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Nov 28, 2017

Hong Kong governance proposals inadequate, activist warns

Many directors independent in name only, according to David Webb

Hong Kong-based shareholder activist David Webb has warned that proposals issued by the special administrative region’s stock market operator to reform corporate governance will not help address concerns about the efficacy of independent non-executive directors.

Listing rules at present require a third of each board to be composed of independent non-executive directors. Hong Kong Exchanges and Clearing, the holding company of the local stock exchange, published a consultation paper on corporate governance earlier this month and has invited stakeholders to submit views on it until December 8. Among its suggestions is a recommendation to require boards, when nominating someone for election as an independent director, to explain why they think that person is independent.

But speaking at an event in Hong Kong about shareholder engagement and activism, Webb said such directors are independent in name only because controlling shareholders can vote in their election. ‘The truth is they are not independent – 90 percent of companies have a controlling shareholder that elects all of the board in general meetings, including the independent directors, which makes [those directors] not independent,’ he said.

Webb added that the solution would be to allow independent shareholders on their own to vote in those elections. ‘The board can propose any candidates it wants, but so can shareholders,’ he noted. ‘And that way we would give independent directors a proper mandate and accountability.’ In these cases, an independent shareholder is one who is not a controlling shareholder – holding 30 percent or more – and is not a director.

Webb says the Stock Exchange of Hong Kong (HKEx) appears to be heading in the opposite direction, because it is proposing to abolish a requirement in the code on corporate governance that independent directors should attend general meetings and develop a full understanding of the views of shareholders. He says that by proposing to delete this requirement, HKEx is essentially saying independent shareholders’ views are not relevant.

‘Now, if that is its view, it should simply abolish all of the requirements to have so-called independent directors and be honest about it intellectually and say, Hong Kong just isn’t ready to have real accountability for capital,’ Webb says. ‘The public can buy shares but they can’t expect to have any directors representing their interests in the boardroom.’