Financial Secretary's speech

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Following is the full text of the speech (English only) by the Financial Secretary, Mr Donald Tsang, at the opening of the International Company Secretaries Conference on Corporate Governance today (Monday):

Mr Ing, Mr King, ladies and gentlemen,

I am very honoured indeed to have the opportunity to welcome such a distinguished audience of experts in the field of corporate governance from all around the world to this international conference.

As is only too obvious, we are living at a time of great challenge and it is not terribly clear when this period will end. However, it is in such testing times that we can see the benefits of sound planning and good governance in all walks of life.

It is also at periods such as this that we have the time to stand back from the coal face, as it were, and check on our position and progress. In a world of seismic rumblings, were our props sufficiently well-placed to prevent the rock from tumbling down on our heads? Was our safety plan well advanced or one of the things we had yet to get around to?

In this context, an international conference on corporate governance is well timed, bringing together representatives of Governments, regulatory authorities, banks and companies from throughout the world.

Even when companies themselves may be fighting for their very existence, it is positive thinking and good practice to look ahead and consider the system by which they are directed and controlled.

For a simple and persuasive argument for taking this positive approach, let us cast our minds back to the Cadbury Report published in December 1992. In many respects, it is the seminal document for corporate governance.

In the preface to the Report, Sir Adrian Cadbury says: "When our Committee was formed just over eighteen months ago, neither our title nor our work programme seemed framed to catch the headlines. In the event, the Committee has become the focus of far more attention than I ever envisaged when I accepted the invitation to become its chairman. The harsh economic climate is partly responsible, since it has exposed company reports and accounts to unusually close scrutiny. It is, however, the continuing concern about standards of financial reporting and accountability, heightened by BCCI, Maxwell and the controversy over directors' pay, which has kept corporate governance in the public eye. Unexpected though this attention may have been, it reflects a climate of opinion which accepts that changes are needed and it presents an opportunity to raise standards of which we should take full advantage."

This statement underlines the fact that the beginning of the corporate governance debate had a direct relationship with the severe economic climate which prevailed in the United Kingdom in the early 1990's and several well-documented, major corporate and financial scandals which happened around then.

In economically straitened circumstances, when legitimate profits are harder to earn, there will be greater temptations for some company directors to act in a manner which is not compatible with their fiduciary duty towards the companies. Clearly, this is neither in the interests of the companies nor the overall economy of the country in question for, if I may quote Sir Adrian again: "The country's economy depends on the drive and efficiency of its companies. (Their boards) must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance."

The same is true for Hong Kong and indeed any other place in the world.

The slowing down of economic activity makes this an eminently suitable time to examine the governance of those corporate structures which deliver wealth to nations with a view to bringing about improvements. For when economic recovery returns - as it will - those structures will be able to take greater advantage of the improving economic climate to the benefit of the global community.

Thus, it is only appropriate that Sir Ronnie Hampel's Final Report to update the Cadbury Report should have been published in January, during the current economic downturn, and I am delighted that Sir Ronnie will be one of the keynote speakers at this conference.

As one of the world's leading international financial and business centres, Hong Kong is vitally concerned with good corporate governance. Accountability, disclosure and transparency are all fundamentally important in ensuring the integrity of Hong Kong's companies and financial markets.

The importance accorded to these principles in Hong Kong has been a reason why we are able to withstand the current economic downturn in a relatively robust manner.

In the case of Hong Kong, understandably, our primary concern has been with - as it must be - the standards of corporate governance in the listed companies given the high degree of public interest, involvement and investment in these companies.

There are 676 companies listed on the Stock Exchange of Hong Kong, with a total market capitalisation of HK$2,670 billion (US$340 billion). In developing standards of corporate governance, the Stock Exchange has been playing a leading role. Its policy is to provide broad guidelines for listed issuers in the belief that self-regulation by listed issuers is more effective and efficient than the imposition of excessive and rigid regulations. This takes the form of a Code of Best Practice which is revised and updated at regular intervals.

The Stock Exchange took its first initiative to promote the concept of corporate governance in 1992. This was followed in subsequent years by the formation of four dedicated Working Groups to study matters in the Cadbury Report that were of relevance to Hong Kong, and notably, to introduce the "Code of Best Practice".

I understand that the Fifth Working Group is about to be formed to examine more in-depth issues relevant to the Hong Kong situation, such as the corporate governance implications of connected transactions and family controlled companies, and to study the recommendations in the Hampel Report.

The Stock Exchange is, however, not alone in promoting good corporate governance in Hong Kong. Thanks to its very extensive computerisation programme over the past few years, the Companies Registry is now able to monitor closely and enforce the timely disclosure of information on directors and companies - both listed and unlisted - which is statutorily obliged to be filed on the public record. Those directors and companies which do not comply with these disclosure requirements render themselves liable to prosecution.

Since July 1994, those directors of companies who in extreme cases have proved to be patently unsuited to be directors may be disqualified under the Companies Ordinance. These provisions are modelled on the United Kingdom's Companies Directors Disqualification Act 1986; prescribe stronger and more specific measures to deal with the problem of rogue directors; and should prove to be a greater deterrent against misconduct by directors than the previous legislation.

Since the legislation was implemented, a total of 140 persons have been disqualified from acting as company directors for various periods of time, and as at November 1, a total of 75 such disqualified orders still remain in force and the relevant disqualification orders are available for public search in the computerised index at the Companies Registry. So maximum transparency has been achieved.

In terms of Company Law reform, the Administration is also looking at ways of improving corporate governance. The recommendations in the Consultant's Report which was commissioned by the Government in late 1994 to undertake an Overall Review of the Companies Ordinance has made a number of recommendations which will have a bearing on corporate governance.

The Consultancy Report has been subject to a lengthy period of public consultation which finished in March this year. The Standing Committee on Company Law Reform, which is a non-statutory body comprising very experienced legal and accounting professionals and academics in the field of company law, as well as representatives of the various market regulators, is undertaking its own independent review of the recommendations.

This Committee will shortly commence its scrutiny of the comments received on the Report, focus in particular on those areas where there is disagreement, with a view to submitting its own Committee Report to me. This Committee Report will point to the direction to which the future Companies Ordinance of Hong Kong should take shape, having regard to our unique circumstances.

There is, however, only so much which law and regulation can do to promote good corporate governance. No matter how good it is in theory, is something which does not and cannot exist in a vacuum. At the end of the day, it involves people, be they academics, accountants, company secretaries, businessmen and, dare I say, civil servants.

Corporate governance can be only as good as the people developing, interpreting and implementing it. Furthermore, good corporate governance can operate effectively only if there is implicit consent and willingness to comply on the part of those responsible for the management of companies.

In Hong Kong, we have a strong civil society with deep roots which is underpinned by a large number of professional bodies and social institutions. Given this framework and tradition, it is both inevitable and desirable that the prime responsibility for promoting corporate governance in Hong Kong must lie with the relevant professional bodies and private sector. I am delighted to say that they have risen to the task.

I should mention here the invaluable work of the Hong Kong Institute of Company Secretaries in promoting good corporate governance in Hong Kong over many years by developing increasing professionalism and dedication among its members. This is because if a company is badly run, this will reflect badly not only on the directors but also on the company secretary.

In recent years, the Institute has taken many initiatives to promote corporate governance including training programmes and research projects, and of course, this major international conference. Furthermore, to foster better links with the Mainland of China to enhance the development of corporate governance, the Hong Kong Institute of Company Secretaries took the commendable step two years ago of establishing a representative office in Beijing.

The Institute, in association with the China Securities Regulatory Commission, is playing a key role in training qualified company secretaries for H Share companies on the Mainland.

Another professional body, the Hong Kong Society of Accountants, is also placing an increasing emphasis on promoting good corporate governance. In this respect, it has made a number of recommendations for additional disclosures and directors' remuneration, and has recommended the formation of remuneration committees as good corporate governance practice. Good, transparent financial reporting and disclosure is one of the key elements in good corporate governance, and we look upon the Society to ensure that Hong Kong has the highest possible international standards among its members in this project.

In addition, the Hong Kong Institute of Directors has recently published a useful booklet entitled 'Guidelines for Directors' aimed at improving the awareness of existing and newly appointed company directors. I believe that more will be done by this Institute to carry out the daunting job of ensuring that the message of corporate governance will reach out to the 1.5 million company directors in Hong Kong.

At the international level, the Hong Kong Securities and Futures Commission is a prominent member of the very influential International Organisation of Securities Commissions, or in brief, the IOSCO, which brings together securities regulators from over 100 jurisdictions.

Of particular importance, at this time, is the Securities and Futures Commission's participation in IOSCO's work on the evaluation of new draft international accounting standards which will ultimately help to improve corporate transparency, raising international standards of securities regulations and strengthening internal and risk management within securities firms, including the management of risk posed by hedge funds as well as regulating securities activity on the Internet.

It is clear that corporate governance is something not only of a domestic concern, but also a matter that warrants international cooperation, especially at a time of rapid economic and financial globalisation.

Ladies and gentlemen, in conclusion, I believe that Hong Kong has made a good start regarding improved corporate governance. But I also recognise that we still have far to go and have much to learn.

Over the next two days, we shall learn much from experts in this area from all around the world which will help considerably in devising and implementing appropriate systems of corporate governance for the 21st century, which is almost upon us.

If there is one message which I would like to leave with you, it is this : Good corporate governance is not an optional extra for companies but an essential element in attracting investment and stimulating growth.

For with a global economy, corporate governance standards must also be global, and those companies whose governance systems are not compatible with international standards will lose out in terms of attracting investment. It is in all our interests to ensure that these standards are as widespread and as high as possible.

Thank you.

End/Monday, November 23, 1998

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