Speech by Secretary for Financial Services at The HK Institute of Directors
Following is the full text of the speech by the Secretary for Financial Services, Mr Stephen Ip, at the luncheon meeting of The Hong Kong Institute of Directors today (February 16):
Corporate Governance in Hong Kong
Moses, Ladies and Gentlemen,
I am honoured to have the opportunity to share with you my views on corporate governance in Hong Kong and measures and initiatives being taken to enhance corporate governance.
I trust you will all agree that good corporate governance is a key element in improving economic efficiency and fostering financial stability. Companies with high standards of accountability, good disclosure practices and high transparency can readily attract capital and investment and would be in a better position to survive economic downturn. It follows that capital would naturally flow into a place with the highest level of corporate governance; and such a place would be the home of corporations when the global economy thrives and a safe haven for capital when the regional economy experiences volatility.
With a common law heritage, an independent judiciary and an effective and efficient market and regulatory regime, Hong Kong's corporate governance standard is amongst the highest in Asia. According to a survey of foreign expatriates working in Asia conducted in May 2000, Hong Kong's corporate governance standard is regarded as among the most satisfactory in Asia. In January this year, Hong Kong has also been referred to by the Managing Director of IMF as 'the standard setter for corporate governance and transparency in Asia'. Our sound regime has helped us to weather the Asian economic crisis and recover at a reasonably quick pace. Nonetheless, I must stress that such findings, comments and past
performance give us no reasons for complacency. The business world is changing all the time; globalization and opening up of new markets around us provide new opportunities as well as new challenges. To maintain our competitive edge, we must not lose sight of the international benchmarks in terms of corporate governance. We have been particularly mindful of the need to strengthen our existing regime.
What then is our existing regime? Like many other international financial centres, we operate within a legal framework of common law, statute law and codes of practices. The system governing the operation of companies in general finds its roots in common law (for example, the fiduciary duties of directors) while our Companies Ordinance also sets out the statutory provisions (for example, the duty to disclose and the rights of shareholders). Companies listed on our Stock Exchange are subject to additional requirements because their shares are publicly held. For example, the provisions in the Securities Ordinance, the Securities (Disclosure of Interests) Ordinance, and the non-statutory Listing Rules of the Stock Exchange, and requirements in the Takeovers Code and Share Repurchase Code all apply to listed companies.
The above combination has evolved throughout the years to cope with the changing market situations and meet the needs of investors. The Companies Ordinance, for example, is under the constant scrutiny of the Standing Committee on Company Law Reform, and it is amended virtually every year to ensure that our companies regulatory regime is in line with international developments and meets the needs of Hong Kong. Our securities legislation has also undergone much transformation and I would elaborate on our latest endeavour in this area later on. Our Listing Rules as well as various Codes, as you are well aware, are under constant review. Nonetheless, our rules and regulations are only as good as the people applying and complying with them. In all discussions on corporate governance, public education and changing investor culture are accepted as an integral part of the process. Good corporate governance is not only about regulations and regulators: it is the product of the concerted efforts and hard work of all participants, be they directors, shareholders, professionals or regulators, all working towards the common objective of creating wealth and jobs, and in the process, furthering Hong Kong's status as a world class financial and business centre.
Our companies law regime is set out under the Companies Ordinance which has been under constant review by the Standing Committee on Company Law Reform. Last year the Standing Committee put forward a total of 62 recommendations for legislative amendments or further study. On the corporate governance front, we aim to introduce legislation in the middle of this year to clarify the duties of directors and enhance the rights of shareholders. The amendments will include abolishing corporate directors which will result in individuals being held responsible for corporate acts; making a director vicariously liable for acts and omissions of his alternates; reducing the threshold for circulating shareholders' proposals
from the present 5% to 21/2% of the voting rights; and giving every shareholder a personal right to sue to enforce the terms of a company's Memorandum and Articles of Association. To facilitate shareholders' understanding of the activities and results of listed companies, we will also be proposing amendments to the Companies Ordinance to allow Hong Kong incorporated listed companies to issue summary financial statements to their shareholders in place of the full accounts. The right of the shareholder to receive a copy of the full accounts would be retained and he may continue to obtain a full copy if he so wishes. Similar measures have been put in place in other common law jurisdictions, in the UK and Australia for example, and this has been well received by shareholders.
The provisions in relation to offers of investments are also enshrined in the Companies Ordinance. In the light of the new types of instruments offered and the new electronic medium through which such offers may be made, the Securities and Futures Commission is reviewing the relevant laws and regulations, with a view to simplifying those provisions and requirements, thereby facilitating subscribers to have more ready access to, and greater understanding of, the contents of the offer documents.
Securities and Futures Bill
Disclosure of information is a cardinal principle in corporate governance. In relation to listed companies, we are proposing, in the Securities and Futures Bill now before the Legislative Council, to enhance transparency, by promoting timely and accurate disclosure of price sensitive information. We seek to lower the initial shareholding disclosure threshold for persons other than directors and chief executives from 10% to 5% and shorten the disclosure notification period from 5 to 3 business days. The Bill also contains proposals to set up a Market Misconduct Tribunal and expand the criminal regime to combat market misconduct, as well as to enhance the investigatory regime in respect of the conduct of listed companies. Another proposal is to create private cause of action for investors to claim damage as a result of reliance on false or misleading public statements. In drafting the Bill, our objective is to provide a regulatory regime that is on par with international standards, compatible with international practices, and takes account of local characteristics and needs.
I am confident that a consolidated and up-to-date regulatory framework as provided for by the Bill will be conducive to developing a fair and transparent market to promote market confidence and investor protection; reducing market malpractice; and facilitating innovation and competition. I look forward to the early passage of the Bill.
Listing Rules and Takeovers and Share Repurchase Codes
Our initiatives to enhance corporate governance are not, of course, limited to those in the Securities and Futures Bill and the amendments to the Companies Ordinance I just mentioned. The governance regime in respect of listed companies indeed is also set out in the Listing Rules of the Stock Exchange. In 1993, in response to the UK Cadbury Report, the Exchange introduced a Code of Best Practice as an integral part of the Listing Rules. The Code increases the accountability of directors to shareholders; and improves shareholders' access to information. It also affirms the rights of the two independent directors as full members of the board, and gives guidance on their role. The Listing Rules, as well as the Code, are under constant review. The Stock Exchange together with the Securities and Futures Commission are now reviewing the Listing Rules of both the Main Board and the Growth Enterprise Market (GEM). The review seeks, inter alia, to improve corporate governance of listed companies through strengthening requirements for financial information disclosure, streamlining disciplinary procedures and upgrading the sanctions. The aim is to complete the review this year.
Separately, the Securities and Futures Commission is also conducting an overall review of the Takeovers and Share Repurchase Codes, with a view to bringing the Codes in line with international standards. I welcome the initiatives taken by the Exchange and the Commission in upgrading the corporate governance regime.
Corporate Governance Review
The Overall Corporate Governance Review announced by the Financial Secretary in his Budget Speech last year is a timely step towards identifying and plugging gaps in our corporate governance regime.
The Standing Committee on Company Law Reform has since been tasked to conduct the Review and has set up three subcommittees to examine subjects relating to directors, shareholders and corporate reporting. A pragmatic two-pronged approach is adopted. Research will be conducted on fundamental issues like the attitudes of institutional investors towards corporate governance standards in Hong Kong; the corporate governance regimes in other jurisdictions; the correlation, if any, between the performance of listed companies in Hong Kong with their shareholders' profile; the roles and functions of audit, nomination and remuneration committees; and the flow of company information and shareholders' rights of access to such information. Whilst waiting for the research findings, the three sub-committees are now examining specific governance topics in earnest. Some examples of the subjects being considered include the need for a statutory statement of duties for directors; shareholder remedies; standards of corporate disclosure; and filing of financial statements by private companies.
Corporate Communication and Accounting Standards
Timely disclosure of and efficient access to quality information are crucial elements of good corporate governance. We therefore favour direct communication between a corporation and its shareholders, and have been identifying impediments to such communication. The Steering Committee on Enhancement of Financial Infrastructure is now examining the introduction of scripless trading. At present, because of the share certificate system, a substantial amount of shares are held through a nominee. Hence, the beneficial owners do not participate directly in corporate affairs. Although technically this impediment could be overcome, there is in practice little direct communication between the corporation and its beneficial shareholders. A dematerialized structure would help to enfranchise the underlying beneficial shareholders and facilitate participation by such owners in a company's affairs. To implement a scripless structure would require changes to the law and I look forward to the Steering Committee completing its task and recommending legislative proposals in the immediate future.
On the quality of information being disclosed, since 1993, the Hong Kong Society of Accountants has been working very hard in bringing the Hong Kong GAAP in line with the International Accounting Standards (IAS). I am glad to say that the adaptation exercise will be completed next year. The recent issue of six more Statements of Standard Accounting Practice seeking to adopt the IAS is an encouraging step.
It is clear that to enhance the standards of corporate governance in Hong Kong, we need the concerted efforts of all parties concerned. In this connection, as a body representing directors, your Institute has an important role to play in drawing together directors and providing them with the necessary back up to better perform their duties. I note that the Institute has taken the positive step in setting up a Corporate Governance Development Foundation which aims to organize and sponsor programmes in promoting good corporate governance and professionalism in director practices. You have also been organizing Continuing Professional Development programmes for your members. The set of 'Guidelines For Directors' which you publish is very impressive and I am sure it would provide a useful reference for the Standing Committee when it develops the non-statutory statement of directors' duties.
Looking ahead, I expect close interaction between the Government and our partners, including of course The Hong Kong Institute of Directors, in realizing our common objective of promoting good corporate governance, and furthering our status as an international financial centre.
End/Friday, February 16, 2001