Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Conference on Corporate Governance in Hong Kong and China today (November 8):
Mr. Beczak (Tad), ladies and gentlemen,
Good morning to you all.
I am both honoured and delighted that you have invited me to deliver the keynote address for today's Conference on Corporate Governance in Hong Kong and China. It could not come at a better time, and I would like to start by expressing my appreciation to the South China Morning Post and Hong Kong Exchanges and Clearing Limited for organizing the Conference, and Morgan Stanley for sponsoring it.
The sub-title you have chosen, "No Time for Complacency" is entirely appropriate. The after-shocks of Enron's mis-governance continue to ripple round the world. The collapse of one of the big five multi-national accounting firms has tarnished the reputation of a whole profession. Now is not the time to say: "It could not happen here", rather we should be asking ourselves "What lessons can we, must we learn from these events?"
"No Time for Complacency" and precious little time for me to make the points I need to make. You have given me around ten minutes to set the key note. So I will be brief and to the point.
Let me start with the Government's role. Investment is an inherently risky business. Nothing governments can do will ever remove the element of risk from any commercial enterprise. Nevertheless, no self-respecting government can afford to allow markets to operate like casinos. It is our job to provide a regulatory framework. Ideally, that framework should facilitate capital allocation while protecting the rights of minority shareholders. In times of plenty, the regulator's job is arguably easier, but vigilance is essential if problems are not to haunt him in a downturn. When times are bad, the risks of fraud and other forms of abuse increase, and at such times extra vigilance is required of all participants: not just the regulators, but also directors, auditors, investment bankers, lawyers, valuers, shareholders and analysts.
True to our traditions, the Hong Kong Government has always tried to keep the regulatory burden light and to keep ourselves out of the market. Our regulators are thus independent and market-oriented. That is part of the secret of our success. The IMF has ranked us as the region's leader in good corporate governance. Nevertheless, problems precipitated by the economic slow down have focused the community on what is and is not acceptable behaviour on the part of market participants and their professional advisers.
I would like to come back to that point in a minute, but first let me set out improvements already in the mill.
We are coming to the conclusion of a mammoth exercise in revamping our Securities and Futures Law. The new law will come into effect next Spring. It incorporates several enhancements to disclosure, which will have a positive effect on corporate governance. For example:
(i) With the introduction of dual filing, the Commission will be able to prosecute persons for intentionally or recklessly filing false or misleading information.
(ii) The time limit for disclosure of directors' dealings will be reduced from 5 days to 3 business days and the percentage disclosure limit reduced from 10% to 5%. (You will note that this is in line with one of the "10 point" proposals announced by the US in March this year.
(iii) The scope of investigations into listed companies conducted by the SFC will be widened. It will be able to look into and get explanations of the records not only of listed corporations but also their auditors, banks and transaction counterparties. The SFC will thus be able more effectively to inquire into misconduct which prejudices shareholders' interests.
(iv) The Market Misconduct provisions will enable civil liability and criminal offences relating to false and misleading information inducing securities transactions. There will also be a new private right of action for those who have suffered loss as a result of market misconduct. They will be able to seek compensation from those responsible for it.
(v) Investors will also have a new private right of action to seek compensation for losses arising from reliance on false or misleading communications, including those issued by listed companies.
(vi) Finally, auditors of listed corporations will have statutory immunity when reporting suspected corporate misconduct to the SFC.
And there is more to come.
Earlier this year, one of the sponsors of today's conference, Hong Kong Exchanges and Clearing Limited released a major consultation paper on Corporate Governance proposals for the Listing Rules. These cover three areas:
- the role and duties of the Board and individual directors;
- protection of shareholders' rights; and
- corporate reporting and disclosure of information.
Results of the consultation are expected soon. I understand that the Exchange intends to put finalized proposals to the Listing Committee, with a view to implementation in phases starting next year.
In a parallel exercise, the Standing Committee on Company Law Reform, chaired by Justice Anthony Rogers, has built on the successful first phase of consultation on corporate governance. I understand that Phase II proposals will be ready for release early next year.
I have no intention of pre-empting the outcome of these reviews. Nor do I have any intention of pre-judging where the line should be drawn between matters requiring amendment to primary legislation, be it the Companies Ordinance or the Securities and Futures Ordinance, and measures which are best left to Stock Exchange rules or SFC codes of practice. That would be unwarranted interference. Nevertheless, I think it proper to set out what I believe the investing public expects, indeed what the investing public has a right to expect:
- The investing public has a right to expect that the sponsors of new listings, and their professional advisers, do a decent job, that "due diligence" is not merely pro forma, and that they accept some responsibility for the initial performance of the companies which they sponsor.
- They have a right to expect company reports to provide a clear and candid indication of the company's financial standing, profitability and potential future performance.
- They have a right to expect thorough, professional and utterly candid auditing of the accounts.
- They have a right to expect responsible behaviour on the part of members of the board, including full, timely and accurate disclosure of all matters which may impact on share price.
- They have a right to expect that Directors of companies will both recognize and respect their rights, and that the Regulators will act decisively in the event of any failure to do so.
On which subject, it is only fair to say that we have a pretty good record of enforcement and the Courts have been taking a serious view of those who break the law. In a number of recent cases, directors have been put behind bar for up to ten years and subject to up to eight years disqualification. No doubt such cases have helped lift our reputation and will discourage other directors from contemplating similar behaviour.
In this context, I also think it proper to set out in simple terms what I believe the community at large and investors in particular expect of our various regulators.
First of all, they expect them to engage the market and the community pro-actively in charting the way forward to meet the challenge of increasingly globalized markets, in carving out Hong Kong's niche and in developing new products.
Secondly, they expect them to consult the investing public on changes to rules and regulations, including corporate governance issues, to find the balance point in each incremental change, and then to act in the interests of the community as a whole.
Thirdly, they expect them to be both activist and resolute in their approach to enforcement. The range of weapons available in their new arsenal is impressive. The aim is to provide, on the one hand, an adequate deterrent and, on the other, an appropriately calibrated response. The community expects them, to use them intelligently and impartially.
Finally, they expect the regulators to be completely clear about their respective roles and, while respecting those roles, to communicate so that no case falls between stools. The community expects that those who break the law will be punished.
In conclusion, ladies and gentlemen, allow me to re-emphasize that good corporate governance cannot be legislated; it has to come from responsible professional advice, and responsible corporate leadership, spurred on by equally responsible investor scrutiny. Nevertheless, the lesson of the last twelve months is that nobody can afford to be complacent, and let me assure you this Government is not. I believe that we have a window of opportunity for reform. Minds are focused, as today's attendance makes abundantly clear. We must use this opportunity to drive through the reforms which we all know need to be put in place if we are to ensure Hong Kong's reputation as an International Financial Centre. You are right: this is no time for complacency; it is time for action. I look forward to working with you all in this enterprise.
End/Friday, November 8, 2002