New listing rules sure to draw same old excuses
It is curious that mainland companies listing in Hong Kong enjoy more latitude in making board appointments here than at home. If the stock exchange has its way, that will change by the end of next year, when at least one third of a firm's directors will be independent, bringing the city into line with the mainland, though still not with Singapore, the United States and Britain. The exchange also wants companies to ensure that all directors, including the city's best-known tycoons, have eight hours of training every year, and to limit the number of boards a person can serve on to avoid them spreading themselves too thin.
These reforms are bound to prove controversial when put to a public consultation over the next two months. The Hong Kong market does not easily embrace change, no matter how far out of step it gets with other major financial centres. The current requirement of at least three independent directors, without a set ratio, ran into such resistance that many companies were still not in compliance by the deadline for meeting it in 2004.
Since then, the expectations of investors and a correlation between perceptions of good governance and market performance have gradually changed the landscape. As of last year, eight out of 10 locally listed companies, and just over seven out of 10 of the companies whose stocks make up the Hang Seng Index, had already ensured a third of their directors were independent. That leaves nearly 300 firms affected by the new rule, including some blue chips.
The excuses trotted out in 2004 can be expected to do the rounds again in debate on all three of the new proposals - that they will make it harder for small firms to find independent directors, raise the burden on directors and increase company costs. It is hard to believe Hong Kong does not have enough well-qualified people, with its well-developed financial markets and many accounting professionals. The more likely reason is that the rewards do not reflect the growing responsibilities of independent directors. Institute of directors chairman Kelvin Wong Tin-yau says independent board members now receive HK$200,000 to HK$300,000 a year - less than half the range for their US counterparts. The marginal increase in operating costs would be a small price to pay for improved governance.
If the proposed mandatory annual training for all directors seems a touch patronising to self-made tycoons, it also sets the right direction for the future generation of directors. In a city where many listed companies are still closely associated with the families that founded them, and where board and management appointments are often from connected interests, independent directors play a crucial role in corporate governance by ensuring that business decisions are in the interests of smaller shareholders.
Analysts have long equated higher standards of corporate governance with better investment returns. A recent study by a group of Hong Kong academics went further, tracking how improvements in governance, including the number of independent directors, affect share price performance and risk. Those that raised their corporate governance ratings were well rewarded by the market, with lower risk and a stronger share price performance.
In the latest survey of regional standards compiled by the Asian Corporate Governance Association, Hong Kong's rating fell compared with 2007 and Singapore took over top spot. As a financial hub that aspires to a long-term future as a global financial centre, Hong Kong should be at the forefront of raising standards.