Corporate governance reforms just baby steps

PUBLISHED : Monday, 14 February, 2011, 12:00am
UPDATED : Monday, 14 February, 2011, 12:00am

While the Hong Kong stock exchange is heading in the right direction with its corporate governance reform proposals, and there are surely practical considerations of how much can be done, it is hard to be impressed.

The proposals seem too timid and far behind. Hong Kong is fast becoming one of the most important capital markets, with some of the world's finest firms seeking primary listings here, including Prada, which hopes to follow L'Occitane and Rusal.

As such, it should set its sights higher, to compare favourably with New York and London, rather than merely reaching parity with the mainland, as it seeks to do by requiring one-third of the board to be independent directors.

There are sound economic and pragmatic reasons to do so. A McKinsey survey found that over 70 per cent of investors are willing to pay a premium for demonstrably well-governed companies. The mainland and Singapore compete with Hong Kong to attract the best companies and are ahead in reform. Hong Kong risks losing out.

Independent directors are one of the most important components of an effective board, and several jurisdictions, including the US, Britain and Australia, insist on a majority of independent directors on each board as an integral part of corporate governance reform.

Hong Kong's one-third proposal falls far behind that. Arguments to the effect that we cannot find sufficient independent directors in this city buzzing with highly qualified professionals and highly successful entrepreneurs are disingenuous.

The recent reform also does not seem to adequately address the very important issue of limits on multiple directorships. The fact is that if you spread someone too thin, they cannot be very effective. The reason given is to avoid unfairly penalising competent directors. But we should focus more on the shareholders and the company and find solutions for the norm rather than the few exceptions.

The reform proposals also seem to miss or inadequately address term limits and mandatory rotation, which have become common in other capital markets. Requirements for financial literacy or experience are conspicuously absent.

To become a director, an individual must be 18, but there is no upper age limit - and no other qualification is required. For an effective board, membership criteria have to be better defined. Further, the proposals suggest eight hours of annual director training. That seems woefully short. It is important to not only educate directors on accounting standards, listing rules, corporate governance practices and listing decisions (which has been suggested), but to also provide in-depth understanding of the running of the company and the industry in which it operates, strategic thinking, leadership training, risk evaluation and ethics.

While the stock exchange is considering making changes to the board structure in Hong Kong, it should also discuss and implement mandatory quotas for women on boards. Countries like Norway, Spain and France are heading in this direction and it is exactly the kind of trailblazing change that one expects from a progressive regulator.

Given the complexity of modern business and the risks to shareholders of bad governance and corporate fraud, there is a demonstrated need for accountability, transparency and responsible decision-making by informed directors with adequate experience, time and diversity of backgrounds, including gender representation. Instead of looking at the floor, Hong Kong should aim to go beyond the ceiling. Its citizens are ready for transparent, accountable and responsible companies.

Sushma Sharma teaches law at City University's School of Law and is the leader of the Postgraduate Certificate in Laws programme