Investment and Innovation: Corporate Governance on the Stock Exchange of Hong Kong

October 30, 2014

Abstract: This paper analyzes corporate governance on the Stock Exchange of Hong Kong, within the context of the Hong Kong Securities and Futures Commission’s (SFC) new rules for the sponsor regime governing initial public offerings (IPO). The focus is on examining the financial ecosystem prior to the reform, with special attention on changes to 1) prospectus liability 2) application proof and 3) sponsors’ roles. However, despite these changes, the Hong Kong Stock Exchange remains wary of the alternative share structures American and English markets have adopted. As a result, companies such as Alibaba Group chose to list elsewhere, in markets that are more investor-friendly. Indeed, while the SFC’s reforms have improved the ethical posture of the Hong Kong market, the long-term consequences of those reforms remain to be seen.

Hong Kong has enjoyed a strong reputation as a center for capital-raising amongst major global financial markets.[1] From 2009 to 2011, Hong Kong was the frontrunner in total funds raised through initial public offerings (“IPOs”), significantly bolstering its market.[2] Last year alone, The Stock Exchange of Hong Kong, Limited (“the Exchange”) saw a record HK$449.5 billion (US$57.7 billion) worth of IPOs.[3] By March 2014, Hong Kong ranked sixth worldwide – and second in Asia – in total market capitalization of all listed companies.[4]

Much of Hong Kong’s financial success results from branding itself as a gateway for foreign companies seeking access to capital funding in Asia. This has benefitted industries, such as luxury retail and natural resources, which have experienced an increase in branding power throughout the greater Asia-Pacific regions. Moreover, the Exchange offers various advantages when listing on the Hong Kong market, such as low tax rates, currency convertibility, unrestricted capital flows, and freedom of information.[5] These advantages are backed up by a strong regulatory framework based on English common law and the International Financial Reporting Standards.[6] For example, Hong Kong’s Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules”) require that new applicants appoint a sponsor to assist it with its initial application for listing.[7] These sponsors are usually financial entities licensed to counsel clients on listing documents, undertaking due diligence, and addressing regulatory concerns. Upon approval of the listing application, the prospectus is required to be authorized by the Exchange for registration before publication by the issuer. Today, the principal rules governing the marketing of new issues in Hong Kong are the Companies Ordinance,[8] the Securities and Futures Ordinance,[9] the Listing Rules,[10] and the Securities and Futures Rules.[11] Historically, such

Steven Wu is a third-year law student at the University of Kansas School of Law, where he is currently pursuing a Juris Doctor with a Business Certificate and an International Trade Certificate. As the former President of the Asian Law Student Association and the Vice President of the International Law Society, Steven has vigorously pursued an interest in legal issues in East Asia. Steven has previously worked for UnitedLex Corporation’s Document Review Division and the Department of Justice’s Executive Office for Immigration Review.

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Moral Cents: The Journal of Ethics in Finance (Summer/Fall 2014)

Financial regulations have proliferated since the Global Financial Crisis. Some, having lost their faith in self-regulation, welcome the new rules. Others, clinging to the belief that a free market ensures financial actors will self-regulate, deplore the promulgation of clumsy and poorly designed regulations. Both sides are right. Regulations are necessary in an ethically unconstrained world but they are sometimes badly thought out, arise too hastily, and have negative unintended consequences. Less regulation is of course more desirable. Yet, for self-regulation to function properly, individual actors must possess a sense of values and work in a culture that genuinely promotes, rather than pays lip service to, ethical behavior.
Thus, the promotion of ethics in individuals and organizations decreases the need for regulations.
This issue of Moral Cents focuses on financial regulations over a diverse range of transactions and actors around the world.
Daryl Koehn and Jo Lynne Koehn analyze dark liquidity or dark pools and the ethical issues associated with them. They bring to light some less obvious but yet, significant problems connected to dark liquidity. The authors direct attention to three possible ways for coping with the problems and ultimately choose a policy of targeted regulations to benefit investors.
Steven Wu writes about corporate governance in Hong Kong, within the context of the Hong Kong Securities and Futures Commission’s new rules for the sponsor regime governing initial public offerings. Mr. Wu questions the rigidity of these new rules. While the reforms are ethically upstanding, their long-term consequences remain to be seen.
Rebecca Wong investigates UK’s Regulators’ Code and analyzes the effectiveness of financial regulation. The Code was published by the Better Regulation Delivery Office in April 2014 and is meant to reduce regulatory burdens. Ms. Wong critiques the Code, finding it lacking, and recommends instead that regulators stress the great need to engender a culture of ethics within the financial services industry.
Calvin Benedict gives an opinion piece calling for enlightened leadership in finance. He uses examples from the Barclays bonuses and job cuts case as well as the BNP Paribas sanctions case. Benedict recommends leaders play a decisive role in building a sense of the systemic and promoting the common good.
Maja Cvjetanovic provides insight into the concept of consumer sovereignty and applies it to recent payday lending reforms in Australia. She argues that consumer sovereignty should be preserved as a ‘normative standard’ and not used in its descriptive sense, as championed by neoliberalism to mean the consumer’s rational ability to fulfill wealth- maximizing preferences. In any case, empirical evidence refutes the latter point of view.
Vesko Karadotchev continues in the vein of criticizing the neoliberal economic model. In particular, he critiques the two major versions of the Homo economicus model, which has dominated economics for a century, and argues both versions have major flaws. The first version is not supported empirically, while the second is too general to be useful. Neither can hope to fully describe human economic behavior.
It would be a fine thing indeed to have as little regulation as possible. But this ideal is a distant goal if we continue to adhere to flawed and empirically disproved economic models. Bring back values into economics and finance, use an economic theory in which ethics plays a central role, then, chances are, regulations cease proliferating.

Editorial by Dr. Kara Tan Bhala

Moral Cents: The Journal of Ethics in Finance is published by
Seven Pillars Institute for Global Finance and Ethics
ISSN 2326-5663

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