Get one in, or kick one out? That's the dilemma many listed Hong Kong companies are facing as the deadline looms for them to rejig their boards of directors in compliance with a new listing regulation.
By the end of this year, the city's companies will need to have at least a third of their directors 'independent'. A difficult task in itself, given the paucity of talent willing to take on these roles for the meagre pay usually on offer, it is bound to be even more complicated for companies with board sizes that are not a multiple of three.
Patrick Rozario, partner and head of risk advisory services of accounting firm BDO Hong Kong, said many companies had been seeking its help on how to comply with the new rule.
'Most listed companies have nine to 12 directors, and many have only about three independent directors,' he said. 'It is estimated that about half the small listed companies won't meet the new listing rules unless they reshuffle their boards.
'Many will have to either add or remove a director, both equally difficult propositions. As the regulation will increase the demand for independent directors, it will get tougher to come up with the right people. And for those facing the opposite situation, where they have to kick a director out, it'll be a painful process.'
BDO surveyed the 232 largest listed companies and found 27 per cent have less than a third of directors who are independent. Rozario believes at least 500 smaller listed companies will be affected.
At present, listing rules require firms to have at least three independent directors, but there is no regulation on the ratio.
An independent director is one who does not work for the company and has no business relationship with it. They also cannot hold more than a 1 per cent stake in the company. Non-executive directors, on then other hand, are those who do not work for the company but have business ties to it.
The move, seen as an important piece of corporate governance reform for 1,400-plus listed companies, is designed to match best international practices and will be an important step in strengthening the voice of minority shareholders.
Rozario said the reform was needed as Hong Kong lagged behind other markets which had had similar, or tougher, requirements on independent directors for a long time.
In the United States, for example, the majority of the board members must be independent, while Britain requires at least half the board, excluding the chairman, must be independent. Singapore and the mainland also require at least one-third of the board be independent.
Kelvin Wong Tin-yau, the chairman of the Hong Kong Institute of Directors, said companies that couldn't find more independent directors would have to consider cutting the size of the board. 'However, we think it is always better to hire more independent directors as they can contribute a lot to corporate governance and development,' he said.
Wong said one reason Hong Kong companies found it difficult to get independent directors was the low remuneration for such roles. On average, they receive HK$150,000 to HK$200,000 a year. In other developed economies, independent directors make about HK$500,000 a year.
'If Hong Kong companies would pay more they would find it much easier to find professionals ready to contribute their time and effort,' Wong said. 'And if a listed company says it can't afford to pay more, one would have to doubt its financial soundness.'