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Following is a question by the Hon Sin Chung-kai and a reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (June 30):

Question:

With regard to enhancing the roles and functions of independent non-executive directors (INEDs) to strengthen the corporate governance of listed companies, will the Government inform this Council:

(a) of the measures to enhance the capability and quality of the INEDs in monitoring the companies;

(b) of the policies which can ensure due diligence of INEDs in supervising the management and operation of the companies so as to protect shareholders' rights and interests; and

(c) whether it has conducted studies on the INED systems implemented in other countries; if it has, of the results of the study and the areas of such systems from which experience can be drawn by Hong Kong; if no such study has been conducted, of the reasons for that?

Reply:

Madam President,

First of all, I would like to thank Hon SIN Chung-kai for raising this question as corporate governance has always been my greatest concern, and I also fully recognise the importance of independent non-executive directors (INEDs) of listed companies. INEDs can monitor the companies in an objective manner as "independents" and give independent views when there is a conflict of interests between the management and the companies themselves. This is of vital importance to the protection of shareholders' interests.

The Corporate Governance Review (CGR) conducted by the Standing Committee on Company Law Reform (SCCLR) covers the INEDs systems. In the process of the review, SCCLR has examined such systems implemented in other countries such as the United Kingdom, the USA, Australia and Singapore. A number of the final recommendations of the CGR Phase II published by the SCCLR early this year are concerned with the INEDs. At present, the Government, the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Ltd. (HKEx) are implementing these recommendations, with a view to upgrading the quality of INEDs and assisting them to supervise with due diligence the management and operation of the companies.

As a first step in implementing these recommendations, the Companies Registry (CR) published, in January this year, the Non-statutory Guidelines on Directors' Duties, as drawn up by the SCCLR, to help directors better understand their duties of care and skill and fiduciary duties. For instance, the Guidelines reminds the directors of their duty to act for the benefit of the company as a whole and to avoid conflicts between personal interests and the interests of the company.

The Hong Kong Institute of Directors (HKIoD) has been playing an important role in enhancing the quality of directors. I understand that the HKIoD provides training courses and continuing professional development programmes for directors to give them a better understanding of their duties under the Companies Ordinance and the Listing Rules. It has also prepared and published guidelines on the conduct, integrity, duties, etc. of directors. For instance, a pamphlet on how the directors of small and medium enterprises should enhance governance and on their due responsibilities was published several months ago.

Regarding duties of and requirements for INEDs of listed companies, they are set out in the Listing Rules of the HKEx and the Code on Corporate Governance Practices, which is expected to take effect in 1 January next year. Most of the provisions of the Code will become effective for accounting periods commencing on or after January next year. The above-mentioned rules and code are made by the HKEx and approved by the SFC. The two regulators will review and update the requirements from time to time in light of market needs and international standards and practices.

To ensure that the board of directors of a listed company has sufficient number of INEDs to provide independent views to the board, the HKEx has amended its Listing Rules so that the minimum number of INEDs of a listed company has been increased from two to three; at least one of the INEDs must have appropriate professional qualifications or accounting or related financial management expertise. The new requirements already came into effect on 31 March this year, with a transitional period of six months.

To enhance the capability and quality of directors, the HKEx specifies in its Code on Corporate Governance Practices 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. Listed companies are required to state in the Corporate Governance Report of their annual reports whether they have complied with the above requirements. Listed companies have to explain in the Corporate Governance Report any deviations from the requirements, as in the case of other provisions of the Code.

The Code on Corporate Governance Practices also recommends that all directors should participate in a programme of continuous professional development to develop and refresh their knowledge and skills. The Code also recommends that listed companies should be responsible for arranging and providing the necessary resources for a suitable development programme.

In addition, the Code on Corporate Governance Practices sets out recommendations on enhancing the capability of INEDs. For example, listed companies should establish a nomination committee which is responsible for, amongst others, assessing the independence of INEDs and reviewing the skills, knowledge and experience of directors.

The Listing Rules stipulate clearly 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 and fulfil duties of skill, care and diligence. In the case of wilful or persistent failure of a director to discharge his responsibilities under the Listing Rules, the HKEx may impose sanctions on him, such as issuing a public statement which involves criticism or a public censure, etc. The above requirements also apply to INEDs. An INED must satisfy the HKEx that he has the character, integrity, independence and experience to fulfill his role effectively. Separately, to ensure the independence of INEDs, INEDs are required to submit to the HKEx a written confirmation in respect of their independence. They are also required under the Listing Rules to inform the HKEx as soon as practicable if there is any subsequent change of circumstances which may affect their independence.

In addition, the Code on Corporate Governance Practices 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 Code also recommends that every director, including INED, should disclose to the listed company at the time of his appointment, the number and nature of offices held in public companies or organisations and other significant commitments, with the identity of the public companies or organisations and an indication of the time involved.

The Code also requires that INEDs should participate in board meetings to bring an independent judgment to bear on issues of strategy, performance, resources and key appointments and standards of conduct, and should take the lead where potential conflicts of interest arise.

Apart from participating in board meetings, INEDs need to serve on other committees. For instance, the Code on Corporate Governance Practices requires listed companies to establish a remuneration committee with specific written terms of reference; a majority of the members of the remuneration committee should be INEDs. The terms of reference of the remuneration committee includes the making of recommendations to the board on the establishment of a formal and transparent procedure for developing policy on remuneration.

The Government and the relevant regulatory authorities including the SFC, the HKEx and the CR, will continue to strive for enhancing corporate governance. The Government also plans to implement various complementary measures, e.g. the proposed establishment of an Independent Investigation Board to deal with the investigation of auditors and a Financial Reporting Review Panel etc., to upgrade market quality with a view to further consolidating the status of Hong Kong as an international financial centre. However, at the end of the day, nobody is in a position to legislate on ethics. Therefore, to nurture good corporate governance culture, we cannot rely on legislation or the implementation of policies by the Government alone. Concerted efforts by the community, especially the listed companies and the investing public, are necessary for bringing about changes in corporate culture and enhancing corporate governance.

Thank you, Madam President.

Ends/Wednesday, June 30, 2004

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