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Usual delinquents dismiss boardroom independence day deadline

THE WORD 'DEADLINE' has a fairly definitive ring to it. In the newspaper world, its application tends to ensure that actual words appear in print every morning as opposed to a big white space.

In prison terms, it was typically seen as a boundary line that inmates could cross only at the risk of being shot.

Even the dictionary leaves little room for ambiguity: 'The point in time by which something must be completed.'

One in 10 listed companies seems however to have had a slight problem with the notion. Last week, they missed a deadline to appoint a third independent non-executive director (INED) to their boards, flouting a new stock exchange rule that was intended to boost governance levels at the corporations.

This was not a requirement that came out of the blue. Companies had eight months to get their boards in order. Hong Kong moreover has a pool of 22,000 accountants, 4,000 qualified financial planners and 5,000 lawyers to choose from if a suitably qualified candidate is what these companies are looking for.

The most prevalent excuse being mooted, however, is money. There may be thousands of potential independent directors out there, but companies - particularly the smaller ones - tend to offer them meagre remuneration. Candidates are naturally wary of taking on potential liability for a token sum.

It is somewhat odd that market forces don't seem to have registered in this argument, the simple solution being to pay these individuals more cash to make the risk worth their while.

So either these companies are unwilling or unable to dig deep into their pockets, cannot find a chummy stooge to take the slot, or the market is trying to tell them something.

It has long been known that there are a fair number of ropey companies in Hong Kong, and while investors may be prepared to enjoy the rollercoaster ride punting their stock, the prospect of sitting on their boards is not an attractive one.

If this reticence to sit on boards is a barometer of the perceived integrity of listed companies, it is not looking particularly good.

Many would also argue that the initiative had already been watered down from the onset, with loose definitions enabling people closely connected with management or the controlling shareholder to become an 'independent'.

As Webb-site.com editor David Webb points out, the new rule has a loophole that allows former executive directors or employees to serve as an INED after a two-year absence, and there is nothing to stop you being an INED of multiple companies in the same group.

With predominantly majority-controlled companies, INEDs would moreover never be truly independent so long as the executives and their associates are allowed to vote on their re-election, he adds.

It was noted in a recent CLSA survey on corporate governance that Hong Kong lacked a truly robust definition of 'independent', the accolade in Asia falling only to India, Malaysia, the Philippines and Taiwan.

Still, the report ranked Hong Kong second in the region in terms of overall governance levels, behind Singapore. According to one of the authors of the report, Asian Corporate Governance Association secretary general Jamie Allen, it is a status that by no means applies across the board at Hong Kong's listed companies.

Rather, the latest non-compliance over INEDs is more indicative of the true state of affairs - a handful of firms at the top of the chart are acutely outweighed by a lacklustre norm and a gaggle of underachievers at the bottom end.

Corporate governance standards are thus on average poor, reflected by the fact that Hong Kong companies do not take it seriously. 'There's no fear there,' he argues.

It seems endemic to him that in Hong Kong, we accept second-best too quickly. 'There is a 'can't do' attitude, we think of excuses why we can't do anything.'

The response of regulators to the INED deadline breach does little to dispel this theory - rather than publicly criticising firms for what is a clear case of non-compliance, the stock exchange has said it will deal with companies 'by discussion and encouragement'.

It is perhaps a more cuddly approach than many had anticipated. Advocates of corporate governance in Hong Kong are however seasoned in the art of patience. Each year they write a corporate governance report, there is little change in the headline performers.

Judging by the recent comments of a fund manager, overseas perceptions of the market here have likewise changed very little in the past few years.

'When it comes to its stock market we know Hong Kong is a crooked little town controlled by a few of the tycoons and we invest accordingly. It's caveat emptor.'

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