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Following is a question by the Hon Bernard Chan and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (April 18):
Question:
Since the Enron case, investors' awareness and expectations of the standard of corporate governance have increasingly been raised. In this connection, will the Government inform this Council of the measures it has adopted to improve corporate governance in the past three years, and whether it has assessed the effectiveness of such measures; if so, of the assessment results?
Reply:
Madam President,
As one of the world's key international financial centres, Hong Kong has long emphasised the importance of good corporate governance to maintaining our financial stability and competitiveness. We adopt a robust and effective regulatory regime under the rule of law, with corporate governance standards being benchmarked against best prevailing market practises including those of the world's foremost financial centres. Our good progress in strengthening corporate governance was recognised by the International Monetary Fund in its Staff Report on Hong Kong released in January 2007.
On the part of the Administration and regulators in the financial services sector, we need to establish and maintain a fair, transparent and orderly market at the macro level; provide a sound institutional framework to encourage good corporate governance at the micro level; and ensure that appropriate penalties and sanctions are in place at the enforcement level for combating fraud and misconduct. Understandably, our primary concern has been - as it should be - with the standard of corporate governance in listed companies given the high degree of public interest.
The initiatives set out in the Corporate Governance Action Plan, which the Administration introduced to the Panel on Financial Affairs of this Council in January 2003, and which was drawn up collectively by the Administration, Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEx), have begun to bear fruit gradually in the past few years:
(a) We have effectively rolled out the Securities and Futures Ordinance (Chapter 571) in April 2003, modernising the regulatory regime for listed companies and the securities and futures markets, and providing for effective enforcement against market misconduct;
(b) With the commencement of the relevant sections of the Companies (Amendment) Ordinance 2004 in July 2005, we have introduced a regime providing for statutory derivative actions to enhance protection of minority shareholders' rights;
(c) The Listing Rules of the Stock Exchange of Hong Kong Limited were amended in 2004 to require each listed company to have a minimum of three independent non-executive directors, at least one of whom must have appropriate professional qualifications or accounting or related financial management expertise. These requirements have been effective since March 2004. A review by HKEx in 2006 revealed that the level of compliance has reached 97% among all listed companies;
(d) A two-phased approach has been adopted to upgrade the regulatory system of intermediaries in initial public offerings. In the first phase, the Listing Rules amendments included a new Practise Note on Due Diligence by Sponsors in respect of Initial Listing Applications which was put in place by HKEx in January 2005. The second phase was completed in January 2007 when the SFC's revised sponsor licensing regime became effective;
(e) The Code on Corporate Governance Practises was promulgated by HKEx in January 2005. Notably, 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 the director has a proper understanding of the operations of the listed company and that he is fully aware of his legal and regulatory responsibilities as well as the governance policies of the company concerned. Listed companies have to explain in their corporate governance reports any deviations from the provisions of the Code. According to a review published by HKEx in March 2007, all the 621 issuers covered by the review had met the requirement to comply or explain, and nearly 90% of these issuers had complied with at least 41 of the 44 Code provisions; and
(f) We are also working on a Securities and Futures (Amendment) Bill to give statutory backing to major listing requirements, so that civil or criminal sanctions might be imposed on listed companies as well as their directors and officers for breaches of the proposed statutory listing requirements.
The collapse of Enron may be regarded as a turning point in corporate governance reforms, not only locally but also globally. The Professional Accountants Ordinance (Chapter 50) was amended in 2004 to enhance independence of, and lay participation in, the regulatory function of the Hong Kong Institute of Certified Public Accountants (HKICPA). Moreover, with the contribution of the HKICPA, Hong Kong became the first jurisdiction in the Asia-Pacific region to achieve full convergence with International Financial Reporting Standards and the best international practise in the areas of auditing and accounting ethics. Another important initiative launched by the Administration is the establishment of the Financial Reporting Council (FRC). The FRC is a new statutory body empowered to investigate accounting and auditing irregularities of companies and collective investment schemes listed in Hong Kong. The Council is now pushing ahead with the preparatory work for building an effective organisation, with a view to enabling it to be fully operational in mid-2007.
Other regulatory reforms in the pipeline include the rewrite of the Companies Ordinance (Chapter 32) since mid-2006. Among other things, the rewrite exercise will review and further strengthen Hong Kong's existing corporate governance framework, with a view to providing Hong Kong with a modernised legal infrastructure attuned to its needs in the 21st century as a major international business and financial centre. On March 29, 2007, we launched the first topical public consultation to improve the accounting and auditing provisions of the Ordinance, aiming at, among other things, improving disclosure and transparency of the information included in corporate annual reports.
Corporate governance must be driven by a strong culture of transparency and responsibility, and through the example of corporate leaders themselves. Hong Kong is blessed with a strong civil society with deep roots underpinned by a large number of professional bodies and related institutions. These bodies and institutions include, for examples, the HKICPA, the Hong Kong Institute of Chartered Secretaries, the Hong Kong Institute of Directors, etc. They are the Administration's partners in promoting good corporate governance practises at the corporate level. Through providing proper training, they cultivate understanding of corporate governance and the responsibilities of different stakeholders; through organising various awards and competitions, they give directors and relevant professionals the sort of peer recognition and incentive to excel continuously; and through sponsoring promotion, they enhance the awareness of the importance of corporate governance among the investing public.
The Administration believes that good corporate governance will continue to be a critical factor in maintaining our competitive edge among other financial markets in future. Over the past three years, our market capitalisation has increased by 135% to reach HKD13,551 billion, with 1,180 companies listed as at end-March 2007. The Global Financial Centres Index, published by the City of London last month, placed Hong Kong third worldwide in terms of financial centre competitiveness, and saw Hong Kong as a genuine global financial heavyweight in the years ahead. However, there is no room for complacency. The Administration, together with all relevant stakeholders, will continue to make every effort to further improve our regulatory regime taking into account the developments in the international arena.
Ends/Wednesday, April 18, 2007
Issued at HKT 12:39
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