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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
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2.
3.
4.
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What is corporate governance?
The system by which corporations are directed and controlled
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
OECD 1998
International Capital Markets Group 1995
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International developments on corporate governance
• 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
Key Developments
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International developments on corporate governance (cont’d)
• OECD seeks universal standard for corporate governance
• International Corporate Governance Network (ICGN)
1999
Key Developments
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Current global focus on corporate governance
Enron, TycoUS Corporate scandals
Intermediary governance
Exchange governance
Statutory regulation
Exchange corporate governance rules
Fund managers, investment banks
NYSE
Sarbanes-Oxley Act
NYSE / Nasdaq listing rules
ExamplesAreas
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Agenda
International background
Development of corporate governance in Hong Kong
Revised Code on Corporate Governance Practices
Conclusion
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2.
3.
4.
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Development of corporate governance in Hong Kong
• Code of Best Practice
• Disclosure of directors’ emoluments and MD&A
• Guidelines on INEDs
• Statement of compliance with Code of Best Practice
• Audit Committees
• SCCLR corporate governance proposals
1993
1994
1995
1998
2001 & 2003
Key Milestones
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• 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
Development of corporate governance in Hong Kong (cont’d)
2002
2003
2004 (planned)
Key Milestones
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Agenda
International background
Development of corporate governance in Hong Kong
Revised Code on Corporate Governance Practices
Conclusion
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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
• 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
Coverage
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Overall structure of corporate governance Rules and Code (cont’d)
Coverage
Draft Code on Corporate Governance Best Practices
• 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
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Covered areas
Content of draft Code – Overview
A. Directors
Section
• Board composition & responsibility
• Access to information
• Level
• Remuneration Committee
B. Directors’ remuneration
• Financial reporting
• Internal controls
• Audit Committee
C. Accountability & Audit
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Coverage
Content of draft Code – Overview (cont’d)
Section
• Management functions
• Committees
• Effectiveness
• Voting by poll
D. Delegation by Board
E. Communication with shareholders
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Section A - Directors
• Frequency of meetings
• Dealing with conflicted matters
• Chairman and CEO
• INEDS
• Nomination committee
• Professional development for directors
Issues Key Code provisions Key recommended best practice
• 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
• Directors’ remuneration
• Remuneration Committee
Issues Key Code provisions Key recommended best practice
• Formal and transparent remuneration policy
• Should be established with majority of INEDs
• Significant proportion of executive directors’ remuneration linked to performance
• Disclosure of details of remuneration of senior management on a named basis
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Section C – Accountability and Audit
• Responsibility for accounts
• Quarterly reporting
• Internal controls
• Audit Committee
Issues Key Code provisions Key recommended best practice
• 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
• Management’s exercise of delegated powers
• Board committees
Issues Key Code provisions Key recommended best practice
• 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
• Effective communication
• Voting by poll
Issues Key Code provisions Key recommended best practice
• 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
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2.
3.
4.
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Comments
Conclusion
• 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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Comments
Conclusion (cont’d)
• 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