HKICS “Corporate Governance at the Crossroads” ConferenceOpening Remarks

Paul ChowChief Executive, HKEx

8 January 2008 (Tuesday)

Conference Programme

Speeches:

Keynote Speech “Are INEDs of Family-Influenced Public Companies Guests at

the Table?”, Professor Deborah DeMott, Duke University

Luncheon Speech by Mr Martin Wheatley, CEO, SFC

Interactive Panels:

“Effectiveness of INEDs”

“Dual A- and H-share listings”

“Ethics and Compliance”

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Agenda Today

Hong Kong’s three-tier system and distinct characteristics

Corporate governance

Why corporate governance?

Hong Kong’s disclosure-based regulatory regime

Hong Kong’s corporate governance reforms (1993-present)

HKEx – Market quality enhancement in 2008

Concluding thoughts

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Listed companies in Hong Kong are governed by a three-tier regulatory system

Set overall policy direction Initiate legislation

Frontline regulator Public organisation Business entity Administer the Listing Rules

Statutory regulator Market watchdog Administer the Codes on Takeovers and

Merger and Share Buybacks Regulate HKEx License, supervise and discipline sponsors

and IFAs

SFC

Government

HKEx

Roles Checks & balances

Executive Council Legislative Council

Process Review Panel Securities and Futures Appeals Panel &

Tribunal Other independent committees Judicial review Review by Independent Commission Against

Corruption (ICAC)

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 4

Hong Kong securities market has two distinct characteristics

Highly concentrated corporate ownership

Many non-Hong-Kong-based companies

Implications

Agency problem not a substantial issue Connected party transaction a potential

issue INEDs may not be truly independent if

appointed by major shareholders

Difficult to deal with misdemeanours due to separate legal systems

Difficult to undertake investigations if individuals and evidence are located outside home jurisdiction

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Why should issuers care about corporate governance?

“Corporate Governance and Market Valuation in China”Frank Song, Chong-En Bai, Qiao Liu, Joe Lu & Junxi ZhangMay 2003

The research paper found that the average market valuation of Mainland companies rated in the top 20% in terms of corporate

governance practices was 41% to 67% higher than those in the bottom 20%.

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Hong Kong’s disclosure-based regulatory regime

Elements of the disclosure-based regulatory regime in Hong Kong Companies are allowed to list if they 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 the market to judge the quality

of listed issuers Sufficient powers available for regulators to pursue and invoke

effective sanctions for wrongdoings post event

Listing criteria

Continual obligations of listed issuers & directors

Quality assurance

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Pressure for corporate governance reforms comes from many directions

Corporate scandals (Enron, Worldcom, etc.)

Higher expectations

from investors

Intense competition for business and

funding

Evolution & convergence of

international best practices & standards

CG Reforms

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In Hong Kong, corporate governance standards have evolved significantly since the 1990s

1993 – 2000 2001-2002

Code of best practices

Disclosure in Annual Reports

Guidelines on INEDs

SCCLR CG proposal (phase I)

HKEx Consultation on CG issues

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1993 – 2000 2001-2002 2003

Code of best practices

Disclosure in Annual Reports

Guidelines on INEDs

SCCLR CG proposal (phase I)

HKEx Consultation on CG issues

FSTB / SFC / HKEx Corporate Action Plan

SCCLR CG proposals (phase II)

HKEx Consultation and Conclusions on CG issues

HKEx / SFC Consultation on sponsors & IFAs

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In Hong Kong, corporate governance standards have evolved significantly since the 1990s (cont’d)

1993 – 2000 2001-2002 2003

Code of best practices

Disclosure in Annual Reports

Guidelines on INEDs

SCCLR CG proposal (phase I)

HKEx Consultation on CG issues

FSTB / SFC / HKEx Corporate Action Plan

SCCLR CG proposals (phase II)

HKEx Consultation and Conclusions on CG issues

HKEx / SFC Consultation on sponsors & IFAs

2004-2005

Consultation on Code on CG Practices (which came into effect in 2005)

CG amendments to Listing Rules

Regulation of sponsors & IFAs

Regulation of accounting profession

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In Hong Kong, corporate governance standards have evolved significantly since the 1990s (cont’d)

Revised code on corporate governance practicesimplemented in 2005

Revised Code on Corporate Governance Practices & Corporate Governance Report

Description

Consist of two tiers of compliance: ­ Code Provisions - a listed issuer is required to comply

or explain­ Recommended Best Practices - compliance is

encouraged but disclosure of non-compliance is voluntary

Contain 5 sections covering: Directors Directors’ remuneration Accountability and auditDelegation by the Board Communication with shareholders

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First and second review of the effectiveness of the Code

Reviewed 621 listed issuers’ 2005 annual reports

Analysed disclosure against 44 code provisions

SecondReview

FirstReview

What did we do? What did we find?

100% complied or explained 89% complied with 41 or more code

provisions (Report published on 30 March 2007)

Details of the Second Review will be published in 1Q2008

Surveyed 1,114 listed issuers

Examined disclosure against all 45 code provisions based on the survey and testing

FurtherReviews

HKEx intends to conduct and publish similar reviews on a regular basis We plan to review the Code this year to determine whether any changes should

be made

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Enhancement of corporate governance standards will never stop…

1993 – 2000 2001-2002 2003 2006-present

Code of best practices

Disclosure in Annual Reports

Guidelines on INEDs

SCCLR CG proposal (phase I)

HKEx Consultation on CG issues

Analysis of CG Practices and Disclosure in 2005 Annual Reports (“First Review”) which was published in Mar 2007

The Financial Reporting Council (FRC) fully operational in 2007

Analysis of CG Practices and Disclosure in 2006 Annual Reports (“Second Review”) results to be published in 1Q2008

2004-2005

FSTB / SFC / HKEx Corporate Action Plan

SCCLR CG proposals (phase II)

HKEx Consultation and Conclusions on CG issues

HKEx / SFC Consultation on sponsors & IFAs

Consultation on Code on CG Practices (which came into effect in 2005)

CG amendments to Listing Rules

Regulation of sponsors & IFAs

Regulation of accounting profession

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CG Watch 2007 – by ACGA and CLSA (Sep 2007)

“Hong Kong has moved into first place for a range of reasons, one of which is that it continues to grapple with some difficult reform issues and its regulatory officials are well aware of the distance between local norms and international standards.” (pp. 16, CG Watch 2007)

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HKEx strategic focus and initiatives for 2007-08

Primary market development Attract Mainland and overseas issuers Introduce and review listing regimes

Secondary market development Remove trading barriers Facilitate participation of intermediaries Improve market making services Support growth in market volume

Product development Facilitate new product launch Develop new products in cash and derivatives markets

Service enhancement Enhance information transparency Facilitate price discovery Improve communication with EPs Streamline admission of EPs

Market Quality EnhancementSystem Enhancement

Business Expansion

Mainland Positioning

Service Improvement

Focu

s of

200

7/08

Stra

tegi

c Th

eme

2007

-09

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Web Proof Information

Pack (“WPIP”)

Milestone achieved: On 5 November 2007, the SFC and HKEx published a joint policy statement on a pilot scheme for posting a WPIP. Effective 1 January 2008, WPIP must be submitted to the Exchange for posting on the HKEx website before information about the listing applicant is first provided to institutional investors.

Next step: Codification of the requirement in the Listing Rules after the pilot scheme.

Market Quality Enhancement

Abolition of Paid Issuer

Announcement

Milestone achieved: The Electronic Disclosure Regime for listed company announcements was launched on 25 June 2007. Listed companies’ announcements are now submitted to HKEx electronically and are available to investors on the HKEx website.

Next step: Phase 2 of EDP effective from 25 December 2007. A statement will then be issued to conclude the 2002 consultation exercise.

Designated Issuer Website

Milestone achieved: Preparation for the infrastructure and content well underway.

Next step: A dedicated issuer website with separate internet infrastructure from the HKEx website will be launched in early 2008 to provide the public with current and archived issuer related information and announcements.

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Market Quality Enhancement (cont’d)

Financial Reporting

Consultation

Milestone achieved: Consultation period ended 5 November 2007. Consultation proposed:

1. Shortening of announcement and financial reporting deadlines for interim (from three months to two months) and annual results (from four months to three months) for Main Board issuers

2. Introduction of quarterly reporting requirements for Main Board issuers

3. Alignment of the GEM Listing Rules related to quarterly reporting with the proposed new Main Board requirements

Next step: Analysis of responses, further data gathering and testing of the substance of arguments under way.

Changes in Suspension

Policy

Next step: In November 2007 the Listing Committee approved the proposal for issuers to publish price sensitive announcements in the morning and lunchtime publication windows without the need to impose a suspension.

Subject to SFC approval, changes will likely to be implemented by the end of 1Q2008. Market education and communication are being prepared.

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Market Quality Enhancement (cont’d)

Combined Consultation

Next step: To be issued in January 2008 to consult on a total of 18 items related to listing policies and corporate governance, such as:

1. Facilitating electronic communication with shareholders2. Explicit SEHK information gathering powers3. Qualified accountants4. Sponsor’s independence5. Public float6. Bonus issue of warrants7. Proposals to reduce the extent of pre-vetting 8. Disclosure of changes in issued share capital9. Disclosure requirements for issues of securities for cash and the

basis of allocation of excess rights in rights issues10. Alignment of requirements for material dilution in a major subsidiary

and deemed disposal11. General mandates12. Voting at general meetings13. Disclosure of information by and about directors14. Codification of the property JV waiver15. Self constructed assets16. Disclosure of information in takeovers

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Asian Roundtable on Corporate Governance 2008

Pursuant to a G-7 mandate to the OECD and World Bank, the OECD organises the Asian Roundtable on Corporate Governance to support corporate governance reforms in Asia.

The Roundtable comprises Asian policy-makers, regulators and business leaders, as well as regional and international experts.

This year’s Asian Roundtable on Corporate Governance will be held in Hong Kong on 13-14 May 2008 (Tuesday-Wednesday)

.

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The upholding of corporate governance standards

Market Participants

Issuers

Regulators

Corporate Governance StandardsMarket Quality

Shareholder ProtectionEducationRegulation

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Concluding thoughts

HKEx will continue to work closely with the SFC to monitor the development of corporate governance in Hong Kong and refine rules and regulations, and their enforcement, in a gradual process based on practical experience

However, good corporate governance is not solely a matter of rules and regulations - it is also a matter of ethics and of people

All of us 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 strive to uphold the highest possible corporate governance standards to help maintain Hong Kong’s excellence in market quality

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Thank you

www.hkex.com.hk

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