Keeping vested interests happy

SCMP May 1 2006

The new board of the Hong Kong Exchanges and Clearing illustrates what is most wrong about governance in the city. It also tells you that, for all his claims to be helping the middle class, Chief Executive Donald Tsang Yam-kuen still represents vested interests.

This particular monopoly lies at the heart of Hong Kong's role as a financial centre. One would expect its board to consist of a mix of interests - market practitioners, listed company board members, representatives of individual and institutional investors, and independent professionals.

But it does not. The new chairman of HKEx is an Executive Council member with a long history of representing the interests of the property oligarchs. No less than three other government-appointed members are executive councillors, two with big interests in listed companies and property.

So much for the notion that the government keeps out of business in Hong Kong. Instead, it uses its power of appointment to protect vested interests, regardless of the interests of the wider community of investors. Such is the perceived influence of officialdom that even the Hong Kong General Chamber of Commerce recently chose a lifelong bureaucrat, with no business experience, to replace Eden Woon Yi-teng as chief executive.

So good luck to two independent, elected members of HKEx - David Webb, who probably knows more about the securities industry than all of the government appointees combined, and Christine Loh Kung-wai, who has a deserved reputation for confronting vested interests with facts.

For sure, the stock market has been prospering, with a huge increase in market capitalisation. But this has been almost entirely due to giant mainland listings - a reflection less of corporate governance in Hong Kong than of the lack of it on the mainland, and the reluctance of mainland companies to meet the stringent compliance requirements that the Sarbanes-Oxley Act requires to list in the United States.

Indeed, so keen has Hong Kong been to attract mainland firms that its own standards have been compromised.

Government appointees have long helped to ensure that HKEx retains far more regulatory power than is proper for a listed monopoly. This in turn ensures that the interests of the investing public take second place to those of family shareholders, managers and investment bankers. The elites are so sure of themselves that they consistently refuse to acknowledge their conflicts of interest. As for Ronald Arculli, the amiable chairman of two quasi-government monopolies, his firm was given the job of determining if there was price collusion in the oil business!

The public is hardly unaware of the clout among the power, property and retail groups. So, it says much about Mr Tsang that he is reluctant to make changes that would help the middle- and lower-income groups. They do not elect him.

There is less awareness of how officially sanctioned oligopolies in the financial sector are making hay at the public's expense. The one that hits the hardest is the Mandatory Provident Fund (MPF). Forced savings may be desirable but the attached fees and charges are a bonanza for the service providers. As Mr Webb's research has shown, those who invested their MPF dollars in HSBC's Hang Seng Tracker Fund would have seen returns over a four-year period of just 12 per cent, compared with 21.7 per cent for those who invested directly in the HK Tracker Fund.

Rip-offs boost the profits of MPF providers but will leave the savers inadequately provided for in old age. But this does not bother the mega rich elite. Nor does it upset Mr Tsang and his bureaucrats, with their inflation-proof pension schemes.

Financial services firms everywhere put their own interests before those of the clients whose wealth they claim to enhance. But Hong Kong has been almost unique in creating a cartel for their benefit. That's because cartels, and quangos, are the main business experience of the ruling elite.

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