Donald Tsang once pledged to make Hong Kong a “paragon of corporate governance”. But, more than a decade later, some critics say the city is in danger of losing its competitive advantage as the improvement in standards has failed to live up to the promise.
A new report into corporate governance in Asia, released yesterday, showed that Hong Kong has slipped below Singapore as the region’s top-ranked market (not including Australia) for investor protections. Published by the Asian Corporate Governance Association (ACGA) and CLSA, the report highlights a weakening commitment to reform in several markets, particularly in North Asia.
The problems in Hong Kong are all-too familiar: powerful tycoons, a lack of truly independent directors, slow and infrequent reporting, weak listing standards and no independent audit regulator.
“We’d like CY [Leung] to reassert the ‘paragon’ ideal,” said Jamie Allen, the long-time head of the ACGA, which was responsible for the country-level analysis in the report. “The government should come out with a clear policy on corporate governance to differentiate Hong Kong as the highest quality market in Asia.”
Allen was keen to point out that both Hong Kong and Singapore are far short of where they should be, but the overall picture is better in Southeast Asia than in the north, where rigid hierarchies, conservative business interests and weak governments are a common set of complaints.
Scores for China, Japan and Taiwan have all fallen since the previous report in 2010, while Malaysia, the Philippines and Singapore are at least making progress.
The financial crisis has played a role. As businesses continue to struggle, some of the pressure for reform has lost its urgency and, in some cases, hard-won gains are slowly being dialled back. Indeed, only two markets — Malaysia and Singapore — have shown consistent improvement in the political and regulatory environment since 2007.
A problem common across the region is family control, particularly when family interests range across multiple businesses through indirect holdings. This raises the likelihood that insiders will use one business to bail out another.
In Japan, the government has shown little interest in moving forward on corporate governance despite the high-profile problems at Olympus. Japanese companies still have no requirement to establish an independent board and the country’s audit regulator did not even have anything to say about the Olympus situation.
The government’s failure to provide any leadership has put the onus on Japanese companies to make their own improvements — corporate governance from the bottom up.
In Hong Kong, tycoons have actively opposed some attempts to improve matters, most notably when they published an open letter in a local newspaper that argued against a trading ban for directors in the run-up to publishing financial reports. Surprisingly, the stock exchange, which Allen considers a weaker regulatory body than the SFC, caved in. “They are too focused on listings and the business side,” he said.
However, Hong Kong is still considered to have a better enforcement regime than Singapore. China, meanwhile, is on a different level. Although there are some good rules on the books, state secrecy laws make a mockery of corporate governance, with companies able to use such claims as a shield against proper investigation of their records.
“This should be an issue of concern to investors,” said Allen. “Should a company be listed if auditors are not allowed to do their job?”
In addition to the market rankings, CLSA provided research into more than 800 listed companies, which gave a similar picture to the ACGA results. Amar Gill, head of Asia research at CLSA, said that it was important to look not just at the average scores, but also at the range — because the worst offenders are often the ones that set expectations about corporate governance standards. In China, Indonesia and Korea, some companies score less than 10%, marking them out as far below standard.
After some good progress throughout the region during the past decade, corporate governance "is no longer an issue investors can take for granted", said the report.