Asia Pacific Business Review

Vol. 18, No. 3, July 2012, 407–423

Contrasting the evolution of corporate governance models: A study of

banking in Hong Kong
Victor Zhenga* and Tsai-man Hob*
a
Hong Kong Institute of Asia Pacific Studies (HKIAPS), The Chinese University of Hong Kong,
5/F, Esther Lee Building, Shatin, New Territories, Hong Kong; bCenter for General Education,
Chung Yuan Christian University, 200, Chung Pei Road, Chung Li 32023, Taiwan

The sub-prime mortgage crisis, the bankruptcies of important US banks, and many
originally family controlled enterprises coming under non-family, CEO-type
leadership during the 2008 global credit crunch led many people to rethink the
relationship between risk management and family businesses. One of the foci was on
the doctrine of separation of ownership. This paper attempts to compare and examine
the evolution of corporate governance in the banking business in Hong Kong by using
two key financial institutions based there. By contrasting the evolution of corporate
governance, management style and pattern of succession, we can see that although they
developed under the same business environment and legal framework, the East-West
business culture and ideology led them to choose different ownership structures and
ways of succession, which ultimately determined their different developmental
trajectories.
Keywords: banking management; China; Chinese family business; corporate
governance; culture; Hong Kong; ownership and control; succession

Introduction
For financial institutions around the globe, 2008 and 2009 were difficult years. Although
far away from the epicentre, two key financial institutions in Hong Kong, the Hongkong
and Shanghai Banking Corporation (HSBC) and the Bank of East Asia Limited (BEA),
were also hit heavily. Because of the huge loan impairment charges and credit risk
provisions in the North American and North European markets, HSBC suffered a
tremendous drop in profits of 62% in 2008. In order to increase the equity ratio, the bank
proposed raising new capital to the tune of HK$ 136.5 billion by a ‘5-for-12 rights issue’
allotment. Shocked by the arrangement, its share price plummeted from the peak of HK$
153.5 per share on 16 October 2007 to the lowest of HK$ 33 on 9 March 2009 (The South
China Morning Post various years and dates).
BEA’s financial situation during the same period seemed even worse. In 2008, there
was the damaging rumour that the bank had made a heavy loss on equity derivatives. Then,
thousands of depositors queued outside the bank’s branches across Hong Kong on 23
September 2008 hoping to withdraw their savings. The senior management of the bank and
the financial officer of the SAR Government responded immediately, so the ‘bank-run’
subsided quickly (The Telegraph 24 September 2008). However, not long after, the
collapse of Lehman Brothers led to its share price dropping rapidly from the highest of

*Corresponding authors. Email: vzheng@cuhk.edu.hk; tsaimanh@cycu.edu.tw

ISSN 1360-2381 print/ISSN 1743-792X online

q 2012 Taylor & Francis
http://dx.doi.org/10.1080/13602381.2011.626156
http://www.tandfonline.com
408 V. Zheng and T. Ho

HK$ 61 per share on 7 December 2007 to the lowest of HK$ 13.2 on 28 October 2008 (The
South China Morning Post various years and dates). On 11 November 2009, other
shockwaves hit BEA and its controlling Li Kwok-po family. It was reported that the
Guoco Group, a Hong Kong listed Malaysian Chinese firm, which was controlled by the
Kuek Leng-chan family, had continuously absorbed BEA shares and become the third
largest shareholder of the bank. Speculation on a takeover grew rapidly (The Standard 12
November 2009).
Although many people may think that there is enough to criticize in these banks, we
may also see them as examples that illustrate the differences in patterns of growth,
organizational structure and control mechanisms between Chinese and Western
businesses. By contrasting the evolution of ownership structure and pattern of succession
of these two banks, we can gain a better understanding of East-West business culture and
ideology.

Literature review, theory and hypotheses

It has long been said that Hong Kong’s impressive growth from fishing village to global
financial centre was due to its laissez-faire policy, impartial legal system and a highly
efficient team of civil servants (Tsang 2009). These are essential, but as George Gilder
(1984, 15) argues:
The prevailing theory of capitalism suffers from one central and disabling flaw: a profound
distrust and incomprehension of capitalists. With its circular flows of purchasing power, its
invisible-handed markets, its intricate interplays of goods and moneys, all modern economics,
in fact, resembles a vast mathematical drama, on an elaborate stage of theory, without a
protagonist to animate the play.
Undoubtedly, many argue that Hong Kong should be proud of its enterprise culture,
which has flourished from British colonial times till today. In-depth studies further suggest
that the family is often the breeding ground for entrepreneurship. Stories such as ‘starting a
business to become one’s own boss’ are frequently quoted as the underlying factors that
sustain the domestic economy (Redding 1990). In fact, according to various reports, a
family business, a typical form of economic unit that is signified by family control and
domination,1 not only contributes a significant proportion of the gross domestic product
(GDP), but also creates a promising number of jobs (Litz 1995).
Although the significant role that is played by family businesses, particularly Chinese
family businesses, in the economy is well-recognized, its style of management, control
mechanisms as well as corporate governance are frequently criticized. Unprofessionally
managed, lack of delegation, paternalistic and distrust of non-family employees are some
of the negative perceptions attributed to Chinese family businesses when compared to
their Western counterparts (cf. Kriz and Keating 2010). The family is believed to hold both
the key management positions and controlling power, not only when the business is small,
but also when it grows large in scale. Modern management theory, which emphasizes
separation of management and control in the West – the so-called managerial revolution –
seldom takes root in Chinese family businesses.2 In responding to this phenomenon, Gary
Hamilton (1998, 55) observes that very often, ‘an owner simultaneously assumes both
positions and is known formally as chairman of the board of directors and general
manager’.
If an owner does not hold both positions simultaneously, these key positions may be
held by different family members. Generally, the father or elder brother holds the position
of chairman, while the son or younger brother serves as general manager. In the 1970s,
 Asia Pacific Business Review 409

another research study in Taiwan found that the finance in family businesses ‘is tightly
held by the head of household’, but the ‘management responsibilities can be dispersed
among family members and non-family professionals’ (Cohen 1976, 90 – 91).
However, we should be very careful in equating delegation of ‘management
responsibilities to non-family professionals’ in Chinese family businesses with the concept
of separation of ownership and management as adopted in the West. The organizational
split of management responsibilities in Chinese family businesses may only refer to
matters relating to short-term benefit or minor matters. Major decisions affecting business
development or the family’s long-term interests are still held firmly in the hands of family
members (Yeung 2000). In other words, the delegation of power to non-family
professionals is still limited.
The seemingly institutionalized feature of Chinese family businesses that puts stronger
emphasis on direct family control and delegates less to non-family professionals may
generally be explained from a cultural perspective. Tam (1990) points out that there is a
strong ‘self-employment mentality’ in Chinese culture. Employees are not prepared to
subject themselves permanently to their bosses, only till such time as their ultimate goal of
‘creating their own businesses’ is fulfilled. Because of this tendency, greater delegation
implies greater risk that former employees may finally leave and become potential
competitors. Less trust and less delegation to employees thus becomes the norm in family
businesses (Kriz and Keating 2010).
In fact, this ‘centrifugal force’ appears not only in society, but also in the family
system. Under the principle of equal inheritance, when the family head decides to divide
the family estate, it should be divided equally among his sons. If the father has four sons,
the estate should be divided into four. If he has six sons, it should be divided into six. In the
next round, when the sons come to divide their property among the grandsons, the family
assets will shrink even more. Additionally, the family head does not have the right to
disinherit his natural son when he reaches maturity (Wong 1985). We can see that the
equal inheritance system not only creates constant downsizing of the family inheritance,
but also shows that the father does not have absolute power over the family estate (Zheng
2009).
Other scholars argue from the angle of management systems. Chinese family
businesses tend to assign key positions to family members or relatives. Outsiders seldom
reach the top echelon. Normally, promotion is based on the level of trust or blood relation,
rather than work performance. Even when non-family employees reach the top
management ranks, delegation of power is still weak. As a result, Chinese family
businesses are frequently criticized for not being able to attract outside talent (Warner and
Rowley 2010).
Looking at it the other way round, in Chinese culture, if the family head appoints non-
family members to very senior positions, it will be generally perceived as a temporary or
transitional arrangement. Sooner or later, this leading role will be re-assumed by a family
member (Zheng 2009). If the family head hands controlling power over to non-family
professionals with the family becoming ordinary shareholders, community criticism may
result and challenges from family members may arise. Chinese family firms are treated as
the property of the household, and not of individuals. The head of the household is
regarded merely as ‘the custodian of a past inheritance that will be passed on to future
holders, his sons and his sons’ sons’ (Hamilton 1998, 51). Second, if family members
cannot manage the business by themselves, but have to rely on non-family individuals,
they would be grossly condemned as ‘prodigals’ or ‘wastrels’, who are labelled not only
unfilial to their ancestors, but also ungrateful to their clan (Zheng 2009).
410 V. Zheng and T. Ho

A conventional argument is that in Chinese culture, there is anxiety that employees

may eventually become competitors. Such a perception clearly weakens the level of trust
and will prevent a large degree of delegation. On the other hand, given the emphasis on
blood ties and the equal inheritance principle, the family head does not have the legitimacy
to make decisions that may weaken family control and interest.

Hypotheses
Putting the abovementioned perspectives together, we can see that it is unlikely, although
not totally impossible, that separation of management and control could operate
successfully in Chinese family businesses. So, in this paper, our major hypotheses are:
H1A: Culture and social psychology determine the mode of business operation and
management, ceteris paribus;
H1B: Separation of ownership and control will not be easily implemented as Chinese
culture puts strong emphasis on blood ties and family control, ceteris paribus.
In order to test these hypotheses, we will use HSBC and BEA as strategic cases in
business history because both banks were established by two groups of Hong Kong
business elites and both of them were publicly listed and operated under the same
company ordinances. In order to better explain this currently understudied area, historical
research is chosen.

Background
Before we begin our analysis, a brief look at corporate history seems appropriate. As the
name suggests, the Hongkong and Shanghai Banking Corporation (HSBC) was founded
by a group of Western business elites, known as ‘taipans’, in 1865. Its goal was ‘[t]o
finance intra-regional trade’.3 When the bank was first founded, most founding members
were admitted as members of the board (a supervisory committee), while the key mover,
Francis Chomley, was elected as the first chairman. Shortly after the formation of the
board, Victor Kresser, a Swiss national, was appointed chief manager to head the
executive committee (King 1987, 11– 21).
In the first decade, the chief manager was not given a free hand in running the bank. It
was ‘managed by its directors in association with Chief Managers’ (King 1987, 21).
Although the scale of the Hong Kong economy had expanded exponentially after further
cessation of the Kowloon peninsula and rapid growth of re-export trade, the bank suffered
huge losses because of its lack of response to currency depreciation in the 1870s. Because
of ‘bad investment and uninspired exchange operation’, there was ‘increasing difficulty in
identifying taipans of sufficient stature willing to become directors’. Thus, in 1875, it may
be said that ‘the Board had dwindled and become isolated’ (King 1987, 21 –44). Faced
with serious challenges, in 1876, the board decided to replace the ‘uninspired’ second
chief manager, James Greig, with Thomas Jackson. After that, the bank gradually
recovered after a series of reforms and restructuring.
In the 1880s, Jackson enhanced the bank’s business in the treaty ports of China and
also expanded its focus to the Southeast Asian regions. As trade in the region became
increasingly active, the bank’s capital and income also went up simultaneously. By the late
1890s, the bank would even cast off direct domination from the directors and ‘became a
true separate entity . . . defined by self-perpetuating professional managers’ (King 1987,
11). At the turn of the century, HSBC further forged its role as the ‘Eastern exchange
 Asia Pacific Business Review 411

bank’, which not only put together many syndicated loans for the Qing government, but
also served the influential role of banker to various governments in East and Southeast
Asia (The HSBC group: A brief history 2008).
Three years after the overthrow of the Qing dynasty and the founding of the Republic
of China in 1911, the first world war broke out in Europe. Since Britain was involved in the
war, HSBC’s business was also affected. However, as the major battlefields were in
Europe, while most of the bank’s investments were in Asia, its actual losses were not as
devastating as expected. After the war, as both people and governments committed
themselves to rebuilding the world economy, HSBC rebounded quickly.
Also seeing the opportunity for economic rebuilding after the war’s end, a group of
Chinese business elite,4 who not only understood modern banking, but also the needs of
modern Chinese businesses, proposed to adopt the Western modern bank model by
founding a new local bank by gathering Chinese capital. This bank was the Bank of East
Asia Limited (BEA). As the founding members of BEA thought that the so-called modern
Chinese banks of the day ‘only had the outward form of Western banks, but not the spirit’,
they put strong emphasis on learning Western ‘good methods’. So, BEA not only followed
strict procedures in incorporating the bank, but also introduced a modern
accounting/auditing system, and modern style of customer service. However, the most
critical mechanism of separating management and control seemed to be intentionally
overlooked. For instance, from the very beginning,the two key positions – that of
chairman and chief manager – were assigned to big shareholders.
Although the corporate governance mechanism of BEA was different from that of
HSBC, with the concerted effort of the ‘influential men in the territory’ (Sinn 1994, 12), its
business went well from the start. Not only did the amount of deposits received from the
public rise continuously, but the numbers of the bank’s representative offices in the
world’s major cities also increased gradually. Other indexes such as total number of staff,
return on equity ratio and dividend payout ratio also increased steadily. By the end of the
1930s, BEA emerged as the most influential Chinese bank in the colony (Sinn 1994). Some
of the big shareholding families even strengthened their connections through marriage
(Ching 1999).
Around the same time, HSBC also expanded greatly. In the 1920s, new bank buildings
opened in Bangkok, Manila and Shanghai. In 1935, the new head office building in Hong
Kong was opened. Because of its irreplaceable position in financing the Chinese economy,
before the 1940s, it was generally believed that HSBC also played a role in nearly every
large syndicated loan in China (The HSBC group 2008).
The prolonged anti-Japanese war not only brought countless casualties, but also
numerous broken families. During this war, particularly after Hong Kong fell into
Japanese hands, the whole Hong Kong financial system came to a complete standstill; both
HSBC and BEA were forced to close doors. Most of their assets on the Chinese mainland,
Hong Kong and elsewhere were either ruined or robbed by the Japanese troops. Both banks
suffered unprecedented losses (Sinn 1994, King 1987– 91).
After the war, both HSBC and BEA reopened for business and put strong efforts into
regaining their vitality. However, civil war broke out again on the Chinese mainland
between the Chinese Communist Party and the Nationalist Party. The victory of the
Communists and the subsequent United Nations trade embargo on the newly established
People’s Republic seriously affected Hong Kong’s economy, and both banks suffered
another serious crisis. Most of their branches on the Chinese mainland were forced to close
doors. They also had to restructure their organizations to enable them to keep up with the
rapidly changing business environment.
412 V. Zheng and T. Ho

As Hong Kong underwent a transformation from a re-export trading port to an

industrialized economy, both banks responded quickly to the change and their businesses
grew continuously. In 1965, a banking crisis erupted suddenly. Although HSBC and BEA
were unaffected, other Chinese banks were hit badly. After this crisis, BEA became more
prudent in expanding its business, while HSBC went further in diversifying its market with
greater momentum (The HSBC group 2008, Sinn 1994).
In the mid-1980s, after prolonged negotiations between the Chinese and the British
governments, the Sino-British Joint Declaration was finally signed. The British
government agreed to end its colonial rule after 30 June 1997 and hand over the
sovereignty of Hong Kong to the Chinese government, while the Chinese government
pledged high autonomy to Hong Kong under the unprecedented framework of ‘one-
country, two-systems’. Despite the high commitment of the Chinese government to Hong
Kong’s future, HSBC chose not to put all its eggs into the Hong Kong basket, but to
change its domicile from Hong Kong to London in 1991. Unlike HSBC, BEA insisted on
keeping its domicile in Hong Kong, not only by re-emphasizing its ‘roots in Hong Kong’,
but also reinstating its longstanding commitment to act as an agent in ‘bringing China to
the world’ (Sinn 1994: 177– 190).
Because of these completely different developmental strategies, from the 1990s
onwards, HSBC gradually shifted its investment focus from Hong Kong to London and
then around the globe through a series of acquisitions and mergers. Within two decades,
the originally localized bank emerged as a globalized bank (The HSBC group 2008). After
the global credit crunch, the bank decided to move back its head office from London to its
birthplace, Hong Kong. Compared to HSBC, BEA put more emphasis on internal growth
instead of making acquisitions or mergers and its pace of expansion was inevitably seen as
less breathtaking. However, various statistics show that BEA has also seen impressive
growth (see discussion in next section).
Clearly, although both banks have faced various hurdles at different stages of
development, both have exercised their entrepreneurial spirit to weather all sorts of
challenges, ultimately becoming huge financial institutions. In short, although BEA stated
clearly in its Prospectus that the bank should learn the spirit of Western banking and much
of the bank’s actual modus operandi is similar to that of HSBC, the most critical
management mechanism is clearly different. Thus, we can see that even though operating
in the same business environment, the two banks travelled along two different paths. One
quickly became a global and truly publicly-owned bank, while the other retains the image
of a local and family-owned bank.

Analysis: performance and competitiveness

Having outlined the banks’ history, let us now turn to their overall performance and
competitiveness. In order to obtain a better evaluation of the two systems, key indicators
such as loan deposit ratio, return on asset ratio and return on equity ratio from the 1950s to
the 1980s will be cited for illustration and comparison.
Before the discussion, we should bear in mind that although both banks are locally
bred, it is difficult to make a direct comparison as BEA is a relatively younger bank and
smaller in scale, while HSBC functions like a ‘quasi-central bank’ and has the right to
issue currency. However, we still think that a brief account of certain statistical indicators
can show their strengths and weaknesses. Of course, one should be very careful in
interpreting these statistics as they were published in a different time, when accounting
methods and auditing requirements were not as strict as today.
 Asia Pacific Business Review 413

Figures 1 and 2 list the loan deposit ratio and the return on asset ratio from 1947 to
1982. From these two indicators, we obtain the general picture that HSBC has a higher
loan deposit ratio, while BEA has a higher return of asset ratio. If we take the 10-year
(1970 – 79) average figures on loan deposit ratio for a general comparison, we see that
HSBC had an average ratio of 49.24%, while BEA had only 43.83%. On the other hand, if
we take the 10-year (1970 – 79) average figures on return on asset ratio for comparison, we
see clearly that HSBC (0.86%) had a lower ratio than BEA (1.24%).
Judging from the higher loan deposit ratio, we can say that HSBC was more
progressive than BEA in lending out its money, particularly when the Hong Kong
economy was experiencing accelerated growth. However, judging from the higher return
on asset ratio, we can see that BEA was more efficient and thus brought itself better
returns. The most important underlying factor affecting their differences in performance
seems to be differences in size and scale. Since HSBC received far more deposits from the
public and gave investors far greater confidence, we can see clearly that it pursued a more
progressive marketing strategy.
Apart from the loan deposit ratio and the return on asset ratio, we also listed the
dividend payout ratio and the return on equity ratio from 1947 to 1982 of these two banks.
In Figure 3, we can see that HSBC has a far higher dividend payout ratio, while BEA has a
relatively higher return on equity ratio. Similarly, if we take their 10- year average ratios
for comparison, we obtain a better understanding of their overall performance and

Figure 1. Loan deposit ratio, 1947– 82 (%). Source: Kung Sheng Daily News various years.

Figure 2. Return on asset ratio, 1947– 82 (%). Source: Kung Sheng Daily News various years.
414 V. Zheng and T. Ho

Figure 3. Dividend payout ratio and return on equity ratio, 1947 –82 (%). Source: Kung Sheng
Daily News various years.

competitiveness. For instance, from 1950 to 1959, 1960 to 1969 and 1970 to 1979, the
average dividend payout ratios for HSBC are 80.36%, 76.30% and 48.96%, respectively,
while the average ratios for BEA are only 22.79%, 23.40% and 27.42%, respectively. If we
look at the return on equity from 1950 to 1959, 1960 to 1969 and 1970 to 1979, the average
ratios for HSBC are 12.93%, 13.61% and 16.25%, respectively, while the ratios for BEA
are 17.84%, 17.12% and 18.74%, respectively.
Once again, because of their differences in size and scale, we can see that HSBC was
more generous in paying higher dividends (40% of the annual profit at the least) to its
shareholders, while BEA clearly undertook a more conservative policy in distributing only
around 20% of its annual profits to its shareholders. However, if we compare their return
on equity ratio, we see that, on the whole, BEA brought a higher rate of profit to its
investors.
Figures 4 and 5 show the annual change of profit and the annual change of dividend
from 1947 to 1982. Both figures display a clear similarity in terms of high fluctuations. If
we take a closer look by calculating the two banks’ average annual change of profit from
1949 to 1979, we see that both banks enjoyed an enviable double digit increase annually.
For instance, in the specified 30 years, the average annual change of profit for HSBC was
14.93%, and for BEA, 12.45%. In the same period, the average annual change of dividend
for HSBC was 13.73%, and for BEA, 14.94%. Clearly, from 1949 to 1979, although

Figure 4. Annual change of profit, 1947– 82 (%). Source: Kung Sheng Daily News various years.
 Asia Pacific Business Review 415

Figure 5. Annual change of dividend, 1947– 82 (%). Source: Kung Sheng Daily News various
years.

HSBC enjoyed a relatively higher average annual change of profit than BEA, its average
annual change of dividend was lower than BEA. In addition, we also see that the
differences in both ratios between the two banks weren’t larger than expected.
In short, we can see that although both banks aimed at financing regional trade while
their shares were listed on the stock exchange, their serving markets and developmental
strategies were clearly different. HSBC mainly served British interests and most of its
clients were medium to large foreign firms, while BEA served the Chinese business
community, mainly firms ranging in size from small to medium. Given that HSBC enjoyed
a number of absolute financial advantages and was bigger in scale, if the overall
performance was measured by a set of the abovementioned indicators, its scores are
surprisingly lower than those of BEA. Such results fit quite well with other research, which
indicates that ‘whether or not the CEO also holds the title of chairman of the board has no
impact on bank performance’ (Fogelberg and Griffith 2000, 63).

Discussion
Although the longitudinal statistics of HSBC and BEA can give us some quantifying sense
about their overall performance, they tell us very little about the evolution of their
organizations and their mechanisms of control. As mentioned earlier, both banks were set
up by two different groups of business elites in the colony. However, due to their
differences in social psychology and cultural background, they pursued their management
and control mechanisms in different ways. If we look at King’s (1987 –91) research on
HSBC and Sinn’s (1994) research on BEA, we can clearly see the differences between the
two.
Although some HSBC directors were members of the founding firms, some were not.
Non-family professionals representing the founding firms’ families were commonly found
on HSBC’s board of directors. However, in BEA, nearly all of the directors were members
of the founding firms, mainly the family heads. The two banks’ chairmen’s lengths of
service were different, too. During the first decade, most HSBC chairmen served for one or
two years. Some stayed in the post for some months only. BEA’s chairmen changed less
frequently. Some even held the post for several decades.5
The lengths of service of the board directors were also different. For instance, at
HSBC, 12 representatives from the founding firms were admitted to the board of directors
416 V. Zheng and T. Ho

in 1865. Ten years later, only four of these firms still had representatives on the board. The
majority had left the board. Additionally, few directors could sit on the board for more
than 10 years. However, at BEA, many of the directors, particularly those from the
founding firms’ families, served for a long time on the board. For example, from 1919 to
1994, we can see that there are a total of 11 directors who had served on the board for more
than 30 years. Two of them even served for nearly half a century.
The appointing of directors or chairmen was also different at both banks. At HSBC, the
appointments were made with term and time limits clearly specified. At the end of the
appointment, the post holder stepped down naturally, even if they were in good health.
However, at BEA, such senior appointments seemed to be for life. No clear retirement age
was set. Many post holders ended their appointment only when they died. In fact, when the
bank was set up, the founding members were given the status of ‘permanent directors’ to
ensure the positions were lifelong (Sinn 1994, 11 –12).
If we go a step further to compare HSBC’s and BEA’s management and control
mechanisms, we can see clearly the significant differences. Table 1 and Table 2 show the
names of the chief managers (later known as chief executives) and their years of service at
HSBC and BEA. In these two tables, we can see some salient differences. First, all the
chief managers of HSBC were experienced bankers who had once served at other banks,
while all the chief managers of BEA were from the founding firms’ families.6 Second, the
length of service of the HSBC chief managers was clearly shorter than that of the BEA
chief managers.7 In other words, HSBC absorbed more outside professionals and with
shorter serving terms, while BEA insisted on deploying insider family members with
longer serving terms.
BEA’s model, emphasizing appointing family members on its board and the longer
serving periods, clearly reflects the Chinese mentality and culture. The patriarch cannot be
replaced even when he is very old. Also, blood ties are vital for appointments. These
further serve as evidence to support the argument that Chinese psychology favours power
and control by elders, not only within the family, but also in business. To some extent, the

Table 1. List of chief managers and their serving years at HSBC, 1865– 1962
Names Year of appointment Number of years
Victor Kresser 1865– 70 5
James Greig 1870– 76 6
Thomas Jackson 1876– 86 10
John Walter 1886– 87 1
Thomas Jackson 1887– 89 2
George Noble 1889– 90 1
Thomas Jackson 1890– 91 1
Louis Bovis 1891– 93 2
Thomas Jackson 1893–1902 9
John Smith 1902– 10 8
Newton Stabb 1910– 20 10
Alexander Stephen 1920– 24 4
Arthur Barlow 1924– 27 3
Arthur Hynes 1927– 30 3
Vandeleur Grayburn 1930– 41 11
Arthur Morse 1941– 53 12
Michael Turner 1953– 62 9
Source: King 1991, 924 –925.
 Asia Pacific Business Review 417

Table 2. List of chief managers and their serving years at BEA, 1919 –97

Names Years of appointment Number of years

Kan Tong-po 1919– 63* 44
Fung Ping-fan 1964– 69 5
Kan Yuet-hing 1970– 72 2
Li Fook-wo 1972– 76 4
Kan Yuet-loong 1977– 81 4
Li Kwok-po 1981– present –
Note: Appointment ended because of death.
Sources: Kung Sheng Daily News various years, Sinn 1994, BEA Annual Report various years.

differences in the length of appointment of CEOs and directors of the board of HSBC and
BEA confirms Wei and Wang’s (2009) finding that CEO turnover is higher in public
enterprises than private enterprises in China.
Also, there was a clear trend of passing key positions within the major shareholding
families at BEA (i.e., the Kan, Fung and Li families, which was called the ‘tri-families
dominant’ pattern), while there was no such trend at HSBC. In short, HSBC shareholders
did not involve themselves directly in the management, while BEA’s major shareholders
simultaneously headed the management team (see the next section).
In order to gain a better understanding of the critical differences between HSBC and
BEA, we suggest three management models for illustration. In Figure 6, we can see the
typical ‘concentration of management and control model’ on the left, the typical
‘separation of management and control model’ on the right, while the ‘partial delegation
model’ is in the middle. As their names suggest, ‘the concentration of management and
control model’ means the major shareholding families firmly control the board of directors
and the management. The common practice indicated earlier is that the owner holds the
position of both chairman of the board and chief manager, or one family member assumes
the position of chairman while another family member serves as chief manager. Since the
executive power and supervisory power are held in the hands of the major shareholders, it
inevitably gives the public a less healthy impression of a paternalistic and family-centred
organizational model that is ill-managed and distrustful of outsiders.

The concentration of The partial The separation of management

management and control model delegation model and control model

Shareholders
Shareholders
Shareholders

Management

Management
Management

Diagram 1.6. Three models on management and control.

418 V. Zheng and T. Ho

The separation of management and control model implies that major shareholders are
not involved in management. They only sit on the board and supervise management. In
other words, while the position of chairman or directors may be held by one of the major
shareholding families, the position of chief manager is usually filled by non-family
professionals. As the executive power and supervisory power are separated by different
groups of stakeholders, the company can offer the public a healthier image of transparency
and accountability.
The partial delegation model can be regarded as a transitional model. This model
suggests that although the major shareholding families still hold the key positions on the
board and the management team, other positions are filled by trusted outsider
professionals. As time goes by or because of contraction in family size, it is believed
that the model may gradually go down the road of separation of management and control.
In short, the organizational structure of HSBC seems to follow the separation of ownership
and control model. Many Western banks such as Bear Sterns, Lehman Brothers and J.P.
Morgan Chase have clearly gone through the process from family owned and controlled to
passing all power to professional CEOs. On the other hand, BEA seems to follow the
concentration of management and control model. Many Chinese banks such as Dah Sing
Bank and Liu Chong Hing Bank still maintain family control, even though many of them
are more than 50 years old.
Although the practice of concentration of management and control in Chinese family
businesses is criticized frequently as being too family centred and ill managed, this does not
imply that there is no positive side to it. Although the practice of separation of management
and control in Western firms is praised as being more transparent and accountable, it does
not mean there is no negative side to this either. The fall of Lehman Brothers in 2008 and
many other originally family controlled enterprises under non-family professional
leadership during the recent financial tsunami has caused many people around the globe to
ponder deeply about their philosophy and style of management (Chen and Hsu 2009).

Discussion: succession and evolution

The salient differences in HSBC’s and BEA’s management and control models further
drive us to compare their patterns of succession in management and the evolution of their
ownership structures (Molley et al. 2010). Although the first decade of HSBC’s
management was dominated by the founding firms’ families, after the reforms undertaken
by Jackson, the bank ultimately adopted the separation of management and control model.
Hence, if we want to understand its succession, we have to look at its board of directors
and management separately. Unlike HSBC, since BEA adopted the concentration of
management and control model, the succession of the board of directors and management
is intertwined. Thus, we should consider them jointly.
The succession pattern of the board of directors of HSBC shows that in the beginning,
some directorships held by the founding firms’ families also passed along bloodlines (King
1987 –91). However, as the bank expanded and time passed, although some directorships
still pass within certain big families, the number of such big shareholders, like the Sassoon
family and the Keswick family, falls. It is true that such families still have significant
influence on the board, but this is not as much as during the early days. A clear trend from
the several big shareholders dominant pattern to a pattern in which numerous small
shareholders sit on the board can be seen (Figure 7).
On the management side, since the succession mechanism is based mainly on
performance rather than blood connections, the competition for key positions at HSBC is
by no means keen. In order to make sure that all the staff are not only familiar with the
 Asia Pacific Business Review 419

Big share holders Small share holders

Diagram 1.7. The evolution of ownership structure: HSBC model (above) and BEA model
(below).

bank’s culture, but also have thorough financial knowledge, the bank offers practical
training not only in Hong Kong and London, but also around the globe. Although most
senior management positions are filled by internal promotions, public recruitment is
stressed just as much. In short, we can say that by any standard, the bank is operated like a
government. Its succession mechanism also puts strong emphasis on formality and
procedure and displays certain characteristics such as meritocratic, impersonal and highly
bureaucratic action (King 1987– 91).
If we look at the succession pattern of the board of directors and management of BEA,
we can clearly see that the passing of the leadership is along the bloodlines of the
controlling families. In 1959, the bank’s second chairman, Shou-son Chow, passed away.
His position was filled by Kan Tong-po, who concurrently also served as chief manager.
Four years later, Kan Tong-po died. Four days later, his son, Kan Yuet-keung, was elected
the new chairman and filled his father’s shoes (Sinn 1994, 107). Some years later, when
other founding directors such as Li Koon-chun and his brother, Lan-sang, died, their sons
succeeded them as directors. In 1978, when the last of the founders, Wong Yun-tong,
passed away, his son took over his father’s role.
As mentioned earlier, in the 1980s, there was a ‘crisis of confidence’ and many people
(companies) chose to leave Hong Kong. HSBC’s change of domicile during the period
demonstrated this lack of confidence. In fact, at BEA, some big shareholders also cast their
votes of non-confidence. In 1984, Kan Yuet-keung announced that he was stepping down
as chairman. Other Kan family members also resigned from the board. The members of the
Li family filled their positions shortly afterwards.
In 1986, another issue that affected the bank’s ownership structure erupted. When the
‘confidence crisis’ was at its peak, the Hong Kong stock market plummeted. The Fung
family seemed seriously affected and was believed to be on the verge of bankruptcy. Fung
Ping-fan decided to sell his controlling shares in Chinese Estate Limited, a cash-rich and
420 V. Zheng and T. Ho

debt-free company, without discussing it with the Lis, who also played key roles in the
company. This action destroyed the harmonious relations between the Lis and the Fungs.
After this development in the 1980s between the Lis, the Kans and the Fungs, the ‘tri-
families dominant’ ownership structure in BEA was pruned to become a ‘single-family
dominant’ pattern. Later, as the Kans and the Fungs further sold their BEA shares, while
the Lis continuously absorbed such shares in the market, more Lis joined the board. If we
look at the bank’s current management team, we can see some interesting features:
. Li Kwok-po holds the position of both the bank’s chairman and chief executive;
. Among the eight non-executive directors, four are from the Li family;
. Of the four senior management members, two are from the Li family; and
. Two sons of Li Kwok-po, Li Man-bun and Li Man-kiu, have been appointed to
senior posts since 2009 and they seem to be his handpicked successors (BEA Annual
Report various years).
Since this study does not aim to analyse the socioeconomic network among the big
shareholders, we will not elaborate on the effects of the relationship interactions among
the Lis, Kans and Fungs, except to point out that this clearly contrasts with the HSBC
model. Although BEA was also founded by a group of business elites, these big
shareholders (families) did not give up control over the management. Moreover, as time
went by, the ‘multi-families dominate’ pattern gradually evolved into a ‘tri-families
dominant’ pattern and finally became a ‘single-family dominant’ structure (Figure 7).
Although BEA is a publicly listed company, it still seems to be unable to cast off its image
of being ‘family-owned’.

Implications
If we take a broader view by looking at other Chinese banks in Hong Kong, we see that
many of them began as partnerships, but as time passed and businesses expanded, the
original partners tended to split up to pursue businesses of their own, or one of the partners
acquired dominant control over the company. Bank of Canton (founded by five major
California returning Chinese families in 1912), Tai Yau Bank (founded by a group of
Eurasian Chinese in 1915, see Note 4) and Hong Kong Swatow Commercial Bank
(founded by a group of Chaozhou merchants in 1934) are frequently quoted examples
(Fung 2002).
A brief look at the property development, shipping and casino sectors throws up
similar patterns. Many of these businesses originally started as a ‘multi-families dominant’
model, but evolved ultimately into a ‘single-family’ dominant one. For example, Sun
Hung Kai Holding split to become Sun Hung Kai Properties, Sun Hung Kai Securities and
Henderson Enterprises in the 1970s. New World Development finally became Cheng Yu-
tong’s family’s flagship business. Sun Tak Holdings eventually fell into the hands of Ho
Hung-sun. These are some well-known cases.
In fact, the original ‘multi-families dominant’ pattern gradually transforming into the
‘tri-families dominate’ structure and finally becoming a ‘single-family dominate’ model
not only appears in other sectors in Hong Kong, but also in Confucian dominant societies
such as South Korea, Taiwan, Singapore and many overseas Chinese businesses in
Southeast Asia. In Taiwan, Hamilton (1998, 58) finds that most of the ‘Chinese joint-
venture companies . . . (started as) limited partnerships . . . but sooner or later, one partner
or the other assumes control of the group’. In Singapore, Lee Sheng-yi’s (1989) early study
on Chinese banks also showed that many of them, formerly founded in partnership, later
 Asia Pacific Business Review 421

restructured to become single family controlled with strategic corporate investors and
numerous public investors. Although market forces were regarded as the main reason for
such change, the implicit tension among the founding partners’ successors should not be
overlooked. Will family businesses on the Chinese mainland also follow a similar
developmental trajectory? If so, what solid implications can be drawn for their
management? Will state-owned and semi-state-owned enterprises gradually fall into
private hands and become family owned?

Conclusions
Throughout this comparison of HSBC and BEA, we argue that because of the great
differences in history, culture and social psychology between the East and the West,
HSBC and BEA evolved in different directions of development, despite being established
with the similar goal of financing the region. The adaptation of the separation of
management and control model by HSBC in the early days laid the foundation for its great
success. As the bank could quickly cast off the ‘family-owned’ image, it was not
considered to be serving only minority interests. Hence, HSBC could obtain monopolistic
financial rights such as serving as a ‘quasi-central bank’ and note-issuing status and
emerge finally as a global and truly ‘publicly-owned’ bank. A formula suggested by Shan
and McIver (2011) – that good corporate governance improves market perception and,
therefore, ensures future profitability – may well apply in the case of HSBC.
Unlike HSBC, although BEA stressed on learning the business spirit of modern
Western banks, it did not adopt the separation of management and control model. Instead,
it chose to concentrate both executive and supervisory power in the hands of big
shareholders. The ‘founding families’ appeared to find it difficult to keep themselves free
of the influence of Chinese culture. As a result, although BEA’s overall performance is
equally impressive, it could not cast off the image of being local and family-owned
because the key controlling positions appeared to pass from generation to generation in the
major shareholding families.

Acknowledgement
This paper is part of the ‘Hong Kong as Financial Gateway for Taiwanese Enterprises’ project and
the ‘Chinese Family Business and Stock Market’ project. The former is supported by the University
Grants Council in Hong Kong (Project Ref. HKU 7549-08), whilst the latter is funded by the Chiang
Ching-kuo Foundation in Taiwan (Project Ref. No. RG012-P-10). Thanks to Mr Roger Luk, former
executive director of Hang Seng Bank, for his valuable comments.

Notes
1. The definition of ‘family business’ is still ambiguous. Although controlling share is always seen
as a key yardstick, not all businesses require 50% stake for exercising control. In a globalized
modern economy, especially for the dispersed shareholding of publicly listed companies,
individual shareholders may not need to have more than 50% shares. Noting this, Claessens et al.
(2000) suggested a cut-off level of 20%. We adopt this benchmark in discriminating the
ownership of a business. No individual shareholder holds more than 20% of HSBC shares. At
BEA, the declared shareholding by the Li Kwok-po family in 2009 was 14.12%, but it is reported
that ‘adding the undeclared shareholders together, the Li family holds 30% at the least’ (The East
Weekly 14 November 2009).
2. Please refer to Rowley and Warner (2010) and Warner and Rowley (2010) for a comparison of
Southeast Asian management and Chinese management.
422 V. Zheng and T. Ho

3. These founding Western elite members were: Francis Chomley of Dent & Co., Albert Heard of
Augustine Heard & Co., Thomas Sutherland of P&O SN Co., Woldemar Nissen of Siemssen &
Co., Henry Lemann of Gilman & Co., Arthur Sassoon of D. Sassoon, Sons & Co., and Douglas
Lapraik as an independent director. Clearly, although nearly all of them were businessmen, they
belonged to different nationalities (King 1987– 91).
4. These founding Chinese business elite members were: Pong Wai-ting, Shou-son Chow, Kan
Tong-po, Kan Ying-po, Li Tse-fong, Li Koon-chun, Mok Ching-kong, Wong Yun-tong, Chen
Ching-shek and Fung Ping-shan (Sinn 1994).
5. For instance, after the first HSBC chairman, F. Chomley, stepped down, T. Sutherland was
selected to fill his shoes. Then, in 1867, J. Dent was appointed to succeed Sutherland, but he only
served two months. After Dent, there were E. Cunningham (serving from March to May 1867),
W. Nissen (June to November 1867), G.J. Helland (December 1867 to 1868), H.B. Lemann
(1869– 70), R. Rowett (1871 –72), T. Pyke (1872 – 73), S.D. Sassoon (1873 –74) and W.H. Forbes
(1874– 75). At BEA, the first chairman served from 1919 to 1925. Then, the position was filled by
Shou-son Chow, who held the post for 34 years.
6. For example, Victor Kresser, before being handpicked as the first chief manager, was from the
Comptoir d’Escompte de Paris. After Kresser, James Greig came from the Asiatic Bank, Thomas
Jackson came from the Agra and Masterman’s Bank, and George Noble came from the
Commercial Bank Corporation of India and the East. However, at BEA, all the chief managers
were from the major shareholding families. Some allegedly had no relevant training before
joining the bank as board directors.
7. Kresser served for five years, while Greig served for six years. Jackson, who was regarded as the
most outstanding and influential chief manager in HSBC’s history, served on four occasions from
1876 to 1902 with the interregnum filled by John Walter, George Noble and Louis Bovis. After
Jackson, it was rare for a chief manager to stay in the post for more than 12 years. Compared to
HSBC, BEA’s chief managers served for a much longer time. For example, Kan Tong-po held the
post of chief manager for 44 years. Then, the helm passed to Fung Ping-fan, Kan Yuet-hing, Li
Fook-wo and Kan Yuet-loong for relatively shorter terms. Li Kwok-po took the post in 1981 and
still holds it today.

Notes on contributors
Victor Zheng is currently Associate Director of the Centre for Social and Political Development
Studies, HKIAPS, the Chinese University of Hong Kong. His research interest includes Chinese
family business, stockmarket and financial capital, and social indicators research in Hong Kong and
Macao.
Tsai-man Clare Ho is currently Assistant Professor at Center for General Education of Chung Yuan
Christian University, Taiwan. Her research interests are globalization and impacts on Asia, family
enterprises in Chinese societies, and various issues of modernity.

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