Corporate Governance in Hong Kong

Intermediate Examination Paper, 2009

22 Pages, Grade: 1,2


Table of Contents

List of Abbreviations

List of Figures and Tables

1 Introduction

2 Definition of Corporate Governance

3 Characteristics of Corporate Governance (and Regulation) in Hong Kong

4 Composition of Shareholders in Hong Kong
4.1 The role of Minority Shareholders
4.1 he Minority Shareholders’ Battle Against Prevailing Norms

5 Recommendations for a Hong Kong Corporate Governance System

6 Conclusion and Outlook

Reference List

List of Appendixes


List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of Figures and Tables

Figure 1 The ‘Tripod’ of Corporate Governance

Figure 2 Distribution of Ownership Structure of SEHK Listed Companies

Figure 3 Principal-principal conflicts in family-based corporate governance systems

1 Introduction

Corporate Governance (CG) has always been a critically viewed topic and is being increasingly discussed after the Enron and WorldCom scandals, which had a worldwide outreach (Petra, 2006, p. 107) or major cases of poor corporate governance in Asia such as the Peregrine or the CA Pacific Securities Case in the 1990s. On this account, stricter rules have been introduced and existing regulations were re-examined in many markets in order to restore the public confidence in corporate governance systems and the transparency and accountability of organisations.

This essay, based on the case study David Webb: A Shareholder Activist in Hong Kong (Peng, 2009, pp. 405-406), is documenting the particularities of the corporate governance system in Hong Kong. The system is characterised by unique features differing from the Anglo-American framework. The extensive amount of family-controlled companies and mainland firms would suggest a deficient corporate governance system. In spite of this, a study by Nan, Kang and Kim (1999) comparing corporate governance among Asian economies indicated that Hong Kong has significantly higher corporate governance standards and equally more sophisticated legal systems governing the protection of property rights than other countries in that area.

As regard to the structure of this coursework, initially, the general theoretic foundations of corporate governance are explained in chapter two. Thereafter, the specifics of the market in Hong Kong will be examined, comparing the development of global corporate governance to the development in Hong Kong. It is also explained why transplanted British and American laws and regulations seem ineffective. Chapter 4.1 then analyses the composition of shareholders in Hong Kong, answering the question as to why there is only a small number of minority shareholders actively participating in corporate gov- ernance. In chapter 4.2, it will be discussed whether minority shareholders are success- ful in confronting the current system. Chapter five gives recommendations on how to establish a corporate governance system tailored to Hong Kong and Asian emerging markets more broadly. Finally, in a retrospective analysis of the paper, the research findings will be analysed and an outlook of the future development of corporate govern- ance in Hong Kong will be given. In order to make this essay more coherent, some sections that are not directly related to the case study questions were added. The chapters which are directly associated to a question from the book are indicated.

2 Definition of Corporate Governance

Corporate governance is commonly defined as “relationships within the firm and be- tween the firm and its environment” (Aguilera, Williams, Conley, & Rupp, 2006, p. 148). Another definition delineates corporate governance as “the systems and processes established by corporate entities for ensuring proper accountability, probity and open- ness” (Dowdney, 2005, p. 37). Above all, corporate governance tries to create a founda- tion of mutual trust among shareholders, a company’s management and its board (also known as the ‘tripod’ of corporate governance - Peng, 2009, p. 380) by “providing a structure through which the objectives of the company are set, and the means of attain- ing those objectives and monitoring performance” (OECD Principles of Corporate Gov- ernance, 2004, Preamble, p. 11). Furthermore, by ensuring a certain level of account- ability and personal responsibility of individuals in an organisation, corporate govern- ance relates to mechanisms by which the principal-agent-problem can be significantly reduced or constrained (Munzig, 2003, p. 9).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: The ‘Tripod’ of Corporate Governance

Adapted from: Peng, M. (2009). Global Strategic Management (2 nd ed.). United States: South-Western.

As outlined above, there are three types (Figure 1) of main participants having an influence on companies: owners, managers and the board of directors (Peng, 2009, p. 381). The ownership structure of a company can be further subdivided into the three following principal forms:

1) The question of concentrated versus diffused ownership arises when looking at the structure of shareholders and owners. When a company is entirely owned by the founders it is known as concentrated ownership. On the other hand when the majority of the company is owned by small shareholders and external managers are in control of running the business (also known as separation of ownership from control) this type of ownership is commonly known as diffused ownership.
2) As opposed to the shareholder dispersion in the Anglo-American system, in most other parts of the world (especially in Hong Kong) many firms are charac- terised by family ownership and control (Carney & Gedajlovic, 2002, pp. 123- 146). On the one hand this pattern can reduce the principal-agent-problem and lead to more focus on long-term performance of the business (Anderson & Reeb, 2003, pp. 1301-1328), however, on the other hand it may also lead to the repres- sion of minority shareholders or negative influence on the business due to family conflicts (Schulze, Lubatkin, Dino, & Buchholtz, 2001, pp. 99-116).
3) The last form of ownership characterised by state-owned enterprises (SOEs) is state ownership. These companies often underperform due to a lack of manager and employee incentivation (Peng, 2009, p. 382).

With regard to the second participant, the managers, in the construct of corporate gov- ernance, two types of conflicts arise: principal-agent and principle-principle conflicts. The former being defined as opposing interests between principals (e.g. shareholders) and agents (e.g. managers). The latter gives rise to conflicts related to the adverse inter- ests of controlling shareholders and minority shareholders (which are essentially in the same group of principals) (Peng, 2009, p. 383). The principle-principle dilemma shall be analysed in more depth in chapter 4.2, as it particularly applies to concentrated own- ership and family-controlled enterprises (a common characteristic for Hong Kong com- panies).

The last part of the ‘tripod’ of corporate governance is the board of directors. Some key features of the board of directors are its composition (e.g. inside or outside direc- tors), its leadership structure (e.g. CEO duality) and interlocks (e.g. directors that serve on several boards).

After having set out the theoretical foundations of corporate governance, the following chapter explains the specific nature of the system in Hong Kong and also analyses the effectiveness of its regulation.

3 Characteristics of Corporate Governance and Corporate Governance Regulation in Hong Kong

Internationally, a multitude of corporate governance systems exists and there is no uni- versally binding body of rules and regulations for companies. Organisations rather act in pursuance of the parameters set out by national governments and regulators (in accor- dance with the OECD Principles of Corporate Governance2004 ) as well as the eco- nomic objectives of the shareholders (Dowdney, 2005, p. 37). The Hong Kong corpo- rate governance system offers some distinctive features, which vary in several ways from other regulations in a way that they need to be specifically adapted to the market characteristics. In this context, it is reasonable to begin with an analysis of the market features of the Hong Kong Special Administrative Region (SAR).

The principle characteristics that are representative for the market are twofold: (a) there are numerous companies from the Chinese mainland and (b) most of the enterprises are family-owned. In 2003 alone, a majority of public companies in Hong Kong originated from the Peoples Republic of China (PRC) (approximately one-sixth of the number of the listed companies in the city). In total, they accounted for US$40 billion in initial public offerings (IPOs) on Hong Kong’s stock market. This is more than on the two Chinese stock markets (Shanghai and Shenzen) together (Zhang, 2008, p. 437). Most of these companies are among China’s largest state-owned enterprises (SOEs). Other than the positive outcomes this has (such as inflow of international equity capital and subse- quently higher market capitalisation) there are equally some disadvantages involved with Chinese firms listed in Hong Kong, as mainland firms might behave differently to local firms. First of all, there is a lack of mutual recognition of legal decisions; Chinese firms are used to a corporate governance system in which they are obliged to follow governmental decrees and guidance whereas the Hong Kong system is largely based on self-compliance. Furthermore, the Hong Kong authorities have limited reach into the mainland and are unfamiliar with the extensive transactions carried out (Conroy, 2004, p. 12). Zhang (2008, p. 438) offers a good example in this respect, concerning the EuroAsia Agriculture case in 2002, where the authorities only recognised a fraud after China mainland authorities had arrested the chairman of the board.

The second distinctive feature of Hong Kong’s market is the family-based corporate governance system, which also gives rise to the problem of connected transactions, disadvantaging minorities. This aspect will be further investigated in chapter four, which discusses the role of minority shareholders.

In order to adapt to these specific market conditions and following international legal developments and adjustments, the Hong Kong regulatory bodies have implemented more or less successful corporate governance rules and regulations. These are mostly based on non-statutory requirements such as those specified under the Listing rules (e.g. number of independent non-executive directors [INEDs], (Conroy, 2004, p. 10). Never- theless, there are also statutory legislations such as the Securities (Disclosure of Inter- ests and Insider Dealing) Ordinances, Takeover Codes, and the Companies Ordinance (Cheung, n.d., p. 3).

The corporate governance model was mainly coined by the British legislation, including the following: (1) the Cadbury Report (1992) with recommendations on the arrangement of company boards and accounting systems; (2) the Greenbury Report (1995) on executive remuneration; (3) the Hampel Report (1998) to combine, harmonise and clarify the Cadbury and Greenbury recommendations; (4) the Turnbull Report (1999) on internal control; all of these being later summarised in the Combined Code of Corporate Governance (1998, updated in 2003 and 2006).

The main regulatory bodies in Hong Kong are the Stock Exchange of Hong Kong (SEHK), carrying out the common supervision and regulation of all market users (as well as their directors and controlling shareholders) and the Securities and Futures Commission (SFC) controlling the securities, futures, and financial investment markets (it also oversees statutory regulations as to ensure full disclosure and fair treatment of the investing public). As regards Hong Kong’s recent developments, one can say that the Code of Best Practice introduced in 1993 by the SEHK was one of the first milestones in the development of corporate governance regulations, laying out the principles of corporate governance for listed companies.


Excerpt out of 22 pages


Corporate Governance in Hong Kong
University of St Andrews
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ISBN (Book)
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Corporate Governance, Hong Kong, Enron, WorldCom, Peregrine, CA Pacific Securities, Corporate Social Responsibility, CG, SAR Hong Kong, Code of Best Practice
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Robert Stolt (Author), 2009, Corporate Governance in Hong Kong, Munich, GRIN Verlag,


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