Analysts band together on policy

Band of brothers (and sisters): an association is becoming the institutional investorÆs de facto voice in Hong Kong.

The Hong Kong Society of Financial Analysts is taking on a new role as an advocate for financial professionals, says Richard Mak, president and a former Japanese equities specialist at Lombard Odier. A non-profit organization founded in 1992 to promote professional and ethical standards for analysts, and a member society of the Association for Investment Management and Research (AIMR), it has recently achieved critical mass with about 2,000 members. As a result, it can go beyond promoting the Certified Financial Analyst programme and become a policy advocate.

Its influence is likely to rise as the number of CFAs based in Hong Kong grows. Over the past three years that number has grown 15% annually, and Mak expects the trend to continue. He predicts the society may number 4,000 before 2010. Moreover, over 90% of members are now local Hong Kongers, not expats. Although the CFA is an English-language programme and the society's meetings are officially in English, it is informally becoming a home-grown, Chinese organization.

That's good, because this is allowing the society to begin directing its resources toward advocating improved corporate governance and independent research, Mak says. "We're engaging regulators and Legco, and responding to legislation and consultations." As a result of its growing size, the CFAs are increasingly seen by regulators as a proxy voice for institutional investors, which lack a formal, unified channel of communication.

As this is a new direction for the society, it is still working out its agenda. CFAs come from not just fund management firms, but also sell-side firms and listed companies, so they appreciate policy nuances.

One area they agree on, however, is the need for more frequent and better disclosure from listed companies, including quarterly reports. Mak argues that the costs to companies are minimal, and that investors needn't fear US-style short-term horizons in a corporate culture dominated by owner-managers. "Quarterly reporting is actually more appropriate for Hong Kong," Mak says.

In addition to disclosure, the society is keen to see minority shareholders' interests defended by independent non-executive directors on boards. This involves a cultural shift, as tycoons think directors are supposed to bring expertise to help them manage the company; when in fact independents are meant to simply be a watchdog and feed back information to investors.

The society wants to help the government define the role of the independent non-executive directors, as well as determine how they are to be nominated, remunerated and audited.

But the CFAs understand that these are long-term endeavours, and recognize that these independent directors will require training, and perhaps licensing. Mak says it's not a simple case of demanding these independent directors. Should their pay or their credentials be made mandatory by law? How do you change the listing rules or company laws to allow for effective independent directors? Do you force small companies to do this too? Mak says the society appreciates the government faces a complicated issue. "But we should set high goals," he says.

The society has already become vocal on issues such as selective disclosure and accounting. It has also called for some responsibilities of the stock exchange's listing committee to be moved, as it creates a potential conflict of interest for the for-profit organization. But while this function should be independent of the exchange, the society isn't in agreement as to how those powers should be allocated.

Another area Mak says the society will become more active involves supporting independent research and introducing standards for objective work. But there is a lot of debate on this issue, and the society is trying to determine if there would be a market for independent research. One area the members seem to agree on is the disclosure of buy-side commissions to brokers, so that institutional investors can compare the numbers and ask questions to determine what lies behind any discrepancies.

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