Corporate governance as a system of processes, practices, mechanisms and rules through which companies are controlled, directed and managed is mainly aimed at enhancing the accountability of managers and directors to the shareholders (Bruno & Ruggiero, 2011). In this sense, shareholders participation and active engagement in the affairs of companies has become an important aspect of corporate management. In Hong Kong, the legal framework for corporate governance is the Companies Ordinance Cap 622 Laws of Hong Kong. This new law contains provisions that are intended to improve transparency in internal controls of companies, strengthening oversight over company management and enhancing accountability of boards of directors. All these legal mechanisms are directed towards ensuring that the interests of stakeholders in the listed companies are guaranteed and protected. In spite of the important role that individual shareholders should play in proper governance of companies, their role is in most cases limited due to the increasing concept of institutional shareholding. Moreover, despite the primacy of their active participation in corporate affairs of companies, the involvement of shareholders in running companies is fraught with challenges, one of them being shareholder activism and conflicts of interests. The purpose of this paper is to critically assess the role that shareholders play in management of companies in Hong Kong and the problems associated with their active engagement in corporate governance process.
A Critical Discussion of the Role of Shareholders in Hong Kong Companies
One of the most important roles of shareholders in any corporate institution is voting which ensures that they elect executives, managers and directors who will be able to effectively manage the company and protect their interests (Whincop, 2001). This may be through direct or proxy voting systems by way of collective action. By voting during annual general meetings, stakeholders play an indirect role in the management of a company through mechanisms that ensure that those elected are able to promote the financial health of the company and bring returns on investments. Moreover, it is the role of shareholders to ensure that they keep the company directors and other executives in proper check to ensure that they account for every dime of their invested funds and to promote company image through ethical management. They should be able to review the performance of the directors and managers of the companies in order to ensure that the poor performing ones are replaced with better performers. In Hong Kong, the company laws allow shareholders to actively participate in the management of the company through voting and representatives in the boards of directors of the companies (Stolt, 2009, p. 7). This has been possible given that most listed companies in Hong Kong are family companies that are owned, directed and controlled by family members which make it easier to ensure tighter internal controls.
Furthermore, according to Michael and Goo (2015), institutional shareholders play the important role of protecting the rights and interests of the minority shareholders. They advocate for the general financial interests of the other shareholders by vouching for enhanced accounting standards to be applied to ensure that the shareholders’ investments are safe. These institutional shareholders also play the role of identifying competent and skilled managers and directors from other companies thus promoting proper corporate governance. They also ensure that problems related to audit weaknesses; insider dealings and family shareholder concentration are solved through active engagement of all shareholders in the affairs of the company irrespective of the volume of their investments. Moreover, Youngmo (2001) notes that the role of family shareholders in Hong Kong companies is to ensure that the management of the companies put the interests of the companies first hence avoiding issues associated with poor management and governance practices by directors of the company. However, as the author notes, in spite of playing the role of ensuring equal treatment of all shareholders, this system of family shareholding in Hong Kong is prone to conflicts of interests between the minority shareholders and the controlling families. There is also the problem of possible abuse of insider information of the shareholders. Institutional shareholders in Hong Kong represented by the Hong Kong Investment Funds Association also play the role of providing timely and reliable financial information and ensure commitment to proper standards of corporate governance. They also provide the required opposition to proposals made by controlling shareholders during general meetings, thus ensuring that minority shareholders’ interests are protected (Youngmo, 2001, p. 228). Shareholders in Hong Kong also play the role of approving transactions made by the company management to ensure proper spending by the company directors and executives.
Critically, however, shareholders most companies in Hong Kong as a study by Michael and Goo (2015) shows do not actively participate in the corporate governance of the companies. This is because of the dominance of family members in most of the boards of directors and committees of the companies. Additionally, active tenement of shareholders in Hong Kong companies is hindered by the strict statutory laws that restrict the management of companies to appointed executives and institutional thus limiting the direct role of individual shareholders. Nevertheless, a Board Diversity Policy has since been adopted by most companies to ensure that there is broad representation of the interests of all shareholders in the decision making process on the affairs of the company (Stolt, 2009).
A Critical Discussion of the Problems Associated with Promotion of Active Shareholder Engagement in Corporate Governance in Hong Kong
A study by Esser and Havenger (2008) examined the perceived challenges and difficulties involved in the active involvement of shareholders, particularly institutional ones, in company management. In their study, the authors identify problems such as lack of divergence between the managers’ and shareholders’ interests and potential conflicts of interests. According to them, the main issue is the problem of company directors not being able to act in the company’s best interest when the shareholders are involved in the corporate governance process as conflicts are bound to arise. Thus, separation of ownership and control which is a fundamental principle of company may be eroded when shareholders are engage actively in corporate affairs of a company. In addition to this problem, there could also be the problem of shareholder apathy due lack of information on company affairs and also lack of a fiduciary obligation toward the company or other shareholders of the company. This active engagement of shareholders also presents a problem of lack of independence in corporate management by company directors. Further to this, shareholder activism which is the influence by shareholders of company practices and policies using their ownership position in the company is another challenge relating to the active engagement of shareholders in corporate governance. It presents a problem to corporate governance in Hong Kong in particular because it enables certain influential shareholders to shape company policies and practices to suit their own interests to the detriment of other minority shareholders. However, from a critical point of view, shareholder activism is actually good in that it helps shareholders of a company in exercising and enforcing their rights in order to enhance their shareholder value and also to voice their concerns with the company management.
Conclusion
As has been discussed in the paper, it is evident that active participation of shareholders in corporate governance is gaining momentum as the demand for transparency and accountability increases. Corporate governance mainly aims at protecting the interests of shareholders who have invested in a company and hence have a stake in its sound management by directors. With increasing involvement of institutional shareholders in Hong Kong, however, the role of shareholders as natural persons is diminishing. Nevertheless, shareholders in Hong Kong play an important role of exercising their voting rights, voicing their concerns to the company management and holding managers accountable. However, there are problems associated with active engagement of shareholders in corporate governance including conflicts of interest, abuse of shareholder position, shareholder activism and administrative and managerial challenges.
References
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Esser, I.-m., & Havenga, M. (2008). Shareholder participation in corporate governance. Speculum Juris, 1(1), 75-94.
Michael, B., & Goo, S. (2015). Corporate governance and its reform in Hong Kong: a study in comparative corporate governance. Corporate Governance Journal, 15(4), 444-475. doi:10.1108/CG-09-2013-0109
Stolt, R. (2009). Corporate governance in Hong Kong. Norderstedt: GRIN Verlag.
Whincop, M. J. (2001). The role of the shareholder in corporate governance: A theoritical approach. Melbourne Univbersity Law Review Journal, 25(2), 418-464. Retrieved June 26, 2016, from http://www.austlii.edu.au/au/journals/melbulawrw/2001/14.html
Youngmo, Y. (2001). Corporate governance in the special administrative region of Hong Kong. In E. Burgeat, Corporate governance in Asia: A comparative perspective (pp. 223-248). London: Organization for Economic Cooperation and Development.
