Pearl ruling can profit exchange

If good corporate governance is the key to securing serious institutional investor interest in a market, then our own Hong Kong stock exchange is surely an important player.

Its listing rules 15 years ago used to be an undemanding thirty-something-page booklet. They are now two loose-leaf volumes of very unplain English, replete with requirements for non-executive directors, independent shareholder votes and, of course, the recent imposition of audit committees.

But whilst the exchange casts its surveillance searchlight looking to illuminate any recent toi dai gau yik or monkey business, the governance of one rather important company is well and truly stuck in a time warp - the exchange itself.

For, make no mistake, Tuesday's decision by the Court of First Instance ruling the blackballing of Pearl Securities unlawful is a wake-up call to the exchange to get its own governance house in order.

The 1988 Securities Review Committee report dubbed it a club, and so did Mr Justice Brian Keith when he delivered his judgment and gave the exchange company his own version of a black ball.

The exchange is, of course, blessed with a de facto monopoly in the trading of securities in Hong Kong and is keen to keep things that way. There is nothing wrong in monopolies, of course - though governance and monopoly interests have stared each other in the face rather uncomfortably for hundreds of years.

The days of medieval England, for example, saw butchers, bakers (and brewers) seeking privileged status to support local monopolies and price controls in return for undertakings to regulate the quality of their product and the conduct of their members. But if our Securities and Futures Commission is tasked with objectively reviewing the fitness of applicants who seek to go into the stockbroking business, then the idea of the exchange's members undertaking their own integrity checks on these very same applicants is totally ridiculous. The truth of the matter, of course, is that these integrity checks masquerade mainly as justification for the exchange's members to preserve their own economic interests in what is still in effect their private company, and perhaps also provide a convenient mechanism to block the admission of someone who is not favoured by the cabal of the day.

But let's get real. The days when stock exchanges were of interest only to the community's very wealthy Rockefellers - or its rogues - are long gone.

Whether we like it or not, nearly every salaryman's occupational retirement-scheme contributions and insurance-premium payments are channelled into them, and an increasing number of the world's greying population will come to rely on the integrity of markets for their income once they have stopped working. So how exchanges go about their daily business, how they regulate the conduct of their brokers, and how they ensure that there is sufficient free float of investible capital and a transparent market, are of critical interest to us all.

I am not suggesting that the exchange's private club structure allows it to be a law unto itself.

Council membership, which includes several very able lay members, is obligated to act in the public interest and the exchange looks set to become a public body for the purposes of anti-corruption laws. But these are merely responsive, band-aid measures and are, after all, restrictive rather than enabling.

A growing number of exchanges have, on the other hand, opened their membership to fund managers and other investors with an interest in the financial markets, and Sydney's exchange recently emulated those whom it serves and became a fully fledged listed company. With a broader group of ownership interests to respond to, the exchange would be far better positioned to determine how best to compete internationally over the longer term.

The economic, strategic and political value of our stock exchange is considerable. But so too is the importance of securing good corporate governance in the form of legitimacy of action and the determination of accountability. There are undoubtedly measures in place which work to impose on the exchange a semblance of public institution status. But it seems an inescapable conclusion that the only sensible way to ensure that the exchange is seen to be reflecting the broader interests of the investing public in its present limited liability company form is to broaden the basis of its ownership from market broker to market user.

John Brewer is editor of Corporate Governance International and a past president of the Hong Kong Institute of Company Secretaries