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Following is a speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Corporate Governance Conference 2006 today (October 13):
Is Hong Kong's Corporate Governance Reform Adding Value?
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Richard, Distinguished Guests, Ladies and Gentlemen,
Good morning. It is my great pleasure to have this opportunity to speak at today's Corporate Governance Conference 2006 organised by the Hong Kong Institute of Chartered Secretaries. This conference has all along been regarded as one of the most important corporate governance (CG) events in Hong Kong. It provides an excellent platform for us to learn from distinguished scholars, corporate executives, and professionals, both local and overseas, about the latest CG developments, and to develop strategies to perfect our local regime.
Value of Corporate Governance
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Corporate Governance affects all of us. And for shareholders, in a direct way. Understandably, shareholders wish to put their money on companies which will reward them with an above-market-average return on their investments. While it is true that there is no magic formula to pick out these companies from the business pool, there have been some research studies suggesting a positive link between good CG and company performance. This also aligns closely with what I personally have seen in my past decades of work in the private sector.
Apart from shareholders, companies themselves also benefit from good CG. Internally, there would be clearer accountability, better-defined responsibilities and greater protection of company interests. These enable companies to capitalise on business opportunities in economic upturns and, equally important, to tide themselves over in economic downturns. Externally, companies with good CG also have easier access to cheaper capital, from both the debt market and the equity market.
At the macro-economic level, CG has wider and more systematic implications for financial markets. It is the cornerstone of an international financial centre (IFC) where the confidence of international investors lies. The Enron and Worldcom sagas did not only have disastrous impact on the companies themselves, their employees and business partners, but also caused a huge loss in market capitalisation as well as the collapse of one of the world's then big five accounting firms. We are keenly aware that Hong Kong as an IFC with a relatively small domestic economy must be especially vigilant in guarding against such economic shocks.
Corporate Governance Reforms
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Governments and businessmen worldwide now fully appreciate the value of CG to their financial markets and have been making strenuous efforts to improve and upgrade their CG regimes. For example, the UK has introduced the Combined Code which sets out the responsibilities of the directors and the board as a whole, and the shareholders of listed companies; the US has enacted the Sarbanes-Oxley Act; Singapore has revised its Code of Corporate Governance to expand the role of the audit committees; Malaysia has introduced mandatory training for all directors of listed companies; and the Mainland will be converging its accounting standards with the International Financial Reporting Standards in the coming year. I am sure that distinguished speakers will share their valuable insights into overseas and Mainland experiences in the coming two days.
In Hong Kong, the Government, regulators and professional bodies have all along been working hand in hand to take forward various initiatives to upgrade our CG regime. Together with our market regulators, the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Limited (HKEx), we drew up the CG Action Plan in 2003, which serves as the blueprint for Hong Kong's CG work. Let me just briefly highlight some major initiatives in four areas, namely the Securities and Futures Ordinance, the Code on CG Practices, statutory derivative action and the Financial Reporting Council:
(a) The Securities and Futures Ordinance
With the roll-out of the Securities and Futures Ordinance in 2003, our regulatory regime for the securities and futures sector has been overhauled and modernised and is now in line with the international practices. Amongst other things, the legislation criminalises the disclosure of false or misleading information by listing applicants and listed issuers to the HKEx. We have also given SFC additional powers to investigate corporate misconduct.
(b) Code on CG Practices
In January 2005, the HKEx launched the Code on CG Practices, which was benchmarked against the best prevailing market practices and international standards. Similar to the UK's Combined Code, it contains two levels of recommendations:
* Firstly, Code Provisions which a listed issuer is required to comply with or account for any deviation in its Corporate Governance Report. For example, if a company deviates from the provisions of holding of board meetings at least four times a year at approximately quarterly intervals, or fails to establish a remuneration committee with a majority of its members being independent non-executive directors (INEDs), it must provide an explanation; and
* Secondly, Recommended Best Practices with which compliance is encouraged, but disclosure of non-compliance is voluntary. Examples of such practices include having at least one-third of the board members being INEDs and the establishment of a nomination committee.
Hong Kong's Code on CG practices, apart from ensuring high CG standards, provides corporate executives with flexibility to devise the best CG measures that suit their company's specific circumstances.
(c) Shareholders' Remedies
To enhance the protection of shareholders' rights, the Companies Ordinance was amended in July 2004 to provide for statutory derivative action. Shareholders can now take statutory action on behalf of a company in respect of any expropriation or other wrongs done to the company. The court is also empowered to award damages to shareholders whose interests have been unfairly prejudiced. So far, the court has granted leave in two cases for the relevant shareholders to take action on behalf of their companies.
(d) Financial Reporting Council
One of our most recent legislative initiatives on CG is the establishment of the Financial Reporting Council (FRC) to enhance the regulatory regime for the accounting profession. The Financial Reporting Council Ordinance was enacted in July 2006. We are now working on the establishment of the FRC including the recruitment of its Chief Executive Officer. It should be in operation in early 2007. As an independent body, the FRC will investigate auditing and financial reporting irregularities associated with listed companies and collective investment schemes. The FRC will be empowered to request for voluntary rectification of the accounts and financial statements by the relevant listed company or to seek a court order declaring non-compliance and directing rectification.
Adding Value?
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Thanks to the collective and concerted efforts made by all stakeholders, particularly company secretaries, various CG initiatives in the Action Plan have, by and large, been successfully put in place. Hong Kong now has an enhanced CG regulatory regime, greater CG awareness by the public; and a larger pool of company secretaries, accountants and directors dedicated to CG. Our achievements are also recognised or commended by various bodies, for example:
(a) The International Monetary Fund noted our further advances in CG during its Article IV Consultation with Hong Kong in 2004;
(b) The Asian Corporate Governance Association ranked Hong Kong second in its study of Asia's CG regimes in 2005 with an overall score just slightly lower than Singapore, while being number one in some items on the scoreboard such as enforcement;
(c) The FTSE Institutional Shareholder Services Corporate Governance Report ranked those companies listed on the Hang Seng Index fourth among the markets under study, and first in Asia in its research report in 2005; and
(d) Professor Stephen Cheung's recent survey on corporate governance of Hong Kong listed companies concluded that there had been a marked improvement in the CG standard of listed companies in Hong Kong in 2005, with an average score 16% higher than that in 2002.
High CG standards, closely knitted together with Hong Kong's other well-known strengths: the rule of law and an independent judiciary, free flow of capital and information, a simple and low tax regime, and a sophisticated and efficient platform for the world to do business with Mainland China, and vice versa, have created substantial value for our shareholders, companies, professionals, and the financial markets as a whole. Indeed, a rigorous CG regime helps Hong Kong establish itself as the premier capital formation centre for the Mainland. Many of the Mainland enterprises have sought listings in Hong Kong not only for raising capital, but also for enhancing their CG standards through complying with Hong Kong's listing requirements which are on a par with international standards. Listing in Hong Kong would give Mainland enterprises the badge of quality from our internationally recognised regulatory standards and help enhance their overall competitiveness.
I am confident that efforts in the past few years on the CG front have definitely paid off, and have added value to our economy and reinforced our position as an international financial centre. Of course, we cannot afford to be complacent. In the coming year, I will accord priority to CG initiatives in three areas:
(a) First, to ensure that the FRC will come into operation early next year, as mentioned in the Chief Executive's Policy Address. The FRC can help Hong Kong attain world-class standards by strengthening CG and shareholder protection;
(b) Second, to introduce a bill into the Legislative Council in the coming months to give statutory backing to major listing requirements covering disclosure of price-sensitive information, financial reporting and other periodic disclosure, and shareholders' approval for certain notifiable transactions. These legislative amendments, when enacted, will further upgrade the standard of corporate disclosure and enhance market quality in Hong Kong;
(c) Third, to pursue the rewrite of the Companies Ordinance (CO) at full speed. We will issue the first topical consultation document on the accounting and auditing provisions of the Ordinance in early 2007. A White Bill would also be issued in mid-2009 for public consultation before the new Companies Bill is introduced into the Legislative Council for scrutiny by the third quarter of 2010. The rewrite exercise will modernise our regulatory framework for the over 550,000 companies registered in Hong Kong and implement a number of CG-related recommendations made by the Standing Committee on Company Law Reform, such as changes to the procedures in company general meetings to ensure greater transparency. We will closely involve various stakeholders, including the Institute of the Chartered Secretaries in the rewrite process. The Institute's representatives sitting on the four advisory groups for the rewrite of the CO will provide valuable inputs from a practitioner's point of view.
Maintaining good CG is the cornerstone of my policy agenda. We will make every endeavour to enhance our CG regime, leveraging from the insights and support of company secretaries and other stakeholders to further strengthen Hong Kong's position as an IFC and a premier capital formation centre for the Mainland.
Before closing, I would like to place on record my appreciation for the work of both the Institute and its members. They are at the forefront of raising the quality of CG in our companies. The Institute has been providing quality training programmes to its members on CG related matters. Today's conference is just one of the many efforts the Institute has made on the CG front. I am sure that more will follow. I wish the conference every success. Thank you.
Ends/Friday, October 13, 2006
Issued at HKT 11:26
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