Probity in the board

The problems besetting a slew of corporates worldwide as a result of executive abuses and the surfeit of stories in the media about corporate indiscretions and executive overcompensation have sharpened a sense of cynicism among the public.

Hong Kong offers a fair sample of companies that have succeeded in establishing a strong corporate governance culture.

Edward Chow Kwong-fai has served as an independent non-executive director at Cosco Pacific for the last five years and is gratified to be serving on the board of a company that is the listed port and container leasing and manufacturing arm of one of the largest state-owned enterprises in China, even if it means putting in long hours.

The Hong Kong-listed and China-owned container-leasing company has been a busy outfit in recent years. Its major expansion has included taking control of the Greek port of Piraeus near Athens, and the purchase of a 10% interest from Maersk in the Yantian port in Shenzhen. Last year the company sold its 20% interest in Chong Hing Bank to a sister company.

The Yantian transaction was a connected transaction, which explains why the independent directors were asked to form a committee to determine whether (i) the price for the targeted asset was fair and reasonable and (ii) the deal would redound to the interest of all shareholders. What mattered in such deals such as Yantian, according to Chow, was that the conflicted directors did not play any part in the process.

Smooth operation

The board is committed to ensuring that all transactions remain above board and that often poses particular challenges in view of the short timetable for approving certain major transactions. “As the windows for approval of deals tend to be short, we often feel the strain,”

Chow admits. “Those not used to pressure cooker situations may buckle, while the right person and board may consider such demanding requirements to be more interesting and worthwhile. There is ever the danger that the board does not possess the ability to understand the gist and the content of the deal.”

He describes Cosco’s independent directors as high-calibre professionals. “We are there for the challenge, not the fees, and what is even more significant is that the company’s mission is part of China’s state policy for that industry.”

While there was an initial period of familiarization between him and the directors and senior management, Chow assures us that any hitches in the communication among board members have long since been ironed out. “The gears of our interaction are well synchronized.”

Heavy workload

The board has adopted quarterly reporting. Despite the resulting increase in their workload, the audit committee has never baulked.

“We readily accept the challenges and the duties that present themselves and we get things done.” What is most gratifying at the end of the day, he confides, is when independent shareholders vote overwhelmingly to approve a deal or measure vetted by his committee.

But given that he has his own business – and a myriad of commitments – how does he find the time to do all this? Chow acknowledges that the process and commitment eat up a lot of time. He pans his arms expansively around his office which is located near Hong Kong’s Central business district. “I can tell you this room is relatively clean now, but there were more Cosco and China Merchants Bank papers in this room than my own company materials. Stacks and stacks of board papers, and audit committee papers. Always a lot of things for me to look into.”

Governance is teamwork

In the last two decades Chow has been active in promoting good corporate governance. “I am keen to see Hong Kong grow more familiar and aware of good corporate governance practices.” Chow was in a good position to help along the agenda, since he used to chair the corporate governance committee at the Hong Kong Institute of Certified Public Accountants (HKICPA). When the HK Institute of Directors (HKIoD) was established more than ten years ago, Chow became involved with the leadership council and the HKIoD award is in fact his brainchild.

When he overheard late last year that he had been nominated, he let it be known that he did not want to be given the award in his personal capacity but, instead, in the name of the whole audit committee. The HKIoD overruled his wish, noting that his involvement in the organization had lightened already, and that it wanted to recognize the major role he has played in enhancing corporate governance across Hong Kong in general and in Cosco Pacific specifically.

Winning the award as a member of the non-executive board and as chairman of the audit committee, Chow expressed the wish that there should be recognition for audit committees as well, rather than individuals, considering that the practice of good corporate governance is all about teamwork.

Capitalism has had its days

Chow is of the the view that the traditional capitalist free market economy model started showing signs of decay up in 1997 and recounts the plethora of plagues that have confronted the system – the Asian financial crisis in 1997-1998, the dot.com bubble, Enron, Lehman Brothers, the subprime crisis. “The whole capitalist system might have worked for 30 to 40 years but it has been cracking up and since then we have seen widespread abuses that have spawned doubt about the future and stability of the capitalist model.”

State capitalism, he opines, offers an alternative model. “The model is not perfect but exists in major emerging markets such as China, India and Brazil and in fact in a few EU countries where a lot of state-owned companies have become listed companies.” Chow believes that China has proven to be quite successful and offers a fresh perspective on how the world economy should run. “There really is a need to provide a balance to the excesses of global capitalism.”

Chow notes how there has been much talk about the G2 offerings and of initiatives in blending both systems, and how this has made it convenient to be on the board of state-owned enterprises, observing how things are done. Cosco Pacific’s senior management has been highly transparent to the board, claims Chow.

“They keep things open to us. If we need specific information relevant to our duties we only need to ask and it is given to us. Though there was a period of learning from one another, eventually the management began to discuss with us what is really on their mind and it has been open and candid. Connected transactions, monitored by independent commitees and independent shareholders’ vote, have proved to be in the interest of all shareholders.” Composed of a high proportion of non-executive directors with a wide range of skills and expertise, the board of directors of The Link Management has been cited for its unfailing pursuit of good corporate governance.

George Kwok Lung Hongchoy is proud of his company’s board of directors. “It is good board with a diverse professional and business background,” the CEO of The Link says approvingly. The quality of its board of directors at The Link contrasts with some listed companies where CEOs may bring in a few of their friends and acquaintances to serve as directors even if those individuals lack the right qualifications for the position to which they were appointed.

In The Link’s case, the directors sitting on the board were all carefully considered and vetted by a nomination committee and a key consideration for their selection was their expertise in the various aspects of the real estate business.

A strong range of skills

“We have a top-notch architect, a banker, an accountant, a lawyer, a property surveyor, a politician, and ex-CEO of Hong Kong Land. The powerful cast of talent in the board includes ex- Hong Kong Land chief executive Nicholas Robert Sallnow-Smith; Wing Hang Bank chairman and chief executive Patrick Fung Yuk Bun; Ian Keith Griffiths, chairman of Aedas Limited, a leading architectural firm; Professor Richard Wong Yue Chim, the deputy vice-chancellor and provost of Hong Kong University; and legendary Hong Kong entrepreneur Allan Zeman.

Hongchoy recognizes the essential role the board plays in keeping senior management grounded. “They provide the check-and-balance mechanism that the company needs if it is to remain dynamic in its approach in building the business. The board has been extremely helpful to senior management in providing professional advice, he argues, attributing the high-quality discussions on the board to the stature and experience of the members. “The board constantly challenges us in the way we think.” Given the calibre of the board, the senior management cannot go to the board unprepared.

As such, the board performs an important role since The Link doesn’t have a controlling shareholder as other companies normally have.” The Link is listed on Hong Kong’s stock exchange and is wholly owned by unit shareholders.

Fresh insights

Hongchoy says the frequency of board meetings is much higher than that stipulated for the company in the Securities and Futures Commission (SFC) guidelines. In 2010, the board met 11 times. The nomination committee which is required only to convene once a year did it three times. Even better, the serving directors turn up regularly at board meetings.

Fresh insights and suggestions emanating from the board have proved invaluable to management. For instance, when the board suggested in 2010 that senior management look at transforming the company into becoming an employee of choice in Hong Kong, the company started allocating more resources to staff training. “Last year we started hiring trainees from universities and that was something we had not done before. We looked too at engaging more of our staff to build a company culture. The Link as a going concern, explains Hongchoy, is confronted with issues facing any large company – considering that it has enjoyed a major asset injection from the Hong Kong government in the form of shopping malls and car parks – yet it suffers too from problems facing start-ups as it is only five years old and lacks a distinct corporate culture.

Continuous enhancements

Hongchoy says the company is constantly enhancing its operation. The company’s success as an enterprise is evident from the strong financial performance year after year. The company which had 250 staff at the time of its IPO now has around 900. Hongchoy joined the company in January 2009 as CFO and was promoted last year to CEO.

The company’s business model is recession-proof, he notes, because most of its properties are small, are located in residential neighbourhoods and rely on non-discretionary spending that is less affected by the cyclical fluctuations. Revenues have much improved after significant renovations to shopping centres. “The upgrades made a major difference to the people who lived nearby and they now have a much better shopping environment. As a landlord, all that we can do is to provide a good operating environment for tenants . So people like to go and shop there.”

More improvements are on the way, he adds. “There are still a lot of shopping centres that we need to upgrade.”

This is a condensed version of three separate articles that run in the January 2011 issue of The Asset