April 2015 Cover Story: Governing with Principle

Chairman and CEO of AEGON Asia, Douglas C Henck is driven to elevate the standard of corporate governance in Asia Pacific. As the Chairman of the Asia Corporate Governance Association (ACFA), Henck is among the most qualified individuals in the region to take up this daunting task

By Wilson Lau


“In the emerging markets particularly, life insurance is the most efficient form of capital savings. Insurance is a critically important social benefit and product. But it needs to be sold ethically and in a manner that balances the interests of all the stakeholders. I’ve been privileged to work towards that goal for many years.”

Henck has been invited to discuss corporate governance at the Executive MBA class of the Hong Kong University of Science and Technology, where he has asked the students to look at newspapers from their home countries for a week. They have each found half a dozen headlines on bribery and other offenses where individuals have clearly violated rules of corporate governance. Every time there is a violation of ethics, one stakeholder benefits at the expense of the others. It is a ‘win-lose’ situation.

Ethical decisions come into play when executives try to balance the interests of all stakeholders to make it a ‘win-win’ situation, he believes. “In insurance, if I charge a customer more than I should, that’s bad for the customer and good for me. If I overcharge the customer too much and he is not going to buy any insurance, that’s bad for both of us. There is always a balance. [Good corporate governance] is not that difficult to achieve as long as an executive thinks through all the stakeholders [when making decisions], including the marketplace and industry.”

Born and raised in the southern part of the United States, Henck studied mathematics at university and began his career at Aetna Inc in 1974. He qualified as a Fellow of the Society of Actuaries four years later.

In 1987, Henck was relocated to Hong Kong to set up Aetna International’s first Asian regional headquarters in the city. It was around this time when he began delving into corporate governance in great depth. Apart from several years working for the nonprofit Baha’i World Centre in Israel, Henck has spent over 23 years in Hong Kong. “We raised our family here,” he notes.

Henck thinks Hong Kong has had several unique advantages over other cities in the region. The British colonial government bestowed a great structure with strong civil service, an independent judicial system, rule of law, and the Independent Commission Against Corruption (ICAC). The city also has advantageous geographical location. Hence, Hong Kong has become an attractive location for multinational corporations to set up their regional headquarters.

This requires an independent judiciary, rule of law, a stable environment and a strong center for financial resources. It also involves, to a large extent, a vibrant stock market, sound financial services and banking.

“This is where corporate governance comes in,” Henck says. “To compete and succeed in financial services, Hong Kong must set a world-class standard for all services, covering financial, accounting, auditing and consulting. That’s how I got interested in corporate governance. I joined ACGA in 2000. I’m passionate about the need in Asia generally and Hong Kong specifically for us to aspire to and work towards the highest possible standards of corporate governance.”

The future of Hong Kong depends on whether it will become Asia’s financial service center, he notes. “Hong Kong needs to be on a global level, on a par with London and New York. If we don’t have the highest standards for listing in the stock exchange, trading rules, or proper audit for trading, Hong Kong will be relegated to a regional competitor.”

Corporate governance is anything but abstract. For a corporation, it is related to how all stakeholders are dealt with and whether they are all treated in an equitable manner, Henck believes. When a company has proper corporate governance in place, the decision-makers view their responsibilities as balancing the needs of all stakeholders for an optimal result.

Chairman and CEO of AEGON Asia, Douglas C Henck
Chairman and CEO of AEGON Asia, Douglas C Henck

“An executive might want to maximize profit, but he also needs to treat all stakeholders fairly, including the customers, shareholders, labor, and management. It means paying fair wages to the employees and management has proper incentives and does not rip off shareholders. It does not mean just looking after the interest of the 20 percent controlling shareholders. All shareholders should be treated in a proportional way.”

There is a list of objective elements for a company to adopt to enhance its corporate governance. For instance, it can create an audit committee for its board of directors, appoint genuinely independent directors on the board who look at issues from a dispassionate perspective, and establish a compensation committee made up of outside directors only. “We have a list of things that are indicative of whether a company has good corporate governance or not,” he says.

But only fulfilling the requirements on this list is not sufficient. “It’s helpful in terms of raising awareness [among all in a corporation] if this list of indicators is inculcated in the corporation.”

Apart from ACGA, Henck became active with AmCham Hong Kong through various committees in the 1980s and eventually sat on the Board of Governors. He served as the Chairman in 1997, the year as the sovereignty of Hong Kong was returned to mainland China. AmCham Hong Kong has been actively advocating for American businesses in Hong Kong, China, Asia and Washington D.C. The issue of “Most Favored Nation” treatment in the 1990’s became the lynchpin by which the association’s opinions were sought in Washington and Beijing.

“I was privileged to testify in front of the US Senate on the Handover and other political issues,” he recounts.

Chairman and CEO of AEGON Asia, Douglas C Henck
Chairman and CEO of AEGON Asia, Douglas C Henck

Corporate Governance for the Long Term

ACGA publishes its biennial “CG Watch – Market Rankings” that ranks 11 countries and regions in Asia Pacific, according to their respective corporate governance practices and standards. Hong Kong and Singapore have always come in first or second place. For the 2014 rankings, they were tied for the first place. “Neither Hong Kong nor Singapore is better than a ‘C’ on a global scale. The US is not up there with an ‘A’ either,” Henck notes.

Corporate governance in Hong Kong still has much room for improvement, Henck reasons. For instance, a short-term mentality has continued to prevail in the business sector, with the local property market as an example. Meanwhile, genuinely independent directors sitting on the boards of companies are still relatively few.

In Hong Kong, there have been critics voicing their objections against the decision by the Future and Securities Commission not to let the Alibaba Group go public on the Hong Kong Stock Exchange under the dual share listing arrangement. The group eventually had its IPO in New York last year. There has since been a formal request to allow future dual share listings at HKEx so as not to miss out on short-term opportunities.

An important element in corporate governance is to protect the right of minority shareholders. One of the ways this can happen in the US is through a class action lawsuit. Hong Kong does not have this in its judicial system. When minority shareholders are cheated, there is almost no way for them to get any redress in Hong Kong.

“Corporate governance is always about the long term. Sometimes we do have to give up the short-term profit of a particular listing to gain long-term benefits,” Henck says. “When Hong Kong has achieved a higher standard [of corporate governance], then it will attract more quality corporations, and only such corporations will be allowed to list here. The investment world will fully understand the investment prospectuses for IPOs [in Hong Kong], and that the audit is legitimate and practiced with professional standard.”

“By contrast, if the city allows cheap listings, poor quality audit, and a poor prospectus to work its way through, the world will discount any listing on HKEx. That’s what happens in Korea today. Shares are discounted because they are on the Korean stock exchange.”

In a survey among ACGA’s members, there’s recognition that if Hong Kong allows dual share listing, there’ll be a discount applied to Hong Kong shares of all companies by up to 20 percent. Our members represent an enormous percentage of the total assets invested in the city. So to look at the short-term loss of the fee from a listing versus the long-term implication of lowering the standard, it’s a fool’s game. Hong Kong needs to establish itself and aim to emulate and be better than New York or London. It should be the place in Asia for strong companies to list their shares.”

Hong Kong also has its share of recent listings of mainland Chinese companies where the audit has been found substandard. Meanwhile, concern has remained for proper oversight of the accounting profession and auditors. Some have made suggestions to set up an independent group to oversee whether individual audit is done properly.

In Hong Kong, the Future and Securities Commission set up additional rules five years ago whereby Hong Kong-listed companies would not be allowed to have any executive trading and any insider trading of any shares from the end of fiscal reporting period until the accounts are actually published. This was an effort not only to curtail insider trading, but also to eliminate the perception of such activity.

“Although these rules were passed, the government has backed down and watered them down due to the objections from many local tycoons. From a corporate governance viewpoint, this was a setback,” Henck notes.

Challenges for Hong Kong

A particular issue in Hong Kong is there remains a relatively short-term mentality towards the business cycle, with the exception of big infrastructure companies. Short-term thinking is not conducive to corporate governance. For many years, Hong Kong’s economy has been dominated by a handful of families. Increasingly, all the large companies in the city are publicly listed with the vast majority of their shares owned by pension funds, mutual funds and individual investors.

While Hong Kong has been built up by family-run enterprises, it recognizes that the vast majority of shares are owned by others, Henck observes. “It seems to me that there needs to be a transformation of thinking, a metamorphosis of management. Organizations will be equally responsible for all their shareholders and treat all stakeholders responsibly … when they practice sound corporate governance. In fact, for those companies that thrive in the long term, there is a clear correlation between well-managed companies and companies practicing good corporate governance.”

When there is an upmarket for stocks, there will be a buying frenzy and new record share prices. By and large, companies with good corporate governance do not fare any better than those that don’t. This is because there is a rush for any shares and investors are not concerned about risks, Henck believes. “But in a down cycle, there’s a flight to safety. Shares of companies with strong corporate governance do much better.”

Strengthening corporate governance begins with the top management. There are obvious ways to enhance corporate governance, and it requires the top management’s commitment to doing their best for all stakeholders, he thinks. “Top executives need to make clear that there are genuinely independent voices on the board and that the company will be transparent in all its disclosures.”

Diversity in the workplace is another key. Companies need to make a real effort to recruit individuals with varied backgrounds and experiences, Henck says. “The benefit that comes with having different voices, whether on the board or management, is that a company has people think about the interests of all stakeholders from multiple perspectives. It deals with the long-term benefits.”

Good communication is needed to ensure good corporate governance cascades to all levels. There can be frequent interviews with the CEO, and appointments at the executive level to look after such issues as compliance, ethics, and environment, social and governance. Employee education is also vital.

“In my company, there isn’t a week goes by where employees are not exposed to some elements of corporate governance. It’s a general management issue. Once a company is set on that course with internal communication inculcating the principles and values throughout the enterprise, then it will come naturally in terms of helping the rank and file to understand the corporate values.”

At the end of the day, corporate governance is about ethics, Henck believes. “It’s about the ethical practices in the marketplace and ethical treatment by a company for all stakeholders in a fair and balanced manner. When a company has that value and a principle-based culture, then having the corporate governance cascade down to all levels of the company will be the least of its challenges. It’ll come naturally.”

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