Academic journal article Advances in Management

Banking Sector Governance - Lessons from Hong Kong Listed Banksa Three Year Perspective Analysis

Academic journal article Advances in Management

Banking Sector Governance - Lessons from Hong Kong Listed Banksa Three Year Perspective Analysis

Article excerpt

Abstract

Hong Kong's financial sector is popular within the banking industry for the range of service providers themselves. Using the case study approach, this paper explores the changes to the boards of directors and governance issues of the 12 listed banks on Hong Kong stock exchange over a three year period. It focuses on issues such as the number of directors on the boards, their qualifications, type of directors in terms of independence, outside directorships held and the auditors of the financial statements from 2004 to 2006.

Through the use of archival data over a three year period, this paper finds that the overall listed banks in Hong Kong exhibit good corporate governance and that this governance has in fact improved in quality over the years. The three year comparison demonstrates that the high level of corporate governance exhibited by the 12 listed banks in Hong Kong from 2004 to 2006 provides a possible explanation to the success of the region a significant international financial center due to the factors such as absence of duality of CEO and chairman, use of the Big four audit firms, qualifications of directors and use of independent non-executive directors on the boards.

Keywords: Hong Kong banks, Governance, Banking industry.

Introduction

Hong Kong is an important international financial center and one way in which it can maintain an orderly commercial environment is through corporate governance. In view of the special roles that banks play in economies, it is especially prudent that listed banks demonstrate good corporate governance to enhance the business setting. This paper explores the current corporate governance initiatives in the backdrop of the Stock Exchange of Hong Kong35 over a three-year period i.e. 2004-when the code was just a draft; 2005-when it became law in 2005 and 2006-the first year of its implementation.

The Hong Kong Monetary authority as of February 2006 reported that there were 137 Licensed Banks, 30 Restricted Licensed Banks, 32 Deposit-Taking companies and 85 Representative Offices of Foreign Banks. For the quarter ended September 2006, banks employed 81,619 persons in Hong Kong. The Hong Kong Trade Development Council21 reported that 76 of the world banks exist in Hong Kong and that it is the second largest loan syndication center in Asia and Asia's third largest international banking sector.

Hong Kong is now the sixth largest foreign exchange center and is known for its high standards of market transparency, disclosure and prudently supervised financial institutions21. These statistics confirm the importance of Hong Kong as a financial center and the importance of its banking industry.

Review of Literature

Corporate Governance: Large corporate collapses of the past 20 years, from the Australian Experience of Bond Corp., Health International Holidays Insurance Ltd. (HIH), OneTel and Harris Scarfe to the American experiences of Enron and WorldCom, have led to an increasing focus on corporate governance in management literature and business research. Most of the debate has been in the agency framework and pursuing the idea that governance regimes had the primary task of discouraging opportunistic managerial behavior. The collapse of such large corporations with seemingly little notice has unsettled investors, government, government and management and reduced confidence in the financial markets. In response, the governments and their regulatory agencies keen to restore confidence have been jolted into knee-jerk reactions including embarking on specification of corporate governance practices for large listed corporations9.

These practices are generally supported by government legislation and made compulsory by the listing rules of stock exchanges worldwide. The international bodies such as the International Monetary Fund22 and the Organization of Economic Cooperation and Development28 too have extended the formal recognition to corporate governance. …

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