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LCQ20: Independent non-executive directors
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    Following is a question by the Hon Emily Lau and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (December 6):


Question:

     As there are no rules or regulations prohibiting independent non-executive directors (INEDs) of a listed company from resigning just before the company announces that it may be facing financial difficulties and requiring them to disclose their reasons for resignation to the shareholders and the public, will the Executive Authorities inform this Council whether:

(a)  it knows the number of cases in the past three years in which INEDs resigned within one month before the company concerned announced that it was facing financial difficulties;

(b)  the relevant authorities plan to review the current situation in which INEDs are not required to disclose their reasons for resignation to shareholders and the public; and

(c)  the relevant authorities plan to strengthen the role of INEDs in order to better protect the interests of small investors?


Reply:

Madam President,

     The Listing Rules of the Stock Exchange of Hong Kong Limited (SEHK) provide that the board of directors of a listed issuer is collectively responsible for the management and operations of the listed issuer.  The SEHK expects the directors, both collectively and individually, to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law.  It means that every director must, in the performance of his duties as a director -

*  act honestly and in good faith in the interests of the company as a whole¡F

*  act for proper purpose;

*  be answerable to the listed issuer for the application or misapplication of its assets;

*  avoid actual and potential conflicts of interest and duty;

*  disclose fully and fairly his interests in contracts with the listed issuer; and

*  apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the listed issuer.

     The above requirements also apply to INEDs.

     In the case of wilful or persistent failure of a director to discharge his responsibilities under the Listing Rules, the SEHK may impose sanctions on him, such as issuing a public statement which involves criticism or a public censure, etc.  

(a)  Commonly, where there is a material change in a listed company's financial position and it cannot adequately clarify its financial position, the company may initially request a suspension in dealing in its securities. The company will then remain suspended pending such clarification.

     Over the last three years, there were 52 listed companies that were suspended were in financial difficulties. In respect of five of these companies, at least one INED of each company resigned within one month before the date of suspension, and in respect of 10 of the 52 companies, at least one INED of each company resigned within one month after the date of suspension.

(b)  The Listing Rules do require publication of reasons for director's resignations. Specifically, they require that an issuer announces changes in its directorate as well as "the reasons given by the director or supervisor for his resignation (including, but not limited to, any information relating to his disagreement with the board and a statement as to whether or not there are any matters that need to be brought to the attention of holders of securities of the issuer)".

     The Listing Rules also require, in respect of all announcements, that:

(i)  the information contained in the document must be accurate and complete in all material respects and not misleading or deceptive; and

(ii)  the issuer must not "omit material facts of an unfavourable nature or fail to accord them with appropriate significance".

     Additionally, the Listing Rules require that all directors give the SEHK an undertaking in the prescribed form (the Director's Undertaking). The Director's Undertaking provides that a director must use his best endeavours to procure the issuer's compliance with the Listing Rules including the issuers' obligation to disclose reasons for the director's resignations.

     Members may wish to note that these Listing Rule requirements go further than the requirements in the United Kingdom, Australia and Singapore. In those jurisdictions, neither the law nor the Listing Rules requires announcement of directors' reasons for resignations.

     The SEHK is considering issuing guidance aimed at clarifying the SEHK's expectations pursuant to the relevant requirements in the Listing Rules.

(c)  The SEHK is continually undertaking initiatives to enhance the standards of corporate governance amongst issuers in Hong Kong.  Specifically, between 2002 and 2004, the Exchange conducted an extensive consultation aimed at bringing the Listing Rules up to best international practices, whilst taking into account the circumstances in Hong Kong. The SEHK sought to strike a right balance between commercial practicality and protection of investors.

     The review resulted in extensive Listing Rule amendments relating to the role of INEDs and the promulgation of a new Code on Corporate Governance Practices (the Code).  The Code requires that every director should ensure that he can give sufficient time and attention to the affairs of the listed company and should not accept the appointment if he cannot do so.

     The SEHK also specifies in the Code that every newly appointed director should receive a comprehensive, formal and tailored induction on the first occasion of his appointment, and subsequently such professional training as is necessary, to ensure that he has a proper understanding of the operations and business of the listed company and that he is fully aware of his responsibilities under statute and common law, the Listing Rules, applicable legal requirements and other regulatory requirements and the business and governance policies of the company.

     The SEHK has been monitoring implementation of the new Code and the amended Listing Rules. Now that they have been in force for about 18 months, the SEHK is considering whether further guidance or enhancements should be made.

     Thank you, Madam President.

Ends/Wednesday, December 6, 2006
Issued at HKT 12:03

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