Corporate governance of Chinese privately owned enterprises listed in Hong Kong : an empirical study of three levels of agency problems

Abstract

Chinese privately owned enterprises (POEs) have become a significant component of Hong Kong’s capital market, accounting for 13 per cent of the market capitalization of the Stock Exchange of Hong Kong and being the largest group of Mainland companies listed in Hong Kong. However, alongside the unwillingness of the Exchange to publicize this group of Mainland issuers, these firms are generally ignored in the research on corporate governance of Hong Kong-listed Mainland companies. By contrast, Red Chips and H-share companies have received much attention. To fill the gap, this dissertation analyses corporate governance, in particular three levels of agency problems, of Chinese POEs listed in Hong Kong.

An empirical study lays a solid foundation for the whole dissertation. It reveals that most Hong Kong-listed Chinese POEs have a controlling shareholder who usually is also the Chairman of the Board. However, with the widespread participation of professional managers in top management, only less than half of these firms are family businesses. Meanwhile, the agency conflict between the controlling shareholder and professional managers is found to be rather intense in these companies. In this respect, the legal and regulatory rules governing the duties of directors of Hong Kong-listed companies, especially those in the Listing Rules, have provided a “bonding function” to help alleviate this conflict.

As to the agency conflict between the majority shareholder and minority shareholders, irregularities and misconducts of Mainland POEs and/or their controlling shareholders are found to be particularly detrimental to the investing public in Hong Kong. However, empirical data discloses that the enforcement actions by the Exchange and the Securities and Futures Commission against abusive individuals and companies are insufficient. Besides, public investors do not have practical means to obtain redress for their pecuniary loss. In this connection, two reform suggestions are proposed: establishing a “Minority Shareholder Compensation Plan” and a strong regulatory cooperation mechanism between Hong Kong and the Mainland.

This dissertation also explores a third level of agency conflict, namely the relationship between Chinese POEs listed in Hong Kong and one of their vital stakeholders – Mainland local governments. It is found that this relationship is indeed a double-edged sword. The lawful participation of controllers of these firms in the Mainland local political system may benefit the company in the long run, while too closely enmeshed ties between businesses and governments may pose huge risks to overseas listed POEs.

In conclusion, this dissertation argues that, since Hong Kong-listed Chinese POEs originated in the Mainland and are essentially operating under the broad background of China's social and economic transition, agency conflicts that exist in these firms have been largely shaped by the social, economic and political milieu of mainland China, and are hence both unique and complicated. By contrast, Hong Kong’s regulatory regime so far has played a rather limited role in tackling these agency conflicts. As a result, compared with the disciplines of Hong Kong’s capital market, the distinct legal and institutional settings in the Mainland remain a more important factor to the overall performance of Hong Kong-listed Chinese POEs.

Nevertheless, it is still submitted that since Mainland companies have formed a significant dimension of Hong Kong’s stock market and have accordingly posed specific challenges to Hong Kong’s regulatory environment, Hong Kong needs to adapt its legal and regulatory rules to address such “local” risks and, in addition to address corporate governance issues of Red-chip and H-share companies, pay more attention to Chinese privately owned companies which are basically NHMPEs/MPEs as categorized by the Stock Exchange of Hong Kong.