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Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Dinner Meeting of the Hong Kong Institute of Directors today (September 16):

Moses, Ladies and Gentlemen,

Thank you for those kind remarks. I am delighted to have this opportunity to address the Hong Kong Institute of Directors (HKIOD). I am particularly happy to be present on an occasion when the Institute presents Certificates of Honorary Fellowship to four people who have contributed significantly to 'good governance' in Hong Kong.

When I recently attended the APEC Finance Ministers Meeting in Mexico, we spent half of our time talking about corporate governance. You can tell that this is a very important subject. It is clearly on the international agenda. It is clearly on the agenda of every responsible government.

Please be assured that I am not about to teach you how to do what you already know very well. No one is more aware than I of the way the Institute of Directors has championed the cause of corporate governance in Hong Kong. You are the practitioners. Your members are in the front-line. Indeed, you are the first line of defence against corporate malpractice. Your example, your individual and collective recognition of the importance of good corporate governance is vital to the process of education and training for the next generation. So I am delighted to see the range of seminars and training programmes the Institute has organized and the number of publications you have put out.

Let us be clear what we are talking about. It is reputation, no more no less. And we all know that you can lose a good name much faster than retrieve a bad one. You don't need to look farther than Enron to understand the speed and scale of the markets' revenge when integrity is called into question. The damage is serious: to the company, to its professional advisers, to its employees and their families, to the families who invested their retirement savings, to the confidence of the investing public at large.

The crisis has sparked a swift reaction in the United States, which is as it should be. Locally, many people have been at pains to point out that Hong Kong has a different accounting standard from the US, "special vehicles" are not permitted, that family-run businesses and the absence of quarterly reporting mean there is no incentive to massage profits and so on. And it is right that anxious investors should be advised of such differences. But, and this is the first point I want to make, none of us can afford to be complacent.

To echo Sir Adrian Cadbury's words, the economic climate is harsh and this has exposed company reports to unusually close scrutiny. I have noticed an increasing frustration expressed by minority shareholders in Hong Kong. Such cases may seem insignificant when compared with Enron or WorldCom, but they are not good for Hong Kong's reputation. They damage our efforts to develop Hong Kong as an international financial centre. It is essential that regulators are given the tools to curb such behaviour. And it is essential that they are seen to be prepared to use them to good effect.

But let me tell you those who break the laws will be punished. A couple of recent examples illustrate the point:

* Guangnan (Holdings) Ltd. - jail sentences ranging from 2 to 10 years and disqualification as a director for 10 years;

* German Kitchen - imprisonment from 3 to 10 years and disqualification for 15 years;

* Mansion Holdings Ltd. - sentences of 3 to 4-and-a-half years and disqualification for 10 years.

No doubt these have helped lift our reputation. Both the IMF and Standard and Poors have ranked us as the region's leader in good corporate governance.

Even so, ladies and gentlemen, the second point that I wish to make is that we should exploit the opportunity afforded by the crisis in the States to re-examine ourselves; we should exploit the opportunity to push through the reforms we know to be necessary. In outline these are:

- protection of shareholders' rights;

- greater transparency;

- measures to deal with misconduct;

- promotion of good directors and best board practices.

By definition that means joint effort and a coordinated approach by a number of parties including the Standing Committee on Company Law Reform, the Securities and Futures Commission, the Hong Kong Exchange, the Professional Associations, and last but not the least, the Institute. It will involve amendments to legislation; it will involve changes to listing rules; it will involve adjustments to practice; it will involve training and education. Above all it will require unity of purpose.

As you are aware, much work is already in hand, but let me run through the key components and timing very quickly:

First, the Securities and Futures Ordinance was enacted in March and the related subsidiary legislation is now going through the Legislative Council. The whole package should come into effect in early 2003.

Second, the Standing Committee on Company Law Reform has undertaken a major review of Corporate Governance in two phases. Under Phase I, it released a Consultation Paper covering 21 proposals in July last year. Most were well received and are being implemented. An example of particular relevance to you is a non-Statutory Code of Directors Duties which will be released for consultation in Phase II of the Review.

I understand that work on Phase II of the Standing Committee's Review is nearing completion. Amongst the issues being considered in this phase are:-

- the structure of the company board including the establishment of audit, nomination and compensation committees;

- the development of appropriate training programmes and qualifications for directors;

- the principles and procedures regarding setting and approval of the level and composition of directors' remuneration;

- the organization and conduct of company general meetings;

- a framework setting out the financial reporting standards for different categories of companies;

- the strengthening of internal controls in companies, and the responsibilities, liabilities and independence of external auditors.

A consultation paper covering these proposals will be released by year's end.

In parallel with the Standing Committee's Review, and this bring me to the third key component, the Hong Kong Exchange issued a consultation paper in January this year, detailing its own review of the Listing Rules as they impact on corporate governance. The Exchange's proposals covered three areas: directors' and board practices; protection of shareholders' rights and corporate reporting and disclosure of information. I understand that the Exchange intends to put finalized proposals to the Listing Committee for approval with a view to implementation in phases, starting first quarter of next year.

There is a clear need for a high degree of internal consultation and external coordination by all parties to ensure that measures taken are mutually compatible and reinforcing. Hence the need recently, for example, to establish a Joint Government and Hong Kong Society of Accountants Working Group to undertake a detailed review of accounting and auditing provisions in the Companies Ordinance.

There are two areas which I would particularly like to mention. The first one is the proposal for quarterly reporting. This is the practice in North America. It is also the practice in Europe with the exception of the UK. Post-Enron, various parties have pointed to the danger of such a requirement focusing attention of short-term profits at the expense of long-term investment needs. Tightly run family companies, it is argued, have no need for such things. Others, a little unkindly, have suggested that only accountants would gain! Both sides have their points and we look forward to the final decision of the HKEx.

The second area I would like to talk about is the training and qualifications of directors of listed companies. I am aware that the Institute recently prepared a position paper on this important subject of training for directors, at the invitation of the Registrar of Companies, for consideration by the Directors Sub-Committee of the Standing Committee. The paper has a number of interesting ideas and I commend you on this initiative. I am told that suitably qualified directors are in short supply. To my mind that is an argument for investing more in appropriate training rather than shying away from prescribing higher standards. Your efforts in this regard is highly appreciated.

This leads conveniently to the final point that I would like to make this evening, which is that good corporate governance can never be simply a matter of legislation.

Recent events in the United States have highlighted the critical importance of having good quality directors on company boards. Directors are the first line of defence of good governance. Having men and women who not only know what they are doing, but also are not afraid to speak up as and when required. Qualifications, training and experience can be recommended, or required through legislation or regulation. Integrity has to come from within the business community itself.

Legislation and regulation, whether it concerns disclosure of directors' compensation or reporting, are about setting minimum standards of behaviour for the protection of the investing public. But any company can choose to go one better by disclosing and doing more than the law requires, deliberately staking its reputation on a public display of 'best practice'. Best practice is a matter not of law but of corporate culture, of mind-set and education.

In the final analysis, improved corporate governance does not come about because of Government reviews, important as they are as catalysts. Good corporate governance comes about through a shared commitment to reputation; through the demonstration effect of our business leaders; through the painstaking work, day-in-day-out, of company directors, company secretaries, accountants, auditors, and regulators; and through the intelligent scrutiny of investors.

In conclusion, ladies and gentlemen, let me repeat three points:

- first, the lesson of the last twelve months is that nobody can afford to be complacent; the Government is not, indeed it is determined that those who defraud the public will not go unpunished;

- second, we have a window of opportunity, while minds are focused, to drive through a package of significant reforms which will ensure Hong Kong's reputation as a leader in good corporate governance; and

- third, good corporate governance does not and cannot exist in a theoretical vacuum, nor ultimately can it be legislated, it must take root in the mind-set of Hong Kong's business community.

That is why, I believe the work of you and your fellow members in the institute is so vitally important. A good start has been made in lifting the quality of the men and women who serve in Hong Kong's boardrooms through the Institute's seminars, training programmes and publications. More important still, however, is your collective commitment and example in leading the way. I want to assure you that you will have the Government's full support in this endeavour.

Thank you.

End/Monday, September 16, 2002

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