Next month sees a conference on a highly specialized but potentially very important subject: the growth of shareholder activism in Hong Kong.
Hong Kong’s stock market is similar to other leading markets such as New York and London in certain ways.
It is large and international. It is subject to world-class listings rules and regulations. It is supported by top-notch market regulators and accounting, legal and other professionals. And it exists in a city with high-quality institutions, such as rule of law, a free press and a clean and efficient bureaucracy.
It also has some differences.
One of the biggest is that a large number of public companies listed here are controlled by families or other dominant shareholders (known as “blockholders”).
This is true of many of our local companies and also mainland Chinese companies, whether state-linked or private-sector.
This is one reason why a few decades ago Hong Kong had a reputation as a market where minority shareholders’ interests were not always well protected.
Legislation and regulation have since strengthened protection of minority shareholders. But there is a constant debate on the structure of the regulatory system and statutory and other guidelines on corporate governance.
(Incidentally, many investors might think that managers tend to dislike or resist additional rules that restrict their behavior in order to achieve good governance standards. In my experience, the reporting and disclosure rules and other requirements of listed companies can be positively helpful for the executives of a family-controlled company. The requirements impose specific and clear rules, which actually make life easier for a CEO who might otherwise have to debate or negotiate governance practices with other family members.)
At the same time, there is growing awareness about the responsibilities of shareholders – which essentially means institutional shareholders’ duties to their stakeholders.
The Securities and Futures Commission earlier this year released voluntary guidelines on shareholders’ responsibilities.
The SFC increasingly expects institutional investors to take their shareholding role seriously, for example by speaking and voting at company general meetings.
This leads us to the issue of active shareholder engagement.
The organizers of next month’s conference (for details see http://www.onc.hk/en_US/161111-shareholder-conference/) have done some research into shareholder activism in Hong Kong.
Most people who follow the local stock market will know about activist David Webb.
Others may remember one or two specific examples where hedge fund or other institutional investors have publicly pressured managements of companies in their portfolios to take steps to increase shareholder value or otherwise improve governance.
These examples are quite rare. But the conference organizers have found that many more examples have taken place – behind closed doors.
This is perhaps not surprising when we consider that managers of family-controlled companies may have a strong personal preference to avoid public confrontation.
This whole issue is key to Hong Kong’s future success as a center for IPOs and a vibrant, world-class stock market, and also of course as a center for fund management.
The locally listed corporate scene in Hong Kong and Greater China is changing and probably entering a new era.
A new generation of managers is rising in Hong Kong’s traditional big family companies.
Mainland companies that are partly state-owned will be expected to play important roles as the country enters perhaps its most important stage of economic reform. Private-sector mainland companies will be expanding overseas.
There will be growing pressure from investors to maximize shareholder value – for example among big conglomerates.
Shareholder activism could help encourage asset disposals, spin-offs, and mergers and acquisitions. Much will depend on having a well prepared regulatory and legal environment.
The outcome will affect nearly all of us – as corporate managers, as stakeholders in savings, pensions and wealth-management funds, or as industry professionals implementing the deals.
It is fair to say that the future of Hong Kong as a leading financial center depends to a great extent on how it develops shareholder activism.
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