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The Development of Corporate Governance

in Hong Kong

Paul M Y Chow

Chief Executive

Hong Kong Exchanges and Clearing Limited

Presented at the AIA Luncheon, 20 August 2003

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The Two ‘Not’s

Not solely a matter of rules and regulatory enforcement

Responsibility cannot rest with one body

Also a matter of culture, of ethics

Many parties involved

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Purpose and Nature

Intermediate TargetsProcesses of decision-making and accountability

Focus of regulators

Final OutcomeIssuers make fair and value-added decisions for shareholders

Focus of market

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Corporate Governance is therefore about PROCESSES ……The processes used to direct and manage the business and affairs of the company

with 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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… The PROCESSES involve :

Responsibilities

Accountabilities

Check and balances

Who should do what

To whom those with responsibilities must account and how

The system of supervision and control procedures and communication flows

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Regulators’ Roles in Promoting Good Corporate Governance

1. Promote awareness of company directors

1. Promote awareness of company directors

2. Promote high level of transparency

2. Promote high level of transparency

3. Provide stakeholders with remedies against unfair behaviour

3. Provide stakeholders with remedies against unfair behaviour

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Historical Development of Corporate Governance in

Hong Kong

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HKEx’s Initiatives in 1990s

1994 Required issuers to disclose detailed directors/management information

1994 Required issuers to disclose detailed directors/management information

1993 Introduced non-mandatory Code of Best Practice

1993 Introduced non-mandatory Code of Best Practice

1994 Announced guidelines on independent non-executive directors

1994 Announced guidelines on independent non-executive directors

1995 Required issuers to include a statement of compliance

1995 Required issuers to include a statement of compliance

1996Required fuller disclosure of information to assess suitability of directors

1996Required fuller disclosure of information to assess suitability of directors

1998 Revised Code of Best Practice

1998 Revised Code of Best Practice

1993 1994 1995 1996 1997 1998 1999

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Other Key Milestones

HK Society of AccountantsHK Society of Accountants

Working groups on corporate governance

Guidelines on audit committees

SCCLRSCCLR Issued Phase I/II consultation papers on corporate governance

SFCSFC

Improvements to the Codes on Takeovers and Mergers and Share Repurchases

Securities & Futures Ordinance

Dual filing procedure

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Market Perception on Corporate Governance

Connected transactions not in the interests of minority shareholders

Unreasonably high remuneration of directors of some poorly performing companies

A number of listed companies are illiquid and with little genuine public floats

General concerns about regulation and disclosure of China-related issuers

Lack of confidence in the regulation of sponsors and IFAs

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Reasons for the Market Perception

Inability of regulators to enforce boundary of unacceptable behaviour

Investors lack legal means to pursue corporate misdemeanours

Regulators’ powers to supervise listed companies are insufficient

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Recent Corporate Governance Initiatives

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“Paragon of Corporate Governance”

January 2002, HKEx Issued consultation paper on proposed amendments to the Listing Rules

July 2002, HKEx Issued consultation papers on initial listing criteria and the delisting mechanism

November 2002, HKEx Issued consultation papers on criteria for continued listing

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May 2003, HKEx & SFCJointly issued consultation paper on the regulation of sponsors and IFAs

May 2003, FSTB & SFCJointly issued “Derivative action” consultation paper

June 2003, SCCLRIssued Phase II consultation paper

“Paragon of Corporate Governance”

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Other Work In Progress

SFC Working on legislation governing public offerings of securities

HK Society of Accountants & SCCLR Reviewing the regulation of accounts and the accountancy profession and proposing to establish an Independent Investigation Board as well as a Financial Review Reporting Panel

Government-appointed Expert GroupReviewing the alignment of responsibilities among the 3 tiers of regulatory system

“Paragon of Corporate Governance”

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Thank you