Transcript Practising Corporate Governance in Hong Kong

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
1
Agenda
1.
International background
2.
Development of corporate governance in Hong
Kong
3.
Revised Code on Corporate Governance
Practices
4.
Conclusion
2
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
3
International developments on corporate
governance
Key Developments
1992
• Cadbury Report (UK)
1990s
• Further UK committees
- Greenburg (on executive pay)
- Hampel (on combined code)
- Turnbull (on internal control)
• Over 30 other countries develop own codes
1997/98
• Asian financial crisis highlights importance of
governance
4
International developments on corporate
governance (cont’d)
Key Developments
1999
• OECD seeks universal standard for corporate
governance
• International Corporate Governance Network
(ICGN)
5
Current global focus on corporate
governance
Areas
US Corporate scandals
Intermediary governance
Examples
Enron, Tyco
Fund managers, investment banks
Exchange governance
NYSE
Statutory regulation
Sarbanes-Oxley Act
Exchange corporate
governance rules
NYSE / Nasdaq listing rules
6
Agenda
1.
International background
2.
Development of corporate governance in
Hong Kong
3.
Revised Code on Corporate Governance
Practices
4.
Conclusion
7
Development of corporate governance in
Hong Kong
Key Milestones
1993
• Code of Best Practice
1994
• Disclosure of directors’ emoluments and MD&A
• Guidelines on INEDs
1995
• Statement of compliance with Code of Best
Practice
1998
• Audit Committees
2001 & 2003
• SCCLR corporate governance proposals
8
Development of corporate governance in
Hong Kong (cont’d)
Key Milestones
2002
• HKEx consultation on corporate governance
amendments to Listing Rules
2003
• FSTB Corporate Governance Action Plan
• HKEx consultation conclusions
2004 (planned)
• Release of revised Code of Best Practice
• Release of new corporate governance Listing
Rules
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Agenda
1.
International background
2.
Development of corporate governance in Hong
Kong
3.
Revised Code on Corporate Governance
Practices
4.
Conclusion
10
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
11
Overall structure of corporate governance
Rules and Code
Coverage
• Voting by poll
Listing Rules
• 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)
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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 noncompliance
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Content of draft Code – Overview
Section
Covered areas
A. Directors
• Board composition & responsibility
• Access to information
B. Directors’
remuneration
C. Accountability & Audit
• Level
• Remuneration Committee
• Financial reporting
• Internal controls
• Audit Committee
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Content of draft Code – Overview (cont’d)
Section
Coverage
D. Delegation by Board
• Management functions
• Committees
E. Communication with
shareholders
• Effectiveness
• Voting by poll
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Section A - Directors
Issues
Key Code provisions
• Frequency of meetings
• Quarterly meeting
• Dealing with conflicted
matters
• Should be dealt with
by board meeting
with INEDs present
• Chairman and CEO
• Roles of Chairman &
CEO separated
• INEDS
• INEDs identified in all
corp.
communications
• INEDs comprise 1/3
of the board
• Training upon
appointment
• Continuous training
• Nomination committee
• Professional development
for directors
Key recommended
best practice
• Should be
established with a
majority of INEDs
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Section B – Directors’ remuneration
Issues
Key Code provisions
Key recommended
best practice
• Directors’ remuneration
• 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
• Remuneration Committee
• Should be
established with
majority of INEDs
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Section C – Accountability and Audit
Issues
Key Code provisions
• Responsibility for
accounts
• Directors to
acknowledge
responsibility for
preparing the accounts
• Quarterly reporting
Key recommended
best practice
• Should be published
within 45 days of quarter
end (Main Board)
• Internal controls
• Directors to review
effectiveness of internal
control at least annually
• Audit Committee
• 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
• Management’s exercise
of delegated powers
• Board to give clear
• Disclosure of the
directions to
division of
management on how to
responsibility
exercise the delegated
between the Board
powers
and management
• Board committees
• 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
• Effective communication
• Chairman of the Board
should attend AGM
Key recommended
best practice
• Notice of general
meetings should be sent
to shareholders at least
21 days before meeting
• Voting by poll
• Chairman should explain
the procedures for
demanding and
conducting a poll
20
Agenda
1.
International background
2.
Development of corporate governance in Hong
Kong
3.
Revised Code on Corporate Governance
Practices
4.
Conclusion
21
Conclusion
Comments
Enhanced Code is
a substantial step
forward
• 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
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Conclusion (cont’d)
Comments
Code is only one
element of
Corporate
Governance
framework
• 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
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