HAMS to the Rescue?
7 August 2001

From The Asian Wall Street Journal

Since the Asian crisis began in 1997, there has been endless debate as to the causes. Some observers have made a pretty persuasive argument that the biggest culprit was poor corporate governance, and even those who disagree with that statement generally admit that it was at least a contributing factor. This partial consensus has led to some constructive discussions within policy circles on how to better regulate the region's listed companies. Now one of Asia's most outspoken minority shareholder advocates has come up with a new way to attack the problem, and his proposal merits serious consideration.

David Webb was formerly an investment banker in Hong Kong, so he is well aware of the conflicts of interest analysts and fund managers at the big houses face. That's why he set up his own independent web site, the eponymous webb-site.com, to report the shenanigans of local companies. Over the past three years he has put professional analysts and reporters to shame with his free service to investors, dishing the dirt on blue chips like PCCW and Jardine Matheson, as well as smaller, family-controlled firms.

More recently Mr. Webb has been recruited to sit on several government bodies to refine capital market regulations. While he evidently thinks this is a worthwhile pursuit, or else he wouldn't be donating his time, he also has a sense of the limitations of government. Regulators can require companies to be more transparent, but their ability to punish companies when they commit serious abuses is limited because government is usually unwilling to allocate the level of resources that would optimize the benefit to society. Surely there should be some way for investors, who after all should be highly motivated to protect their own interests, to band together.

That's exactly what Mr. Webb has come up with. The idea is to set up a Hongkong Association of Minority Shareholders, HAMS for short. This statutory body would be governed by a board made up of investors, both large and small, and funded by a tiny tax on stock market transactions. The idea is that all investors would benefit by reducing the losses caused by poor corporate governance, so it would end up being a "user pays" levy.

Two of the association's proposed functions aren't very controversial. It would give minority shareholders a bigger public voice. In Hong Kong, much of the regulation is done by the stock exchange itself, which is a for-profit company. In order to maximize its profits, the exchange has a natural temptation to skimp on enforcement of its own rules. The association might push the government and the exchange to be more vigilant about enforcing existing rules, and help them to craft new ones. Mr. Webb, for instance, has been pushing for quarterly reporting, and better disclosure of company reports on the Internet.

HAMS would also rate companies on a sliding scale according to their adherence to set standards of good governance. For instance, Hong Kong currently requires that companies have two independent directors, but they are appointed by majority shareholders. Companies that brought in more independent directors, and allowed minority shareholders to select them, might boost their score. This could benefit the company by raising its stock price and lowering its cost of capital.

The third function might strike some observers, particularly those from the U.S., as more worrisome. Mr. Webb proposes that HAMS would also on occasion mount lawsuits on behalf of minority shareholders. This is because even in cases where there has been a clear violation of the law, the expenses of litigation in Hong Kong are so high that minority shareholders are frequently left with no recourse. And because there is so little threat of lawsuits, majority owners have been riding rough-shod over the small investor with related-party transactions and other abuses. True, the U.S. has seen a plague of frivolous class-action lawsuits on behalf of investors which have done more harm than good. But the way the law is written in Hong Kong, there is little risk of this happening. The problem is rather the opposite, that the little guy is denied access to the law. HAMS might level the playing field somewhat.

Even though Hong Kong is already a major financial center with relatively high standards of regulation, it's surprising what some companies have been able to get away with there. Now the territory has a chance to maintain its leadership position by experimenting with a new approach to the problem. As Asia grapples with the need to improve corporate governance to lower its cost of capital and prevent another crisis, it's worth considering whether the HAMS proposal might be one of the answers.

Copyright by The Asian Wall Street Journal, all rights reserved. Reproduced with permission.

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