HKICS “Corporate Governance at the Crossroads” Conference
Opening Remarks
Paul Chow
Chief 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
Roles
Government
SFC
HKEx
Checks & balances

Set overall policy direction

Executive Council

Initiate legislation

Legislative Council

Statutory regulator

Process Review Panel

Market watchdog


Administer the Codes on Takeovers and
Merger and Share Buybacks
Securities and Futures Appeals Panel &
Tribunal

Other independent committees

Regulate HKEx

Judicial review

License, supervise and discipline sponsors
and IFAs

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

Frontline regulator

Public organisation

Business entity

Administer the Listing Rules
4
Hong Kong securities market has two distinct characteristics
Implications
Highly concentrated
corporate ownership

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
Many non-Hong-Kongbased companies
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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 Zhang
May 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%.
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Hong Kong’s disclosure-based regulatory regime
Elements of the disclosure-based regulatory regime in Hong Kong

Listing criteria
Continual obligations of
listed issuers &
directors
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
Quality assurance
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Pressure for corporate governance reforms
comes from many directions
Corporate
scandals (Enron,
Worldcom, etc.)
Higher
expectations
from investors
CG Reforms
Evolution &
convergence of
international best
practices &
standards
Intense
competition for
business and
funding
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In Hong Kong, corporate governance standards have evolved
significantly since the 1990s
1993 – 2000
 Code of best
practices
 Disclosure in
Annual
Reports
 Guidelines
on INEDs
2001-2002
 SCCLR CG
proposal
(phase I)
 HKEx
Consultation
on CG issues
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In Hong Kong, corporate governance standards have evolved
significantly since the 1990s (cont’d)
1993 – 2000
 Code of best
practices
 Disclosure in
Annual
Reports
 Guidelines
on INEDs
2001-2002
 SCCLR CG
proposal
(phase I)
 HKEx
Consultation
on CG issues
2003
 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
 Code of best
practices
 Disclosure in
Annual
Reports
 Guidelines
on INEDs
2001-2002
 SCCLR CG
proposal
(phase I)
 HKEx
Consultation
on CG issues
2003
2004-2005
 FSTB / SFC /
HKEx
Corporate
Action Plan
 Consultation on
Code on CG
Practices (which
came into effect
in 2005)
 SCCLR CG
proposals
(phase II)
 HKEx
Consultation
and
Conclusions
on CG issues
 CG amendments
to Listing Rules
 Regulation of
sponsors & IFAs
 Regulation of
accounting
profession
 HKEx / SFC
Consultation
on sponsors &
IFAs
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Revised code on corporate governance practices
implemented in 2005
Description

Revised Code on
Corporate Governance
Practices & Corporate
Governance Report

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 audit
Delegation by the Board
Communication with shareholders
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First and second review of the effectiveness of the Code
What did we do?
First
Review


Further
Reviews
Analysed disclosure against
44 code provisions

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

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
Second
Review
Reviewed 621 listed issuers’
2005 annual reports
What did we find?
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Enhancement of corporate governance standards will never stop…
1993 – 2000
 Code of best
practices
 Disclosure in
Annual
Reports
 Guidelines
on INEDs
2001-2002
 SCCLR CG
proposal
(phase I)
 HKEx
Consultation
on CG issues
2003
2004-2005
 FSTB / SFC /
HKEx
Corporate
Action Plan
 Consultation on
Code on CG
Practices (which
came into effect
in 2005)
 SCCLR CG
proposals
(phase II)
 HKEx
Consultation
and
Conclusions
on CG issues
 HKEx / SFC
Consultation
on sponsors &
IFAs
 CG amendments
to Listing Rules
 Regulation of
sponsors & IFAs
 Regulation of
accounting
profession
2006-present
 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
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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)
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HKEx strategic focus and initiatives for 2007-08
Primary market development
Mainland
Positioning
Business
Expansion
Service
Improvement
Secondary market development
Focus of 2007/08
Strategic Theme 2007-09
 Attract Mainland and overseas issuers
 Introduce and review listing regimes




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 Enhancement
System Enhancement
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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: Preparation for the infrastructure and content well
underway.
Designated
Issuer Website
Web Proof
Information
Pack (“WPIP”)
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: 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.
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Market Quality Enhancement (cont’d)
Milestone achieved: Consultation period ended 5 November 2007.
Consultation proposed:
Financial
Reporting
Consultation
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.
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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 shareholders
2. Explicit SEHK information gathering powers
3. Qualified accountants
4. Sponsor’s independence
5. Public float
6. Bonus issue of warrants
7. Proposals to reduce the extent of pre-vetting
8. Disclosure of changes in issued share capital
9. Disclosure requirements for issues of securities for cash and the
basis of allocation of excess rights in rights issues
10. Alignment of requirements for material dilution in a major subsidiary
and deemed disposal
11. General mandates
12. Voting at general meetings
13. Disclosure of information by and about directors
14. Codification of the property JV waiver
15. Self constructed assets
16. 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).
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The upholding of corporate governance standards
Corporate Governance Standards
Issuers
Market
Quality
Market
Shareholder Protection Participants
Education
Regulation
Regulators
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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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Thank you
www.hkex.com.hk
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