The Hong Kong Institute of Chartered Secretaries

1. The Hong Kong Institute of Chartered Secretaries Louisa Lau General Manager Professional Seminar The Hong Kong Shue Yan University 22 October 2008

2. Today’s Sharing What is Corporate Governance? Stakeholders’ needs Shortcomings of Corporate Governance Internal Controls Company secretary’s role Introduction of HKICS

3. Current News …

6. Collapse of Barings

7. Definitions of Corporate Governance Promoting corporate fairness, transparency and accountability directors and auditors handle their responsibilities towards shareholders a firm’s relationship to society, corporate social responsibility

8. System by which business corporations are directed and controlled distribution of rights and responsibilities among different stakeholders in the corporation the rules and procedures for making decisions on corporate affairs the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance Definitions of Corporate Governance

9. A mindset of compliance Fair, Equitable, Transparent A good internal control system Definitions of Corporate Governance

10. Main ingredients of Corporate Governance

11. A typical Corporate Governance Structure of a listed company Typical Corporate Governance Structure Typical Corporate Governance Structure Typical Corporate Governance Structure Typical Corporate Governance Structure Typical Corporate Governance Structure Core Duties Core Duties Core Duties Core Duties Core Duties Other considerations Other considerations Other considerations BoD and its Committees • Decide and direct the company’s strategic directions • Effectively monitor the Management • Ensure the Management is responsible to the shareholders Operations Department Level • Execute the strategic direction of the Board • Operate day-to-day business • Achieve business targets • BoD and its Committees • Close supervision ; BoD must possess professional knowledge and business experience • Investors are concern of the structure of the Board • Compare with other listed companies • Operations Department Level • CEO or Chairman of the Board as the spokesman of the company • Except Investors Relation department, other operations departments’ transparency is low. Board of Directors Company Secretary Executive committee Audit Committee Remuneration Committee Risks Mgt Com. Nomination Committee Accounts and finance Investors Relation Subsidiaries and Branches Production and Services Business operation units … Functional Business A typical corporate governance structure includes the Board of Directors, its Committees of the Board , Management and Operations departments / units

12. Stakeholders Shareholders Ratings Agencies Staff Directors LISTED COMPANY Government Suppliers Communication Media Regulators SOCIETY

13. Shareholders Minority Voting power Relying on rules & regulations Shareholders in general Investment returns Value of company/ stock price Stakeholder’s needs

14. Is it a main duty of a Director to increase the value of the company OR to increase the return to shareholders? Value VS Price VALUE > PRICEBuy/Hold VALUE < PRICES Sell

15. A listed company is sitting on huge cash. When asked by reporters, the Board of Directors have made it clear that the Board have no immediate investment or acquisition targets. There is a strong desire of shareholders for the company to pay big cash dividends. Cases for discussion

16. In recent years, the average earning of the company is above HK$100 million, and every year the Board of Directors have donated about HK$3 million to Universities/charity. A shareholder disagreed with such donation at the AGM. Cases for discussion

17. (3) A consortium of listed companies have acquired three vacant/never occupied residential buildings. The Directors planned to demolish, rebuild and sell the properties for an estimated profit of about HK$1 billion. If, however, to renovate and sell, the profit is estimated to be HK$3 million. So, they decided the former one. There are strong objections from society (e.g. environmental protection bodies, media, residents in the neighbourhood, etc.) Cases for discussion

18. Directors Don’t want complicated rules & regulations Don’t want heavy penalties Cost of corporate governance Stakeholder’s Needs

19. Government To make it an international financial centre Regulators To reduce disclosures To enforce with “Teeth” Rules on penalities Stakeholder’s Needs

20. Punishment: Civil/ Criminal Post-vetting Burden on intermediaries Increase supervisory power of minority and other stakeholders Statutory Backing

21. Stakeholder’s Needs

22. A listed company requested for suspension of trading on 27/10/2008 (Friday) after the noon time. A reporter approached a Director of the Company, and requested for releasing an exclusive report of what’s going on the next day (Saturday). It was expected that an official press announcement would be published on Monday. As the Director, would you agree to help the reporter? Cases for discussion

23. (2) IF AWSJ approached you (a Director) and requested for exclusive reporting on the Monday press (with an assurance of the Chief Editor that no news would be leaked out before Monday). Do you agree to help? Cases for discussion

24. (3) Shall a Director avoid meeting reporters/media? How to handle media? How to avoid mis-quoting? Cases for discussion

25. Investor support Media Support Relevance to stakeholders Influence to vested interests Role of government Incentives to corporate governance

26. Investor Support • In its Consultation Paper in July 2003, the Standing Committee on Company Law Reform (SCCLR) reviewed attitudes of international institutional investor towards corporate governance standards in Hong Kong • The level of corporate governance was last of a list of 21 “information needs” of such investors • Corporate governance was described as “somewhat important” and placed 17th in a ranking of 22 company specific factors relevant for investment decisions

27. Investor Support Why would investors push for better corporate governance? • They can sell • No reason to do other shareholders’ work for them (and for free) “The review found evidence of a general reluctance to tackle corporate governance in investee companies” - Myners Review 2001

28. Investor Support • Absence of shareholder organisations • Quality of their own governance • The reasons for investment • Value counts, not governance “If poor governance is being introduced as a result of the transaction, the company must demonstrate that the economic benefits clearly outweigh any reduction in shareholder rights” - ISS HK Corporate Governance Policy, w.e.f. 1 January 2008

29. Media Support Why wouldn’t the media support good corporate governance? • Complicated • Not interesting to readers • Advertising revenue • Self-censorship • Defamation “The media also have a part to play in drawing attention to governance issues of public or shareholder concern” - Cadbury

30. Relevance to Stakeholders What evidence is there that other stakeholders support good corporate governance? • Employees • Lenders • Insurers • NGO’s (environmentalists, community groups) etc.

31. The influence of vested interests Does corporate governance threaten vested interests? • Accountants • IPO companies • Sponsors • Listed companies • Controlling shareholders • “The State”

32. The Role of the HKSAR Government Is the HKSAR Government an unequivocal promoter of good corporate? • Its own governance • HKSARG’s role on listed companies, statutory corporations • Exercise of patronage and nomination powers • Political appointments • Hong Kong as financial services centre – quantity or quality of listings (and risk of forum shopping)

33. The influence of regulation

34. “One size fits all” “Too often [Companies] believe that the codes have to be treated as sets of prescriptive rules” - Hampel

35. Box-ticking • Regulation can promote “box-ticking” • “Box-ticking” does not equal good governance • Focus on processes not outcomes • Complexity (affects accessibility and instinct) “Box ticking takes no account of the diversity of circumstances and experience among companies, and within the same company over time” “It can be seized on as an easier objective than the diligent pursuit of corporate governance objectives” “It might even be possible for the next disaster to emerge in a company with, on paper, a 100% record of compliance” – Hampel

36. Box-ticking (Cont’d) • In 2005, 89% of 621 HK issuers complied with 41 or more of the 44 Code provisions (HKEx Analysis, 2007) • 49% of Hong Kong listed companies “achieved full compliance with the Hong Kong Code of Corporate Governance” – (Grant Thornton Study 2007) • But • is this true? • what is the substance behind the tick? • is uniformity a quality? “Raising standards cannot be achieved by structures and rules alone … they provide a framework … but what counts is the way in which they are put to use” - Cadbury

37. Regulation is Reactive • Regulation is reactive to events, such as • Enron • WorldCom • Parmalat • Meaning that its development is • unstructured • unpredictable • politically driven • catches the innocent and the guilty; and • operates by punishment, not reward

38. Emphasis on Financial Reporting • Regulation has focused on financial reporting but value drivers can be varied and wide-ranging • customer service • employee development • innovation • reputation management • supply chain management • environmental performance • ethnical behaviour and values • relationships with governments and regulators • These are non-financial disclosures which often fall outside “corporate governance” as commonly understood and regulated

39. Promotion of Risk-aversion • Corporate Governance does not create value • May help manage downside risk • Encourages compliance with set procedures for its own sake • Inhibits • flexibility • rapidity • creativity in the decision-making process • Sarbanes-Oxley “It is equally important to have structures and principles which allow businesses to flourish and grow” - Hampel

40. The impact of reality

41. An Outdated Corporate Model? • Is corporate governance being implanted into a corporate model which is outdated? • The joint stock company is a 19th century structure • It reflects an era when • business was simpler • businesses were smaller • geographical coverage was smaller • businesses were often single asset or single activity • information flow was lower and slower • any single individual (or group of individuals) could “understand the business” “Some have argued that the increasing complexity of business life … is such that the whole structure of the board needs to be reconsidered” – Higgs

42. Governing the Family How effective can corporate governance processes be in reconciling the reality of Family control with the potential negatives of: • misalignment of Family’s interests with those of other shareholders • blurring of the roles of owners and management (where Family has quasi-executive role) • inability to attract and retain quality management • misdealings between the Family’s private interests and its listed vehicle

43. Governing the Outsiders • How can Corporate Governance be applied to businesses which • are incorporated outside Hong Kong • have no business in Hong Kong • have no management in Hong Kong and whose only Hong Kong connections is their listing?

44. Governing the Outsiders (Cont’d) • Is it possible for Hong Kong’s corporate governance standards to be applied to red-chips which • are state-owned • operate under a different legal regime and regulatory structure • have a different corporate model (e.g. supervisory boards, no audit committees etc.) and will list elsewhere if pushed? “Despite the efforts taken so far by the authorities to emphasise minority shareholders’ rights, significant or observable changes have yet to take effect in the listed Chinese companies” - CFA China Corporate Governance Survey 2007

45. Over-emphasing the Role of INEDs Are corporate governance developments putting an unrealistic burden on INEDs? • INEDs have no executive role – no daily involvement • Businesses are too complex to be overseen by INEDs • Threatens the principle of the unitary board • Risks of office outweigh the benefits (especially if things go wrong) • Difficulty in sourcing INEDs • Procedures for appointing INEDs • Can they be truly independent? “Care needs to be taken in imposing additional duties and workload on INEDs beyond those with which they can realistically cope” - HKICS Report 2006

46. Solutions ……

47. Some thoughts on the way forward • Investors to be proactive on corporate governance (as in the UK) • Government to set an example • Regulatory breather • Broader disclosure and verification of non-financial data • Limitation of liability for INEDs • Eliminate connected transactions • Recognise and accept the limitations of corporate governance regulation • The best corporate governance should be measured by results – sustained delivery of value to all shareholders

48. INTERNAL CONTROL is a risk management process and system with the aims to achieve: Operations efficiency Reliability and accuracy of operations/ financial data Compliance of rules/regulations Ideas of Internal Control

49. Risk Management AVOID CHOICE OF INTERNAL CONTROLS REDUCE RISK TRANSFER ACCEPT

50. Segregation of duties/ check-and-balance Reduce frauds Protect company assets Main Focus of Internal Control