Transcript 2107_Opening Speech by Mr Paul Chow (HKEx).
HKICS “Corporate Governance at the Crossroads” Conference Opening Remarks
Paul Chow Chief 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” 2
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
3
Listed companies in Hong Kong are governed by a three-tier regulatory system
Government Roles
Set overall policy direction Initiate legislation
Checks & balances
Executive Council Legislative Council
SFC HKEx
Statutory regulator Market watchdog Administer the Codes on Takeovers and Merger and Share Buybacks Regulate HKEx License, supervise and discipline sponsors and IFAs Process Review Panel Securities and Futures Appeals Panel & Tribunal Other independent committees Judicial review Review by Independent Commission Against Corruption (ICAC) 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 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 5
Why should issuers care about corporate governance?
“Corporate Governance and Market Valuation in China”
Frank Song, Chong-En Bai, Qiao Liu, Joe Lu & Junxi Zhang
May 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%.
6
Hong Kong’s disclosure-based regulatory regime
Elements of the disclosure-based regulatory regime in Hong Kong Listing criteria
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
Continual obligations of listed issuers & directors
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
Quality assurance
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 7
Pressure for corporate governance reforms comes from many directions
Corporate scandals (Enron, Worldcom, etc.) Higher expectations from investors CG Reforms Intense competition for business and funding Evolution & convergence of international best practices & standards 8
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 9
In Hong Kong, corporate governance standards have evolved significantly since the 1990s (cont’d)
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
2003
FSTB / SFC / HKEx Corporate Action Plan SCCLR CG proposals (phase II) HKEx Consultation and Conclusions on CG issues HKEx / SFC Consultation on sponsors & IFAs 10
In Hong Kong, corporate governance standards have evolved significantly since the 1990s (cont’d)
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
2003 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 11
Revised code on corporate governance practices implemented 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 audit Delegation by the Board Communication with shareholders 12
First and second review of the effectiveness of the Code
First Review Second Review Further Reviews What did we do?
Reviewed 621 listed issuers’ 2005 annual reports Analysed disclosure against 44 code provisions
What did we find?
100% complied or explained 89% complied with 41 or more code provisions (Report published on 30 March 2007) Surveyed 1,114 listed issuers Examined disclosure against all 45 code provisions based on the survey and testing Details of the Second Review will be published in 1Q2008 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 13
Enhancement of corporate governance standards will never stop…
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
2003 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
2006-present
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 14
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) 15
HKEx strategic focus and initiatives for 2007-08
Mainland Positioning Business Expansion Service Improvement
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 Enhancement
System Enhancement 16
Market Quality Enhancement
Abolition of Paid Issuer Announcement Designated Issuer Website 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.
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.
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.
17
Market Quality Enhancement (cont’d)
Financial Reporting Consultation Changes in Suspension Policy 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.
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.
18
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 shareholders 2.
3.
4.
5.
Explicit SEHK information gathering powers Qualified accountants Sponsor’s independence Public float 6.
7.
8.
9.
Bonus issue of warrants Proposals to reduce the extent of pre-vetting Disclosure of changes in issued share capital Disclosure requirements for issues of securities for cash and the basis of allocation of excess rights in rights issues 10. Alignment of requirements for material dilution in a major subsidiary and deemed disposal 11. General mandates 12. Voting at general meetings 13. Disclosure of information by and about directors 14. Codification of the property JV waiver 15. Self constructed assets 16. Disclosure of information in takeovers 19
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) .
20
The upholding of corporate governance standards
Corporate Governance Standards Issuers
Shareholder Protection
Market Participants
Education Regulation
Regulators
Market Quality
21
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 22
Thank you
www.hkex.com.hk
23