1. 1 The Development of Corporate Governance in Hong Kong Paul M Y Chow Chief Executive Hong Kong Exchanges and Clearing Limited Presented at the AIA Luncheon, 20 August 2003

2. 2 The Two ‘Not’s u Not solely a matter of rules and regulatory enforcement u Responsibility cannot rest with one body Also a matter of culture, of ethics Many parties involved

3. 3 Purpose and Nature Intermediate Targets Processes of decision- making and accountability Focus of regulators Final Outcome Issuers make fair and value-added decisions for shareholders Focus of market

4. 4 Corporate Governance is therefore about PROCESSES … …The processes used to direct and manage the business and affairs of the company with objective of balancing: u The attainment of corporate objectives u The alignment of corporate behaviour with the expectations of society u The accountability to recognised stakeholders

5. 5 … The PROCESSES involve : u Responsibilities u Accountabilities u Check and balances Who should do what To whom those with responsibilities must account and how The system of supervision and control procedures and communication flows

6. 6 Regulators’ Roles in Promoting Good Corporate Governance 1.Promote awareness of company directors 2. Promote high level of transparency 3. Provide stakeholders with remedies against unfair behaviour

7. 7 Historical Development of Corporate Governance in Hong Kong

8. 8 HKEx’s Initiatives in 1990s 1994 Required issuers to disclose detailed directors/management information 1994 Required issuers to disclose detailed directors/management information 1993 Introduced non- mandatory Code of Best Practice 1993 Introduced non- mandatory Code of Best Practice 1994 Announced guidelines on independent non- executive directors 1994 Announced guidelines on independent non- executive directors 1995 Required issuers to include a statement of compliance 1995 Required issuers to include a statement of compliance 1996 Required fuller disclosure of information to assess suitability of directors 1996 Required fuller disclosure of information to assess suitability of directors 1998 Revised Code of Best Practice 1998 Revised Code of Best Practice 1993199419951996 1997 19981999

9. 9 Other Key Milestones HK Society of Accountants u Working groups on corporate governance u Guidelines on audit committees SCCLR u Issued Phase I/II consultation papers on corporate governance SFC u Improvements to the Codes on Takeovers and Mergers and Share Repurchases u Securities & Futures Ordinance u Dual filing procedure

10. 10 Market Perception on Corporate Governance u Connected transactions not in the interests of minority shareholders u Unreasonably high remuneration of directors of some poorly performing companies u A number of listed companies are illiquid and with little genuine public floats u General concerns about regulation and disclosure of China-related issuers u Lack of confidence in the regulation of sponsors and IFAs

11. 11 Reasons for the Market Perception u Inability of regulators to enforce boundary of unacceptable behaviour u Investors lack legal means to pursue corporate misdemeanours u Regulators’ powers to supervise listed companies are insufficient

12. 12 Recent Corporate Governance Initiatives

13. 13 “Paragon of Corporate Governance” u January 2002, HKEx Issued consultation paper on proposed amendments to the Listing Rules u July 2002, HKEx Issued consultation papers on initial listing criteria and the delisting mechanism u November 2002, HKEx Issued consultation papers on criteria for continued listing

14. 14 u May 2003, HKEx & SFC Jointly issued consultation paper on the regulation of sponsors and IFAs u May 2003, FSTB & SFC Jointly issued “Derivative action” consultation paper u June 2003, SCCLR Issued Phase II consultation paper “Paragon of Corporate Governance”

15. 15 Other Work In Progress u SFC Working on legislation governing public offerings of securities u HK Society of Accountants & SCCLR Reviewing the regulation of accounts and the accountancy profession and proposing to establish an Independent Investigation Board as well as a Financial Review Reporting Panel u Government-appointed Expert Group Reviewing the alignment of responsibilities among the 3 tiers of regulatory system “Paragon of Corporate Governance”

16. 16 Thank you