Bonanza defies losses
Saturday, January 5, 2002
MATTHEW BROOKER
The name stands out in this year's Business Post survey of directors' pay: Pacific Century CyberWorks.
The company stands at the extreme on almost every measure. It paid probably the biggest remuneration package ever awarded to a board in Hong Kong, way ahead of all the other companies in the survey. It reported the biggest percentage increase by far, 5,151 per cent compared with 93.33 per cent for second-placed CKI Holdings. It was the only company in the survey to report a loss for the year under review. And it produced the worst shareholder returns by far - a negative one-year return of 72.1 per cent.
The trials of CyberWorks have already filled plenty of column centimetres. The company, chaired by Richard Li Tzar-kai, in less than a year went from a moribund penny stock to the owner of the SAR's former telecommunications monopoly, propelled by a wave of investor euphoria for the Li family name and on the technology theme.
It is open to question whether any useful conclusions about pay trends can be drawn from the company's record-breaking HK$768 million package. CyberWorks' lucrative pay day says more about the roller-coaster Internet boom than it does about directors' compensation.
Directors' emoluments reported by CyberWorks last year included HK$597 million in profits on share options. Those options were granted at HK$2.35 in August 1999 when the planned takeover of Cable & Wireless HKT had not been hatched.
Who could have foreseen that the company's shares would rise so far so fast, enabling the takeover of a stock market behemoth? Or that market support would evaporate so quickly afterwards?
Last year the company inevitably faced severe criticism for the payouts after it was forced to retrench and suspend dividend payments in the face of a collapsing share price and deteriorating operating conditions.
Nevertheless, the HKT shareholders who went along for the ride may feel entitled to complain, having seen their stable utility stock deflate like a punctured dotcom.
Three CyberWorks directors picked up more than HK$100 million in 2000, with the highest-paid believed to be deputy chairman Francis Yuen Tin-fan, after a HK$283 million windfall.
The company's protestations that the figure was "theoretical", since not all the shares were sold after the options were exercised, appears debatable. What the directors decided to do with the shares after exercising their options was a personal financial decision.
In any case, even if the share option profits are stripped out, CyberWorks paid its board HK$171 million, which would have placed it second in this year's survey. CyberWorks declined to comment for this article.
The second-biggest payout in the survey was made by Hutchison Whampoa, whose highest-paid director - believed to be group managing director Canning Fok Kin-ning - picked up HK$120 million.
The contrast is stark. While CyberWorks directors have presided over a steep decline in shareholder value, Hutchison's payouts were largely related to the hugely profitable 1999 sale of Orange, its British mobile phone arm, which enabled the group to report record profits of HK$117 billion that year.
At the aggregate level, this year's survey confirms the trend of previous years - directors' pay is rising at a faster rate than profits and at a faster rate than wages in the general economy.
Over a one-year period, total directors' pay rose 62.85 per cent, against a 33.7 per cent fall in aggregate net profit.
However, the figures are skewed somewhat by the size of the CyberWorks payout. Excluding CyberWorks, the rise was 1.27 per cent. Excluding CyberWorks and Hutchison, the rise was 16.2 per cent. The median was a 8.28 per cent rise.
By contrast, government statistics show the lowest-paid category of employees - those up to supervisory level - received average pay rises of only 0.6 of a per cent in the year to December 2000 and 0.9 of a per cent in the year to June last year. Wages have been generally flat since the Asian crisis in 1998.
As in previous years, there appears in many cases to be little if any relation between directors' pay and corporate performance.
The survey compared the change in directors' pay to the change in net profit, earnings per share (EPS) and total shareholder return (TSR), share price changes plus dividends, over a one-year period or, for the 22 companies that were index members in 1994-95, over six years.
While some companies showed favourable trends, others - particularly property companies - exhibit an inverse relationship.
Pay at New World Development has risen 115 per cent since 1994-95, despite a 95.26 per cent decline in EPS and a negative TSR of 57.25 per cent. Pay at Sino Land has doubled despite an 82.52 per cent drop in EPS and a negative TSR of 31 per cent, and pay at Henderson Land is up 95.75 per cent, despite a 42.05 per cent fall in EPS and a TSR of only 8.39 per cent.
The survey results should be treated with caution. One year's figures can be subject to large distortions - bonuses may be paid that relate to several years of work.
However, the poor quality of disclosure by most companies does not help shareholders in trying to figure out their company's pay policies.
"I think a lot of companies in Hong Kong and Asia don't adequately explain their director and senior executive remuneration policies. And so, investors don't know if these policies are legitimate or not," Asian Corporate Governance Association secretary-general Jamie Allen said.
"Without adequate disclosure, an investor can't possibly know if these pay awards are reasonable."
Hong Kong companies do not have to explain their pay policies, nor say why discretionary bonuses were paid. They must list the remuneration of directors in half million dollar bands, but do not have to say who received what.
HSBC Holdings, which conforms to London listing rules, is an exception, providing a full accounting of each director's rewards, broken down by fees, salaries, benefits and bonuses. Group chairman Sir John Bond was the highest paid director with a total package of HK$18.6 million in 2000, more than double the amount he received in 1999. HSBC's net profit rose 22.56 per cent last year, and it has provided a TSR of nearly 400 per cent over six years.
HSBC, rare among Hang Seng Index companies, also has a remuneration committee which sets directors' pay, and spells out details of the TSR benchmarks it uses to determine share awards.
In a report two years ago, the Hong Kong Society of Accountants recommended SAR companies be required to set up remuneration committees - usually composed of part-time directors, often advised by outside consultants.
Hong Kong Exchanges and Clearing is considering the proposal as part of an ongoing review of the listing rules.
"The existing listing rules contain no requirements on remuneration committees. We are, however, aware that remuneration committees are a corporate governance matter and we intend to consult the market on this." an HKEx official said.
However, remuneration committees would not be a panacea, Mr Allen said. To function effectively, they needed truly independent directors and in Hong Kong the independence of such directors had often been called into question.
He said remuneration committees had not always worked well in the United States, where experience showed independent directors often would not vote against big pay awards, particularly if they were chief executives of other companies.
Nevertheless, establishing such committees would at least subject directors' pay to a formal process, rather than being set at the whim of the controlling shareholder.
"I would strongly urge companies to set up remuneration committees," City University of Hong Kong head of the accountancy department, Professor Judy Tsui, said. She has carried out research on the issue for the Government.
"It is very important that the executives don't determine their own pay."
A parallel issue is disclosure.
"Right now the disclosure of remuneration is minimal," she said.
However, Arthur Andersen partner Kennedy Liu Tat-yin said companies should not be forced to make full disclosure of pay policies, since this was a commercial secret. Shareholders who wanted to question a company's policies could attend the annual general meeting, he said.
"But I seldom see this kind of thing happen," he said.
In theory, executive pay should be less of an issue in Hong Kong than in markets such as the US and Britain, where the subject continues to arouse heated controversy.
Since most companies in these markets have widely dispersed shareholders, managers have much greater power. They may be tempted to drain company resources, not just by paying themselves exorbitant salaries, but from wasteful perks such as plush offices and executive jets - hence the need for close monitoring.
In Hong Kong, by contrast, most companies have a single controlling family shareholder, whose members are also the firm's leading executives.
The money they receive as salaries is often insignificant compared to the value they have invested in the company and the dividends they receive.
For example, Li Ka-shing as usual took only a HK$5,000 director's fee from Cheung Kong (Holdings) last year, but pocketed HK$1.33 billion in dividends from his 834 million shares. (Mr Li's interests in group companies Hutchison Whampoa and CKI Holdings are largely held through Cheung Kong.)
Which begs the question: Why do directors' pay packages keep rising?
One answer may be increased hiring of professional managers, a sign of a maturing market. Another reason may be plain insensitivity.
"I think a lot of companies don't see the damage they do to their reputations when they give their senior executives or directors a pay rise while at the same time cutting staff and wages," Mr Allen said.
"In the total scheme of things, the amount of money you pay directors is often small. But it is a leadership as well as a public-relations issue."
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