There is a problem on many boards of listed companies in Hong Kong. We have rarely – if ever – seen independent directors resign due to fundamental disagreement with the company. Hong Kong has yet to see a board remove a CEO for doing a poor job. Why are company boards so often letting their shareholders down?
In most cases, independent directors in Hong Kong are not accountable to anyone other than those who have appointed them to the board.
The fundamental problem is a lack of accountability of the board to anyone other than the board. Board members are subject to annual performance reviews, but these are generally done by other board colleagues. Controlling shareholders in Hong Kong have little reason to change incentives to encourage independent directors to act with independence. Very few such shareholders can be expected to willingly cede real control of their company. Independent directors are most often there for compliance reasons, paid at a level signaling the minimal expectations of them.
Investors need access to independent directors who are best positioned to give a true picture of whether boards are functioning properly.
Independent directors also have an important role to explain to investors the board considerations on executive remuneration and succession, and explain their logic to shareholders, not via IR intermediaries representing management.
Independent directors need to have the right incentives, be accountable to investors and provide a truly unbiased, readily accessible perspective on the board. But without a lead, designated point of contact, independent directors can only be expected to be followers – of those with dominant control.
In many markets, an independent Chair is usually accessible to investors, reflecting the priority placed on shareholder interests and engagement. This is the norm in Australia, Singapore has lead independent directors, and Malaysia has senior independent directors with a similar function. Yet in Hong Kong, independent directors are typically not permitted – let alone required – to engage shareholders, with only management entrusted to communicate with investors.
The Hong Kong Exchange is in a strong position to protect shareholders and address generally opaque and often dysfunctional boards. The days of inaccessible and unaccountable independent directors must come to an end. Companies in our market and their shareholders deserve an independent Chair or a lead independent director, accountable to all shareholders and upholding governance practices that support the aspirations of an international finance centre.
Nelson Chow, Chairman
Hong Kong Investment Funds Association
Jamie Allen, Secretary General
Asian Corporate Governance Association