The stock markets of Hong Kong and Singapore are characterised by companies with concentrated shareholdings. In addition, they routinely attract issuers whose assets and businesses are located outside the country of listing. The financial crisis of 2007/2008 triggered a wave of financial fraud cases in Hong Kong and Singapore. These fraud cases occurred despite the corporate governance reforms enacted in the wake of the Asian financial crisis of 1997, largely influenced by the UK corporate governance code and the Sarbanes–Oxley Act of 2002. These key reforms had focused on the boards of publicly listed companies.

The occurrence of these fraud cases raises the following questions. First, notwithstanding the regulatory reforms, do the companies engaging in fraud (hereinafter, the fraud companies or firms) have board characteristics that are different from the non-fraud firms? Second, are foreign listings more likely to commit fraud than domestic ones? A positive or negative finding to either or both these questions will be relevant to determine the optimal regulatory responses needed to prevent future fraud cases. Third, why has fraud occurred among the domestic and foreign listings in both jurisdictions, despite the legal reforms mentioned above?

In our paper, we seek to address these questions. We hand-collected a dataset of 37 companies listed in Hong Kong and 25 companies listed in Singapore (and/or their top management), which were investigated for corporate fraud during the 2007–2014 period. We also collected data on a control group consisting of 62 matched pair firms with similar size, listing and industry, which were not alleged, or found, to be engaged in fraud between 2007 and 2016, being the latest practicable year when the data was collected.

When we compare the differences in board characteristics between the fraud and the non-fraud companies, we find that there are not many differences between the two groups; there is no difference in the proportion of independent directors (whether on the boards or their audit committees), the board size, or whether the largest shareholder is also the CEO, chairman or founder. However, there is some evidence that the fraud firms are more likely to have the same person occupying the role of CEO and chairman (or CEO and chairman who are close family members) than the non-fraud firms. We further find that there is a difference in the financial expertise of the audit committees; fraud firms have fewer persons with non-accounting financial expertise than non-fraud firms. In particular, companies liable for disclosure-fraud have fewer directors with non-accounting financial expertise than their matched firms. We also find that, regardless of the country of incorporation, a significant proportion of fraud firms in Hong Kong and Singapore are overseas Chinese enterprises.

We proceed to draw lessons from the results of our findings. First, we find that fraud firms are more likely to present a CEO/chairman duality (or both being close family members). While it may be argued that this observation is also found in well-run firms, such a characteristic is concerning if there happen to be significant conflicted transactions between the listed company and these persons or their affiliates. When we review all the fraud cases in our sample, we find that a significant proportion of the cases deal with problematic related party transactions, which encompass outright misappropriation of assets as well as payments or provision of benefits to controlling shareholders for goods or services that are either not properly disclosed or approved.

Second, we notice that, where the errant directors or managers are located outside the jurisdiction of listing, and the cooperation of the foreign regulatory authorities is not necessarily forthcoming, the independent directors and local regulators have limited powers to prevent fraud or, should fraud occur, to initiate enforcement proceedings.

Finally, we address the reasons why fraud has continued to occur among domestic and foreign listings, despite the legal reforms that strengthened the independence of the boards. Upon reviewing the fraud cases, we find that independent directors have low (and yet above zero) risk of being held liable for failure of oversight in preventing fraud. In those cases where public enforcement actions are taken against the errant directors, the majority of actions target executive directors. However, there are signs that this position may be changing in Hong Kong, as independent directors have also recently been targeted in enforcement actions for breach of their duty of oversight or care.

Our study contributes to the literature on comparative corporate governance in various respects. First, the differences in board characteristics among fraud and non-fraud companies questions the suitability of the regulatory framework governing listed companies in Hong Kong and Singapore. These two countries have highly concentrated shareholdings among their listed firms, which is in stark contrast with the United States and the United Kingdom, where diffused shareholding is predominant, and the appropriate regulatory response to control fraud may differ. Second, this study highlights the problems faced by regulators in jurisdictions whose stock exchanges have significant proportions of foreign listings. Our findings should be of interest to policymakers and stock exchanges seeking to attract foreign issuers.


Wai Yee Wan is Associate Professor of Law and Lee Kong Chian Fellow at Singapore Management University

Christopher Chen is Associate Professor of Law at Singapore Management University

Chongwu Xia, formerly Post-doctoral Research Fellow at Singapore Management University, is currently Assistant Professor at Xiamen University, Institute for Financial & Accounting Studies

Say H Goo is Professor of Law at the University of Hong Kong