Speech
Speech by SFST at Hong Kong Institute of Directors Annual Dinner cum Presentation of Directors of the Year Awards 2006 (English only)
Tuesday, November 21, 2006
Following is a speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at Hong Kong Institute of Directors Annual Dinner cum Presentation of Directors of the Year Awards 2006 today (November 21) (English only):
The Honourable Charles (Lee), Peter (Wong), Moses (Cheng), Ladies and Gentlemen,
Thank you for your kind introduction, Peter.
It is my privilege and honour to be here tonight to accept the Institute's Honorary Fellowship, and to be with friends who share a common mission, an unwavering commitment - to do our part in improving Hong Kong's corporate governance.
Market sitrep
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Corporate governance is one of the key factors contributing to the success of any capital market. The corporate governance initiatives which we have instituted in Hong Kong in the past few years have begun to bear fruit. Our market capitalisation at the end of October 2006 was HK$ 11,393 billion, ranking 2nd in Asia after Japan, and 8th in the world.
To date, Hong Kong has successfully drawn over 350 Mainland enterprises to list here. They are attracted to Hong Kong, amongst other things, because of our widely recognized corporate governance regime, adoption of international accounting standards and efficient access to international capital. When ICBC launched the world's largest IPO last month, it raised HK$ 124.5 billion in Hong Kong. The public offering of H-shares recorded an impressive oversubscription by 75 times, with the international institutional tranche of the IPO also over-subscribed very significantly.
Let me recap what we have done in the corporate governance area in recent years.
* Commencement of the Securities and Futures Ordinance in 2003 modernising the regulatory regime for the securities and futures sector;
* Introduction of statutory derivative actions in 2004 to enhance protection of minority shareholders' interests;
* Amendment to the Listing Rules in 2004 to require listed companies to have a minimum of 3 Independent Non-Executive Directors (INEDs). The compliance rate has now reached 97%;
* Launch of the Code on Corporate Governance Practices on 1 January 2005, benchmarked against best prevailing market practices and international standards; and
* Adoption of the amended Listing Rules since the beginning of this year to impose more stringent due diligence requirements on IPO sponsors.
We are still taking forward other initiatives to further strengthen our corporate governance. For example, the Financial Reporting Council (FRC) Ordinance was enacted in July this year to provide for the establishment of an independent authority to investigate irregularities in listed companies' audit reports and financial statements. We expect the FRC to be in operation by early 2007.
HKIoD's Contributions
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Corporate governance is a culture and therefore, Government's initiatives could only succeed with the complementary efforts by many others, including the Hong Kong Institute of Directors (the Institute). Your contribution in providing professional training to directors is important for promoting Hong Kong's corporate governance. As an international financial centre, we need a professional and well-informed body dedicated to international best practices and directors' on-going self-improvement.
Recent surveys
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The recently-published results from the Institute's "Corporate Governance Scorecard" study are also encouraging. I note that, having assessed over 170 major Hong Kong companies based on international standards and the Hong Kong Exchange's "Recommended Best Practice for Corporate Directors", an overall 16% improvement has been recorded as compared to the results in the first study in 2004. These results will serve to inspire continued self-reflection and improvements.
In the international arena, the International Monetary Fund in its Concluding Statement published recently recognized that "corporate governance [in Hong Kong] has been strengthened" and emphasized that "reinforcing its reputation for strong market infrastructure and supervision is key to Hong Kong SAR's future as a financial center."
Room for Improvement
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While it is reassuring that our efforts are being recognized, there is always room for improvement.
According to a report published in end 2005, Hong Kong's executive directors were amongst the highest paid in Asia. However, the link between directors' pay packages and corporate performance was not strong. The report claimed that only about a quarter of Hong Kong companies were found to attach performance conditions to long-term incentive awards. Further, and most regrettably, there have been recent cases in which executive directors - professional, full-time directors - might have failed their oversight duties and have not taken action until it was too late.
We also unfortunately hear from time to time of directors - be it executive or non-executive - shirking their duties, or at the first sign of problems, responding by resigning, often citing "personal reasons". Those directors would be mistaken if they thought that by doing so, they were no longer held liable for problems that had occurred during their term.
There is certainly a lot for those directors to reflect on and to learn from the directors we are here to recognise tonight.
Directors' role
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The kind of directors that companies and shareholders have equally come to appreciate are those directors who diligently oversee management's performance and make use of their own expertise and networks to promote the interest of the company. They bring integrity, insights and inspiration to the boardroom and can be relied upon in times of prosperity and growth as well as adversity and crisis.
Our company law, which is the same as other common law jurisdictions, makes no distinction between the duties and liabilities of executive and non-executive directors. However, when deciding on the degree of a director's liability, the courts will take into account the position in the company held by that director; the knowledge, skill and expertise which can be reasonably expected of any person serving in that position and that individual director's personal knowledge, skill and experience.
Given that directors are charged with important functions in the management of a company, my advice is this: firstly, directors must remain vigilant at all times; and secondly, they must continuously upgrade themselves.
In the boardroom, directors are responsible for asking tough questions when necessary in overseeing management decisions and the company's finances. They should hold management responsible for meeting designated performance targets executed in accordance with best practices. And at the personal level, directors must uphold the strictest rules of integrity and steer clear of any possible conflicts of interest.
Directors must be attuned to the pulse of the market, and be alert to changes in market and shareholders' demands. They must always stay abreast of the latest legislative requirements and developments on the corporate governance front. Ongoing professional training is a must.
Ladies and gentlemen, this is no easy task, but not "mission impossible" either. The award winners tonight, individual directors and boards, are being recognised for their achievements. They have much wisdom and experience to share, and should serve as examples to us all.
Looking ahead
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Looking ahead, we continue to rely on the Institute to promote the corporate governance culture. I cannot emphasize more the importance of your work in training directors, and trust that you will continue to outreach to new and incumbent directors, as well as our Mainland counterparts, in further raising the standards of our corporate governance. We count on you to ensure that your members are always aware of the latest global developments on corporate governance, and to continue to widely circulate and regularly update your published Guidelines in accordance with best prevailing market practices.
On the legislative side, the Government has just embarked on a five-year project to modernise Hong Kong's Companies Ordinance. We will be conducting a series of public consultation on topical issues starting early next year. The first consultation will be on auditing and accounting provisions in the Companies Ordinance. I urge you to take time to go through the consultation document, and to consider and discuss the issues raised. I sincerely invite you all to share your expert views with us during the upcoming consultations.
Closing remarks
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Finally, I would like to extend my thanks again to the Institute for the Honorary Fellowship, which will serve as a source of encouragement and motivation to me.
And my warmest congratulations to all the deserving award winners tonight. As investors place ever-increasing trust in directors, I look forward to working closely with you all in further advancing Hong Kong's corporate governance regime.
Thank you.