Topics: Corporate governance, Board of directors, Stock market Pages: 20 (9713 words) Published: April 2, 2015
Corporate Governance in Hong Kong, China
Rising to the Challenge of Globalization

Stephen Y. L. Cheung

Stephen Y. L. Cheung is Professor, Department of Economics and Finance, City University of Hong Kong

State of Corporate

work put in place in the last 10 years have proved to
be effective in providing an open, fair, and orderly
market. In the two cases where provisional liquidators had to be appointed in respect of Peregrine and CA Pacific, the failure of these companies did not
cause any substantive systemic problem, nor did they
lead to further volatility in the market (Financial Services Bureau 1998). This study documents the corporate governance
system in Hong Kong, China, to draw lessons from
its strengths and weaknesses. It discusses the characteristics of the economy’s firms, the regulatory framework, the problems encountered, and the measures undertaken, as well as additional recommendations to address them. Major cases of financial collapse arising from poor corporate governance are

presented along with government actions to deal
with them. The study provides specific policy recommendations and concludes with a discussion of prospects for the further enhancement of corporate
governance in Hong Kong, China.

Characteristics of Firms

Corporate governance refers to the rules and incentives by which the management of a company is directed and controlled to maximize the profitability and long-term value of the firm for shareholders while

taking into account the interests of other legitimate
stakeholders (Stone, Hurley, and Khemani 1998).
Corporate governance mechanisms may be broadly classified as external and internal mechanisms (Agrawal and Knoeber 1996). External mechanisms
are determined by outsiders. These include institutional shareholdings, outside block holdings, and takeover activity. Internal mechanisms are decided by the firm’s decision makers. These consist of insider

shareholding, board membership and characteristics
(such as size of the board, number of outside independent directors, and remuneration committees), debt financing, and the use of outside markets for
managerial talent.
Good corporate governance, complemented by a
sound business environment, can strengthen private
investment, corporate performance, and economic
growth. A comparison of corporate governance
among Asian economies indicated that Hong Kong,
China (along with Malaysia and Singapore) maintains significantly higher standards of corporate governance and at the same time has developed more sophisticated and adequate legal systems to protect

property rights than the rest of the countries in the
region (Nam, Kang, and Kim 1999).
Although Hong Kong, China was also hard hit by
the Asian financial turmoil, it has weathered the storm
strongly and confidently. Between June 1997 and
March 1998, the market capitalization of the Stock
Exchange of Hong Kong (SEHK) shrank by 24 percent while that of other regional securities markets 2
lost from 15 to 79 percent in US dollar terms.
Hong Kong, China’s trading, settlement, and risk
management systems continued to work well throughout the period of volatility in the securities and futures markets. The institutional and regulatory frame-





In Hong Kong, China, most listed companies tend to
be controlled by families. According to a survey of
the ownership structure of 553 listed companies in
the economy in 1995 and 1996 (Hong Kong Society
of Accountants [HKSA] 1997b), 53 percent have
one shareholder or one family group of shareholders
owning more than half of the entire issued capital....

References: 4This portion is based on IMF (1999) and the Securities
Coughlan, A.T., and R.M
lar terms, the Taipei,China market lost 15 percent;
Singapore and Tokyo shrank by 27 and 31 percent, respectively; while the Philippines lost 45 percent and Indonesia 79 percent (Financial Services Bureau 1998).
Ciscel, D.H., and T.M. Carroll. 1980. ”The Determinants of
Executive Salaries: An Econometric Survey.” Review of
Freeman, S. 1977. “Wage Trends as Performance Displays
Productive Potential: A Model and Application to Academic Early Retirement.” Bell Journal of Economics 8
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