The Foxes Guarding Hong Kong's Hens

According to leading shareholder activist David Webb, weak laws, meager oversight, and boardroom cronyism cost investors dearly

By Bruce Einhorn

For Hong Kong's business elite, perhaps the only person more annoying than a pesky democracy activist is David M. Webb, a 36-year-old Englishman who's an outspoken advocate for minority shareholders. In a city where most listed companies are dominated by patriarchs, their offspring, and their pals, the shareholders Webb champions aren't the sort of investors who get a lot of respect.

On his Web site (named, naturally enough,, Webb frequently exposes how those in control of Hong Kong companies enrich themselves at the expense of small-time shareholders. That doesn't win him many friends among the tycoon set, who are accustomed to doing cozy deals without a lot of scrutiny.

Webb's most recent battle came to an inglorious end in mid-August when he and other shareholders failed to vote down a deal involving plastic Christmas-tree maker Boto International Holdings, which wanted to sell almost all of its assets to investors led by Carlyle Group and Boto's chairman (see BW, 08/23/2002, "Hong Kong's Cautionary Christmas Carol").

With the deal narrowly approved by shareholders, Boto has just one business left, a startup computer-animation division that is, to put it mildly, unlikely to strike fear into the hearts of the folks at Pixar. BusinessWeek's Asia Technology Correspondent Bruce Einhorn recently spoke with Webb about the significance of the episode and broader corporate-governance issues. Edited excerpts of their conversation follow:

Q: I understand why this deal was a major concern in Hong Kong, especially to you and other shareholders. But why should other people care?


People in other parts of the world have a less direct interest, but if they hold any Asian mutual funds, then they should be concerned about corporate governance in Asia.

Q: I thought we were just talking about Hong Kong. Is this a problem across the region, too?


The problems that we see in Hong Kong are typical of what we see across Asia. They arise from the ownership structure of companies, which in most cases have a controlling shareholder. The Hang Seng index has 33 stocks, and 32 have a controlling shareholder -- a single person or group of persons who have the ability to control the composition of the board. That doesn't mean 51%, but just 30%, which is de facto control.

Q: How does Asia compare to Western markets?


If you look at the FTSE 100, I would be surprised if any one of these companies had a controlling shareholder with 30%. Even in the U.S., Bill Gates has only about 20% of Microsoft. Most of the large companies have no dominant shareholder.

Q: Still, don't Asian companies have independent directors representing the interests of minority shareholders?


In most Asian jurisdictions, we have the notion of independent directors, but they're elected in general meetings, and the controlling shareholders are allowed to vote. As a consequence, the controlling shareholders end up appointing the independent directors who are supposed to monitor them. You have the fox guarding the hen house.

Q. What's an example of how things don't work?


In general meetings in Hong Kong, resolutions get passed by a show of hands unless someone demands a one-share/one-vote poll. The show-of-hands system is an inheritance from Victorian Britain, and it doesn't work in a society where most shareholders cannot come to the meeting because they live in New York or Edinburgh or are at work.

[So] a lot of transactions just get pushed through by people present at the meeting -- who are normally employees of the company. I've just come back from a general meeting. I was the only outside shareholder there.

Q. What was so bad about the Boto deal that made you launch such a big campaign against it?


The problem was that they were trying to sell almost their entire core business at a knockdown price. The exit price-earnings ratio was about 6.5 times [March, 2002] earnings adjusted for a provision that they threw in. There was no premium to the market price.

Q: If the deal was so bad, why weren't you able to get enough votes?


In summary, the deck was stacked against us by the stock exchange allowing [some] management-related shareholders to vote for the transaction [which was enough to tip the balance]. The people allowed to vote included an executive director who stepped down at the meeting and claims to be retiring. Over three-quarters of the shares held by the public [not affiliated with management] were against.

Q: What's so bad about allowing the management-related shareholders to vote?


They have a conflict of interest. If you work for somebody and he sees you voting against his proposal, how does that affect your career prospects?

These things are never black and white. But the regulators should always give independent shareholders the benefit of the doubt in these rulings. It's hard enough already to get justice. If the transaction stood up on its merits, then independent investors would have been in favor of it. But they weren't.

Q: So why do you think the exchange ruled the way it did?


Unfortunately, the rulemaking bodies in Hong Kong are dominated by people who are [from] listed companies or advisers getting revenues from them.

Q: Overall, how does Hong Kong compare to other markets when it comes to corporate governance?


If you look at the dynamics of corporate governance, it's a mixture of incentives and deterrence. It's like a sound mixer -- there's one knob for government controls, another knob for shareholders controls, and another for criminal courts. In America, there is a very strong class-action system. That offsets weaknesses in the regulatory system. In Hong Kong, we have no class-action system and a very weak regulatory system. There aren't enough deterrents to abusing minority shareholders.

Q: What has the government's track record been like?


The last major intervention was in 1996, when they sought a winding-up order for Mandarin Resources Corp.

Q: That was before the 1997 handover. Now that Hong Kong is part of China, is there less of a commitment to cracking down on abuse?


The willpower to intervene in severe cases of shareholder abuse must come from the government, and we do have a different government than what we had in 1996. We have a Chief Executive [former shipping magnate Tung Chee-hwa] who is a tycoon. A lot of his friends are tycoons. He has been more obviously biased to Big Business than any of the previous administrations that I know of. It's fair to say that government has always had a business color here. But the willpower to spend money on high-profile cases is not there now.

Q: The work you do must make you a lot of enemies. Is it dangerous?


One of the great things about Hong Kong is that it has a free press and rule of law, which allows me to do this without feeling personally endangered. I have never been sued and never been threatened physically. I wouldn't want to do this in mainland China because I don't think the courts are reliable enough in their decisionmaking -- and [because of] their corruption.

Hong Kong is one of the few places in the region where you can speak out. The government in an indirect fashion has encouraged me by putting me on various committees. I'm the only shareholder on the shareholder subcommittee on company law reform.

Q: But the bureaucrats don't seem to be listening. Why have they bothered to even put you on the advisory committees?


: Critics might say it's an effort to make it look like they're doing something for shareholders. But I take the position that it's better to lobby from the inside rather than the outside. At least I have a seat at the table. You can't rock the boat if you are swimming around outside it.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

Edited by Patricia O'Connell