PRACTISING CORPORATE GOVERNANCE IN HONG KONG

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PRACTISING CORPORATE GOVERNANCE IN HONG KONG

• Speech to American Chamber of Commerce in Hong
  Kong, 12 December 2003
• By Paul M Y Chow, Chief Executive
• Hong Kong Exchanges and Clearing

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Agenda

• International background
• Development of corporate governance in Hong Kong
• Revised Code on Corporate Governance Practices
• Conclusion

1.
2.
3.
4.
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What is corporate governance?
OECD 1998
The system by which corporations are directed and
controlled
International Capital Markets Group 1995
The processes used to direct and manage the
business and affairs of the company with the
objective of balancing

• the attainment of corporate objectives
• the alignment of corporate behaviour with the
  expectations of society
• the accountability to recognised stakeholders

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International developments on corporate governance
Key Developments

• Cadbury Report (UK)
• Further UK committees
• Greenburg (on executive pay)
• Hampel (on combined code)
• Turnbull (on internal control)
• Over 30 other countries develop own codes
• Asian financial crisis highlights importance of
  governance

1992
1990s
1997/98
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International developments on corporate
governance (contd)
Key Developments

• OECD seeks universal standard for corporate
  governance
• International Corporate Governance Network (ICGN)

1999
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Current global focus on corporate governance
Examples
Areas
Enron, Tyco
US Corporate scandals
Fund managers, investment banks
Intermediary governance
Exchange governance
NYSE
Statutory regulation
Sarbanes-Oxley Act
Exchange corporate governance rules
NYSE / Nasdaq listing rules
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Agenda

• International background
• Development of corporate governance in Hong Kong
• Revised Code on Corporate Governance Practices
• Conclusion

1.
2.
3.
4.
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Development of corporate governance in Hong Kong
Key Milestones

• Code of Best Practice
• Disclosure of directors emoluments and MDA
• Guidelines on INEDs
• Statement of compliance with Code of Best
  Practice
• Audit Committees
• SCCLR corporate governance proposals

1993
1994
1995
1998
2001 2003
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Development of corporate governance in Hong Kong
(contd)
Key Milestones

• HKEx consultation on corporate governance
  amendments to Listing Rules
• FSTB Corporate Governance Action Plan
• HKEx consultation conclusions
• Release of revised Code of Best Practice
• Release of new corporate governance Listing Rules

2002
2003
2004 (planned)
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Agenda

• International background
• Development of corporate governance in Hong Kong
• Revised Code on Corporate Governance Practices
• Conclusion

1.
2.
3.
4.
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Rationale of introducing the Code on Corporate
Governance Practices

• Existing code very brief
• need for more detailed, operational guidance
• Public expectations of issuers have risen
  substantially
• Need to catch up with international standards

• Draws on revised UK Combined Code (issued July
  2003)
• Code in final stage of drafting
• To be released for public exposure

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Overall structure of corporate governance Rules
and Code
Coverage

• Voting by poll
• Disclosure of directors remuneration
• Quarterly reporting GEM Board only
• Report on Corporate Governance Practices
• Required to include in Annual Report
• Explain compliance with the Code in half yearly
  report
• (Can be cross referenced to the last annual
  report if there have not been any changes)

Listing Rules
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Overall structure of corporate governance Rules
and Code (contd)
Coverage

• Principles
• Code Provisions
• Comply or explain
• Issuers may develop their own more stringent
  codes
• Recommended Best Practices
• Recommended only, but issuers are encouraged to
  comply or explain non-compliance

Draft Code on Corporate Governance Best Practices
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Content of draft Code Overview
Covered areas
Section

• Board composition responsibility
• Access to information

• Directors

• Level
• Remuneration Committee

• B. Directors remuneration

• Financial reporting
• Internal controls
• Audit Committee

• C. Accountability Audit

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Content of draft Code Overview (contd)
Coverage
Section

• Management functions
• Committees

• D. Delegation by Board

• Effectiveness
• Voting by poll

• E. Communication with shareholders

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Section A - Directors

• Issues

• Key Code provisions

• Key recommended best practice

• Frequency of meetings
• Dealing with conflicted matters
• Chairman and CEO
• INEDS
• Nomination committee
• Professional development for directors

• Quarterly meeting

• Should be dealt with by board meeting with INEDs
  present

• Roles of Chairman CEO separated

• INEDs comprise 1/3 of the board

• INEDs identified in all corp. communications

• Should be established with a majority of INEDs

• Continuous training

• Training upon appointment

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Section B Directors remuneration

• Issues

• Key Code provisions

• Key recommended best practice

• Directors remuneration
• Remuneration Committee

• Formal and transparent remuneration policy

• Significant proportion of executive directors
  remuneration linked to performance
• Disclosure of details of remuneration of senior
  management on a named basis

• Should be established with majority of INEDs

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Section C Accountability and Audit

• Issues

• Key Code provisions

• Key recommended best practice

• Responsibility for accounts
• Quarterly reporting
• Internal controls
• Audit Committee

• Directors to acknowledge responsibility for
  preparing the accounts

• Should be published within 45 days of quarter end
  (Main Board)

• Directors to review effectiveness of internal
  control at least annually

• Should comply with the required duties as set out
  in the Code

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Section D Delegation by Board

• Issues

• Key Code provisions

• Key recommended best practice

• Managements exercise of delegated powers
• Board committees

• Board to give clear directions to management on
  how to exercise the delegated powers

• Disclosure of the division of responsibility
  between the Board and management

• Should prescribe clear terms of reference
• Committees should report back to Board on their
  decisions or recommendations

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Section E Communication with Shareholders

• Issues

• Key Code provisions

• Key recommended best practice

• Effective communication
• Voting by poll

• Chairman of the Board should attend AGM
• Notice of general meetings should be sent to
  shareholders at least 21 days before meeting

• Chairman should explain the procedures for
  demanding and conducting a poll

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Agenda

• International background
• Development of corporate governance in Hong Kong
• Revised Code on Corporate Governance Practices
• Conclusion

1.
2.
3.
4.
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Conclusion
Comments

• Follows leading international practice
• Disclosure-based approach allows flexibility to
  accommodate issuers of different natures
• Will help address concerns on corporate
  governance of listed issuers
• Will help develop quality of issuer management
• Some issuers will have difficulty complying,
  hence a transition period

• Enhanced Code is a substantial step forward

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Conclusion (contd)
Comments

• Other elements include Exchange rules and statute
• In addition to the Exchange, the SFC and
  Government bodies play a part
• And good corporate governance practice depends
  also on directors and advising professionals
• The support of the market community is needed

• Code is only one element of Corporate Governance
  framework