Implementation and Enforcement in Corporate Governance

1
Implementation and Enforcement in Corporate
Governance the Case of Hong Kong

• Paul Chow
• Chief Executive, HKEx
• 2 November 2004
• OECD 6th Asian Roundtable on Corporate
  Governance

2
Listed companies in Hong Kong are governed by a
three-tier regulatory system
Roles
Checks balances

• Set overall policy direction
• Initiate legislation

• Executive Council
• Legislative Council

Government

• Statutory regulator
• Market watchdog
• Administer the Codes on Takeovers and Merger and
  Share Buybacks
• Regulate HKEx
• License sponsors and IFAs

• Process Review Panel
• Securities and Futures Appeals Panel Tribunal
• Other independent committees
• Judicial review
• Review by Independent Commission Against
  Corruption (ICAC)

SFC

• Frontline regulator
• Public organisation
• Business entity
• Administer the listing rules

• Oversight by SFC (via SFO and various MOUs)
• Balanced board structure
• Independent Listing Committee and Listing Appeals
  Committee
• Other independent committees
• Judicial review
• Review by ICAC

HKEx
3
Hong Kong securities market has two distinct
characteristics
Implications

• Agency problem not a substantial issue
• Connected party transaction a potential issue
• INEDs may not be truly independent if appointed
  by major shareholders

Highly concentrated corporate ownership

• Difficult to deal with misdemeanours due to
  separate legal systems
• Difficult to undertake investigations if
  individuals and evidence are located outside home
  jurisdiction

Many non-Hong-Kong-based companies
4
Hong Kongs solution is to adopt a primarily
disclosure-based regulatory regime
Elements of the disclosure-based regulatory
regime in Hong Kong
Listing criteria

• Companies allowed to list if comply with
  requirements stated in the Listing Rules
• Quantitative requirements - profit track record
• Qualitative requirements - appropriate management
  experience suitability of business
• Listed issuers obliged to maintain adequate
  procedures, systems and controls to enable them
  to comply with the Listing Rules
• Directors obliged to understand their
  responsibilities under the Listing Rules
• Timely accurate information dissemination
• Disclosure-based regime - up to market to judge
  the quality of listed issuers
• Sufficient powers available for regulators to
  pursue and invoke effective sanctions for
  wrongdoings post event

Continual obligations of listed issuers
directors
Quality assurance
5
Hong Kong has undertaken a number of key CG
initiatives recently
Descriptions

• Make reference to UK Combined Code
• Consist of two tiers of compliance
• Code Provisions - a listed issuer is required to
  comply or explain its non-compliance in its
  Corporate Governance Report
• Recommended Best Practices - compliance is
  encouraged but disclosure of non-compliance is
  voluntary
• Contain 5 sections covering
• Directors
• Directors remuneration
• Accountability and audit
• Delegation by the Board
• Communication with shareholders

Revised Code on Corporate Governance Practices
Corporate Governance Report
6
Hong Kong has undertaken a number of key CG
initiatives recently (continued)
Descriptions

• Increase minimum number of INEDs from 2 to 3
• Mandate the requirement of establishing an audit
  committee which comprises non-executive directors
  only and a minimum of 3 members
• Strengthen the rules governing notifiable
  transactions and connected transactions
• Mandate the disclosure of individual directors
  remuneration on a named basis
• Require any subsequent refreshments of the
  general mandate be subject to independent
  shareholders approval

Amendments to Listing Rules Relating to Corporate
Governance Issues
7
Hong Kong has undertaken a number of key CG
initiatives recently (continued)
Descriptions

• Consider to enshrine the following provisions
• Regular financial reporting obligations of listed
  companies
• Disclosure obligations in relation to corporate
  transactions (particularly connected
  transactions)
• Obligation to disclose price-sensitive
  information

Enshrining key Listing Rules provisions in statute

• Clarify the role and responsibilities of sponsors
  and IFAs (e.g. definition of independence
  expectation on due diligence)
• Further enhance the Securities and Futures
  Commissions (SFCs) regulatory regime focusing
  on
• Enhanced eligibility criteria
• Further development of the SFCs licensing,
  inspection and enforcement functions

Strengthening regulation of sponsors and
independent Financial advisers (IFAs)
8
Hong Kong has undertaken a number of key CG
initiatives recently (continued)
Descriptions

• Establish the Independent Investigation Board
  (IIB) to
• Consider complaints of alleged accounting,
  auditing and ethics irregularities committed by
  professional accountants involving listed
  entities
• Establish the Financial Reporting Review Panel
  (FRRP) to
• Inquire into apparent departures from the law and
  accounting standards in the annual accounts of
  companies
• Seek remedial action

Enhancing regulation of the accounting profession
9
Conclusion

• Major corporate governance reforms are underway
  in Hong Kong
• The SFC and the Exchange, as regulators, will
  continue to closely monitor the development of
  corporate governance in Hong Kong and refine the
  rules and regulations, and their enforcement, in
  a gradual process
• However, good corporate governance is not solely
  a matter of rules and regulations - it is partly
  a matter of ethics and of people
• The regulators can help promote a good governance
  culture by raising public awareness through
  education and training
• Our ultimate goal is to establish a compliance
  culture where directors, market participants and
  professionals all want to behave well themselves

10
Thank You