Investors don't count at HKEx
19 January 2003
Hong Kong Exchanges and Clearing Limited (HKEx) has at last announced the results of a market consultation on the listing rules relating to corporate governance issues, which was launched almost a year ago on 21-Jan-02. The consultation period was extended on 22-Apr-02 and ended on 24-May-02, so it has taken them 8 months to make conclusions.
The proposals, which were hardly revolutionary to begin with, have been progressively watered down and in may cases scrapped, and the end result is an exercise in form over substance, a collection of superficial enhancements to the rules without really getting to the main issues. We will cover the details of this in a later article, but the most shocking part of the announcement is the way in which HKEx has chosen to count the submissions it received.
Regular readers may recall that Webb-site.com produced a series of 5 detailed articles covering major aspects of the reform proposals, what was wrong with them, what was right with them, and where HKEx had missed the point altogether. We then made it possible for readers, rather than filling in the HKEx's 142-page questionnaire, to submit their views to HKEx through a web-based form on our site, which included a box in which the reader could add any other points they wished to make, agreeing or disagreeing with the content of our articles.
Altogether, 337 people took the time to submit their views to HKEx in this way. Most of them were investors, and many were professionals from the financial industry. Some gave a company name, while others wrote in their own name. 25 of them added their own variations to the submission.
We shouldn't have bothered to write anything at all. In the announcement on Friday 17-Jan-03, HKEx wrote:
"There were 167 responses to the consultation, including submissions from issuers, market practitioners and a variety of organisations. One of responses (sic) represents near identical responses from 337 individuals who submitted their views to the Exchange indirectly through a website operated by a financial analyst."
So in other words, the 337 separate responses made by e-mail, almost all in support of our views, count for only 1. HKEx also released a profile and analysis of the respondents and responses. In this afterthought, the HKEx did condescend "for information purpose" to produce a calculation of what the results would have been if these 337 were counted separately, but has ignored that completely in reaching its conclusions. If HKEx had used these alternative results in their conclusions paper, then it would have been clear that investors views were often very different from what the issuers wanted.
Throughout the conclusion paper, there are repeated references to "the majority of respondents" taking various views, most of which investors would disagree with - which really should read "the majority of respondents (excluding investors)", because they have indeed been excluded from such statements. Even HKEx recognises this in places; we found 5 occurrences of the phrase "a majority of respondents (mostly issuers)".
Of the other 166 respondents, 110 were listed issuers, counting for 66% of the total, and 28 were from financial advisers, lawyers and accountants, whose income from listed companies is far greater than anything they might earn from investors. There were also 13 submissions from "professional and trade associations" which probably includes people like the Institute of Directors, Institute of Company Secretaries and Society of Accountants, the members of which would principally be issuer-based. That just leaves 3 "other" market practitioners and 12 "others" of no description.
There appear to be no other investor submissions included in the 166 other "responses", so it is safe to say that in summarising the views of respondents, the views of all but 1 investor were disregarded. If we had not made our form available, some of these 336 other people might have submitted directly and been counted. Ironically, by facilitating investor input, we have in fact reduced it.
It is notable that HKEx did not aggregate the views of any of the other 166 respondents. Are we supposed to believe that all of the 110 listed companies are independent of each other and made different submissions? This is almost certainly not the case, given the number of pyramid groups in Hong Kong. Cheung Kong, for example, has 7 listed companies in its group, while Henderson Land has 6 and Wheelock has 5. We wonder how many of these companies made submissions.
Democracy with Hong Kong characteristics
This is all reminiscent of the worst subterfuge of colonial rule in which a 1987 Green Paper on direct elections attracted 368,431 responses. The pro-China lobby distributed pre-printed forms which were signed and sent back, and counted separately against democratic reforms, while most of the signatures in favour of direct elections were attached to petitions led by the United Democrats (forerunner of today's Democratic Party). The Government Survey Office decided to count all the pre-printed forms separately while treating each petition as just one submission, and thereby was able to declare that "more were against than in favour of direct elections in 1988". In fact, 72% of the signatures had been in favour. (for more on this, see Jonathan Dimbleby's The Last Governor, p107).
Members of the public who are currently signing petitions against the draconian Article 23 have good cause to wonder whether the Government will count their petitions in the same way.
In another parallel, this abuse is rather like a typical shareholders' meeting here, where in a show of hands, the public investors represented by Hong Kong Clearing (owned by HKEx) count for 1 vote, and all the company's employee shareholders who attend the meeting count for 1 vote each.
Now, HKEx is treating the views of investors in the same casual manner. In so doing, it seems certain to have put another nail in its own regulatory coffin. As we have submitted to the Expert Group on market reform, HKEx, as a for-profit listed company regulating others by contract, should get out of regulation altogether. We need a regulator that will act in the public interest, not that of the tycoons, and listing rules which are made by the full-time regulator and not by a part-time committee of issuers and their advisers. The Expert Group is currently working on its report which is due in March.
A Breach of Law?
Under Section 8(2) of the Exchanges and Clearing Houses (Merger Ordinance), HKEx must:
"(a) act in the interests of the public, having particular regard to the interests of the investing public; and
(b) ensure that where the interests referred to in paragraph (a) conflict with any other interests...the former shall prevail".
Now how on Earth can HKEx be said to have "particular regard to the interests of the investing public" when the investing public who took an interest in it by submitting responses are being so blatantly ignored? Are they really claiming that 337 respondents are not representative of what the investing public thinks? Will the Government prosecute HKEx for breaking this law?
© Webb-site.com, 2003
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