We urge shareholders of HKEx (0388) to veto a proposed change to the Articles of Association which would damage good governance and facilitate the stifling of dissenting views. We speak from first-hand experience. HKEx is setting a bad example to the companies it regulates, and the rot should stop now. In passing, we also cast an eye on the ongoing CITIC Pacific case.

HKEx AGM: veto item 7
11 April 2010

The Annual General Meeting of Hong Kong Exchanges and Clearing Ltd (HKEx, 0388) will be held on 22-Apr-2010. The circular, including the notice of meeting on pages 4-8, is here.

Webb-site.com has no objection to the first 6 items on the agenda, but urges shareholders to vote against item 7, the last item on the list, which proposes changes to the Articles of Association. This is a Special Resolution, so it needs 75% approval of shares which vote. Two parts of this proposal are not objectionable, relating to the use of electronic communications with shareholders, and the nomination period for candidates for directors (although the Listing Rules in this respect should be amended, but that's another topic). However, because it contains a toxic element, the bundle must be rejected.

The part that is highly objectionable and damaging to good governance is the proposal to allow the board to pass written resolutions, without a board meeting, by obtaining written approval from a simple majority of directors. Currently, the articles, in common with most listed companies, allow written resolutions only if they are unanimous. That is the way it should be, because:

Even worse for HKEx than others

On top of the reasons above, which apply to any company, HKEx has a unique governance structure in which only 6 out of its 13 directors can be elected by shareholders. Another 6 are appointed directly by Government, and the remaining 1 is the Chief Executive, who is appointed with the approval of the Securities and Futures Commission, the directors of which in turn are appointed by the Government.

So the proposal to allow passing of resolutions by 7 directors is, in effect, a proposal to tighten government control and stifle dissenting views. With the block votes of 6 government-appointed directors plus the Chief Executive, or just one of the other directors, the Government can pass proposals, and there would be no record in the board minutes of dissenting views, because there would be no board minutes without a board meeting.

This is not just a theoretical risk. Your editor, David Webb, was a shareholder-elected director of HKEx from 2003-2008. Without divulging confidential details, we can tell you that there were at least two occasions on which he objected to circulated proposals, and as a result they were discussed in a board meeting instead, because that's what the Articles require. One of those proposals regarded a matter on which he had been in the majority view at the previous board meeting. The proposal related to a matter which involved another Government body and Government policy. Subsequent to the meeting, the Government-appointed directors made a U-turn (after the Chairman discussed it with Government ministers) and the revised, reversed position was circulated for board approval. Webb objected and, at the subsequent meeting, the proposal was approved after vigorous debate, by 9 to 3. The Government-appointed directors each considered that they did not have a conflict of interest in voting on this matter, even though it related to Government policy and 4 of them were Executive Councillors (cabinet members) under a duty of "collective responsibility" to support it.

Calling a board meeting is easy

The quorum (the number needed to do business) for an HKEx board meeting is just 4 directors, which should not be difficult to achieve, since they could all phone in, and if you cannot contact 4 directors by phone then you are unlikely to be able to get 7 to sign something anyway. However, at least half of those present must be Government-appointed, just in case the independent shareholder-elected directors start acting too independently.

HKEx, in proposing this amendment to its articles, is also setting a bad example to the market which it is supposed to regulate through its subsidiary, the Stock Exchange of Hong Kong Ltd. We don't want other companies behaving this way, so we must stop the rot. The feeble justification HKEx offers in the circular is:

"decision making by way of a resolution in writing is of no avail if any of the Directors or committee members are not contactable, or are unable to sign for reasons such as being away from Hong Kong"

This does not hold even a thimble of water. First of all, there is this modern invention called the telephone, by which one can attend a short-notice board meeting without being here, and a more recent invention called a "fax machine", by which one can sign documents. If one of the directors is really uncontactable for more than a few hours, and there is an urgent matter, then a short-notice board meeting is the way to go. If HKEx was really concerned about not being able to contact one director, it would have proposed "all but one" or "excluding any director who is known to be outside HK and not immediately contactable". That would give overseas directors a chance to answer the phone. But that's not what they are proposing. They also claim that the proposal will:

"help balance the pursuit of good corporate governance and timely decision making"

That's a false trade-off when you think about it. It makes "good corporate governance" sound like a hindrance to "timely decision making", which it is not, and carries the implication that timely decision making is bad for corporate governance. Of course it isn't, but unilateral decision-making and the elimination of dissenting views and debate is indeed bad for corporate governance.

There have been a few occasions when a director has been incapacitated longer-term - for example, in 2008-2009 Henry Fan Hung-ling retained his government-appointed seat but excused himself from board meetings and papers during the ongoing CITIC Pacific investigation. So he could not have signed any written resolution. He continued to accept his HKEx director's fee though, and when his term expired after the AGM on 23-Apr-2009, the Government did not reappoint him. Incidentally, we are still waiting for the outcome of the police investigation, which was "still underway" according to a Legislative Council answer on 20-Jan-2010. It's now more than a year since the police searched the premises. Perhaps the Department of Justice is having one of its "Sally Aw" moments. The longer we wait, the less credible the Government looks. If ever a case was black and white, this was it (page 43 of the circular)

But if HKEx really finds it inconvenient to have a director who can't direct but declines to resign, then there is a simple answer - remove him from the board. All the other directors can resolve to do that, or in the case of Government-appointed directors, they can't, but the Financial Secretary can (Article 94).

Publish your M&A

Finding online the Memorandum and Articles of Association (M&A) or Bye-laws of HK-listed companies, the most fundamental document of any company, is almost impossible. The Listing Rules now require that every listed company must have a web site. So the Listing Rules should be amended to require that every listed company puts its M&A on its web site (preferably in the Corporate Governance section), and uploads a copy to HKEx as well, so we can find them in the central depository of company filings. Meanwhile, if you work for a listed company, do this voluntarily! We did manage to find a few M&A though, and here they are:

Company Written resolution Article
Bank of East Asia Unanimous 108
CLP Unanimous 122
HK Electric All except those absent from HK or incapacitated through ill health or disability 134
HSBC Unanimous 129.1

Finally, we note that in Part 1 of Table A of Schedule 1 of the Companies Ordinance, which contains the standard Articles of Association for a public company incorporated in Hong Kong, Article 108 requires unanimous approval for written resolutions. So keep HKEx the same, and vote against item 7 at the AGM.

Webb-site.com understands that the leading voting advisory firm, Institutional Shareholder Services Inc. (a subsidiary of Riskmetrics), has recommended its clients to vote against this resolution.

© Webb-site.com, 2010

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