Independent directors to escape stock exchange vetting
By SIMON FLUENDY
COMPANIES which fail to comply with one of the key components of the territory's investor protection rules are unlikely to be challenged by stock market officials.
The stock exchange said yesterday there would be no monitoring of the independence of non-executive directors appointed to listed companies, as required by regulations which came into force on December 31.
The appointment of completely independent directors to monitor the interests of minority shareholders was part of the package of investor protection measures announced in August last year.
While officials admit the exchange has no accurate figures on how many companies have complied, the Institute of Directors (IOD) has warned that many companies have independent directors on paper but not in reality.
The exchange has made just one attempt to establish compliance: a circular sent out to companies shortly after the new rules were published.
''The board itself must take a view on independence,'' said Jo Eddings, assistant director of the listings division. ''We believe the level of compliance is very high.'' No statistics were publicly available, she said.
She said ''almost all companies responded'' and the ''compliance level is very high''.
''These things are changing all the time and we do not have a reliable up-to-date statistic,'' she added.
Ms Eddings said the circular had been sent to listed companies when changes to Chapter 3 of the stock exchange listings rules were promulgated but ''only about 50 said they had no independent non-executive directors''.
She said many companies had made board appointments since then and she had received ''a lot'' of telephone calls asking for advice or guidance.
''We will be going back to various companies to double check over coming weeks,'' she said.
But she ruled out a search for companies without non-executive directors or any attempt to probe claims of independence.
''Judging independence is not a science,'' she said. ''In fact, it is a bit of an elephant test - you know one when you see one.'' Ms Eddings said it was fair to describe the stock exchange policy on the new regulations as ''softly, softly''.
''It must be largely up to the companies, we are not in the business of approving boards,'' she said.
But she said new listings over the past two years had to have two independent non-executives anyway, which meant that a large fraction of companies should have complied.
She said companies had to adapt over time. ''When connected transaction disclosure regulations were introduced in 1989, there was a real outcry, people hated it,'' she said. ''But over time it has become accepted. The rule changes in August were huge. The approach we take is to do things gradually.'' ''They have only defined independence in the most general of terms,'' said Professor Bob Tricker of the Hong Kong University Business School.
The Institute of Directors reckons there is serious cause for concern. ''The institute feels that the vast majority of companies in Hong Kong are short of really independent non-executives,'' said Con Conway, who is compiling a register of institute members taking non-executive roles.
He believes the exchange has glossed over the reality by not closely questioning firms.
''In the past, a number of prominent figures have acquired a very large number of directorships based on old friendships, school ties and the like,'' Mr Conway said.
''The IOD is not of the opinion that this is in the spirit of the regulations. If someone holds 10 or 20 directorships, they cannot be said to be fully cognisant of what is going on inside all of them.'' Mr Conway warned that investors could be misled into believing that a high profile personality had been recruited to a board meant the company had to be sound.
Judge Edward Tyler said non-independence of non-executives could be a factor taken into consideration in a case based on some form of minority shareholder oppression.
But he doubted the power of the exchange to enforce its regulation. ''What could they really do if a major player turned round and told them to clear off? Given the size of the market, not much,'' he said.
The exchange's ultimate sanction is delisting but Leo Chiu, partner at law firm Deacons, compared this to a nuclear bomb. ''Everyone gets blown to pieces, including the minorities,'' he said. ''It is the dilemma the exchange faces. It takes real courage to apply for a delisting.'' The last few days have seen a flood of announcements of non-executive directorships by companies ranging from the small to the largest.
For instance, Paul Cheng Ming-fun has joined the board of Hongkong Bank and former Australian prime minister Bob Hawke has joined the board of Emperor group.
But a fax poll of more than 30 listed companies elicited only a tiny number of replies, from the largest firms contacted.