Recent discussions surrounding MTR’s delays in the high-speed rail project connecting Guangzhou with Hong Kong have largely focused on the lack of communication between MTR’s CEO and his staff and the poor English of a legislator. While these discussions are interesting, an aspect of the discussions is sorely missing – investor protection. The MTR fiasco illustrates three aspects of investor protection seems to be falling short in Hong Kong: (1) Disclosure, (2) Corporate Governance, (3) Ability to Sue.
Take for a second and imagine that you own shares in Boeing, a large aircraft producer. Imagine that Boeing recently received a big order for its top-of-the-line aircraft, which Boeing had invested significant capital expenditure to develop and that Boeing has just learnt that it can no longer meet the deadline for this big order because of certain circumstances beyond its control. Boeing decides not to disclose this information to its shareholders. Wouldn’t you as a shareholder of Boeing want to know about this information as soon as it occurs since it would affect your investment decision as a reasonable investor? Wouldn’t you expect that once the Board of Directors of Boeing learnt of this information, they would inform you as a shareholder of the company immediately rather than you learning about it from the newspapers or the US government?
Turning to MTR, the Secretary for Transport and Housing, Professor Anthony Cheung Bing-leung, and other MTR directors, recently admitted that they failed to disclose to Legco that the deadline for the high-speed rail project would be missed back in November 2013. Isn’t it strange that these directors did not immediately disclose this information to the shareholders immediately back then? Even if not, there is not a single word about the delay mentioned in the annual report for 2013. One could of course argue that this information did not reach the threshold levels required under the Listing Rules to require disclosure, but doesn’t this seem strange that the Listing Rules don’t require disclosure either (1) immediately or (2) at least in MTR’s annual report? This doesn’t give much assurance to MTR’s investors.
Another related point to disclosure. Why are MTR’s shareholder hearing this information second hand in a Legco committee meeting or through the newspaper? Shouldn’t MTR’s shareholders, as owners of MTR, hear this information directly from MTR and learn of this information concurrently with the public?
A further point exacerbates the problem. The Government is the biggest shareholder of MTR. In this instance, MTR had clearly provided information to the Government but withheld this information from the public and its shareholders. MTR thus deliberately chose to treat its shareholders differently in terms of disclosure. Shouldn’t shareholders in general be treated the same in terms of disclosure? Why doesn’t Hong Kong law address this issue? If I were an MTR shareholder, I would feel very uncomfortable with this point.
(2) Corporate Governance
One of the main arguments for governments to privatise their wholly-owned utilities was that it would subject the utilities to public accountability through enhanced corporate governance. These public utilities would be subject to the same rules as any listed company.
This recent MTR fiasco reveals the largest of companies need to ramp up their corporate governance and that Hong Kong’s Listing Rules are either inadequate or are inadequately enforced, such that listed companies are required to maintain effective internal controls. However, above all, our culture of corporate governance needs to be largely improved if one of our largest exemplary companies communicates with its shareholder in the manner described in (1) above.
(3) Ability to Sue
The MTR incident begs the question: What would happen if the MTR did breach a Listing Rule or the Securities and Future Ordinance? Would the Stock Exchange or the SFC, respectively, enforce the rules against the MTR or its directors? One would hardly think so given that the Government is the largest shareholder of MTR. This does not provide investors with much confidence or protection in the Hong Kong capital markets. In the US, private suits are permitted against companies who violate certain securities laws relating to disclosure, but in Hong Kong, the Stock Exchange and the SFC are the primary enforcers of the laws relating to disclosure. Perhaps its time to use this MTR incident as an opportunity to revamp our securities laws to allow individuals to bring suits against companies, especially when there may be a conflict of interest, or how can we continue to call ourselves one of the major financial centres in the world?