Former overpaid banker paying his dues

KUALA LUMPUR: Following the financial meltdown of 2008, blamed largely on lax corporate regulation, shareholder activists are calling for stricter corporate governance, greater disclosure and fairer treatment of minority shareholders towards shoring up equity valuations and lowering cost of capital.

Delivering his talk to directors of financial institutions here recently, well-known Hong Kong shareholder activist David Webb highlighted corporate governance issues in the region, particularly in Hong Kong, that had retarded equity valuations and devalued otherwise well-run companies.

The talk was part of the ongoing financial institutions directors’ education (FIDE) programme, which is offered by Bank Negara Malaysia and Malaysia Deposit Insurance Corporation.

“Investors investing in badly governed corporations will discount the share price with an expectation for losses if there is inadequate, infrequent and delayed disclosure,” he said.

In most of Asia where corporations are government- or family-controlled, there is little opportunity for a shareholder activist to voice his opinions, except when voting on related transactions.

The dominance of government- and family-holders makes it necessary to have mechanisms in place to level the playing field for minority shareholders.

Webb believes that once checks and balances such as disclosure, class actions and proper penalties are in place, there will be fairer treatment, higher prices and lower cost of capital, resulting in economic gains for all.

Webb. Photo by Suhaimi Yusuf

“Every jurisdiction has to remain competitive by raising their sovereign ceiling by putting these systemic changes in place, to ensure fairer treatment for minority shareholders and a more competitive economy.”

Webb is an advocate of top-down reforms of law and regulation through media pressure, lobbying policymakers and being involved in the policymaking.

Shareholder protection, he argued, could be improved by making poll-voting mandatory at company general meetings. He is critical of the conventional method of voting by a show of hands, as it fails to reflect the sentiments of those absent from the meeting, resulting in the lack of knowledge of any opposing votes.

As a result of Project Poll, one of his initiatives to demand poll taking at AGMs, mandatory poll taking came into effect in Hong Kong last January.

On the issue of independent directors, Webb observed that no market had yet to get it right despite existing requirements on the minimum number of independent directors sitting on the board.

“So long as they are voted in by the controlling shareholders, they serve only at the pleasure of the controlling shareholders, and they are not independent,” he said.

His reform proposal is to treat elections of independent directors as a related-party transaction to disallow the votes of interested parties.

After retiring from a wildly successful five-year career in investment banking in London, Webb was elected as a non-executive director of Hong Kong Exchanges and Clearing Ltd in 2003, before resigning in 2008 citing concerns over governance.

Queried on the reasons for his activism, Webb said: “I am very fortunate to have a strong financial security to back my cause, after being overpaid as an investment banker. I am able to contribute some of my returns back to Hong Kong society.

“You need the fundamental protections of freedom of speech and an open society where you will not be sued for everything you say. I could not have done this (advocate for shareholders’ rights) successfully in a country like Singapore, for example.”

There is also a problem of communication — retail investors are often unaware of shareholder meetings. Voting turnout is typically between 40% and 50% of public votes.

“The simple solution to this is for regulators to impose an obligation on custodians to seek voting instructions from their beneficiaries. Of course, this would incur more costs, but all forms of democracy cost money,” he said.

Webb said punitive measures for rule transgressors could also be improved in the region.

What is the downside risk of breaking the law or regulation? The lack of proper sanctions means that the laws and regulations have a bite with no teeth.

One redress is for civil tribunals (such as the Market Misconduct Tribunal in Hong Kong) to order disgorgement of profits and payment of legal expenses. Hong Kong has stepped up prosecution for corporate crimes, but there are bars to this such as the high burden of proof beyond reasonable doubt.

While there is a statutory derivative action mechanism in place, there is a disincentive for shareholders to commence such a proceeding since damages are paid to the company and yet the individual is expected to foot the costs of litigation until the court directs otherwise.

As a solution to this, Webb referred to jurisdictions such as Australia where litigation finance companies exist. Further, a contingent fee system for lawyers would promote shareholder activism