Hong Kong lags behind in protecting its shareholders: Long-delayed reforms may still fall short of what is needed, writes Joe Leahy:
COMPANIES & FINANCE ASIA-PACIFIC:
Financial Times; Jun 5, 2001
By JOE LEAHY
Mark Mobius, head of Templeton Emerging Markets Fund, did not mince his words - China might one day become Asia's standard-bearer for corporate governance, he told a Hong Kong forum last month.
The claim, which shocked Hong Kong's financial community, might seem far-fetched today - many still view China's young markets as little better than casinos. But China has been creeping ahead of Hong Kong - the traditional pioneer in financial market reforms - on a number of fronts. Most recently, it unveiled plans to require Chinese companies to file quarterly financial statements from next year.
The issue is a wake-up call for the territory. Critics say Hong Kong, Asia's second-largest market after Japan, lacks several hallmarks of a world-class financial centre, such as a strong regulator and effective protection for minority shareholders.
"You really can't claim to be an international-class financial centre if, in terms of regulation, in terms of minority investor protection, you're nowhere near what people expect of a mature world market," said Alexa Lam, chief counsel and executive director of the Securities and Futures Commission, the market regulator.
Warning signs that the territory is slipping behind are appearing with greater frequency. In one recent example, a study by CLSA, an independent brokerage, ranked three of Hong Kong's biggest business groups in the world's bottom 20 large-cap emerging market companies based on corporate governance.
The companies included Hutchison Whampoa, the ports and telecommunications group, and Pacific Century CyberWorks, the territory's main phone company, controlled respectively by Hong Kong's richest tycoon, Li Ka-shing, and his son Richard. With their subsidiaries, the companies account for at least 15 per cent of the territory's market capitalisation.
Critics argue that historically, family domination of Hong Kong's corporate landscape has created little incentive to improve minority shareholder protection.
The problem has manifested itself in a cumbersome regulatory regime, which provides the SFC with token powers of investigation.
To reform the system, the government has combined regulations spread over 10 existing ordinances into one document, the Securities and Futures Bill. Some 13 years after it was first conceived, the bill is currently before the Legislative Council, Hong Kong's de facto parliament.
Among the key changes, the bill will empower the SFC to conduct fuller probes into companies it suspects of wrongdoing. This will include allowing it to cross-check transactions with third parties, auditors and bank records.
The bill also proposes transforming Hong Kong's existing insider dealing tribunal into a "market misconduct tribunal" able to hear a wider range of cases, including price rigging and providing misleading information.
Importantly, investigators will also be given the flexibility to pursue more of these offences through civil or criminal proceedings.
Currently, some, such as insider trading, are classified as civil only and require a lower standard of proof, while others are regarded as criminal, and carry what are sometimes prohibitively high standards of proof.
Critics argue, however, that even with the reforms, the SFC will fall short of overseas regulators such as the US Securities and Exchange Commission.
"The SEC's powers of investigation are protected by the constitution . . . It can even subpoena suspects. But here (Hong Kong's SFC) cannot even summon people to come to their offices," says Larry Lang, chair professor of finance at the Chinese University of Hong Kong.
Outside the SFC, Hong Kong's legal system also provides few affordable safeguards for minority shareholders.
Hong Kong law does not permit US-style class action lawsuits against errant companies, or contingency fees for lawyers, under which they are paid only when they win a case.
Changing Hong Kong's British-based legal system to allow more, US-style litigation by minority shareholders might be one solution, but this would involve "a major change of culture", says Ms Lam.
More realistic in the short term might be a proposal put forward by David Webb, editor of Webb-site.com, a corporate governance watchdog, to set up the Hong Kong Association of Minority Shareholders (HAMS).
The body, which would be funded by a minimal levy on share trades, would lobby on behalf of investors, independently rank companies based on corporate governance, and use its financial muscle to sue offenders.
"We have a monopolistic situation here where there is no debate on corporate governance between investors and issuers," says Mr Webb.
"HAMS, I hope, would within a few years create the conditions for more private-sector activism."
The proposal still has a long way to go, having only recently been submitted to a shareholders' sub-committee of the government's standing committee on company law reform.
So far, though, the feedback has been positive. The government's Financial Services Bureau dubbed the proposal a "novel" idea and said it was open to public consultation on the issue.
Whether or not HAMS proves to be the solution, the message is clear: Hong Kong needs to do more on corporate governance lest its fast- learning neighbour, China, steals the initiative - and the dollars.
Copyright: The Financial Times Limited
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