Is the glass half full, or half empty? In terms of corporate governance, Hong Kong outshines the rest of the region. But it also aspires to be a global financial centre in the mould of New York or London, and on that basis, Hong Kong's record is laughable. Over the next several years as the lines continue to blur between Hong Kong and China markets, the Fragrant Harbour has the chance to really become Asia's financial capital. But this means that complacency about corporate governance and comparisons with, say, Southeast Asian markets is no longer worthwhile. If Hong Kong is to achieve its ambitions, it must consider the glass half empty.
Indeed, the new Chief Secretary for Administration, Donald Tsang, highlighted corporate governance in his last budget speech when he was financial secretary. The controversial Securities and Futures Bill now winding its way through the Legislative Council is supposed to address these issues. But it is a canard, shifting responsibility from the culprits - the companies' owner-managers - to third-party service providers such as accountants or investment banks.
Meanwhile investors sit on the sidelines. Retail investors treat the market as a week-day alternative to the Saturday horse races, and many institutional investors are silenced because their affiliated investment banks fear upsetting clients; besides they do not mind bad corporate governance if their peers face the same obstacles.
Local gadfly David Webb sees a way out. He is proposing the government endorse a new entity called HAMS (Hongkong Association of Minority Shareholders) that would have three objectives: to promote and lobby for improvements to the legislative and regulatory framework for investment; to establish a corporate governance rating system to provide incentives for companies to follow best practices; and to pursue quasi-class action lawsuits against egregious corporate offenders on behalf of investor members.
The rub: this costs money. Good lawyers and accountants needed to pursue this agenda are expensive. Webb proposes the government institute a levy on the stock market of 0.005% (or $1 for each $20,000 trade). He estimates this could fund an annual budget of HK$200-300 million, enough to get HAMS off the ground. He notes the cost of bad corporate governance outweigh this fee: investors demand a premium of 18-27% for it, which suppresses stock values. HAMS itself would attract as broad a base of public membership as possible, who would directly elect HAMS executives.
Webb has submitted this proposal to the shareholder subcommittee of the standing committee of company law reform, which was established by the financial secretary's office. To get any further, HAMS will need the endorsement of the government for the market levy, which ultimately means Chief Executive Tung Chee-hwa. Then the government can table enabling legislation and establish a steering committee to guide it through the legislative process, including opening it to comments from the public.
Hong Kong managed to achieve a half-full glass with the 1992 merger of its various stock exchanges, which transformed the market from a smoke-filled backroom club to what it is today, the region's premier exchange. This is no longer enough. Hong Kong needs another dramatic boost forward, a means of clearing through the vested interests and apathy. HAMS is a good start. FinanceAsia urges the Tung administration to endorse HAMS and the corporate governance levy. Fill the glass.
(c) Finance Asia, 2001. This editorial is reproduced with permission.