The Stock Exchange of Hong Kong

NEWS RELEASE

October 30, 1999

The term "Corporate Governance" has become somewhat over-worked. It seems to cover everything from boardroom ethics to accounting standards. I am therefore glad that the phrase "Protecting Investor Interests" is added to the title of this session, because that is the core of what I understand by corporate governance. Its essence is the establishment of processes to ensure that directors and controllers of companies are held properly accountable to their shareholders, that they are subject to checks and balances to prevent the abuse of power, and that proper disclosure is made of matters affecting shareholder interests. In companies where there is a single controlling shareholder or family group (which is quite common in Hong Kong), corporate governance is closely bound up with the protection of minority shareholders.

Why does good corporate governance matter? Obviously there are a host of moral reasons why it is important for public companies to be run by people of integrity and for investors to be treated fairly. There are also important practical reasons.

The first of these is that the quality of corporate governance profoundly affects the willingness of investors to entrust their money to company management. Governance therefore lies at the heart of the capital formation process. Companies which have a consistent record of good governance are able to raise capital on better terms. The cost of capital would be higher for companies perceived to abuse the trust placed in them by investors. In the long run, companies with a lower cost of capital tend to prosper at the expense of the others and have a definite competitive advantage.

The quality of corporate governance can also affect the economy as a whole. If a stock market acquires a reputation for listing companies with questionable governance credentials, investors will avoid it. This can affect the ability of even well-governed companies in that market to raise capital. It will also cause issuers to take their business to other markets with better reputations. In an economy like Hong Kong, which depends to a substantial extent on its position as an international financial centre, the perceived integrity of the securities market is particularly important. Damage to the market's reputation through persistent cases of bad corporate governance affects the development of the securities industry as a whole, as thus affects the wealth-creation process more widely.

For these reasons, the Stock Exchange of Hong Kong imposes upon itself a central role in the system of corporate governance.

Our Listing Rules contain numerous provisions aimed at protecting investors from abuse, particularly the minority investors. The main objectives of these rules are: (1) to ensure that initial applicants for listing are suitable; (2) the marketing of securities is conducted in a fair and orderly manner; (3) investors are given sufficient information to make properly informed decisions; (4) investors receive proper ongoing disclosure; and above all, (5) all shareholders are treated equally and fairly.

For that matter, let us look at the provisions of Chapter 14. It requires consent from shareholders for transactions of a certain type or size, and particularly of so called "connected transactions". Connected transactions are those between the company on the one hand and any director or substantial shareholder of the company on the other. This is designed to ensure that directors and controllers act in the interests of shareholders as a whole, and do not subordinate the interests of minority shareholders to their personal interests. At the Exchange over the years, we have had a number of tussles with company controllers who proposed transactions which we felt were disadvantageous to minority shareholders. For that reason alone, we objected to those proposed transactions. I believe our system has stood up well to such tests. The general level of corporate behaviour by Hong Kong listed companies has improved markedly over the last decade.

An integral part of the Listing Rules is a Code of Best Practice, which we introduced in 1993. The aim is to increase the accountability of directors of listed issuers. This complements the requirement that listed companies must have at least two independent, non-executive directors and relates to the role they should play.

We have more recently tightened up the rules regarding disclosure of the personal history of listed company directors and disclosure of emoluments paid to individual directors and senior management.

I should add that, since the introduction of 'H' share companies to our market in 1993, we have a number of listed companies whose directors are Mainland citizens. They are subject to exactly the same rules as the directors of any other Hong Kong listed company. A considerable effort has been made by the Exchange to provide seminars and training courses for listed company directors and managers, both from Hong Kong and the Mainland. I believe this educational effort has played an important part in the raising of standards of conduct which we have witnessed in recent years.

In addition to the listing Rules, we have in Hong Kong an array of other legislative and regulatory provisions designed to encourage or enforce good corporate governance. These include the Takeovers Code (administered by the SFC), the Securities Ordinance, the Securities (Disclosure of Interests) Ordinance, and the Securities (Insider Dealing) Ordinance. Time does not permit a description of all the provisions of these instruments. They are largely based on similar legislation and rules in the UK, Canada, Australia or the USA. I believe it is fair to say that collectively they constitute a first world investor protection framework.

Obviously, rules need to be backed up by effective enforcement - particularly as we move more towards a disclosure-based regulatory regime, in place of the traditional merit-based approach. It is important that directors who are tempted to abuse the trust of investors should see that this is likely to involve serious consequences for them personally.

Again, over the past decade or so, through a joint effort by Government, the SFC and the Stock Exchange, we have steadily improved the effectiveness of our enforcement procedures. I believe we have managed to do this without becoming unduly bureaucratic or intrusive. Obviously, there is a balance to be struck between over- and under-protecting investors. Regulators in some developed markets have perhaps erred in the direction of acting too much as "Nanny" to the market, or of inhibiting commercial flexibility with copious rules and regulations. Our philosophy in Hong Kong is to adopt a practical and non-bureaucratic approach, as far as this is possible. Above all, we seek to apply the spirit of the rules, rather than mechanistically following their letter. This is not an easy course to steer but, in general, I think we are perceived internationally to have a reasonably effective investor protection regime without imposing excessive regulatory burdens on the market.

Nevertheless, good corporate governance remains the most effective means of investor protection. The empowerment of investors with information enables them to decide whether the risk profile of a listed company is within an acceptable level. The principle of good corporate governance is particularly important for our newly launched Growth Enterprise Market (GEM). It applies every bit as much to companies listed on GEM as to Main Board companies. Indeed, because we have adopted a fully disclosure-based regulatory regime for GEM, good corporate governance is arguably even more important. We will therefore be watching this aspect particularly closely as the new market develops.

In summary then, I believe we have a well-developed corporate governance regime in Hong Kong. We will, however, continue to improve and up-date the rules and their enforcement. We go to some pains to convince directors and market practitioners that corporate governance is not some theoretical religion invented by accountants, lawyers or regulators, but an essential way of life for the directors and managers of listed companies, with very practical consequences both for their companies and for our market as a whole.

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