CNOOC revelation a can of worms SFC should probe

When it comes to the mainland or any major state-owned enterprise, it is amazing how slow our Hong Kong regulators can be. The latest development is the public admission that the well-publicised incentive scheme for Hong Kong-listed CNOOC's senior management is only a show - and that much of the money that was supposedly paid to them has actually been 'donated' to its parent company. The admission was made by the parent, China National Offshore Oil Corp, through news agency Xinhua on Monday. In fact, this type of fake compensation scheme is well known among Hong Kong-listed mainland state-owned enterprises. Often, the executives of these state-owned companies are in fact paid very little. Their official pay is largely fiction, designed to convince investors that management has generous 'western-style' incentive schemes to insure they are well motivated. The disclosure about what's really going on comes amid growing criticism of the 'excessive' amounts paid to management of state-owned enterprises at a time of economic difficulties. CNOOC chairman Fu Chengyu has become an easy target with his 12 million yuan (HK$13.6 million) official package, more than twice the amount the entire board of rival Sinopec is getting. In an attempt to pacify the criticism over high pay, the parent's spokesman explained the reality: 'In order to remove the worry of international investors in investing in mainland enterprises [back in its 2001 listing], CNOOC designed, with government approvals, a set of remuneration and share option schemes in line with international practice. The pay is regularly disclosed to the capital markets. 'In fact, from day one of its listing in 2001, the whole senior management has donated the reward approved by the board to the parent company.' The real pay is determined by the State-owned Assets Supervision and Administration Commission based on individual merit. 'The difference between the nominal and real pay is one between the sky and land,' said the spokesman. Any responsible regulator would jump from his seat at this public statement. It's not just about corporate governance and transparency. Imagine a listed firm hiring a consultant for HK$10 million and then its major shareholder comes out and says: 'Well, in fact I pocketed the HK$10 million and left a few dollars on the table for the consultant.' Here we have a case that is more serious. Instead of a one-off transaction, CNOOC has been repeatedly making - first in its 2001 offering document and then in eight consecutive documents - statements that apparently are different from the facts. Our regulators should have at least asked the company to confirm to the public whether its parent has been telling the truth, and then investigate if the law has been broken. But five days after the public admission, we haven't heard anything from Hong Kong regulators. I can easily come up with some excuses. First, the practice is an open secret, so why the fuss? Well, it is true that CNOOC is not alone. It's a practice widely adopted by state-owned enterprises, in particular the red chips. And it's been there ever since the listing of mainland enterprises in Hong Kong in the '90s. Some parent companies even have their own investment arms deciding when management should exercise the share options and when to sell. Members of management are no more than a list of names that hold the options. (Those interested in the details can refer to my column on April 14, 2007.) Not acting on an open secret is one thing. Not acting in the face of a public admission is another. At stake is the integrity of our regulatory regime. Second, it's China. The unstated part is that the practice is needed to get things done. State corporations are headed by political appointees who are not real businessmen. It would be politically unacceptable for them to actually take the high pay that is the international standard. Besides, listed companies need the support from their parents for smooth functioning, and there is no better lubricant than money that flows back to them in the form of a compulsory donation from management. While I never underestimate the difficulty of getting things done on the mainland, this political reality should not be a concern for our regulators. The job of a regulator is to keep our market fair and therefore attractive to investors. Third, this is a can of worms. Is our regulator tough enough to bring a big state-owned enterprise to justice? And where should the investigation begin and where should it stop? With Xinhua making an official admission, I just see no way to avoid the issue. It is time for our market regulator to bite the bullet and show the world Hong Kong is not just another mainland stock market but one with international standards. Note: the columnist owns CNOOC shares.