1 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

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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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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




Conclusion

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• 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




Conclusion

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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


• 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


• 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


• 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


• 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




Conclusion

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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

Documents

1 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