“All of these proposals are just ignoring the real problem, which is that INEDs are only as independent as the controlling shareholder wants them to be, which in most cases, is not at all,” Webb said in an e-mailed reply to Bloomberg News today. “It doesn’t make any difference how many committees you have, or what fraction of the board is labeled ‘independent,’ if they all serve at the pleasure of the king.” (Hong Kong Exchange Evades ‘Real Problem’ With Reform, Says Webb – Bloomberg, 2/8/2011.
This should sound familiar to US shareowner activists. The best solution here appears to be proxy access — without the limitations proposed by the SEC. That may not work in Hong Kong with so many companies controlled by one owner. Indeed, David Webb shared an e-mail with me that he had sent to Bloomberg. Here’s one of the more substantive portions:
To make the system work, independent directors should be elected by independent shareholders. The controlling shareholder, and all of the other directors and their associates, should be required to abstain from voting. If we did that, then the board could still nominate candidates for election, but the candidates would have to be acceptable to independent shareholders, who could always nominate other candidates if they are not satisfied. The INEDs would then have a mandate from, and an accountability to, independent shareholders. If they didn’t look after investors interests, they would be voted out. They would have the authority to ask difficult questions and be the “eyes and ears” of investors in the board room. That’s the way it was for me when I was an INED at HKEx, but only because HKEx is one of the few companies that does not have a controlling shareholder.
For more, see Webb’s February 2002 post, Listing Rules Review: Board Games. Want to know what’s going on with shareowner activism in Hong Kong and beyond? Sign up for a free subscription to webb-site.com and tell a friend.