Implementation and Enforcement in Corporate Governance – the Case of Hong Kong

1. Implementation and Enforcement in Corporate Governance – the Case of Hong Kong Paul Chow Chief Executive, HKEx 2 November 2004 OECD – 6th Asian Roundtable on Corporate Governance

2. Listed companies in Hong Kong are governed by a three-tier regulatory system Roles Checks & balances Set overall policy direction Initiate legislation Executive Council Legislative Council Government Statutory regulator Market watchdog Administer the Codes on Takeovers and Merger and Share Buybacks Regulate HKEx License sponsors and IFAs Process Review Panel Securities and Futures Appeals Panel & Tribunal Other independent committees Judicial review Review by Independent Commission Against Corruption (ICAC) SFC Frontline regulator Public organisation Business entity Administer the listing rules Oversight by SFC (via SFO and various MOUs) Balanced board structure Independent Listing Committee and Listing Appeals Committee Other independent committees Judicial review Review by ICAC HKEx

3. Hong Kong securities market has two distinct characteristics Implications Agency problem not a substantial issue Connected party transaction a potential issue INEDs may not be truly independent if appointed by major shareholders Highly concentrated corporate ownership Difficult to deal with misdemeanours due to separate legal systems Difficult to undertake investigations if individuals and evidence are located outside home jurisdiction Many non-Hong-Kong-based companies

4. Hong Kong’s solution is to adopt a primarily disclosure-based regulatory regime Elements of the disclosure-based regulatory regime in Hong Kong Listing criteria • Companies allowed to list if comply with requirements stated in the Listing Rules • Quantitative requirements - profit track record • Qualitative requirements - appropriate management experience & suitability of business • Listed issuers obliged to maintain adequate procedures, systems and controls to enable them to comply with the Listing Rules • Directors obliged to understand their responsibilities under the Listing Rules • Timely & accurate information dissemination • Disclosure-based regime - up to market to judge the quality of listed issuers • Sufficient powers available for regulators to pursue and invoke effective sanctions for wrongdoings post event Continual obligations of listed issuers & directors Quality assurance

5. Hong Kong has undertaken a number of key CG initiatives recently Descriptions • Make reference to UK Combined Code • Consist of two tiers of compliance: • Code Provisions - a listed issuer is required to comply or explain its non-compliance in its Corporate Governance Report • Recommended Best Practices - compliance is encouraged but disclosure of non-compliance is voluntary • Contain 5 sections covering: • Directors • Directors’ remuneration • Accountability and audit • Delegation by the Board • Communication with shareholders Revised Code on Corporate Governance Practices & Corporate Governance Report

6. Hong Kong has undertaken a number of key CG initiatives recently (continued) Descriptions Increase minimum number of INEDs from 2 to 3 Mandate the requirement of establishing an audit committee which comprises non-executive directors only and a minimum of 3 members Strengthen the rules governing notifiable transactions and connected transactions Mandate the disclosure of individual directors’ remuneration on a “named” basis Require any subsequent refreshments of the general mandate be subject to independent shareholders’ approval Amendments to Listing Rules Relating to Corporate Governance Issues

7. Hong Kong has undertaken a number of key CG initiatives recently (continued) Descriptions • Consider to enshrine the following provisions: • Regular financial reporting obligations of listed companies • Disclosure obligations in relation to corporate transactions (particularly connected transactions) • Obligation to disclose price-sensitive information Enshrining key Listing Rules provisions in statute • Clarify the role and responsibilities of sponsors and IFAs (e.g. definition of independence & expectation on due diligence) • Further enhance the Securities and Futures Commission’s (SFC’s) regulatory regime focusing on: • Enhanced eligibility criteria • Further development of the SFC’s licensing, inspection and enforcement functions Strengthening regulation of sponsors and independent Financial advisers (IFAs)

8. Hong Kong has undertaken a number of key CG initiatives recently (continued) Descriptions • Establish the Independent Investigation Board (IIB) to: • Consider complaints of alleged accounting, auditing and ethics irregularities committed by professional accountants involving listed entities • Establish the Financial Reporting Review Panel (FRRP) to: • Inquire into apparent departures from the law and accounting standards in the annual accounts of companies • Seek remedial action Enhancing regulation of the accounting profession

9. Conclusion Major corporate governance reforms are underway in Hong Kong The SFC and the Exchange, as regulators, will continue to closely monitor the development of corporate governance in Hong Kong and refine the rules and regulations, and their enforcement, in a gradual process However, good corporate governance is not solely a matter of rules and regulations - it is partly a matter of ethics and of people The regulators can help promote a good governance culture by raising public awareness through education and training Our ultimate goal is to establish a compliance culture where directors, market participants and professionals all want to behave well themselves

10. Thank You