1 “The Importance of Developing Corporate Governance for SMEs” By Mr. Herbert Hui, JP, FHKIoD, LLB Chairman, The Hong Kong Institute of Directors 10 May 2006

2 1. Industry Background 2. Five Stages of SMEs 3. Why Corporate Governance is so important to SMEs? 4. Importance of a Board for SMEs 5. Corporate Governance Guidelines for SMEs (6 Steps) 6. Conclusion Content

3 Industry Background Definitions of SMEs:  Employ fewer than 100 people in manufacturing and fewer than 50 in non- manufacturing activity.  There are about more than 300,000 of them representing 98% of total business establishment in Hong Kong.  In Hong Kong, nearly 60% of the working population in private sector are being employed by SMEs. Sources from the Trade and Industry Department, HKSAR

4 Five Stages of SMEs Stage 1 Owned by a single individual who may be assisted by family members Stage 2 Of growing size which employ people other than close relatives Stage 3 With several shareholders or partners, whether members of the family Stage 4 With a substantial number of shareholders Stage 5 Listed on the Stock Exchange

5 Why Corporate Governance is so important to SMEs?  Private SMEs do not have regulatory oversight, like the SFC or Stock Exchange, to enforce conformance to market and ethical principles.  This leads to a higher propensity for corruption and commercial crimes.  Developing and embracing a set of Corporate Governance Guidelines will help set a clean and dedicated environment for the private SME and to foster an ethical culture.

6 Importance of a Board for SMEs “The HKIoD seeks to develop and promote corporate governance by making the case to the Board room that it is in their own interests to build a solid and practical corporate governance structure to better identify and deal effectively with the many different risks associated with doing business in the modern day environment.”

7 Corporate Governance Guidelines for SMEs 1. Planning 5. Leading 4. Organizing 3. Operations/ Implementation 2. Key Performance Indicators (KPIs) 6. Controlling Corporate Governance Practice Guidelines Sources from “Guidelines on Corporate Governance for SMEs in Hong Kong”, published by HKIoD

8 1. Planning  Each SEM has to determine its own business strategy objectives  The business objectives need to be revised and approved by the Board each year  Strategic planning can be used to focus the Company towards ethical development objectives.

9 2. Key Performance Indicators  Each area of the business planning will vary from business to business, depending on the type of business and its development stage.  Identify areas of strategic importance and subsequently translated those to KPIs.  KPIs are guidelines and measurements to the effectiveness of business performance, which are predictable, achievable and measurable.

10 3. Operation and Implementation  Set up a Board:- The composition of a Board includes a Chairman, Executive Directors, Non-executive Directors (NEDs) and Independent Non- executive Directors (INEDs)  Key functions of a Board :- 1. Keeps the management team in place through accountability; 2. Monitors the way in which the management operates the Company’s business 3. Approves the direction in which management proposes to take the company

11 4. Organizing  The Board of Directors sit at the top of the company’s decision making hierarchy and the way it deals with making decisions and managing risks is how a company is principally judged on its governance standards by stakeholders.  In this situation, external experiences of Independent Non-executive Directors add a lot of value to the Board in a decision making process.

12 5. Leading  Leadership involves an awareness of social responsibility and good corporate governance.  Leadership style may need to change as the business develops.  The board sets the corporate culture for the entire company, including its tolerance level towards bad behavior.

13 6. Controlling  Corporate Governance is about exercising effective control.  Control involves effective management systems, such as: 1. Regular board and management meetings 2. A company corporate governance culture 3. Internal control system 4. Risk management system 5. Human resources training 6. Key Performance Indictors (KPI)

14 Conclusion  As mentioned earlier, just having the hardware (CG Guidelines) is not enough. A lot of commercial crimes occur even when the Company has all the basis of a good Corporate Governance structure.  More importantly, one needs to reach out to the MINDSET of the owner and management to apply Corporate Governance concepts diligently.  Only then, can you have a healthy CORRUPTION-FREE environment for that particular business.

15 Thank You