Corporate Governance in Hong Kong 1. Corporate Governance in Hong Kong Hong Kong’s position as an international economic and financial center is attributed to its exemplary corporate governance. With Hong Kong’s various authorities and regulatory bodies emphasizing on transparency and accountability for listed companies, Hong Kong was ranked first for corporate governance among 11 Asian countries in 2007. (Refer to Appendix 1) The Stock Exchange of Hong Kong (SEHK) describes corporate governance as the “duties, functions and power of the board of directors as a whole and executives and non-executive directors individually”.
These binding responsibilities include the fulfillment of their legal obligations towards the company and its shareholders, the proper conduct of their functions in relation to the company’s business assets, abiding by standards of best practice and ethics as well as accepting responsibility for their actions. 2. Alternative Labels The common label applied by most Hong Kong companies is Corporate Governance. However, some companies prefer alternative descriptors such as Corporate Risk Management or Enterprise Governance.
3. Introduction of Corporate Governance in Hong Kong . 1History of Corporate Governance The history of corporate governance in Hong Kong dates back to the 1700s and the South Sea Bubble episode, where there were fundamental changes in business laws and practices in England. The need to access financial resources and seek economic and social progress has brought corporate governance into greater prominence. As a former British dependent territory, Hong Kong has its regulatory system based on English common law, but its business practices and corporate governance carry both Asian and UK influences.
The family ownership structure that prevails in Hong Kong signifies the strong influence of dominant shareholders and a limited voice for minority shareholders. SEHK published its own Code of Best Practice in 1993 to enshrine good corporate governance practice. In addition, many improvements have been made at a macro level since the Asian Financial Crisis in 1997. Corporate governance is increasingly emphasized by government authorities, regulators and NGOs; there is a clear intent to adopt governance standards at the highest level. The following illustrates the typical family business in Hong Kong.
The first priority in the family business will be given to the immediate family members, then related parties in business and finally, other shareholders. Figure 1: Priority (“Concentric rings”) in the family business in Hong Kong Source: Ferdinand A. Gul and Judy S. L. Tsui , The Governance of East Asian Corporations-post Asian Financial Crisis 3. 2Nature of Corporate Governance 3. 2 Corporate Governance Index in Hong Kong Corporate Governance Index is an objective benchmark for regulators to distinguish varying corporate governance standards of different companies.
The criteria are based on internationally accepted principles of fairness, transparency, accountability, and responsibility in corporate governance. Its qualitative measurement is differentiated from quantitative data and provides investors with better consolidated and more comprehensive analysis of the companies’ profile. Regulators currently recommend that the score should be reviewed regularly and Hong Kong CGI should be charged by HKEx or any independent commercial entity. Source: Hon. Laura M. Cha, member of Exective Council, HKSAR Government, The case for a Corporate Governance Index for Hong Kong.
Retrieved from http://www. hkbu. edu. hk/~apcgc/ms-laura. php 4. Influences on Corporate Governance Quoting from the Manager of CLP Holdings Limited, Mrs. Chan, “Corporate governance is a process of continuous improvement”. In shaping the corporate governance efforts, Hong Kong has taken into account its unique blend of Western and Asian cultures. 4. 1Western Influence Until 1997, Hong Kong was colonized by the British and thus, the Western Culture predominantly exists in Hong Kong. As a former British dependent territory, Hong Kong has its regulatory system based on English common law.
Hong Kong complies with The Companies Ordinance (Cap 32), originally derived from the United Kingdom Companies Act 1948. This provides the basic regulatory infrastructure, addressing corporate governance issues for all companies. The Committee on the Financial Aspects of Corporate Governance was set up in May 1991 by the Financial Reporting Council and London Stock Exchange to address the financial aspects of corporate governance in the United Kingdom. It produced the Code of Best Practice in UK, which was adopted by SEHK in 1993.
The Committee also came up with the Cadbury Report in 1992, which provided a basis for Hong Kong to adopt certain recommendations regarding the Board of Directors. For instance: A mixture of executive and non-executive directors on board; seeking of separate professional advice by independent directors; and regular board meetings. However, some recommendations of the Committee have not been adopted by Hong Kong. For instance, large companies in Hong Kong are not required to separate the roles of CEO and Chairman. This is hard to practise due to the family-dominated business characteristic. . 2Asian Influence As prevalent in East Asian countries, most listed companies in Hong Kong are family-controlled, resulting in minority shareholders being placed at a disadvantage. To protect the interests of minority shareholders, SEHK implemented the Listing Rules to strengthen the practice of corporate governance in listed companies. According to the rules, at least three nonexecutive directors must sit on the board of a company to ensure its independence. This minimizes the influence of majority shareholders in family-dominated companies.
In addition, family-dominated banks face the problem of reckless lending to connected parties. To minimize such lending, the power to regulate bank ownership structure was strengthened and restrictions on connected lending were implemented under the Banking Ordinance in 19863. In its efforts to develop the “Code on Corporate Governance Practices”, SEHK takes into account the culture and history of a market. Since there is no single set of universal code that fits all economies, it is imperative that the code is market-oriented and adapts to the culture of Hong Kong. 5. Company Law
In Hong Kong, the duties and obligations on Directors and Officers are covered primarily by three sets of ordinances and rules: 1) Hong Kong Listing Rules 2) Securities and Futures Ordinance (“SFO”) 3) Companies Ordinance 5. 1Hong Kong Listing Rules On March 31 2004, significant changes were made to the Hong Kong Listing Rules. This includes the updating of entry requirements for listing applicants and listed companies, as well as increasing guidance and requirements on directors and their independence. For instance, a listed company must have at least three independent directors.
Disclosure of accounting matters must be qualitative and quantitative. 5. 2Securities and Future Ordinance (“SFO”) The Securities and Futures Ordinance (SFO) was introduced on 1 April 2003 for listed companies in Hong Kong. It enforced a ? new licensing regime which makes insider dealing a criminal offence. Besides, it introduced detailed provisions on securities misconduct and more extensive disclosure requirements. Under the SFO, dual filing of listing documents and various types of corporate communications with both HKEx and SFC is also required.
This enables the SFC to investigate and prosecute deliberate or reckless misstatements. 5. 3Companies Ordinance The Companies Ordinance came up with various changes dealing with issues such as the regulation of foreign companies, prospectus liability and enhancement of shareholders’ remedies. 5. 3. 1Shareholders’ rights 5. 3. 1. 1 Right to call meetings and propose resolutions Members of a Hong Kong company holding more than 5% of its issued share capital may request that meetings be convened. In relation to foreign companies, the position is governed by domestic law. 5. 3. 1. Voting requirements While most matters only require a simple majority vote, certain matters must be approved by independent shareholders. This occurs in situations where interests of shareholders differ. 5. 3. 1. 3Nomination and election of directors Directors of listed companies must rotate every three years. Shareholders may nominate anyone to be a company director by informing the company, after which personal information of candidates would be circulated. 5. 3. 1. 4Enforcement powers The constitution of a Hong Kong company is a statutory contract between the members and the company.
The Companies Ordinance has been amended to allow a shareholder directly to enforce provisions contained in the constitution. 6. Main Corporate Governance Initiative Committee of The Stock Exchange of Hong Kong Limited Refer to table 6. 7 Holding Company of Holding Company of f Standing Committee on Company Law Reform Refer to table 6. 6 Figure 2: Overview of Organizations with Corporate Governance initiatives Source: Corporate Governance (An Asia-Pacific Critique) by Low Chee Keong Table: 6. 1 Country Bodies| Role| CG Initiatives|
Securities and Futures Commission (SFC)| Administer the laws governing the securities and futures markets in Hong Kong| Year 2004 – Introduced the concept of dual filingYear 2006 – Developed regime governing public offering of shares and debentures in the Companies OrdinanceYear 2008 – Submitted a report to the Financial Secretary on “Issues raised by the Lehmans Minibond crisis” to enhance investor protection| Table 6. 2 Country Bodies| Role| CG Initiatives| Hong Kong Monetary Authority| Maintain monetary and banking stability| Year 1998 – Published Best Practice Guide on Financial Disclosure|
Table 6. 3 Country Bodies| Role| CG Initiatives| Hong Kong Society of Accountants| Review the regulation of accounts and accountancy profession| Year 2000 – Organized Best Corporate Governance Disclosure AwardsYear 1997 – Published guidelines on disclosure in annual reports and directors’ business review| Table 6. 4 Country Bodies| Role| CG Initiatives| Independent Commission Against Corruption (ICAC)| Serves as Hong Kong’s Anti-Corruption Agency| Year 1996 – ICAC and the Guangdong Provincial People’s Procuratorate collaborated to publish the ‘A Legal Guide for Investors’ in Guangdong and Hong Kong
Year 2002 – Published Ethics in Practice for businesses in Shanghai and Hong Kong Year 2004 – Organized the Ethical Management seminar to deepen cross-border businesses understanding of the anti-corruption and bribery legislation| Table 6. 5 Country Bodies| Role| CG Initiatives| Companies Registry| Advise the Government on policy and legislative issues regarding company law, corporate governance| Year 1997 – Ensure that the Companies Ordinance remains responsive to the everyday needs of the business and society|
Table 6. 6 Country Bodies| Role| CG Initiatives| Standing Committee on Company Law Reform (Committee of Companies Registry)| Regulator of listed companies in Hong Kong| Year 1990 – Proposed establishing a Financial Reporting Review Panel in line with the UK Panel Year 2003 – Issued its Phase II consultation paper, proposing actions to enhance Hong Kong’s corporate governance| Table 6. 7 Country Bodies| Role| CG Initiatives|
The Stock Exchange of Hong Kong Limited (SEHK)| Serves as front line regulator of listed issuers| Year 1993 – Developed the “Code on Corporate Governance Practices” (Refer to Appendix 2)Year 1998 – Issued its “Market Consultation Policy Paper on Financial Disclosure”Year 2002 – Issued a consultation paper on proposed amendments to the Listing Rules – Produced policy papers that outline roles and responsibilities of corporate boards | Table 6. 8 Country Bodies| Role| CG Initiatives| Hong Kong Exchanges and Clearing Limited (HKEx)| Holding Company for SEHK| Year 1999 – Implemented comprehensive market reform of the stock and futures markets| . Efforts in Encouraging Corporate Governance 7. 1Punishment Effort (Cases and Measures taken for Corporate Governance) 7. 1. 1Peregrine Investments Case One of the main contributory factors leading to the liquidation Peregrine Investments Holdings Ltd Dealt with Indonesian taxi company, Steady Safe Bought US$265 million worth of US dollar-denominated promissory notes Rupiah’s precipitous fall led to major loss and investor’s loss of confidence Executive management did not monitor and supervise the investment Managing director and cofounder were not aware of this new investment Lack of internal control
Asia’s largest home-grown investment house besides Japan Figure 3: Peregrine Investments lack of internal control leading to liquidation. Measures taken: The government of Hong Kong placed great emphasis on this case and required financial institutions to disclose more investment information to SEHK and shareholders, particularly on potential markets’ risk procedures. 7. 1. 2The CA Pacific Securities Case CA Pacific Finance Transferred shareholdings of cash accounts to margin accounts Without investor’s acknowledgement
Used investors’ share as collateral to secure bank loans Company ran into liquidation problems due to the drop in share market Shares used as collateral was sold by the bank Public lost confidence in small and medium-size brokerage houses Investors lost their shares in both cash and margin accounts Figure 4: CA Pacific Finance utilizes unauthorized funds Occurred just after CA Pacific Incident 7. 1. 3Forluxe Securities Case Figure 5: Forluxe Securities obtains margin financing without authorization Forluxe Securities
Misused investor’s shares to obtain margin financing without seeking approval Owner disappeared with HK$20 million worth of investor’s shares Conducted lending business through finance arm Further undermined public Confidence in brokerages Measures: SEHK and SFC started visiting selected brokerage houses regularly and their associated financial companies. The aim is to ensure financial accuracy and adequacy of risk management procedures. Financial Services Bureau, SEHK and SFC set up a special task force to ensure a proper monitor system for brokerage houses. . 2Awards / Efforts in encouraging Corporate Governance Hong Kong has designed various awards and support in encouraging Corporate Governance (CG). Corporations with exemplary CG are recognized publicly. These recognitions not only benefit individual companies’ profiles, but also maintain credibility and competitiveness in the financial market. Figure 6: Main form of rewards for Corporate Governance 7. 2. 1Hong Kong Corporate Governance Excellence Awards
These awards were launched in 2007 by Chamber of Hong Kong Listed Companies and the Center for Corporate Governance and Financial Policy, Hong Kong Baptist University. They were designed to encourage improvements in corporate governance of listed companies in Hong Kong. The awards are conferred annually and the judging criteria include: * Corporate governance culture * Protection of shareholders interests * Transparency in governance, standard of the board, internal control and risk management * Corporate social responsibility
Winners of Hong Kong Corporate Governance Excellence Awards in Hong Kong, December 3, 2008 will be tabulated in the following in order of stock code: Category for Hang Seng Index Companies| Category for Hang Seng Composite Index Companies| Category for Other Main Board and GEM Board Companies| * China Construction Bank Corporation (939) * The China Shenhua Energy Company Limited (1088) * The Industrial and Commercial Bank of China Limited (1398) * Ping An Group of China Limited (2388)| * China Railways Group Limited (390)| * Giordano International Limited (408) * Yip’s Chemical Holdings Limited (709) * Shui On Construction and Materials Limited (983)| Figure 7: Companies received Hong Kong Corporate Governance Excellence Awards in 3 different categories. 7. 2. 2 Best First-time Annual Report Award Hong Kong has constantly sought to better its corporate governance. It not only focuses on the existing companies in the capital market, but also encourages new companies to practise good corporate governance. The new award entitled “Best First-time Annual Report Award” was introduced in 2008 to encourage good corporate governance in new companies. The awards are presented in five different categories: * Hang Seng Index (HSI)-constituent companies * Non-HSI main board-listed companies * GEM-listed companies * H-share companies * Public sector/not-for-profit organizations 7. 2. Best Corporate Governance Disclosure Awards These awards, introduced in 2000 and pioneered by the Hong Kong Institute of CPAs, advocate accountability and transparency to stakeholders. In addition, much emphasis was placed on voluntary disclosures of relevant information in annual reports that exceed legal and regulatory requirements. The government, regulators and business communities provide great support for the implementation of awards. In 2008, 3 more categories were introduced — the Diamond, Platinum and Gold Award. These new additions highlighted the importance of risk management and internal controls. 7. 2. 4Directors of the Year Awards
This award was first launched in Asian countries in 2001. Its main aims are to publicize the significance of good corporate governance, and recognize directors for their outstanding corporate governance practices. This helps to encourage their continuous efforts to promote good corporate governance and directorship in Hong Kong. The Directors of the Year Award is classified into different categories: * Listed Companies (SEHK—Hang Seng Index Constituents) * Listed Companies (SEHK—Non-Hang Seng Index Constituents) * Private Companies * Statutory/Non-profit-distributing Organizations 8. Case Studies of Country’s Top Corporations Company| Overview| Reasons for exemplary CG|
NWS Holdings Limited| Operates businesses in infrastructure, facilities rental, construction-related contracting and public transport. Awarded Hong Kong Corporate Governance Excellence on 4 December 2007. (Refer to Appendix 3)| Outstanding management team and effective policies:1. Balanced composition of executive and non-executive directors. Established the Corporate Governance Steering Committee to foster Corporate Governance2. Issued Guidelines on Internal Control System and Corporate Governance Manual to ensure related rules and regulations are fully complied. Distributed handbook for Corporate Policy on Staff Responsibility. | Hong Kong and Shanghai Banking Corporation Limited| Largest banking and financial services organizations in the world.
Combined Code on Corporate Governance (UK) and the Code on Corporate Governance Practice (HK). | 1. Balance of executive and non-executive directors. Establish the Corporate Sustainability Committee. 2. Key procedures established by the Directors help provide effective internal control. 3. Communication with shareholders is highly prioritized. Shareholders are well-informed about HSBC’s activities. | Company| Overview| Reasons for exemplary CG| Bank Of China| Bank of China is a leading listed commercial banking group in Hong Kong in terms of assets and customer deposit, offering a comprehensive range of financial products and services to customers. (Refer to Appendix 4)| 1.
Reviews its Corporate Governance system constantly to ensure conformity to international and local best practices. 2. Clear division of responsibilities between the Board and the Management. 3. Roles of Chairman and CEO are clearly established and stipulated in the Board’s Mandate. 4. Publishes quarterly financial and business reviews to update shareholders on the performance, financial position and prospects of the Company. | Li ; Fung Group| A global trading group supplying high-volume, time-sensitive consumer goods. E. g. Garments and hard goods. (Refer to Appendix 5)| 1. Takes responsibility in maintaining a sound and effective system of internal controls. 2.
The Board, the four committees, Group Chairman and Group Managing Director all have clearly defined roles and responsibilities to perform. 3. Follows the principles of transparency, accountability and independence| Company| Overview| Reasons for exemplary CG| CLP Holdings Limited| Operates a vertically integrated electricity generation, transmission and distribution business. | 1. Combined Code on Corporate Governance Practices, and company’s existing principles and practices2. Adopted a policy of open communication and fair disclosure. 3. A sound board of directors and a dynamic management team. | Figure 8: Case Studies for exemplary in Hong Kong. Source: Media Information, http://www. nws. com. hk/html/eng/pdf/PR2007120501E. pdf
The similarities among these five companies with exemplary Corporate Governance are as follows: * Implement their own Corporate Governance policies, beyond the minimal Code of Best Practice * Focus strongly on internal control and communication with their shareholders * Ensure that their boards and committees have distinct roles and responsibilities to prevent conflicts of interest which might undermine the credibility of companies. 9. Promote Good Corporate Governance Culture 9. 1Shareholder Activism Figure 9: Hong Kong’s level of Shareholder Activism Shareholder activists have risen over the years and challenged companies to improve returns or restructure. However, shareholder activism is uncommon in Hong Kong due to three main reasons.
Firstly, many companies in Hong Kong are family-based, resulting in minority shareholders having less capacity to express their opinions during general meetings. Secondly, shareholders cannot afford the fees required to sue the companies even if they want to. Lastly, shareholders seldom voice out during meetings since they are usually out-voted by controlling shareholders. 9. 1. 1Promoting Shareholder Activism Even though Hong Kong’s shareholder activism is not prevalent, some organizations are being established to promote active shareholder activism. For instance, Asian Corporate Governance Association (ACGA) created an investor discussion group, providing shareholders a common platform to discuss pertinent issues. 9. 2Appointment Service
Companies must ensure that their boards consist of credible directors before seeking financial assistance from institutional investors. The Hong Kong Institute of Directors offers services such as matching companies with candidates on the Institute’s register of qualified members for director appointment. 9. 3CEO’s Compensation Directors’ compensation will be disclosed on an anonymous individual basis, of a general description of the remuneration policy and long-term incentive schemes. In addition, the Code of Best Practice has included that the Remuneration Committee should consist of mainly independent non-executive directors (INEDs). 9. 4Corporate Reporting
Companies in Hong Kong need to maintain and disclose their financial information in compliance with Hong Kong accounting and auditing standards, which are based on the International Accounting Standards and International Standards on Auditing. 9. 5Audit Committee and Internal Controls The Audit Committee must comprise of at least three non-executive directors, a majority of INEDs, one of whom is qualified in financial reporting, and chaired by an INED. The Code of Best Practice also recommends an evaluation by each company of the effectiveness of internal control, covering financial, operational and compliance controls and risk management. 9. 6Transparency and Disclosure Any director or chief executive is required by law to inform the listed company of relevant interests.
A listed company is required by law to make a register of this information available for public scrutiny. 9. 7Private Companies Government, professional bodies and chambers of commerce are working on enlightening and empowering private companies, particularly the Small and Medium Enterprises (SMEs), in the field of corporate governance. Source: Carlye W L Tsui, An Overview of Corporate Governance in Hong Kong. The Hong Kong Institute of Directors. June 2003. Retrieved from http://www. hkiod. com/publication/overview_eng. pdf Conclusion Corporate governance in Hong Kong has come a long way, with more companies embracing good governance practices to attract investment and gain competitiveness in the global market.
Initiatives undertaken by regulatory bodies, such as the development of Code of Best Practice, serve as a stepping stone to bring Hong Kong’s corporate governance to greater heights. However, areas that call for attention still exist: * Highly concentrated share ownership by families leading to disadvantaged minority shareholders * Uncommon shareholder activism and lack of initiatives by institutional investors to ameliorate the situation * Lack of truly independent INEDs * Only Company Ordinance (CO) and Securities and Futures Ordinance (SFO) hold legal power; the Listing Rules and Code of Best Practice on corporate governance do not
Despite the problems mentioned above, corporate governance is becoming increasingly prevalent in Hong Kong society. In light of the ongoing governmental initiatives to ameliorate the situation, Hong Kong is envisaged to maintain its status as one of the countries with topmost corporate governance in Asia. Source: Ferdinand A. Gul and Judy S. L. Tsui , The Governance of East Asian Corporations-post Asian Financial Crisis Appendix 1 Source: Corporate Governance Watch 2007 http://www. ethicalcorp. com/content. asp? ContentID=5483;ContTypeID=67 Appendix 2 Appendix 3 Case study of NWS Holdings Appendix 4 Bank of China (Hong Kong) Appendix 5 Li ; Fund Group ——————————————- [ 2 ]. Mary Swire, Hong Kong Ranked Above Singapore In Terms Of Corporate Governance. Tax-News. com. 26 September 2007. http://www. tax-news. com/archive/story/Hong_Kong_Ranked_Above_Singapore_In_Terms_Of_Corporate_Gover nance_xxxx28508. html [ 3 ]. Morrison Shiona, Corporate governance in Hong Kong: a quantitative and qualitative study. The University of Hong Kong. 1995. Retrieved from http://hub. hku. hk/handle/123456789/37603 [ 4 ]. Hong Kong KL. Culture of Hong Kong. Retrieved from http://www. hongkongxl. com/culture/ [ 5 ]. Standard & Poor’s, Corporate Governance in Hong Kong. 22 January 2002. Retrieved from http://www. legco. gov. k/yr01-02/english/panels/fa/papers/fa0724cb1-2513-1e. pdf [ 6 ]. The Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd. The Financial Aspects of Corporate Governance. December 1992. Retrieved from http://www. ecgi. org/codes/documents/cadbury. pdf [ 7 ]. Stephen Y. L. Cheung Corporate Governance in Hong Kong, China: Rising to the Challenge of Globalization. Retrieved from http://www. adb. org/Documents/Books/Rising_to_the_Challenge/Sound_Practices/hkcg. pdf [ 8 ]. Stijin Claessens, Simeon Djankov, and Larry H. P. Lang, The Separation of Ownership and Control in East Asian Corporations Retrieved from http://www. doingbusiness. rg/documents/claessens_djankov_lang. pdf [ 9 ]. Hong Kong Exchanges and Clearing Limited, Pubic and Corporate Responsibility. 9 May 2007. Retrieved from http://www. hkex. com. hk/exchange/cg/public_corp_responsiblity. htm [ 10 ]. Deacons & Jardine Lloyd Thomson Limited, Recent developments in Corporate Governance in Hong Kong. November 2004. Retrieved from http://www. jltasia. com/media/press_releases/2004/HK_LegalBriefing_nov04. pdf [ 11 ]. Deacons, Hong Kong: Corporate Governance Guide. 28 November 2004. Retrieved from http://www. hg. org/articles/article_444. html [ 12 ]. Low Chee Keong, Corporate Governance (An Asia-Pacific Critique). [ 13
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