hkics “corporate governance at the crossroads” conference opening remarks paul chow chief...
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HKICS “Corporate Governance at the Crossroads” ConferenceOpening Remarks
Paul ChowChief Executive, HKEx
8 January 2008 (Tuesday)
Conference Programme
Speeches:
Keynote Speech “Are INEDs of Family-Influenced Public Companies Guests at
the Table?”, Professor Deborah DeMott, Duke University
Luncheon Speech by Mr Martin Wheatley, CEO, SFC
Interactive Panels:
“Effectiveness of INEDs”
“Dual A- and H-share listings”
“Ethics and Compliance”
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Agenda Today
Hong Kong’s three-tier system and distinct characteristics
Corporate governance
Why corporate governance?
Hong Kong’s disclosure-based regulatory regime
Hong Kong’s corporate governance reforms (1993-present)
HKEx – Market quality enhancement in 2008
Concluding thoughts
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Listed companies in Hong Kong are governed by a three-tier regulatory system
Set overall policy direction
Initiate legislation
Frontline regulator
Public organisation
Business entity
Administer the Listing Rules
Statutory regulator
Market watchdog
Administer the Codes on Takeovers and Merger and Share Buybacks
Regulate HKEx
License, supervise and discipline sponsors and IFAs
SFCSFC
GovernmentGovernment
HKExHKEx
Roles Checks & balances
Executive Council
Legislative Council
Process Review Panel
Securities and Futures Appeals Panel & Tribunal
Other independent committees
Judicial review
Review by Independent Commission Against Corruption (ICAC)
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 4
Hong Kong securities market has two distinct characteristics
Highly concentrated corporate ownershipHighly concentrated corporate ownership
Many non-Hong-Kong-based companiesMany non-Hong-Kong-based companies
Implications
Agency problem not a substantial issue
Connected party transaction a potential issue
INEDs may not be truly independent if appointed by major shareholders
Difficult to deal with misdemeanours due to separate legal systems
Difficult to undertake investigations if individuals and evidence are located outside home jurisdiction
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Why should issuers care about corporate governance?
“Corporate Governance and Market Valuation in China”Frank Song, Chong-En Bai, Qiao Liu, Joe Lu & Junxi ZhangMay 2003
“Corporate Governance and Market Valuation in China”Frank Song, Chong-En Bai, Qiao Liu, Joe Lu & Junxi ZhangMay 2003
The research paper found that the average market valuation of Mainland companies rated in the top 20% in terms of corporate
governance practices was 41% to 67% higher than those in the bottom 20%.
The research paper found that the average market valuation of Mainland companies rated in the top 20% in terms of corporate
governance practices was 41% to 67% higher than those in the bottom 20%.
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Hong Kong’s disclosure-based regulatory regime
Elements of the disclosure-based regulatory regime in Hong Kong
Companies are allowed to list if they 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 the market to judge the quality
of listed issuers Sufficient powers available for regulators to pursue and invoke
effective sanctions for wrongdoings post event
Listing criteriaListing criteria
Continual obligations of listed issuers & directorsContinual obligations of listed issuers & directors
Quality assurance Quality assurance
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Pressure for corporate governance reforms comes from many directions
Corporate scandals (Enron, Worldcom, etc.)
Corporate scandals (Enron, Worldcom, etc.)
Higher expectations
from investors
Higher expectations
from investors
Intense competition for business and
funding
Intense competition for business and
funding
Evolution & convergence of
international best practices & standards
Evolution & convergence of
international best practices & standards
CG ReformsCG Reforms
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In Hong Kong, corporate governance standards have evolved significantly since the 1990s
1993 – 2000 2001-2002
Code of best practices
Disclosure in Annual Reports
Guidelines on INEDs
Code of best practices
Disclosure in Annual Reports
Guidelines on INEDs
SCCLR CG proposal (phase I)
HKEx Consultation on CG issues
SCCLR CG proposal (phase I)
HKEx Consultation on CG issues
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1993 – 2000 2001-2002 2003
Code of best practices
Disclosure in Annual Reports
Guidelines on INEDs
Code of best practices
Disclosure in Annual Reports
Guidelines on INEDs
SCCLR CG proposal (phase I)
HKEx Consultation on CG issues
SCCLR CG proposal (phase I)
HKEx Consultation on CG issues
FSTB / SFC / HKEx Corporate Action Plan
SCCLR CG proposals (phase II)
HKEx Consultation and Conclusions on CG issues
HKEx / SFC Consultation on sponsors & IFAs
FSTB / SFC / HKEx Corporate Action Plan
SCCLR CG proposals (phase II)
HKEx Consultation and Conclusions on CG issues
HKEx / SFC Consultation on sponsors & IFAs
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In Hong Kong, corporate governance standards have evolved significantly since the 1990s (cont’d)
1993 – 2000 2001-2002 2003
Code of best practices
Disclosure in Annual Reports
Guidelines on INEDs
Code of best practices
Disclosure in Annual Reports
Guidelines on INEDs
SCCLR CG proposal (phase I)
HKEx Consultation on CG issues
SCCLR CG proposal (phase I)
HKEx Consultation on CG issues
FSTB / SFC / HKEx Corporate Action Plan
SCCLR CG proposals (phase II)
HKEx Consultation and Conclusions on CG issues
HKEx / SFC Consultation on sponsors & IFAs
FSTB / SFC / HKEx Corporate Action Plan
SCCLR CG proposals (phase II)
HKEx Consultation and Conclusions on CG issues
HKEx / SFC Consultation on sponsors & IFAs
2004-2005
Consultation on Code on CG Practices (which came into effect in 2005)
CG amendments to Listing Rules
Regulation of sponsors & IFAs
Regulation of accounting profession
Consultation on Code on CG Practices (which came into effect in 2005)
CG amendments to Listing Rules
Regulation of sponsors & IFAs
Regulation of accounting profession
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In Hong Kong, corporate governance standards have evolved significantly since the 1990s (cont’d)
Revised code on corporate governance practicesimplemented in 2005
Revised Code on Corporate Governance Practices & Corporate Governance Report
Revised Code on Corporate Governance Practices & Corporate Governance Report
Description
Consist of two tiers of compliance:
Code Provisions - a listed issuer is required to comply or explain
Recommended Best Practices - compliance is encouraged but disclosure of non-compliance is voluntary
Contain 5 sections covering: Directors Directors’ remuneration Accountability and auditDelegation by the Board Communication with shareholders
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First and second review of the effectiveness of the Code
Reviewed 621 listed issuers’ 2005 annual reports
Analysed disclosure against 44 code provisions
Second
Review
Second
Review
First
Review
First
Review
What did we do? What did we find?
100% complied or explained
89% complied with 41 or more code provisions
(Report published on 30 March 2007)
Details of the Second Review will be published in 1Q2008
Surveyed 1,114 listed issuers
Examined disclosure against all 45 code provisions based on the survey and testing
Further
Reviews
Further
Reviews
HKEx intends to conduct and publish similar reviews on a regular basis
We plan to review the Code this year to determine whether any changes should be made
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Enhancement of corporate governance standards will never stop…
1993 – 2000 2001-2002 2003 2006-present
Code of best practices
Disclosure in Annual Reports
Guidelines on INEDs
Code of best practices
Disclosure in Annual Reports
Guidelines on INEDs
SCCLR CG proposal (phase I)
HKEx Consultation on CG issues
SCCLR CG proposal (phase I)
HKEx Consultation on CG issues
Analysis of CG Practices and Disclosure in 2005 Annual Reports (“First Review”) which was published in Mar 2007
The Financial Reporting Council (FRC) fully operational in 2007
Analysis of CG Practices and Disclosure in 2006 Annual Reports (“Second Review”) results to be published in 1Q2008
Analysis of CG Practices and Disclosure in 2005 Annual Reports (“First Review”) which was published in Mar 2007
The Financial Reporting Council (FRC) fully operational in 2007
Analysis of CG Practices and Disclosure in 2006 Annual Reports (“Second Review”) results to be published in 1Q2008
2004-2005
FSTB / SFC / HKEx Corporate Action Plan
SCCLR CG proposals (phase II)
HKEx Consultation and Conclusions on CG issues
HKEx / SFC Consultation on sponsors & IFAs
FSTB / SFC / HKEx Corporate Action Plan
SCCLR CG proposals (phase II)
HKEx Consultation and Conclusions on CG issues
HKEx / SFC Consultation on sponsors & IFAs
Consultation on Code on CG Practices (which came into effect in 2005)
CG amendments to Listing Rules
Regulation of sponsors & IFAs
Regulation of accounting profession
Consultation on Code on CG Practices (which came into effect in 2005)
CG amendments to Listing Rules
Regulation of sponsors & IFAs
Regulation of accounting profession
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CG Watch 2007 – by ACGA and CLSA (Sep 2007)
“Hong Kong has moved into first place for a range of reasons, one of which is that it continues to grapple with some difficult reform issues and its regulatory officials are well aware of the distance between local norms and international standards.” (pp. 16, CG Watch 2007)
“Hong Kong has moved into first place for a range of reasons, one of which is that it continues to grapple with some difficult reform issues and its regulatory officials are well aware of the distance between local norms and international standards.” (pp. 16, CG Watch 2007)
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HKEx strategic focus and initiatives for 2007-08
Primary market development Attract Mainland and overseas issuers Introduce and review listing regimes
Secondary market development Remove trading barriers Facilitate participation of intermediaries Improve market making services Support growth in market volume
Product development Facilitate new product launch Develop new products in cash and derivatives markets
Service enhancement Enhance information transparency Facilitate price discovery Improve communication with EPs Streamline admission of EPs
Market Quality EnhancementSystem Enhancement
Business Expansion
Mainland Positioning
Service Improvement
Fo
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of 2
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/08
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Web Proof Information
Pack (“WPIP”)
Milestone achieved: On 5 November 2007, the SFC and HKEx published a joint policy statement on a pilot scheme for posting a WPIP. Effective 1 January 2008, WPIP must be submitted to the Exchange for posting on the HKEx website before information about the listing applicant is first provided to institutional investors.
Next step: Codification of the requirement in the Listing Rules after the pilot scheme.
Milestone achieved: On 5 November 2007, the SFC and HKEx published a joint policy statement on a pilot scheme for posting a WPIP. Effective 1 January 2008, WPIP must be submitted to the Exchange for posting on the HKEx website before information about the listing applicant is first provided to institutional investors.
Next step: Codification of the requirement in the Listing Rules after the pilot scheme.
Market Quality Enhancement
Abolition of Paid Issuer
Announcement
Milestone achieved: The Electronic Disclosure Regime for listed company announcements was launched on 25 June 2007. Listed companies’ announcements are now submitted to HKEx electronically and are available to investors on the HKEx website.
Next step: Phase 2 of EDP effective from 25 December 2007. A statement will then be issued to conclude the 2002 consultation exercise.
Milestone achieved: The Electronic Disclosure Regime for listed company announcements was launched on 25 June 2007. Listed companies’ announcements are now submitted to HKEx electronically and are available to investors on the HKEx website.
Next step: Phase 2 of EDP effective from 25 December 2007. A statement will then be issued to conclude the 2002 consultation exercise.
Designated Issuer Website
Milestone achieved: Preparation for the infrastructure and content well underway.
Next step: A dedicated issuer website with separate internet infrastructure from the HKEx website will be launched in early 2008 to provide the public with current and archived issuer related information and announcements.
Milestone achieved: Preparation for the infrastructure and content well underway.
Next step: A dedicated issuer website with separate internet infrastructure from the HKEx website will be launched in early 2008 to provide the public with current and archived issuer related information and announcements.
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Market Quality Enhancement (cont’d)
Financial Reporting
Consultation
Milestone achieved: Consultation period ended 5 November 2007. Consultation proposed:
1. Shortening of announcement and financial reporting deadlines for interim (from three months to two months) and annual results (from four months to three months) for Main Board issuers
2. Introduction of quarterly reporting requirements for Main Board issuers
3. Alignment of the GEM Listing Rules related to quarterly reporting with the proposed new Main Board requirements
Next step: Analysis of responses, further data gathering and testing of the substance of arguments under way.
Milestone achieved: Consultation period ended 5 November 2007. Consultation proposed:
1. Shortening of announcement and financial reporting deadlines for interim (from three months to two months) and annual results (from four months to three months) for Main Board issuers
2. Introduction of quarterly reporting requirements for Main Board issuers
3. Alignment of the GEM Listing Rules related to quarterly reporting with the proposed new Main Board requirements
Next step: Analysis of responses, further data gathering and testing of the substance of arguments under way.
Changes in Suspension
Policy
Next step: In November 2007 the Listing Committee approved the proposal for issuers to publish price sensitive announcements in the morning and lunchtime publication windows without the need to impose a suspension.
Subject to SFC approval, changes will likely to be implemented by the end of 1Q2008. Market education and communication are being prepared.
Next step: In November 2007 the Listing Committee approved the proposal for issuers to publish price sensitive announcements in the morning and lunchtime publication windows without the need to impose a suspension.
Subject to SFC approval, changes will likely to be implemented by the end of 1Q2008. Market education and communication are being prepared.
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Market Quality Enhancement (cont’d)
Combined Consultation
Next step: To be issued in January 2008 to consult on a total of 18 items related to listing policies and corporate governance, such as:
1. Facilitating electronic communication with shareholders2. Explicit SEHK information gathering powers3. Qualified accountants4. Sponsor’s independence5. Public float6. Bonus issue of warrants7. Proposals to reduce the extent of pre-vetting 8. Disclosure of changes in issued share capital9. Disclosure requirements for issues of securities for cash and the
basis of allocation of excess rights in rights issues10. Alignment of requirements for material dilution in a major subsidiary
and deemed disposal11. General mandates12. Voting at general meetings13. Disclosure of information by and about directors14. Codification of the property JV waiver15. Self constructed assets16. Disclosure of information in takeovers
Next step: To be issued in January 2008 to consult on a total of 18 items related to listing policies and corporate governance, such as:
1. Facilitating electronic communication with shareholders2. Explicit SEHK information gathering powers3. Qualified accountants4. Sponsor’s independence5. Public float6. Bonus issue of warrants7. Proposals to reduce the extent of pre-vetting 8. Disclosure of changes in issued share capital9. Disclosure requirements for issues of securities for cash and the
basis of allocation of excess rights in rights issues10. Alignment of requirements for material dilution in a major subsidiary
and deemed disposal11. General mandates12. Voting at general meetings13. Disclosure of information by and about directors14. Codification of the property JV waiver15. Self constructed assets16. Disclosure of information in takeovers
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Asian Roundtable on Corporate Governance 2008
Pursuant to a G-7 mandate to the OECD and World Bank, the OECD organises the Asian Roundtable on Corporate Governance to support corporate governance reforms in Asia.
The Roundtable comprises Asian policy-makers, regulators and business leaders, as well as regional and international experts.
This year’s Asian Roundtable on Corporate Governance will be held in Hong Kong on 13-14 May 2008 (Tuesday-Wednesday)
.
Pursuant to a G-7 mandate to the OECD and World Bank, the OECD organises the Asian Roundtable on Corporate Governance to support corporate governance reforms in Asia.
The Roundtable comprises Asian policy-makers, regulators and business leaders, as well as regional and international experts.
This year’s Asian Roundtable on Corporate Governance will be held in Hong Kong on 13-14 May 2008 (Tuesday-Wednesday)
.
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The upholding of corporate governance standards
Market Participants
Market Participants
IssuersIssuers
RegulatorsRegulators
Corporate Governance StandardsCorporate Governance StandardsMarket Quality
Market Quality
Shareholder ProtectionShareholder Protection
EducationEducation
RegulationRegulation
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Concluding thoughts
HKEx will continue to work closely with the SFC to monitor the development of corporate governance in Hong Kong and refine rules and regulations, and their enforcement, in a gradual process based on practical experience
However, good corporate governance is not solely a matter of rules and regulations - it is also a matter of ethics and of people
All of us 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 strive to uphold the highest possible corporate governance standards to help maintain Hong Kong’s excellence in market quality
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