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Following is a speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Annual Dinner of The Hong Kong Institute of Chartered Secretaries (HKICS) today (January 17):
New Year Wishes - Corporate Governance in Hong Kong
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Richard, Distinguished Guests, Ladies and Gentlemen,
Good evening. Let me, first of all, wish you a happy and prosperous 2006!
I am delighted to be here tonight to address the Hong Kong Institute of Chartered Secretaries Annual Dinner 2006. This is indeed a great opportunity for me to share with a group of key professionals in Hong Kong - company secretaries, my thoughts in the area of corporate governance (CG).
Importance of Corporate Governance
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CG is close to the heart of anyone in our business community, particularly all of you sitting here who have been taking good care of the CG system in your companies. Since the collapse of Enron and Worldcom, perhaps no one in the business sector can afford not to take CG seriously. While good CG may not on its own ensure the prosperity of companies, poor CG can definitely put companies in jeopardy. The Chief Executive mentioned in his maiden Policy Address last October that -
"Hong Kong is a leading international financial centre in the Asia-Pacific region. We will continue to consolidate this position, which is of vital importance to our prosperity. ...... The Government upgrades the quality of financial markets by enhancing the regulatory regime and the promotion of good corporate governance. ......".
These succinct remarks have clearly demonstrated the importance the Government has attached to the subject of CG. As we all know, the "formula" is as simple as that － Good CG enables Hong Kong to stay ahead as a preferred choice for quality issuers to raise capital, and for quality investors, both local and overseas, to invest their money, thereby strengthening Hong Kong's position as an international financial centre. The community as a whole, from individual companies and shareholders to the general public, will benefit one way or another. Some figures on our financial markets will give you a feel of how the formula is working -
* As at end-December 2005, Hong Kong's stock market ranked eighth in the world and second in Asia in terms of market capitalisation.
* In terms of equity raised in the first 11 months of 2005, Hong Kong ranked fourth globally and first in Asia, ahead of Tokyo.
* Hong Kong is the premier international financial centre for the Mainland. The vast majority of Mainland enterprises listed outside the Mainland are listed on our stock exchange. Over past years, Mainland enterprises have raised more than HK$1,080 billion in Hong Kong.
* In terms of asset management, Hong Kong is rising fast as Asia's leading asset management centre. In 2004, our total asset management business amounted to HK$ 3,618 billion.
For 2006, I have a few wishes relating to CG and would like to share them with you.
First Wish: Government and Regulators
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Let me start with my first CG wish, which is made for the Government and regulators. Our general philosophy has always been that: both Government and regulators should strike the right balance between effective regulation and market developments, thereby making our financial market not only fair and orderly, but also a vibrant and growing one. With this in mind, I wish that the Government and the regulators will continue to -
(a) put in place a regulatory regime, which is on a par with the evolving international standards;
(b) ensure that effective sanctions and remedies are available if and when things go wrong; and
(c) provide an environment that encourages and facilitates the business sector to pursue good CG.
Over the past few years, there has been much progress in these areas. Just to quote some examples -
(a) The Securities and Futures Ordinance
Following the roll-out of the Securities and Futures Ordinance (SFO) in April, 2003, our regulatory regime for the securities and futures sector has been overhauled and modernised, and is now in line with the international practices. For instance, we have criminalised filing or disclosure of false, or misleading, listing documents, given that proper disclosure of information by listed companies is essential to orderly market transactions and protection of investors. The Securities and Futures Commission is also given enhanced powers to combat corporate misconduct.
(b) Code on Corporate Governance Practices
The Code on Corporate Governance Practices launched by HKEx, which has been benchmarked against the best prevailing market practices and international standards, came into effect in January, 2005. The Code contains two levels of recommendations -
* Code Provisions: A listed issuer is required to comply or explain its non-compliance in its Corporate Governance Report. Examples include holding of board meetings at least four times a year at approximately quarterly intervals, and the establishment of a remuneration committee with a majority of its members being independent non-executive directors (INEDs); and
* Recommended Best Practices: Compliance is encouraged but disclosure of non-compliance is voluntary. Examples include having at least one-third of the board members being INEDs.
By adopting a comply-or-explain rather than a prescriptive approach, the Code can encourage corporate officers like you to design the best CG measures that suit a company's specific circumstances.
In the coming year, we will continue with our work to spearhead an important legislative exercise, namely to give statutory backing to major listing requirements such as disclosure of price-sensitive information and financial reporting and other periodic disclosure. The proposals aim to further enhance the standard of corporate disclosure. Our plan is to introduce the legislative proposals into the Legislative Council (Legco) within this year.
More importantly, later this year, we will launch the planned rewrite of the Companies Ordinance, a law book which many of you know is several inches thick. Other than modernising the relevant provisions so as to help reduce business costs, such as facilitating companies to introduce electronic communications, the rewrite has another major objective. That is to implement the remaining CG-related recommendations made by the Standing Committee on Company Law Reform, such as changes to the procedures in the nomination and election of directors. We believe that with the implementation of these recommendations, which are important building-blocks of a stronger CG regime, Hong Kong's position as an international business and financial centre will be further enhanced. We will closely involve the stakeholders, including the professional bodies like the HKICS, throughout the rewrite. Your participation and advice will definitely help us to ensure that the new Companies Ordinance would be a quality piece of work that meets Hong Kong's circumstances.
Second Wish - Shareholders
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My second wish goes to shareholders. Shareholders own companies, and have the legitimate rights to say how the companies should operate. Since their own investments are involved, it is natural to expect them to have a watchful eye on the CG of their companies. The key is to properly equip them and promote awareness. Shareholders should be encouraged to monitor the operations of a company. How to read the financial statements and annual reports? What is the environment in which the company is operating? What are the internal checks and balances, and any areas for improvement? Shareholders should also understand their rights, including their rights to attend, speak and vote at general meetings. Numerous publicity campaigns and public education are organised by the regulators on an on-going basis, with a view to helping shareholders to be more proactive in monitoring their companies and exercising their rights in a positive manner.
The equipping, or empowerment, of shareholders so that they will be able to exercise their rights is also an important element of a good CG system. In Hong Kong, Schedule 3 of the Companies (Amendment) Ordinance 2004 has become operative in July, 2005. The new legislation provides an avenue for shareholders to seek statutory derivative action on behalf of a company on any expropriation or other wrongs done. The court is also now empowered to award damages to shareholders whose interests have been unfairly prejudiced.
Third Wish - Directors
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My third CG wish is made for directors. Good CG at the company level can hardly be achieved by a robust regulatory framework and vigilant shareholders alone. Good CG has therefore to start from the company boardroom.
Directors are responsible for overseeing the affairs and activities of a company. Representing shareholders of a company, they are entrusted with the responsibility of running the corporation, including acting as a check on corporate management. To champion CG at the company level, it is of utmost importance to, first of all, help directors understand their roles, duties and obligations. There are already many useful and handy references on these duties around us, such as the Guidelines of Directors' Duties drawn up by the Standing Committee on Company Law Reform. What follows is appropriate training both on first appointment and a continuous basis for directors to help them acquire a thorough understanding of the prevailing laws and rules in the market as well as their obligations and rights. The Code on Corporate Governance Practices, which I have mentioned earlier, has included a code provision for comprehensive and formal induction for all newly appointed directors. There is also a recommended best practice on continuous training for all directors.
Fourth Wish: The Professionals
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Now let me turn to the fourth and also the last CG wish, which is made for the professionals. For example, accountants perform a variety of roles, as auditors who conduct an external, independent review of the financial reporting process and company financial statements, and as professional accountants in business, who may act as finance controllers, internal auditors or compliance officers. Irrespective of the exact roles they undertake, they are all important gatekeepers. Shareholders, creditors, investors and even the regulators rely on their report to ensure the integrity of the financial statements of a company. I trust that the profession will continue to meet or even exceed stakeholders' expectations, and safeguard the "purity" of the information in company accounts.
The Government will also continue to ensure that the accounting profession is subject to an effective, transparent and independent regulatory regime. In this regard, together with the Hong Kong Institute of Certified Public Accountants, we have done a lot in the past few years, such as the enactment of the Professional Accountants (Amendment) Ordinance 2004 which opens up the governance body, as well as the investigatory and disciplinary systems, of the Institute. Another initiative being taken forward is the proposal to establish a statutory Financial Reporting Council, which will be tasked to carry out independent investigation into any irregularities concerning the auditors of listed corporations and to conduct enquiry into the financial reports of listed corporations to ensure their compliance with relevant regulatory requirements.
Of course, I cannot complete the CG picture if I miss the chartered, or company, secretaries, who also play an important role. The secretary of a company has to undertake a wide range of duties, both statutory and non-statutory. These include completing and filing of various returns and documents, setting up a system for proper keeping and update of records, advising on relevant procedures such as holding of general meetings or board meetings, acting as the primary source of counsel to directors over company affairs and so on. Furthermore, the company secretary is the one who knows how the "nuts and bolts" of the companies' work day to day. Indeed, one may say that he or she is the de facto guardian of a company's CG through ensuring compliance with the relevant requirements and upholding business ethics. He or she is also the one who is expected to possess skills and expertise in areas such as company law, financial management, company secretaryship and administration.
Without the good work and active participation of a group of professional company secretaries like you, we would not be able to achieve a robust CG regime. I therefore wish that company secretaries will continue to push for good CG in handling company affairs. While not a fortune teller, I am very confident that this wish would materialise, to a large extent because of the outstanding job done by the HKICS. Over the years, the Institute has strived to enhance its members' as well as other stakeholders' understanding of the new CG requirements. For example, there is a biennial CG Conference to offer an opportunity for renowned local and overseas experts to share their insights on typical CG issues. In 2004, the HKICS also introduced an enhanced continuing professional development programme, endorsed by the HKEx, that is designed to equip its members working in listed companies with the current knowledge and skills to implement effectively the new CG regulations. The HKICS is also a strong promoter of good CG culture through various means such as publication of newsletters and guidelines, organisation of workshops and so on. The newly released second edition of the Report on "The Duties and Responsibilities of Independent Non-Executive Directors of Hong Kong Main Board Listed Companies" is another good example of HKICS's invaluable contribution to the promotion of good CG practices in Hong Kong.
Conclusion
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Indeed, I am confident that all the CG wishes I mentioned earlier will come true in 2006. My confidence comes from the on-going and strong commitments made by all relevant parties, including regulators, accountants, shareholders, directors and company secretaries, to further upgrade Hong Kong's CG regime and provide an environment for it to grow and prosper. Let us all continue to work together towards this objective in 2006. Thank you very much.
Ends/Tuesday, January 17, 2006
Issued at HKT 20:01
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