Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Annual Dinner cum Presentation of Directors of the Year Awards 2004 of the Hong Kong Institute of Directors today (November 30) (English only):
Herbert, Distinguished Guests, Ladies and Gentlemen,
I am very pleased to be invited to address your Annual Dinner again since my presence last year. I noted that the Dinner Party is getting bigger and bigger and you may need a larger venue next year. First of all, let me congratulate all the awardees tonight. They all well deserve the honour as "Directors of the Year", by setting very good examples of excellence and integrity. My tribute also goes to Herbert and colleagues of the Hong Kong Institute of Directors for their efforts to promote corporate governance culture and make the "Directors of the Year Awards" a great success.
Of course, the concept of "corporate governance" is no stranger to you. The saga of Enron and Worldcom reminds the world of the necessity to forge efforts of all relevant stakeholders to safeguard responsible corporate governance. At the micro-level, your companies will profit from corporate governance in terms of better protection of company interests, and clearer accountability, not to mention a higher market valuation protentially.
Beyond that, corporate governance has a systemic implication. It is the foundation of our capital market and where confidence of the investing public lies. As Hong Kong is an international financial centre and also the premier capital formation centre for the Mainland, every effort should be made to further improve our corporate governance landscape so that it is on a par with the best international practice. So let us reflect together in this splendid evening how hard we have been working on and the progress so far in championing the corporate governance cause for Hong Kong. Last year, I introduced to you the Corporate Governance Action Plan I had put forth together with the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Limited (HKEx). Tonight I am pleased to tell you that we have already yielded good dividend from the Action Plan.
The International Monetary Fund (IMF) has just completed the annual health check on Hong Kong's financial services sector and economic outlook. In its concluding statement, the IMF Mission notes that Hong Kong has made further advances in corporate governance. This recognition is, in fact, the result of collective and concerted efforts and commitments of all relevant stakeholders including directors, company executives, auditors, Government and regulators, shareholders, professional bodies, the academia and the business community at large over the years. Here I wish to showcase the good Hong Kong story under the action headers of "three Es".
Enhancing the Regulatory Regime
The role of Government and the regulators is what I will call the first "E" - "Enhancing the Regulatory Regime". Our goal is to maintain a fair and orderly market.
On this front, the Securities and Futures Ordinance, which has been in force for over one and a half years, is a hallmark reform to modernize the securities regulations in Hong Kong. In many ways the corporate governance dimensions have been enhanced in the new laws. In relation to the issuers, the Ordinance renders the filing of false and misleading listing documents and materials a criminal offence. The Ordinance also gives the SFC greater enforcement power to combat various types of corporate misconduct. And the disclosure regime raises market transparency and helps maintain a level-playing field among market participants.
The financial scandals I mentioned at the beginning awoke the whole world as to the importance of public oversight of accountants. The Professional Accountants (Amendment) Ordinance 2004 passed by the Legislative Council in July provides for the opening up of the governance body and disciplinary system of the Hong Kong Institute of Certified Public Accountants. More lay persons are being appointed by the Chief Executive to the Council as well as the Investigation and Disciplinary Panels of the Institute to enhance their independence and transparency.
The second "E" is most relevant to the distinguished group of audience before me tonight - "Equipping Directors". We expect no less from directors, who should be equipped to discharge their duties diligently and responsibly. The Guidelines of Directors' Duties drawn up in January 2004 by the Standing Committee on Company Law Reform has brought increased awareness of the nature of directors' obligations and liabilities. The Guidelines have set out 11 general principles of directors' duties, including acting in good faith for the company's benefit, exercising care, skill and diligence, and avoiding conflict of interests. Although the Guidelines are not exhaustive statements of the laws, they make the general principles of directors' duties under the common law and equity more accessible to laymen. I appeal to each and every director to place these principles in heart in directing and overseeing the company management and strategy.
We have also placed much emphasis on the role of independent non-executive directors, whom the UK's Higgs Review put as the "custodians of the governance process". This category of directors is expected to bring to companies expertise, objectivity, and the ability to monitor the board's performance and oversee the internal control as well as financial reporting. I shall highlight the attribute "independence" which enables independent non-executive directors to be an honest custodian without fear or favour. In this aspect, the Listing Rules have been amended recently to increase the minimum number of independent non-executive directors from two to three and to require one of whom to possess accounting or financial management qualification. I know some listed companies have spent a great deal of efforts to find the right persons for compliance with the new rules, but, as I firmly believe, this is the right direction we should head towards as with the international trend.
Are there not enough suitable candidates for assuming directors' duties in Hong Kong? Here lies the importance of directors' training. When we look at other international financial centres, the development is also to ensure that all directors receive appropriate training on the first appointment with corporate governance awareness and knowledge refreshed from time to time thereafter. As a strong advocate in this area, I am pleased to learn that the Hong Kong Institute of Directors provides directors with comprehensive continuous professional training. HKEx has included in the new Code on Corporate Governance Practices which will become effective next year the provision relating to comprehensive and formal induction for all newly appointed directors, and recommend comprehensive training for directors as a matter of best practice. All these are very good starts, and we look forward to further improvement in overall quality of company directors in Hong Kong.
The third "E" - "Empowering Shareholders". Here we mean the equity afforded to shareholders who, by their investments, should be entitled to remedies and rights. The Companies (Amendment) Ordinance 2004 passed by the Legislative Council in July this year represents a breath of fresh air to enhance shareholder remedies. The Ordinance provides that a shareholder can take a statutory derivative action on behalf of the company against directors or management on expropriation or other wrongs done. It also enhances the deterrent effect by giving the power for the court to award damages to shareholders whose interests have been unfairly prejudiced. We expect that the relevant provisions will be brought into effect in 2005, by then we will have a strengthened regime in place to protect shareholders.
Equally important is encouraging investor activism by education. The SFC reaches investors through the mass media, on-line resources and various promotional programmes. This soft work is important in promoting among the shareholders the awareness of their rights and the considerations in appraising companies. And I encourage them to exercise their rights. They can drive good corporate governance and make a difference.
In retrospect, the implementation of the initiatives under the three "Es" was no easy task and in fact demanded a lot of hard work by the Government and all stakeholders. We have witnessed solid progress in terms of corporate governance regulation, and compliance and awareness, particularly in the past few years. We now have a more corporate-governance-focused business culture underpinned by an enhanced regulatory regime; as well as a more corporate-governance-conscious pool of directors, accountants, company secretaries and other intermediaries.
Of course, there is still much to be done. It is timely for all of us to build on the past achievements, to reflect on the new challenges, and to map out our strategies in the years ahead. Our roadmap can be grouped under, again, action headers three "Cs".
First, "C" for compliance. I think it is important to recognize that the prime responsibility for compliance lies with those who do the business, not those who regulate. We shall continue to spearhead several important legislative amendment exercises to enhance the regulatory framework, including giving statutory backing to important listing requirements as well as establishing the Independent Investigation Board and the Financial Reporting Review Panel.
Legislation sets down the minimum standards. Companies are always encouraged to do not only what is within the strict parameters of the laws but also what is right. This is how you can deliberately stake the companies' reputation on a public display of best practice. To this end, HKEx will promulgate next year a revised Code on Corporate Governance Practices, which consolidates what is regarded as the best practice to facilitate application of corporate governance in your companies.
We want to ensure that compliance is a high priority within companies, from the lower level of operational details to the higher level of strategic direction. We want to see proper resources are devoted to the compliance function so as to ensure quality oversight in the light of the specific nature of the business. We want to see a culture of compliance to be further developed. Always remember action speaks louder than words.
Just now I mentioned "culture". I want to underline this word which is the second "C" I'm referring to. We cannot legislate ethics. Good value-based corporate governance requires a greater participation from stakeholders, not necessarily more legislation but greater integrity, commitment, morality, honesty and transparency. What is really needed is a change of mindset to create a culture of corporate governance. Without your internalising ethics into daily running of business, the phrase "corporate governance" will only be recited as a mantra without regard to its real import, as Justice Owen has cautioned in his investigation report of the debacle of HIH Insurance, the largest corporate collapse in the Australian history.
I think you will agree that the success of building up a good corporate culture and achieving satisfactory compliance hinges very much on the concerted efforts of all concerned stakeholders, including directors, company executives, auditors, Government and regulators, shareholders and professional bodies. The Government will remain committed to promoting good corporate governance. Regulators like the SFC and the HKEx are more than willing to assess and identify practical difficulties for compliance and to assist companies to build in corporate governance devices. I am pleased that many professional bodies took the initiatives to promote compliance. The success of the model directors under this banner of the Institute's "Directors of the Year Awards" we share tonight is a good example of such initiatives. I am also assured by the Hong Kong Institute of Certified Public Accountants, Hong Kong Institute of Company Secretaries, and, of course, Hong Kong Institute of Directors that they will stand ready to offer you advice on how to help to put in place an effective compliance system.
Corporate Governance Benchmarking
After all, I will think that corporate governance is more than purely a "box-ticking" exercise. Therefore, when we are talking about "corporate governance benchmarking", the difficulties are how we measure fairly both the outward conformance and the performance within. We have noted some published corporate governance surveys across different economies and in Hong Kong with interest. As always we have an open mind to suggestions on the area of our corporate governance reform where further enhancement is desirable. Reading the survey findings in a learned fashion will require putting them in a proper and careful context. The methodologies and the underlying assumptions count here.
Having said that, I am encouraged by the growing attention of rating agencies, professional bodies and the academia in corporate governance benchmarking when they set their own research agenda. For example, the Hong Kong Institute of Directors has recently joined hands with the City University of Hong Kong to assess the corporate governance of Hong Kong listed companies. I look forward to seeing more to come, which are useful reference to see where we now stand after turning so many plans into actions. In a parallel exercise, the Government and regulators will also follow closely the evolvement in the international arena. Our door is always open, and we need externally-oriented foresight to make further advances. We should seek to actively demonstrate to the whole world the benchmark that investing in Hong Kong is afforded the best protection and that our listed companies are managed with excellence.
Ladies and gentlemen, promoting corporate governance is always high on my policy agenda. We have already made very good progress in terms of the three "Es", i.e. enhancing the regulatory regime, equipping directors and empowering shareholders. We have set in motion and reached a number of milestones. Looking ahead, we would have to keep up our efforts to enhance the regulatory regime and facilitate compliance, to cultivate the corporate governance culture and to collaborate to promote good corporate governance practices - the three "Cs" I have taken you through.
Let me point out that Hong Kong as an international financial centre has zero-tolerance in white-collar crimes and corporate mis-governance. I would like to appeal to you, and the companies you serve, to be our partners to let corporate governance take root in our economy. Feedback on the areas that all of us need to make further efforts is more than welcome.
Thank you very much.
Ends/Tuesday, November 30, 2004