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Reform dressed in vested interests

Proposed revamp of HKEx's Listing Committee appears typically skewed

Nearly eight years have passed since it was first decided the time had come to overhaul the rule-making body of Hong Kong's stock exchange.

Last month, the front-line regulator of listed companies outlined its case for the reform of the Listing Committee. It was a conspicuously low-key occasion.

A consultation paper, 'Why Reform Now?' was loaded on to the exchange's website late on a Friday afternoon. Press coverage was neither widespread nor sensational.

Yet the proposals drew a passionate response from advocates of corporate governance reform in Hong Kong - just not for the reasons the stock exchange had hoped.

Criticism was fast to focus on the low number of investors proposed for this key policy-making body, which will decide how the bourse is policed - and who gets to join it.

While the number of Listing Committee members would be increased to 28 from 25, just eight - albeit up from the current four - would be taken from the investor community.

The rest would come from investment banks, law firms and accountancy practices, leaving the body skewed towards the issuer-side of the market.

'It's just an extension of the existing system,' noted corporate governance activist and Webb-site.com editor David Webb.

As a minority on the committee, investors were outweighed by the people who advised listed companies for a living, he explained. This has translated into what he sees as slow progress in raising the bar on corporate governance for issuers.

Proposals to introduce quarterly reporting, for example, have been shelved, and the Listing Committee itself would still work on a show-of-hands basis at meetings, rather than by poll voting.

Stephen Cheung Yan-leung, professor of finance at City University, nevertheless believes there could be progress if the mix of people was right. 'It's not about the numbers. I think it's about the quality.'

Regulatory reform has had a turbulent history in Hong Kong, and often seems to lean towards the protection of vested interests and away from investors.

For a brief time in 2003, the exchange itself was to be relieved of its gatekeeper role after the government endorsed an expert group's recommendation that the listing function be handed over to the Securities and Futures Commission.

After pressure from tycoons, the government backtracked on the idea, leaving front-line regulation in the hands of the exchange while proposing statutory backing to the listing rules.

The current proposals are likewise steeped in a volatile history. A previous attempt to abolish the Listing Committee, in 2002 - although the need for change was mooted in 1998 - was abandoned.

In the recent paper, the stock exchange proposes to reshape the Listing Committee into four committees.

The Listing Policy Committee - with 28 members - will be the ultimate rule-making body. Under it, there would be two sub-committees, the Listing Decisions Panel (which would be responsible for day-to-day approval of public offerings) and the Listing Review Panel.

A Disciplinary Review Panel would hear appeals.

Membership of these committees could overlap. For example, someone who sat on the policy committee could also attend meetings of the decisions panel.

It is a situation Mr Webb believes would create an inherent conflict of interest for would-be members, such as fund managers, who would be governed by in-house compliance rules on most public offerings.

'As the current proposal stands, it's too much of a conflict,' he said.

It would make the prospect of joining the committee even less appetising, compounding a pervading reluctance to join a body of which investors are a minority.

'Unfortunately, right now, there are a lot of vested interests dominating the listing committee,' said Richard Mak Kan-chong, immediate past president of the Hong Kong Society of Financial Analysts.

'So if the investor feels there's anything they want to make a noise about ... we don't have enough votes.'

Recruiting fund managers to sit on the policy side of the listing process would be easier if they did not have to be involved in initial offer decision making.

'Yes, there is insufficient representation by investors. One way to get around it is to reform the structure, take away the listing approval function,' explained Mr Mak.

He is confident the society will ruffle some feathers during the consultation process. 'There will be more noise, more responses coming in ... so stay tuned.'

Mr Webb is not as optimistic. He has decided to boycott the consultation process, dubbing it a sham.

'I have always tried to engage, even if the odds are against me ... but I decided on this occasion, investors could have more impact if they didn't send in submissions.'

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