PRACTISING CORPORATE GOVERNANCE IN HONG KONG

1. PRACTISING CORPORATE GOVERNANCE IN HONG KONG Speech to American Chamber of Commerce in Hong Kong, 12 December 2003 By Paul M Y Chow, Chief Executive Hong Kong Exchanges and Clearing

2. Agenda 1. International background Development of corporate governance in Hong Kong Revised Code on Corporate Governance Practices Conclusion 2. 3. 4.

3. What is corporate governance? OECD 1998 The system by which corporations are directed and controlled International Capital Markets Group 1995 The processes used to direct and manage the business and affairs of the company with the objective of balancing : • the attainment of corporate objectives • the alignment of corporate behaviour with the expectations of society • the accountability to recognised stakeholders

4. International developments on corporate governance Key Developments • Cadbury Report (UK) • Further UK committees • Greenburg (on executive pay) • Hampel (on combined code) • Turnbull (on internal control) • Over 30 other countries develop own codes • Asian financial crisis highlights importance of governance 1992 1990s 1997/98

5. International developments on corporate governance (cont’d) Key Developments • OECD seeks universal standard for corporate governance • International Corporate Governance Network (ICGN) 1999

6. Current global focus on corporate governance Examples Areas US Corporate scandals Enron, Tyco Fund managers, investment banks Intermediary governance Exchange governance NYSE Statutory regulation Sarbanes-Oxley Act Exchange corporate governance rules NYSE / Nasdaq listing rules

7. Agenda 1. International background Development of corporate governance in Hong Kong Revised Code on Corporate Governance Practices Conclusion 2. 3. 4.

8. Development of corporate governance in Hong Kong Key Milestones 1993 • Code of Best Practice • Disclosure of directors’ emoluments and MD&A • Guidelines on INEDs • Statement of compliance with Code of Best Practice • Audit Committees • SCCLR corporate governance proposals 1994 1995 1998 2001 & 2003

9. Development of corporate governance in Hong Kong (cont’d) Key Milestones 2002 • HKEx consultation on corporate governance amendments to Listing Rules • FSTB Corporate Governance Action Plan • HKEx consultation conclusions • Release of revised Code of Best Practice • Release of new corporate governance Listing Rules 2003 2004 (planned)

10. Agenda 1. International background Development of corporate governance in Hong Kong Revised Code on Corporate Governance Practices Conclusion 2. 3. 4.

11. Rationale of introducing the Code on Corporate Governance Practices • Existing code very brief • need for more detailed, operational guidance • Public expectations of issuers have risen substantially • Need to catch up with international standards Draws on revised UK Combined Code (issued July 2003) Code in final stage of drafting To be released for public exposure

12. Overall structure of corporate governance Rules and Code Coverage • Voting by poll • Disclosure of directors’ remuneration • Quarterly reporting [GEM Board only] • Report on Corporate Governance Practices • Required to include in Annual Report • Explain compliance with the Code in half yearly report (Can be cross referenced to the last annual report if there have not been any changes) Listing Rules

13. Overall structure of corporate governance Rules and Code (cont’d) Coverage • Principles • Code Provisions • Comply or explain • Issuers may develop their own more stringent codes • Recommended Best Practices • Recommended only, but issuers are encouraged to comply or explain non-compliance Draft Code on Corporate Governance Best Practices

14. Content of draft Code – Overview Section Covered areas • Directors • Board composition & responsibility • Access to information • Level • Remuneration Committee B. Directors’ remuneration • Financial reporting • Internal controls • Audit Committee C. Accountability & Audit

15. Content of draft Code – Overview (cont’d) Section Coverage • Management functions • Committees D. Delegation by Board • Effectiveness • Voting by poll E. Communication with shareholders

16. Section A - Directors Issues Key Code provisions Key recommended best practice • Frequency of meetings • Dealing with conflicted matters • Chairman and CEO • INEDS • Nomination committee • Professional development for directors • Quarterly meeting • Should be dealt with by board meeting with INEDs present • Roles of Chairman & CEO separated • INEDs identified in all corp. communications • INEDs comprise 1/3 of the board • Should be established with a majority of INEDs • Training upon appointment • Continuous training

17. Section B – Directors’ remuneration Issues Key Code provisions Key recommended best practice • Directors’ remuneration • Remuneration Committee • Formal and transparent remuneration policy • Significant proportion of executive directors’ remuneration linked to performance • Disclosure of details of remuneration of senior management on a named basis • Should be established with majority of INEDs

18. Section C – Accountability and Audit Issues Key Code provisions Key recommended best practice • Responsibility for accounts • Quarterly reporting • Internal controls • Audit Committee • Directors to acknowledge responsibility for preparing the accounts • Should be published within 45 days of quarter end (Main Board) • Directors to review effectiveness of internal control at least annually • Should comply with the required duties as set out in the Code

19. Section D – Delegation by Board Issues Key Code provisions Key recommended best practice • Management’s exercise of delegated powers • Board committees • Board to give clear directions to management on how to exercise the delegated powers • Disclosure of the division of responsibility between the Board and management • Should prescribe clear terms of reference • Committees should report back to Board on their decisions or recommendations

20. Section E – Communication with Shareholders Issues Key Code provisions Key recommended best practice • Effective communication • Voting by poll • Chairman of the Board should attend AGM • Notice of general meetings should be sent to shareholders at least 21 days before meeting • Chairman should explain the procedures for demanding and conducting a poll

21. Agenda 1. International background Development of corporate governance in Hong Kong Revised Code on Corporate Governance Practices Conclusion 2. 3. 4.

22. Conclusion Comments • Follows leading international practice • Disclosure-based approach allows flexibility to accommodate issuers of different natures • Will help address concerns on corporate governance of listed issuers • Will help develop quality of issuer management • Some issuers will have difficulty complying, hence a transition period Enhanced Code is a substantial step forward

23. Conclusion (cont’d) Comments • Other elements include Exchange rules and statute • In addition to the Exchange, the SFC and Government bodies play a part • And good corporate governance practice depends also on directors and advising professionals • The support of the market community is needed Code is only one element of Corporate Governance framework