Interlocking Directorates, Firm Strategies, and Performance in Hong Kong: Towards a Research Agenda

ASIA PACIFIC JOURNAL OF MANAGEMENT, VOL. 17, 29-47 (2000)

Interlocking directorates, firm strategies, and performance in Hong Kong:

Towards a research agenda

KEVIN Au,’ MIKE W. PENG’ AND DENIS WANG’

‘Department of International Business, Faculty of Business Adminzstration, Chinese University of Hong Kong,

Sbatin, N. T, Hong Kong

E-mail: k~~n@baf:msmail.cuhk.edu,hk

2Fisher College of Business, Ohio State University, Columbus, Ohio 43210, USA

Filling a gap in the interlocks literature which has been largely centered on the West, we present preliminary data on the pattern of interlocking directorates among the top 200 largest corporations in pre-1997 Hong Kong. Then we identify four separate groups of firms in Hong Kong, and suggest propositions based on the resource dependence perspective on the critical relationships among their interlocking directorates, firm strategies, and performance. These propositions have the potential to form the building block of an emerging research agenda that will shed light on the role of interlocking directorates in an increasingly important part of the world.

1. INTRODUCTION

An interlocking directorate occurs ‘when one person affiliated with one organization

sits on the board of directors of another organization’ (Mizruchi 1996: 271). With

over four decades of sustained research, interlocking directorates have become ‘perhaps

the most-studied social structure in organization theory’ (Davis and Greve 1997: 12;

Pettigrew 1992). However, since much of this research is conducted in the United

States, whether findings based on U.S. samples can be generalized to other countries

remains to be explored. In the past two decades, interlocks researchers have started

to examine non-U.S. samples. Examples include Stokman, Ziegler, and Scott’s (1985)

edited book on nine European countries, Richardson’s (1987) work on Canada, Gerlach’s

(1992) study on Japan, Li’s (1994) article on ten industrial countries, and, most

recently, Pederson and Thomsen’s (1997) contribution on twelve European countries.

However, with one exception (Wong 1996), none of the published studies have

explored interlocking directorates in Hong Kong. Wong (1996) focused on the

changing patterns of interlocking directorates among Hong Kong firms during the

period of 1976-86. Since then, significant social, economic, and political changes

have occurred in Hong Kong. During this period, China has become the largest

emerging economy in the world. At the same time, its political system continues to

CCC 0217~4561100/040029-20

0 2000 BY JOHN WILEY & SONS (ASIA) LTD

30 K. AU, M. W. PENG AND D. WANG

be dominated by a totalitarian regime. Therefore, both the market opportunities and

political uncertainties in China led numerous Hong Kong firms to maneuver for

position in anticipation of the handover to China in 1997. Using interlocking

directorates to deter environmental uncertainties appears to be a major approach

employed by many firms. These practices, in turn, may affect these firms’ strategies

and performance. Despite these important activities, very little is known about the

dynamics of these relationships. To partially fill this gap, we first present preliminary

data on the pattern of interlocking directorates among Hong Kong firms. We then

compare and contrast the data with findings from the West, and suggest a new

research agenda. A number of propositions on the relationship among interlocking

directorates, firm strategies, and performance in pre- 1997 Hong Kong are presented.

There are a number of compelling reasons why research focusing on interlocking

directorates in Hong Kong is important. First, blending Chinese tradition with

British and Western influence, firms in Hong Kong operate in a unique institutional

environment. Theoretically, studying whether predictions based on findings from

the West hold with firms in Hong Kong will allow us to identify the boundaries

of existing theories. Moreover, from a strategic point of view, the maneuvering of

firms in pre-1997 Hong Kong requires increased knowledge about whether some of

these strategies, such as recruiting outside directors, can pay off. In sum, in the

absence of a controlled experiment, Hong Kong firms may represent a ‘viable research

laboratory’ (Shenkar and von Glinow 1994: 56) in which to examine the dynamic

relationship among interlocking directorates, firm strategies, and performance.

2. THEORETICAL BACKGROUND

Shenkar and von Glinow (1994) suggested that when undertaking management and

organizational research on China, scholars be cautious about the applicability of

various mainstream theories. Therefore, a careful selection of the theoretical perspective

is necessary. According to Zahra and Pearce’s (1989) comprehensive review, among

the four major theoretical perspectives underlining interlocks research, resource

dependence has received the strongest support. Agency theory and legalistic theory

have been moderately supported, and class hegemony theory, rooted in the Marxist

tradition, has only received limited support. In this exploratory inquiry, we adopt a

resource dependence perspective for the following reasons. First, class hegemony

theory is difficult to generate empirically falsifiable predictions, due to the theory’s

ideological presumption that hegemony of the ‘rich’ class automatically results in

their members being appointed to boards. Second, existing legalistic research mostly

focuses on U.S. corporate laws, which may not be applicable to Hong Kong. Agency

theory rests on a fundamental assumption of the separation between ownership and

control and the entire agency research in this area focuses on how boards and directors

can minimize agency problems on the part of top managers (Fama and Jensen 1983).

INTERLOCKING DIRECTORATES, FIRM STRATEGIES, AND PERFORMANCE IN HONG KONG 31

For most firms in Hong Kong, however, the founding families still have predominate

control and the separation of ownership and control is less profound (Brewer 1997;

Redding 1990). This is not only true for Chinese companies, but also for British

companies such as Swire and Jardine. Thus, agency theory may not be readily applicable

in this context.

Resource dependence theory (Pfeffer and Salancik 1978), on the other hand,

seems to be most relevant. Its basic proposition is that organizations attempt to

control the flow of resources in turbulent and uncertain environments. Applied to

the context of interlocking directorates, this theory views board directors as important

boundary spanners that link with the environment and extract resources for successful

operations, and predicts that in an uncertain environment, firms will use interlocking

directorates to achieve better coordination with other organizations and reduce

uncertainty (Burt 1983). These predictions have been supported by a large body of

empirical research in the West (Boyd 1990; Pennings 1980). In the Hong Kong

context, the unprecedented handover from British to Chinese rule created a great

deal of uncertainties, thus presenting an institutional background appropriate for the

resource dependence perspective. In addition, this perspective was also adopted by

Wong (1996) in studying Hong Kong’s interlocking directorates. In sum, the strong

support of the resource dependence theory in the literature, the uncertainty that pre-

1997 Hong Kong firms had to confront, as well as the previous use of the theory

in this context lead us to embrace a resource dependence perspective in this paper.

3. INTERLOCKING DIRECTORATES IN HONG KONG

In the only published study on interlocking directorates in Hong Kong, Wong

(1996) focused on the top 100 listed non-financial firms and the top 25 listed

financial firms during the period of 197646. His general finding was that Hong

Kong firms in 1986 were ‘loosely connected and multi-centered’ (Wong 1996: 108).

The firms were differentiated into separate business groups such as the Hongkong

BankSwire group, the Jardine group, the K. S. Li Group, and the Y. K. Pao group

(p. 107). Wong did not extend his work beyond 1986. Given the significant political

and economic changes since then, it is necessary to update our knowledge about

interlocking directorates in Hong Kong during the pre-1997 era.

Toward this end, we focused on the overall interlocking pattern among the 200

largest listed companies in terms of their market value by the end of 1996

(Table 1). These 200 firms virtually included all the firms that Wong (1996) studied.

Based on the information collected by Wardley Financial Information Services,’ we

computed key network statistics and compared them with those from Stokman and

’ Wardley Financial Information Services, Ltd., a subsidiary of the Hongkong Bank, compiles publicly

available information from published company reports and updates this information every two weeks.


colleagues’ (1985) work on the top 250 largest firms in Great Britain and the United

States (also shown in Table 1). While Stokman and colleagues studied interlocking

directorates in nine European countries and the United States, only British and U.S.

data are chosen here because these are the only two countries in their study that have

the same one-board system as Hong Kong. In Germany, Belgium, and Austria, for

example, a two-board system is used, which renders their data less comparable with

those from Hong Kong.* Of course, the challenges that pre-1997 Hong Kong firms

faced were different from those British and U.S. firms confronted in the mid-1980s.

However, the institutional environment in Great Britain and the United States in

the 1990s did not change as drastically as that in Hong Kong; therefore, the 1980s

data may still be useful as a basis for comparison. In addition, Stokman and colleagues

(1985) reported the most comprehensive comparative study on interlocks using a

standard methodology. Therefore, we believe that it is useful to contrast our findings

from Hong Kong, using the same methodology, with theirs in order to enable some

baseline comparison.

Within a network of interlocking directorates among corporations, only persons

with two or more positions - the multiple directors - generate interlocks. Just

like the cases in Great Britain and the United States, multiple directors in Hong

Kong are a minority group. The proportion of multiple directors in Hong Kong

(17%) is closer to their counterparts in the United States (18%) than in Great

Britain (11%). The mean number of positions per directors in Hong Kong (1.29),

i.e., the cumulation ratio, is also similar to the United States (1.28) but larger than

Great Britain (1.15). The relatively large cumulation ratio of Hong Kong firms can

be attributed to either a large proportion of multiple directors or a high number of

directorships per multiple director. In other words, the cumulation ratio can be high

if many directors sit on two boards. But the same ratio can also be the result of a

small number of multiple directors who belong to many boards while most of the

other directors have few directorships or are not multiple directors at all.

The number of director seats held by multiple directors reveals that Hong Kong has

a smaller proportion of multiple directors who belong to just two boards (61%), compared

to Great Britain (69%) and the United States (64%). However, there are more directors

who sit on more than two boards and create a lot of interlocking directorships. Among

those 3% of directors who have more than five interlocks, four of them have six interlocks,

and four have eight. More strikingly, David Li Kwok PO, chairman and CEO of the Bank

of East Asia, sits on nine boards. The most heavily interlocked director is Charles Lee Yeh

Kwong, who is a qualified solicitor of the Supreme Court of England and Wales and of

‘In Hong Kong, Great Britain, and the United States, a single board is legally responsible for all

corporate affairs. In countries with a two-board system, the shareholders appoint a supervisory board, which in turn appoints directors for the executive board. The executive board is responsible for operations while the supervisory board monitors its behavior. The two boards perform its functions

similar to the non-executive and executive directors in the one-board system (Stokman et al. 1985: 17).


Hong Kong and serves in numerous public offices. He sits on eleven boards. Overall,

Hong Kong firms seem to have more ‘heavy linkers’ who are highly connected with more

than five boards (3%) while most of the other multiple directors only have a minimum

number of interlocks. In contrast, there are only 1% such ‘heavy linkers’ who sit on more

than live boards in both Great Britain and the United States.

Interlocking directorates can be regarded as a communication network creating

interorganizational relationships (Mizruchi 1996). The extent of such communication

can be measured by density, which is defined as the fraction of pairs of corporations

Table 1 Interlocking directorates in pre-1997 Hong Kong: A comparison with Great Britain and the United States

Hong Kong Great Britain

(Top 200 firms) (Top 250 firms)

United States

(Top 250 firms)

Interlocking Directorates Total Number of Directors Total Number of Director Seats

Total Number of Multiple Directors Proportion of Multiple Directors

Cummulation Ratio” Number of Director Seats Held

by a Multiple Director 2

3 4

5 more than 5

Interorganizational Relationships

Density Multiplicity 1

3 more than 3

Distance 1 2% 2 10%

more than 2 88%

1,628 2,682 3,108 2,105 3,091 3,976

276 282 564 17% 11% 18%

1.29 1.15 1.28

61% 69% 64%

25% 21% 24%

6% 6%’ 8% 5% 3% 3%

3% 1% 1%

,029 ,017 ,035 78% 94%b 84% 10% 5% 13%

5% 2% 2% 7% 0% 1%

2% 3% 12% 22% 86% 75%

Sources: Data on Hong Kong firms are from the authors’ own calculation based on publicly available

company information compiled by Wardley Financial Information Services Ltd., a subsidiary of Hongkong Bank. The British and U.S. data are from Stokman et al. (1985: 22-27).

d Definition of Variables (Brass 1992; Scott 1991) Cumulation Ratio: Total number of director seats/Total number of directors Number of Director Seats Held by a Multiple Director: The number of companies that a multiple

director serves. Density: The extent to which all possible relations are actually present. Operationally, it is the

number of observed interlocks between directors to all possible interlocks. Multiplicity: It is the number of separate contacts which make up the relationship, and is a measure

of the intensity of the relationship. Operationally, it is the number of interlocking directors that any two firms have.

Distance: It is a measure of the closeness between any two members of the network. Operationally,

it is the shortest path that a firm could reach another firm b Multiplicity for Great Britain does not add up to 100% probably because of rounding error (see

Stokman et al. 1985: 25).


between which a connection exists (Brass 1992; Scott 1991). The density of the

Hong Kong director network (0.029) is between that of Great Britain (0.017) and

the United States (0.035). This hints that comparatively, the overall connection of

Hong Kong firms with each other is moderate.

The strength of the connection may be measured by multiplicity of the connection,

which is the number of interlocking directors between each particular pair of connected

companies (Brass 1992; Scott 1991). The data suggest that more Hong Kong firms

(22%) are connected through multiple directorships than British (7%) and U.S.

firms (16%). In particular, there are 7% of Hong Kong firms that are connected

through four or more directors, while none of the British firms and only 1% of the

US. firms have such a strong strength in their connections. Interlocked firms in

Hong Kong are therefore linked tighter than their British and American counterparts.

Such close relationships, however, do not mean that Hong Kong firms as a

whole are intensely connected. Distance is defined as the number of interlocking

directorates that a particular firm needs to go through before it can reach a target

firm (Brass 1992; Scott 1991). For instance, if there is an interlocking director

between firms A and B, it is said that they are at distance 1 apart. This is because

A can reach B by going through merely one link between them. However, if A and

B both have a common director with firm C but do not have one between themselves,

then A and B are at distance 2 apart. This is because A needs to go past its link with

C and then the link between C and B in order to reach B. C in this case becomes

a meeting ground for A and B. Pairs of corporations at a greater distance from one

another can hardly be assumed to communicate through such interlocks (Stokman

et al. 1985: 25). The data on Hong Kong indicate that while there are as many firms

at distance 1 (2%) as those in Great Britain (2%) and the United States (3%), they

are less likely to be at distance 2 from other firms. Moreover, 88% of the Hong

Kong firms are connected at more than distance 2, while 86% of the British firms

and 75% of the American firms have such a large distance. This suggests that firms

in Hong Kong are either very close at distance 1 or 2, or else they are not connected

at all. British firms were similar although their ties were far less strong.

In sum, the overall pattern of interlocking directorates among firms in

pre-1997 Hong Kong may be regarded as separated but close-knit islands in the

middle of an ocean, a pattern that Wong (1996) observed. The overall linkage is

sparse; but for those firms that share interlocking directorates, the connection tends

to be very strong.

4. GROUPS OF FIRMS IN HONG KONG

Given the organizational diversity represented by firms from different backgrounds

and origins in Hong Kong, the generic label ‘Hong Kong firms,’ which we used in

earlier sections, needs to be further divided into four constituent groups. Table 2


illustrates the four groups among the top 100 listed firms. By the end of 1996, these

100 firms represented 75% of the capitalization of all the listed firms in Hong

Kong, indicating their enormous size and power. Representing 95% of the capitalization

among the top 200 group, these 100 firms are truly giants, even when compared

with the second-tier firms ranked from 101 to 200. Each of these groups is briefly

highlighted below.

BRITISH FIRMS (THE ‘HONG’)j

Originating in the mid-1800s these firms used to dominate almost every major

industry in Hong Kong. However, starting in the 1970s their dominance has been

challenged by the rise of Hong Kong Chinese firms. Fearful of an unfavorable

environment under the Chinese rule after 1997, a number of them, such as Jardine

Matheson and Dairy Farm International, sought to sell off non-core assets, migrate

assets overseas, list shares in London and Singapore, and register the corporation in

places such as Bermuda and the Cayman Islands. However, given their roots, they

are not able and willing to completely withdraw from Hong Kong, which is a

lucrative market and gateway to China. As a result, some of them negotiated with

government-backed mainland Chinese firms which sought to expand into Hong

Kong (the ‘red chips’). For example, in 1990, Cable and Wireless sold 20% of their

shares of Hong Kong Telecom to China International Trust and Investment Corporation

(CITIC). Swire sold 12.5 % of Cathay Pacific shares to CITIC in 1987, and also sold

38.3% and 35.8% of Dragon Air shares to CITIC and China National Aviation

Corporation, respectively, in 1992. By doing this, British firms can coopt these ‘red

chips’ and improve their relations with China, which may lead to new opportunities

in China.

In the 1990s while British firms had substantially retreated from monopoly

positions in certain industries, they remained strong in key industries such as banking,

financial services, and civil aviation. By the end of 1996, 13 of them, representing

HKs822.91 billion4 in market value, were among the top 100 group measured

by capitalization, representing the second largest group among the top 100 in

terms of capitalization (26%) and the third largest group in terms of the number of

firms (13%).

‘Strictly speaking, these firms should be called ‘Hong Kong British firms,’ which are different from ‘authentic’ British firms. For compositional simplicity, we will use the term ‘British firms’ to refer to them throughout the article. Recently, however, there seems to be increasing justification to call

them British firms, since some of them, such as Jardine Matheson, moved their headquarters to London and became more ‘authentic.’

“The Hong Kong dollar was pegged to the U.S. dollar at HK$7.8/US$l at the time.

Tabl

e 2

The

top

100

liste

d co

mpa

nies

in

Ho

ng

Kong

by

th

e en

d of

19

96:

four

gr

oups

of

fir

ms”

Hong

Ko

ng

Britis

h Ho

ng

Kong

Ch

inese

So

uthea

st As

ian

Firm

s Ma

inland

Ch

inese

Fi

rms

No.

of

com

panie

s in

the

top

100

Tota

l m

arke

t va

lue

(HK$

bil

lions

)

%

of

capit

aliza

tion

amon

g the

top

10

0

%

of

capit

aliza

tion

amon

g

the

total

listed

co

mpa

nies

Tota

l %

of

ca

pitali

zatio

n of

the

top

10

0 am

ong

all

listed

Tota

l %

of

ca

pitaln

ation

of

the

top

10

0 ov

er th

at

of

top

200

Nam

e Lis

?

13

822.9

1

34.31

%

25.66

%

74.79

%

94.58

%

HSBC

Ho

lding

s

Hong

Ko

ng

T&co

rn

Hang

Se

ng

Bank

Swire

Pa

cific

‘A’

Catha

y Pa

cific

Swire

Pa

cific

‘B’

Natio

nal

Mutu

al As

ia

Hong

Ko

ng

& Sh

angh

ai Ho

tels

New

Asia

Realt

y ‘A

’

APT

Satel

lite

Holdi

ngs

Asia

Satel

lite

Telec

om

52

11

1020

.25

86.6

42.53

%

3.61%

31.81

%

2.7%

Hutch

&on

Wha

mpea

Sun

Hung

Ka

i Pr

oper

ties

Cheu

ng

Kong

Ho

lding

s

Hong

Ko

ng

Elec

tric

Hong

Ko

ng

& Ch

ina

Gas

Cheu

ng

Kong

Inf

rastr

uctur

e

Hend

erson

La

nd

New

Worl

d De

velop

men

t

Wha

rf Ho

lding

s

Bank

of

Ea

st As

ia

Amoy

Pr

oper

ties

Kowl

oon

MTR

Bu

s

Holdi

ngs

Lei

Shing

Ho

ng

Hope

well

Holdi

ngs

Vtec

h Ho

ldmgs

Rega

l Ho

tels

Inter

natio

nal

Holdi

ngs

Grea

t Ea

gle

Holdq

s

Man

hatta

n Ca

rd

Chine

se

Estat

es

Holdi

ngs

Wing

Ha

ng

Bank

Varitr

onix

Inter

natio

nal

Realt

y De

velop

men

t ‘A

’

Tsim

Sh

a Ts

ui Pr

oper

ties

Shan

gn-La

As

ia

Dao

Heng

Ba

nk

Grou

p

Kerry

Pr

oper

ties

South

Ch

ina

Mor

ning

POX

Firs

t Pa

cific

Sino

Land

CDL

Hotel

s

HKCB

Ho

lding

s

Liu

Chon

g Hi

ng

Bank

C.

P.

Pokp

hand

24

468.9

3

19.55

%

14.62

%

China

T&

corn

CLP

Holdi

ngs

Ltd.

CITI

C Pa

cific

China

Re

sourc

es

Enter

prise

s

COSC

O Pa

cific

John

son

Elec

tric

Holdi

ngs

Yue

Yuen

Ind

ustria

l Ho

lding

s

China

M

erch

ants

Holdi

ngs

Beijin

g En

terpr

ises

Ng

Fung

Ho

ng

China

Ov

erse

as

Land

&

Tabl

e 2

(Con

tinue

d)

Hong

Ko

ng

Britis

h

Hong

Ko

ng

Airc

raft

Engin

eerin

g

Star

T&

corn

Hong

Ko

ng

Chine

se

South

east

Asian

Fi

rms

Mainla

nd

Chine

se

Fmns

Hend

erson

In

vestm

ent

Ting

yi Ca

yman

Isl

ands

Gu

angd

ong

Inve

stmen

t

Holdi

ngs

Whe

elock

&

Co.

China

M

otor

Bus

Ka

Wah

Ba

nk

A

Hysa

n De

velop

men

t Ro

ad

King

Inf

rastr

uctur

e CN

PC

Hong

Ko

ng

2 u 5;

New

Worl

d Inf

rastr

uctur

e Di

ckso

n Co

ncep

ts Hu

anen

g Po

wer

R

Inter

natio

nal

3

Hang

Lu

ng

Deve

lopm

ent

Centu

ry G

ty Ch

ina

Ever

brigh

r 5 F;

Lead

ing

Spita

Co

nrowa

Or

iental

Pr

ess

Grou

p Ch

ina

Trav

el Int

erna

tiona

l “m

P&bu

rg

Inter

natio

nal

Pearl

Or

iental

CO

SCO

Inter

natio

nal

3

Telev

~slon

Br

oadc

asts

Dah

Sing

Fin

ance

Ch

ina

Reso

urces

Be

ijing

Holdi

ngs

Land

i

Smar

tone

T&co

rn

Pere

grine

In

vestm

ent

China

Na

tiona

l Av

iation

4,

Holdi

ngs

F

Li 81

Fu

ng

Hong

Ko

ng

Parkv

iew

Guan

gzho

u In

vestm

ent

g W

ing

Lung

Ba

nk

Shun

Ta

k Ho

lding

s Ti

anjin

De

velop

men

t $

Holdi

ngs

5

Fura

ma

Hotel

s &

Inve

stmen

t As

ia St

anda

rd Gu

angn

an

Holdi

ngs

Guoc

o Gr

oup

Hong

Ko

ng

Ferry

Ch

ina

Areo

spac

e M

Holdi

ngs

2

HKR

Inter

natio

nal

Minl

y 8

Mira

mar

Ho

tels

& Es

prit

Holdi

ngs

8

Inve

stmen

t 8 z 0

’ W

e us

ed

contr

olling

ow

nersh

ip,

defin

ed

as

the

origi

n of

the

lar

gest

share

holde

r, as

the

cla

ssific

ation

cri

teria

to

place

fir

ms

in dif

feren

t gr

oups

.

b In

de

scen

dmg

order

of

capit

aliza

tion

as

of

Dece

mbe

r 31

, 19

96.

Som

e of

the

na

mes

m

ay

be

misl

eadin

g. Fo

r ex

ample

, Hu

tchiso

n W

hamp

oa

was

hntor

ically

a Br

itish

firm

, bu

t

is no

w co

ntroll

ed

by

K.

S.

Li’s

Cheu

ng

Kong

, a

Hong

Ko

ng

Chine

se

firm

. Si

mila

rly,

Hang

Se

ng

Bank

, wh

ich

was

a Ho

ng

Kong

Ch

inese

fir

m,

is no

w a

mem

ber

of

the

HSBC

Grou

p, a

Britis

h co

mpa

ny.

We

obtai

ned

infor

mati

on

abou

t ev

ery

firm

’s lar

gest

share

holde

r fro

m

Ward

ley

Finan

cial

Infor

mati

on

Servi

ces

Ltd.

w

4


HONG KONG CHINESE FIRMS

No longer operating under the shadow of the British companies, Hong Kong Chinese

firms are currently the backbone of the economy. By the end of 1996, both their

number (52) and total capitalization (42.53%) were the largest among the top 100

group. With HK$1,020.25 billion in market value, these 52 firms contributed

31.81% of the total capitalization among all listed firms in Hong Kong.

The rise of these firms can be traced back to the 197Os, when they started to

challenge the dominance of the British hongs. Some of them successfully wrested

control of major companies from them, such as the takeover of Hutchison by

K. S. Li’s Cheung Kung Group in 1979, and of the Hong Kong and Kowloon Wharf

by Y. K. Pao’s World Maritime in 1980. Another reason which fueled their growth

is the selloffs by major British hongs in the 1980s and 1990s such as the sale of

Hong Kong Electricity from the Jardine group to K. S. Li and the sale of Wheelock

to Y. K. Pao. In the 199Os, the Hong Kong Chinese firms have dominated key

industries such as property, manufacturing, shipping, and media. They also have

substantial market shares in hotel, restaurant, and retailing industries.

SOUTHEAST ASIAN FIRMS’

Usually controlled by ethnic Chinese, these firms initially came to Hong Kong to

escape anti-Chinese turmoil in countries such as Malaysia and Indonesia in the

1960s. Since the 1970s the rapid development of Southeast Asian economies created

a number of multinationals that sought to invest in Hong Kong and to use Hong

Kong as regional headquarters for expansion into China. For example, Sino Land is

controlled by Ng Chee Siong from Singapore. The Salim family from Indonesia

controls the First Pacific Group. The Kuok family from Malaysia controls Shangri-

la Hotel, South China Morning Post, and other prestigious companies. The relatively

low-profile Dhanin Chearavanont from Thailand controls C. P. Pokphand, which is

emerging as a major foreign investor in China. The concentration of multinational

banks in Hong Kong made it easy for these firms to gain access to large sums of

capital which are not readily available in Southeast Asia. In the 199Os, these firms

were active in a number of industries such as property, hotels, banking, shipping,

trading, and retailing. With 11 of them listed among the top 100 group with a total

of HKs86.66 billion in market value, these firms represented a viable economic

force (3.61% among the top 100) in Hong Kong.

>One reviewer suggested that these firms can also be called ‘overseas Chinese firms,’ which we agree.

In this article, we choose to label them as ‘Southeast Asian firms,’ mostly due to our preference for the diversity in out composition. Otherwise, there may be too many ‘Chinese’ firms (i.e. Hong Kong

Chinese, overseas Chinese, and mainland Chinese) that may confuse the reader.


MAINLAND CHINESE FIRMS (THE ‘RED CHlPS’j6

Latecomers to Hong Kong, these firms have both a political and economic mission.

As instruments of policy, they seek to displace British firms from their traditional

spheres of influence, such as public utilities and civil aviation. Economically, the ‘red

chips’ also represent the interest of the mainland Chinese government to raise capital

in Hong Kong, to obtain experience and expertise in a market economy, and to serve

as springboards for some of these firms’ eventual internationalization. While some

of them such as China Merchants (shipping) and Ng Fung Hong Ltd. (foodstuffs)

have been operating in Hong Kong since the 195Os, the massive arrival of the ‘red

chips’ in the 199Os, represented by companies such as China Telecom, Shanghai

Industrial, and Beijing Enterprises, marked the coming of age of this group, and

sparked a great deal of shareholder interest in Hong Kong (Newsweek 1997).

In the 199Os, the ‘red chips’ were active in a number of industries such as

banking, foodstuffs, hotels, telecommunications, and shipping. In 1995, the Hong

Kong Stock Exchange created a separate index to track the performance of these

firms. By the end of 1996, with 24 firms (20% capitalization) listed among the top

100, the ‘red chips’ contributed 14.62% of the total capitalization among all listed

firms in Hong Kong.

In sum, firms in Hong Kong can be divided into four identifiable groups. The

group boundaries, however, may become blurred in some cases, due to asset exchanges and

interlocking directorates. Such interaction helps generate a number of propositions below.

5. PROPOSITIONS

According to the resource dependence perspective, interlocking directorates offer

organizations several advantages. First, interlocks provide for information to be

exchanged. Outside directors have access to a firm’s performance data, are apprised

of important investment proposals before they are implemented, and are able to

bring their experience to bear on strategic problems confronting a firm (Baysinger

and Hoskisson 1990). Second, interlocks allow one organization regular input into

the other firm’s decision-making apparatus, thus asserting power and influence (Mizruchi

1996). Finally, interlocks are associated with interfirm resource dependence in that

they enable firms to coopt sources of environmental uncertainty and stabilize transaction

relationships (Burt 1983; Pennings 1980; Pfeffer and Salancik 1978).

“Another group of mainland Chinese firms active in Hong Kong are called ‘H share’ firms. These firms still maintain their headquarters in the mainland and list their shares on the Hong Kong Stock

Exchange in order to raise capital. Their governance structure such as board members is not as transparent as those of the ‘red chips,’ which are subject to regulation by the Hong Kong authorities. As a result, other than data published in company reports, information about the ‘H share’ firms,

especially their board members, is difficult to collect. Throughout this article, our discussion will focus on the ‘red chips’ but not ‘H shares.’

40 K. AlJ, M. W. PENG AND D. WANG

Approaching 1997, British, Hong Kong Chinese, and Southeast Asian firms

confronted two substantial challenges: (1) to cultivate goodwill with China and (2)

to invest in China. Appointing mainland Chinese directors to the board appears to

serve both purposes. Symbolically, these firms send a friendly signal to the Chinese

authorities. Moreover, these new directors tend to be high-ranking executives managing

mainland Chinese companies operating in Hong Kong (the ‘red chips’). Since all of

the ‘red chips’ are flagship state-owned enterprises which are affiliated with powerful

ministries (e.g. China Telecom belongs to the Ministry of Posts and Telecommunications;

China National Petroleum Corporation belongs to the Ministry of Energy), some of

these executives also hold ministerial ranks in the mainland Chinese hierarchy.

As a result, they tend to have very good connections with various levels of the

government and different industrial ministries in China. Therefore, they may be able

to help various Hong Kong firms’ operations in China by exercising their influence

back home.

However, the scale and scope of introducing mainland Chinese board members

will not be equal among these three groups of firms. Hong Kong Chinese firms may

be the first group to initiate these practices, since (1) they have historically maintained

closer ties with the mainland; (2) given that most of their assets are in Hong Kong,

they have more at stake should they offend the new government; and (3) they are

more interested in investing in China (Hong Kong is the largest source of foreign

investment into mainland China for the period of 1978-97). Mainland Chinese

executives and officials may also be more interested in these interlocks, because they

not only facilitate economic integration between Hong Kong and China, but also

signal political significance linking these two politically unified economies.

‘Southeast Asian firms may be the second group to follow these practices.

Although their home base is in Southeast Asia, they regard China as a major market

for expansion. Ethnic Chinese in origin, owners of these firms, are likely to emphasize

the ‘homecoming’ nature of their relationship with China, and mainland Chinese

authorities have reciprocated by offering preferential treatments such as tax holidays

to welcome their investment (Kao 1993).

Due to institutional, political, and economic pressures (e.g. Palmer et al. 1993),

British firms may find that they have very little choice but to follow these practices.

Since most of them can trace their origins to the 1800s (including some involvement

in the notorious opium trade), it is not surprising that their relations with China had

historically been tense. Although some of them such as Jardine moved their headquarters

and some assets elsewhere, a substantial part of their assets and operations still

remain in Hong Kong. Therefore, these British firms simply cannot afford to have

bad relations with China.

In sum, the appointment of mainland Chinese directors to the board may

resemble an institutionalization process, first initiated by Hong Kong Chinese firms

and followed by Southeast Asian firms. Actions by British firms can be seen as


mimetic isomorphism in that appointing mainland Chinese directors provides increasing

legitimacy to these firms (DiMaggio and Powell 1983; Oliver 1997). Stated formally:

Proposition 1 Appointing mainland Chinese directors to the board will be first

adopted by Hong Kong Chinese firms, followed by Southeast Asian firms, and then

by British firms

Given the strategic role of directors (Baysinger and Hoskisson 1990), mainland

Chinese directors are likely to influence appointing firms’ China strategies. These

directors may facilitate the cooperation between these Hong Kong firms and the ‘red

chip’ firms that they manage, including tacit collusion, preferential transactions,

mutual shareholding, and joint ventures. Moreover, they may exercise their influence

in China and make use of their connections to obtain better deals for these Hong

Kong firms. Given China’s underdeveloped legal and regulatory environment, inside

connections and personal networks are important for business success (Boisot and

Child 1996; Peng and Heath 1996). With such inside connections, these Hong

Kong firms which have mainland Chinese directors on their boards may achieve

better performance in China compared with their competitors which do not have

such assistance (Luo and Chen 1997; Peng 1997). Therefore, we suggest:

Proposition 2 For British, Hong Kong Chinese, and Southeast Asian firms, there

is a positive relationship between the presence of mainland Chinese directors on their

boards and the scale and scope of their investment in China.

Proposition 3 For British, Hong Kong Chinese, and Southeast Asian firms, there

is a positive relationship between the presence of mainland Chinese directors on their

boards and the performance of their China operations.

While British, Hong Kong Chinese, and Southeast Asian firms may find

appointing mainland Chinese directors to be of value, ‘red chip’ firms may similarly

find it attractive to introduce non-mainland Chinese directors to the board. Several

reasons contribute to these practices. First, operating in an unfamiliar environment

which is dramatically different from China in almost every aspect (i.e. small, rich,

entrepreneurial, well-regulated, and international), the ‘red chips’ have a great deal

of interest to deter environmental uncertainties. Creating stable relations with local

firms through interlocking directorates appears to be a natural choice (Pfeffer and

Salancik 1978). Second, one of the major purposes behind the objective of the

Chinese government to encourage these ‘red chips’ to come to Hong Kong is to learn

from the management expertise of local firms and to facilitate, transfer, and diffuse

such learning back to China. Appointing Hong Kong directors and working with

them on strategic issues allow for the exposure to such highly valuable expertise.

42 K. AU. M. W. PENG AND D. WANG

Third, back home, mainland Chinese firms have been found to engage in a great deal

of network- and relationship-building activities among top managers from different

companies in order to achieve growth (Peng 1997). Therefore, it is not surprising

that they continue their similar practices in Hong Kong. Finally, the political mission

behind many ‘red chips’ calls for increased integration with - and possible control

of - key industries in Hong Kong in anticipation of the handover. Thus, coopting

local firms through interlocking directorates intensified in pre-1997 Hong Kong.

Similar to the dynamics of introducing mainland Chinese directors to the

board of Hong Kong firms, the ‘red chips’ may have a marked preference in appointing

certain outside directors over others. Specifically, for historic, economic, and political

reasons, they may favor directors from Hong Kong Chinese firms. For example, in

1979, K. S. Li, chairman of Cheung Kong, was appointed a director of CITIC, which

is a major ‘red chip’ firm directly managed by the State Council of China. Secondly,

the ‘red chips’ may welcome ethnic Chinese directors from Southeast Asian firms.

Finally, for strategic reasons, they may have to coopt certain British firms by creating

interlocking directorates with them. To sum up:

Proposition 4 For mainland Chinese firms in Hong Kong (the ‘red chips’), outside

directors will first come from Hong Kong Chinese firms, followed by those from

Southeast Asian firms, and then by those from British firms.

For the same reason that mainland Chinese directors may influence Hong

Kong firms’ strategies in China, Hong Kong directors may help craft the strategies

of ‘red chip’ firms in Hong Kong. Initially, many ‘red chips’ treated their operations

in Hong Kong as an option to test their ability to compete in a market economy.

As a result, the outcome would be highly uncertain due to their lack of familiarity

with the environment. With more assistance from their Hong Kong directors, they

may become more confident in their ability to compete in Hong Kong, and, as a

result, may accelerate the injection of investment in Hong Kong. Moreover, it is

plausible to argue that Hong Kong directors, given their familiarity with the local

economy and expertise in running competitive organizations, may help their appointing

firms achieve better performance in Hong Kong. Therefore, we suggest:

Proposition 5 For mainland Chinese firms in Hong Kong (the ‘red chips’), there

is a positive relationship between the presence of non-mainland Chinese directors on

their boards and the scale and scope of their investment in Hong Kong.

Proposition 6 For mainland Chinese firms in Hong Kong, there is a positive

relationship between the presence of non-mainland Chinese directors on their boards

and the performance of their Hong Kong operations.


In sum, as the gateway to China and also China’s gateway to the world, Hong Kong

features substantial interaction among British, Hong Kong Chinese, Southeast Asian, and

mainland Chinese companies through interlocking directorates. Approaching 1997, these

activities intensified, resulting in a number of strategic and performance implications.

6. TOWARDS A RESEARCH AGENDA

Dissatisfied by the lack of interlocks research on Hong Kong, we have argued that

the transition approaching 1997 presented fascinating grounds to advance our

understanding of the relationship among interlocking directorates, firms’ strategies,

and performance. The propositions outlined above represent preliminary efforts to

start probing into these complex, dynamic, and important relationships. We believe

that these efforts, if supported by empirical work, have the potential to culminate

in an emerging research agenda that can lead to major findings, similar to those

reported by Pennings (1980), Burt (1983), Mizruchi (1996), and Zajac and Westphal

(1996) on interlocks in the United States, by Richardson (1987) in Canada, by

Stokman and colleagues (1985) and Pederson and Thomsen (1997) in Europe, and

by Gerlach (1992) in Japan.

As a preliminary endeavor, this article makes three contributions. First, it

extends Wong’s (1996) work to the critical, pre-1997 era. The period of 1976-86

that Wong studied did not witness the arrival of a large number of ‘red chip’ firms

from mainland China, nor did the China strategies and operations become so important

for most firms in Hong Kong. To the best of our knowledge, this article represents

a first effort to focus on the role of interlocking directorates in pre-1997 Hong

Kong. Second, Wong did not show standard network measures for interlocking

directorates, such as density, multiplicity, and distance, which made his results less

comparable with those from the West. In contrast, we have been able to compare and

contrast the findings from Hong Kong with those from Great Britain and the

United States. Finally, Wong’s work was a descriptive study trying to gain an

understanding of interlocking directorates in a particular era. He did not test any

hypotheses, nor did he propose any testable propositions to guide future work. Issues

of firm strategies and performance were largely ignored.

There are several advantages of pursuing this research agenda. Empirically, it

will add to our knowledge about the role of interlocking directorates in an increasingly

important area of the world which is underexplored by interlocks researchers.

Theoretically, these endeavors can help determine the applicability of certain existing

theories (Peng et al. 2000 in press; Shenkar and von Glinow 1994). Moreover, the

unique dynamics permeating interlocking directorates in Hong Kong, such as the

diversity of firms from different backgrounds and the unity between ownership and

control in most firms, may allow for the development of new theories. Methodologically,

data about Hong Kong firms’ interlocking directorates, strategies, and performance


are more transparent and reliable, compared with data from China. Therefore, the

results may be more comparable with those from the West.

One issue which is worth discussing is that the relationship between interlocking

directorates and firm performance proposed in P3 and P6 is correlational, but not

causal. Given the conflicting results in the literature on the interlocks-performance

link (Burt 1983; Pennings 1980; Richardson 1987), we are unable to predict apriori

the causal direction of such a connection for Hong Kong firms. As a preliminary

step, identifying the correlation between interlocking directorates and firm performance

will be important. Commenting on the inconclusiveness of the research on the

interlocks-performance link in the West, Mizruchi and Galaskiewicz (1994: 241)

suggested that ‘perhaps alternative types of interorganizational relations . . . have a

more consistent impact on performance, but this has yet to be demonstrated empirically.’

Taking this as a point of departure, this new research agenda centered around Hong

Kong firms may be regarded as an attempt to introduce a new empirical context to

investigate the critical but inconclusive relationship between interlocks and performance.

There are a number of issues within this research agenda that are beyond the

scope of the propositions and call for further exploration. First, the extent to which

interlocking activities is influenced by the Chinese culture needs to be rigorously

examined. Although the literature is full of conceptual writings on the Chinese

propensity to engage in relationship- and network-building activities (Kao 1993;

Redding 1990; Weidenbaum and Hughes 1996), there is little theory-driven,

hypothesis-testing research testing out both the extent and limits of such cultural

impact on firm behavior. The diffusion process that we described, namely, various

Chinese firms may appoint interlocking directorates first and then British firms may

join, may be a reflection of the Chinese interest to initiate ties with people who have

the shortest cultural distance from them first. As a result, the proposed research

agenda allows for an opportunity to propel research centered on the impact of

Chinese culture on firm behavior from a conceptual stage to a theory-testing phase.

Second, the extent to which outside directors can contribute needs to be delineated.

Despite the increasing use of outside directors, boards of various kinds of Hong Kong

firms, including the ‘red chips,’ still tend to be dominated by insiders (Brewer 1997), thus

rendering the discussion of outsider dominance and its strategic implications articulated

in the literature (Fama and Jensen 1983) less relevant. While outsider dominance of the

board is out of the question, outsider participation can still be substantial in this context.

A person sitting on more than one board may not necessarily represent any firm, but can

be a professional, lobbyist, or politician with a defined scope of contributions. For example,

the most heavily linked individual who has 11 board memberships, Charles Lee, is a

solicitor though well-connected. Therefore, the focus of this research agenda is not on the

number and/or dominance of outside directors, but rather on the substantive contributions

of those few ‘resource-rich’ outside directors who are most densely connected to the

environment with multiple board seats.

INTEFLOCKING DIRECTORATES, FIRM STRATEGIES, AND PERFORMANCE IN HONG KONG 45

Third, board size may be a critical issue. Goodstein et al. (1994: 248) found that

large and diverse boards may hinder their ability to initiate strategic change, particularly

during periods of environmental turbulence. Such an environment calls for fast strategic

decision making (Eisenhardt 1989), which in turn would favor an efficient board size that

is not too excessive. Beyond a threshold, board size may have a negative effect on firm

performance, since it may be difficult for directors to reach decisions in a timely fashion

(Zahra and Pearce 1989: 315). Under these circumstances, the selection of a few high

caliber outside directors becomes critical (Zajac and Westphal 1996). Given that Hong

Kong is a small city state with a limited pool of capable directors and the limited slots

for outside directors in Hong Kong firms, people with non-redundant contacts may have

better social capital to contribute (Burt 1997) and thus may be sought more eagerly by

companies.

Finally, it will be interesting to extend this research into the post-1997 era. As

the mainland Chinese economy becomes more open, transparent, and competitive,

Hong Kong firms’ operations may be increasingly determined by their competitive

capabilities, rather than the connections and contacts that certain mainland Chinese

directors provide. Therefore, whether the predictions will hold in the post-1997

remains to be explored in future work.

7. CONCLUSION

Overall, research on interlocking directorates in Hong Kong can be regarded as

efforts to improve our understanding of the embeddedness of organizations (Granovetter

1985). In a broader context (Judge and Zeithaml 1992; Oliver 1997), these endeavors

also reflect the interest to integrate the institutional perspective focusing on the

diffusion of interlocking practices (Pl and P4) with strategic management research

concentrating on strategies and performance (P2, P3, P5, and P6). These efforts, we

believe, will shed considerable light on the role of interlocking directorates in an

increasingly important part of the world that researchers cannot afford to ignore.

ACKNOWLEDGMENTS

This research was supported in part by a Dean’s Incentive Grant, a Direct Allocations

Grant (project code 2087004), and a Lee Hysan Foundation Research Grant from

United College of the Chinese University of Hong Kong. We thank Wardley Financial

Information Services Ltd., for allowing us to access its database. We also thank

C. M. Lau, Shige Makino, Kent Neupert, Agnes Peng, David Thomas, and participants

at a University of Hong Kong seminar for their helpful comments, and Forrest Chan

and Ben Lai for their research assistance. Address all correspondence to Kevin Au,

Department of International Business, Chinese University of Hong Kong, Shatin,

N.T., Hong Kong (email: [email protected]).


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