appConfigEntityId

bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

hooksArticlePageAdvertisementConfigArticle

liveArticle

appConfig

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

sponsorType

urlAlias

moreOnThisArticles

sectionsV2

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

json

Peter Guy

Shareholder activism and its hedge fund advocates are the 21st century's version of 1980s greenmailers and corporate raiders.
The struggle between the Bank of East Asia's Li family and US activist hedge fund manager Elliott Management Corp revives the debate in this city of how long family banking dynasties can exist in a changing business environment.
Founded in 1918, BEA is the largest independent local bank and third-largest lender in Hong Kong.
The Li family holds less than 7 per cent of the stock but controls the board of directors and occupies senior management positions.
Recently, the bank executed a nearly US$1 billion share sale and placement to Japan's Sumitomo Mitsui Banking Corp despite heavy objections and criticism from Elliott.
BEA says the subscription was a good opportunity to broaden its capital base and strengthen its position to meet upcoming Basel III regulations.
Elliott argues that the placement is designed to entrench management and ownership control by the bank's founding family and discriminates against the interests of independent investors. Elliott's interest in the outcome is motivated by its HK$1.8 billion or 2.5 per cent stake in the bank.
The row has raised the level of scrutiny over family management within BEA. The question being asked is if the family ownership and control model is appropriate for post-financial-crisis banking at a time when the industry globally is being compelled to evolve sophisticated risk controls employed by disciplined senior management teams.
Some of the banks that went bust during the crisis in Spain, Greece and Cyprus featured family owners overwhelmed by unforeseen volatility and a punishing liquidity crisis.
While family owned and operated enterprises run successfully in many industries, major changes in the global financial industry following the crisis now require a level of independent corporate governance and management that directly challenges the nature of a family structure. These changes are being aggressively driven by regulators and central bankers.
Data from S&P Capital IQ shows BEA's share price has been a one to three-year relative underperformer compared with the Hang Seng Index and BOC Hong Kong (Holdings).
This is not clear evidence that family members are not good managers, but it does seem to suggest the market is asking if they are the best people to run a publicly listed bank in today's rapidly changing and complicated regulatory environment.
Chairman and chief executive David Li Kwok-po has appointed two of his sons as deputy chief executives.
Concentrating management authority in the hands of family member-owners sits at odds with current industry practice, no matter how conservative a bank's lending policies, even if it has a chief risk officer – as BEA does in the shape of Johnny Mao.
Quite aside from Elliott's profit-motivated challenge, these are legitimate issues of regulation because post-crisis banks are now run as a public trust.
A professionally run operation is in the public interest and banking regulations have become principle-based rather than rule-based. This means that it is not enough for a bank to assert that it is sound and compliant because its balance sheet meets Basel III standards.
Owner-managers must demonstrate and convince the authorities that family-filled organisational structures do not pose a specific risk to credit and investment decisions.
As the global financial crisis showed, banks usually don't slide into a gradual decline like ailing manufacturers. They tend to fail fast with an attendant risk of social chaos requiring government bailout.
Regulators need to decide if Hong Kong can afford to have its third-largest bank run as a family business.
This story has been corrected to remove the error in the orginal which stated that BEA did not have a Chief Risk Officer


Activist hedge funds have family-run banks in their sights

Bank of East Asia raises HK$6.57 billion in share placement to Sumitomo Mitsui

The tie-up between BEA and Sumitomo Mitsui was first announced in September. Photo: Bloomberg

Business

Banking & Finance

Bank of East Asia's fight with activist fund revives debate of how long banking dynasties can exist


Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

The View

Activist hedge funds have family-run banks in their sights

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Bank of East Asia's fight with activist fund revives debate of how long banking dynasties can exist

Bank of East Asia's fight with activist fund revives debate of how long banking dynasties can exist