general public" was one factor that would counteract the culture of family-controlled businesses, which was averse to change.
Mr Skinner said shareholder action had reaped some benefits for shareholders of Jardine Matheson.
"Shareholder activism is a necessary condition for accelerating corporate governance reform," Mr Webb said.
"Without it reform will be much slower. Shareholders are in a state now when they don't have any usable rights."
Mr Webb estimates that investors in the Hong Kong market lose about 2.5 per cent of performance per year due to bad governance.
The Hams levy would be only a fraction of this.
But he insists that good governance is more than "just a whingeing shareholder problem". "People often forget that the flipside of good governance is lower cost of capital," he said.
"If you have a higher rating on your stock you will be able to finance your expansion and acquisitions more effectively."
This would become even more important as more multinationals, with lower borrowing costs, moved into China after its accession to the World Trade Organisation.
He said companies striving to uphold higher standards ran the risk of being tarred with the same brush as those who ignored these issues.
"It is no coincidence that the long-run average price-earnings ratio of Hong Kong is so much lower than the USA or Britain. Our stocks are discounted for their risk," he states on Webb-site.com. The SFC this month appointed Mr Webb to the influential Takeovers and Mergers Panel and the Takeovers Appeal Committee.
Public acknowledgment of the efforts of a man perceived by some as a lone voice crying out in vain signals willingness on the part of regulators to raise governance standards. In his last Budget speech, outgoing Financial Secretary Donald Tsang Yam-kuen said he wanted Hong Kong to become a "paragon" of corporate governance.
"If (Mr Tsang) is serious about his comments . . . then he is going to have to get behind a proposal like this, or something like it, to get a real reaction going in the market," Mr Webb said. "At the moment we have plenty of voices from issuers saying 'we don't need a lower takeover threshold' or 'we don't need lower disclosure thresholds'. They don't hear from investors because they are not represented."
Mr Webb will spend this year lobbying interested groups such as the Society of Accountants and the Financial Services Bureau for support.
The Hams proposal will be tabled at a forthcoming meeting of the Shareholders' Sub-committee of the Standing Committee on Company Law Reform, on which Mr Webb sits. Visitors to Webb-site.com are invited to send an e-mail supporting the proposal to the Financial Secretary's office.
"Hams won't exist unless the Government endorses the proposal," Mr Webb said. "I am not minded to set up a kitchen group of part-timers who have a low budget and meet once a month. We need something that is much more substantive with a full-time executive staff."
Shareholder activism has been a force in the US since the early 1990s and is a new phenomenon in Asia, according to a recent report from The Conference Board, based in New York.
"It is increasingly accepted that institutional investors can act as a critical check on management behaviour, and in some countries in the region, governments have attempted to encourage investor activity to put pressure on companies to change their corporate governance practices," The Conference Board states in its report entitled "Global trends examined from an Asian perspective".
CyberWorks to escape fallout, Page 3
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