Non-compliance of corporate governance harms HK's financial sector
Updated: 2014-02-17 07:13
By Fung Keung (HK Edition)
Hong Kong's status as a world financial center is being threatened by local companies' non-compliance of corporate governance. The trend, if anything, is worrying. The Securities and Futures Commission is well-advised to play a more active role in urging local firms to extend more protection to minority shareholders.
A survey done by BDO Ltd, a financial services consultancy, has found that the percentage of companies in the city complying with Hong Kong's corporate governance code plunged to its lowest level since the code was first adopted in the city in 2006.
With the launch of a free-trade zone in Shanghai a few months ago and Beijing's plans to have 10 or so more to be set up in other places on the mainland, Hong Kong's competitiveness in attracting foreign investment can be weakened if investors' rights aren't well protected.
In the free-trade zones, Beijing has boldly moved a step further in its market-economy reforms. For instance, foreign banks in the free-trade zones are allowed to make loans, set lending rates and conduct foreign-exchange business freely (almost). Previously, these market-economy measures were only available in Hong Kong.
Those who wish to see Hong Kong maintaining its competitiveness, such as the Hong Kong General Chamber of Commerce, Hong Kong Association of Banks and the Chinese Manufacturers' Association, should start a joint campaign to rein in companies which exhibit the highest levels of non-compliance of Hong Kong's corporate governance code.
The BDO research highlights several areas of non-compliance, which include the lack of a whistle-blowing policy, a policy to communicate with minority shareholders and a policy to separate the roles of the company chairman and the CEO.
About 82 percent of Hang Seng Composite Index firms don't have a policy to talk to their minority shareholders, about 77 percent fail to comply with a requirement to establish a whistle-blowing mechanism for people to report any malpractices involving senior management, the survey shows. About a quarter of Hang Seng Composite Index firms do not comply with the policy to have different people occupying the posts of chairman and chief executive.
Of the 12 industries surveyed, conglomerates, telecommunication, property development and consumer goods showed the worst decline in 2013 compared with a year earlier. Conglomerates that showed full compliance of the code or "provided more information" fell from 86 percent to 25 percent; and consumer goods firms dropped to 53 percent in 2013 from 70 percent in 2012.
The high levels of non-compliance of various policies perhaps are due to the fact that the corporate-governance code is a voluntary one. Since non-compliance doesn't carry any legal penalty, many family-run companies' owners may not want to share their secrets with minority shareholders. This line of thought, nevertheless, must change.
Hong Kong has very little natural resources. We rely heavily on foreign investment. Non-compliance of corporate governance definitely will drive foreign investors to the mainland or other developing economies in Asia. For Hong Kong's economic development and perhaps survival, local companies must be more willing to open up and disclose more information to foreign investors.
Last but not least, our Securities and Futures Commission (SFC), an independent statutory body set up in 1989 to regulate the securities and futures markets in Hong Kong, can play a more active role in "coercing" companies to comply with the code on corporate governance. SFC derives a broad range of investigative, remedial and disciplinary powers from the Securities and Futures Ordinance and a subsidiary legislation.
The author is coordinator of the Financial Journalism major program at Hong Kong Baptist University.
(HK Edition 02/17/2014 page9)