Following is the speech by the Chief Secretary for Administration, Mr Donald Tsang, on "Good Corporate Governance: Good Business" delivered at the Hong Kong Management Association's annual fellowship dinner at the InterContinental Hotel this (December 2) evening:
Dear David, ladies and gentlemen,
It is a great pleasure to join you tonight for the annual fellowship dinner of the Hong Kong Management Association. I would like, first, to congratulate the new Fellows and Charter Members of the Association, and tonight's award winner. I applaud their dedication and commitment to lifelong learning - something we should all aspire to.
Tonight, I would like to talk about a topic that is not only close to my own heart, but one that is also being addressed by governments and business the world over as a matter or priority, particularly in the light of some high profile corporate failures in recent times.
For companies, good governance means securing access to broader-based, cheaper capital. For investors, a commitment to good governance means enhanced shareholder value. For both, good governance equals good business. And all of us are working towards that goal, whether through legislative measures, training, or inculcating a new standard of ethics in business. It is also pleasing to have on board the backing of international organisations, such as the World Bank and the OECD, as they can have significant influence, especially in some of the less developed economies.
You also may be aware of the findings of an opinion survey released in July 2002 by international consultancy, McKinsey and Company. This survey showed that the overwhelming majority of investors were prepared to pay a premium for shares in companies showing high governance standards. The actual premium investors said they were prepared to pay for shares varied from country to country. For instance, in North America and Western Europe the premiums averaged 12 to 14%; in Asia and Latin America, the premiums averaged 20 to 25% and over 30% in Eastern Europe and Africa. The survey also showed that more than 60% of investors surveyed said that governance considerations might lead them to avoid individual companies with poor governance.
This should be a salutary message to us all, reflecting the importance people place in good corporate governance. In Hong Kong, it should be another incentive for us to try a little harder at improving the way in which we operate our businesses and administration. We all have a vested interest in this. We want to ensure the reputation of Hong Kong's financial markets. Sound corporate governance can increase economic efficiency, enhance the confidence of investors and the capability of capital formation through listings. They help maintain and enhance our competitiveness as a leading international financial centre and as a premier capital formation hub for China.
Over the years, I believe we have come a long way in raising the standards of corporate governance. But we can never be complacent. What was up to international standards, say, five years ago has generally passed its used-by date today. We must put ourselves in the forefront in compliance with the latest standards in corporate governance, never falling behind what London or New York has achieved. Indeed, we should set the pace among all Asian markets. We have the fundamental elements to continue moving forward to the next level - the rule of law, a mature legal system and a set of sound statutes; a light, but effective regulatory regime; the presence of world class professionals, including lawyers, accountants, auditors; and a clear and correct concept of corporate governance on the part of all relevant players, be they directors, management or the shareholders of companies.
For the government, it means establishing and maintaining a fair, transparent and orderly market at the macro level: providing a sound institutional framework to encourage good corporate governance at the micro level; and ensuring that appropriate penalties exist for fraud or dishonest acts at the enforcement level. And, as there are many different players involved in promoting corporate governance, we in the government have a clear responsibility to provide a co-ordinating role. That's why the Secretary for Financial Services and the Treasury earlier this year drew up a Corporate Governance Action Plan in conjunction with the key players - the Securities and Futures Commission and the Hong Kong Exchanges and Clearing Limited - for the development of a healthy market.
The plan sets out a number of goals and their order of priority so we can constantly review progress. The measures are mainly aimed at encouraging enterprises in Hong Kong, particularly listed companies, to enhance their transparency and accountability, in order to keep pace with international trends. The five priority areas involve: -
* upgrading the Listing Rules and Listing Functions in the stock exchange;
* tightening the regulation of sponsors of Initial Public Offerings;
* the effective roll out of the new Securities and Futures Ordinance;
* the successful completion of a major review of corporate governance by the Standing Committee on Company Law Reform; and
* early implementation of the Standing Committee's recommendations in the 1st phase of its corporate governance review.
I am pleased to say that good progress has been made and the pace is gathering momentum since the action plan was drawn up in January. The HKEx has completed the streamlining of the listing process in order to improve quality control at the point of entry. And, it is also in the course of amending the Listing Rules to improve the initial and continuing listing requirements. The HKEx is also working on the introduction of a new corporate governance code early next year.
Our second task - tightening the regulatory regime for IPO sponsors - has been the subject of a joint consultation exercise by the Exchange and the Securities and Futures Commission. We trust that the two bodies will give due consideration to the comments expressed by the market as well as the general public when working out a set of measures that are conducive to the healthy development of a quality equity market.
Our third task - rolling out the new Securities and Futures Ordinance - was completed on April the 1st this year. It has strengthened the requirements in respect of the disclosure of information on listed companies and enhanced the powers of the SFC. This new Ordinance has established an effective regulatory regime that responds to prevailing needs and boosts the confidence of investors.
Our fourth and fifth tasks, which revolve around recommendations from the two-stage review of corporate governance by the Standing Committee on Company Law Reform, are in the process of being implemented. We have just finished public consultation and the Standing Committee will soon submit its recommendations to the Government after taking account of the comments received.
Three other important topics - one on the oversight of auditors and the quality of financial reports, which could lead to the establishment of a Financial Reporting Review Panel to examine the financial statements of companies, is now the subject of a consultation exercise; so, too, is the second topic, which aims to give statutory backing to certain fundamental listing requirements. The third is a general one relating to the use of good English as well as good Chinese in the discharge of good corporate governance. This is particularly important to our aspiration as the premiere international financial centre in Asia. As we look to building on the combined strengths offered across our Pearl River Delta hinterland, we must also be clear in mind about our competitive strengths and advantages that differentiate us in Asia. We must uphold the integrity of our legal system. We must maintain our level playing field. And we must continue to foster professionals and talents with good command in both the English and Chinese languages. By building on our unique strengths, we play not only to our own edges, but we also optimize our contribution to the modernisation of China.
Ladies and gentlemen, good systems and sound statutes ultimately depend on the people who implement them. Adopting the correct concept of corporate governance and the cultivation of integrity in corporate culture are the principles that count most in raising the standard of corporate governance. No one can legislate for ethics in business; and that, indeed, is the essence of what I am saying here. But we can, and do, help by actively encouraging the continued training of company directors to ensure they have a better understanding and knowledge of their duties. Shareholders, too, have a responsibility to learn and to understand their rights - their rights to attend general meetings and exercise their voting powers. The Hong Kong Society of Accountants is also proposing measures to enhance the oversight of the accounting profession.
In the end, success depends on the corporate sector adopting a real commitment to ethical business practice and fair treatment of stakeholders. The government, the SFC and the Exchange will do everything they can to advocate and promote good corporate governance. However, it is even more important for business to give its visible support and demonstrate why good governance makes good business sense, and why it is vital to ensure Hong Kong remains at the forefront in Asia. Good corporate governance is the key to maintaining the confidence of investors and ensuring the good reputation of our financial market. And I know the Hong Kong Management Association will always be there playing a part in helping to make this possible.
End/Tuesday, December 2, 2003