Corporate Governance in Hong Kong Essay Example

in the region and the regulatory system has been fashioned after English common law.

The regulatory structure for companies in Hong Kong is established by The Companies Ordinance (Cap 32), which was modeled after the United Kingdom Companies Act 1948. It addresses corporate governance concerns and governs all companies. Additionally, the Committee on the Financial Aspects of Corporate Governance, created by the Financial Reporting Council and London Stock Exchange, focused on financial aspects of corporate governance in the United Kingdom and developed the Code of Best Practice. This code has been utilized by SEHK since 1993.

The Cadbury Report, released by the Committee in 1992, established the foundation for Hong Kong to implement appropriate measures for their Board of Directors. The report advocated having a combination of executive and non-executive directors on the board, the independent directors seeking professional advice separately, and frequent board meetings. Despite this, certain recommendations were not implemented in Hong Kong, such as not mandating the separation of roles between CEO and Chairman in large corporations.

Asian Influence

To address the issue of family-dominated banks engaging in irresponsible lending to linked parties, regulations on bank ownership structure and limitations on connected lending were reinforced in 19863 through the Banking Ordinance. The SEHK considers the culture and history of a market while developing the "Code on Corporate Governance Practices".

The main regulations in Hong Kong regarding the responsibilities of Directors and Officers are established by three sets of ordinances and rules: (1) Hong Kong Listing Rules, (2) Securities and Futures Ordinance (“SFO”), and (3) Companies Ordinance.

Hong Kong Listing Rules

The Hong Kong Listing Rules

underwent important modifications on March 31 2004, which comprised the improvement of the listing applicants and listed companies' entry criteria. Furthermore, it augmented the guidance and demands regarding directors and their status of independence.

The disclosure of accounting issues should include both qualitative and quantitative information.

Securities and Future Ordinance (“SFO”)

The SFO was implemented on 1 April 2003 to regulate listed companies in Hong Kong. The regime introduced stricter regulations for insider dealing and made it a criminal offense. Additionally, it included detailed provisions on securities misconduct and expanded disclosure requirements.

The ability to investigate and charge intentional or careless misrepresentations is granted to the SFC.

Companies Ordinance

The Companies Ordinance introduced several modifications related to the control of overseas companies, responsibility for prospectuses, and improvement of shareholders’ recourse.

Shareholders’ rights

Shareholders can now enforce provisions in the constitution due to an amendment in the Companies Ordinance.

Efforts in Encouraging Corporate Governance

Punishment Effort (Cases and Measures taken for Corporate Governance)

The liquidation of Peregrine Investments Holdings Ltd resulted from multiple factors. Among the primary causes was the acquisition of US dollar-denominated promissory notes valued at US$265 million from Steady Safe, an Indonesian taxi company. Due to a substantial decrease in Rupiah's value, this investment incurred significant losses, leading to investor mistrust. Furthermore, neither the executive management team nor the co-founder and managing director were aware of or supervised this investment. The lack of internal control also contributed to the situation.

Figure 3 depicts how Peregrine Investments, aside from Japan, was the biggest domestically-owned investment firm

in Asia. However, due to inadequate internal control measures, the company had to be liquidated. In response, the Hong Kong government urged financial institutions to reveal more investment-related data to SEHK and stockholders. This was especially necessary regarding potential market risk management protocols.

The CA Pacific Finance case involved the transfer of shareholdings from cash accounts to margin accounts without the investor's permission.

By using investors' shares as collateral for bank loans, the company encountered liquidation issues due to a decrease in the stock market. As a result, the bank sold off these shares, leading to a loss of confidence in small and medium-sized brokerage firms amongst the public. Consequently, investors suffered losses on their cash and margin account holdings.

The Forluxe Securities Case involved the unauthorized use of an investor's shares for obtaining margin financing. The owner of the company vanished along with HK$20 million worth of the investor’s shares. To make matters worse, the company conducted a lending business through its finance arm, which further shook public confidence in brokerages. To address this issue, the SEHK and SFC have started visiting selected brokerage houses regularly with their associated financial companies. This measure aims to ensure financial accuracy and adequacy of risk management procedures. Moreover, a special task force comprising the Financial Services Bureau, SEHK, and SFC has been established to ensure proper monitoring systems for brokerage houses.

Awards / Efforts in encouraging Corporate Governance

Hong Kong Corporate Governance Excellence Awards

In 2007, the Hong Kong Listed Companies Chamber and the Center for Corporate Governance and Financial Policy at Hong Kong Baptist University collaborated to create awards that

aim to promote advancements in corporate governance for listed companies based in Hong Kong.

• Corporate governance culture
• Protection of shareholders interests
• Transparency in governance, standard of the board, internal control and risk management
• Corporate social responsibility

Best First-time Annual Report Award

Efforts are consistently being made in Hong Kong to improve corporate governance by advocating for the implementation of good practices among newly established and existing companies within the capital market.

• Hang Seng Index (HSI)-constituent companies
• Non-HSI main board-listed companies
• GEM-listed companies
• H-share companies
• Public sector/not-for-profit organizations

Best Corporate Governance Disclosure Awards

Directors of the Year Awards

The primary objective of the award initiated in 2001 in Asian nations is to promote good corporate governance and honor directors for displaying exemplary practices in this field. The award helps to create awareness about the significance of corporate governance and encourages directors to strive and maintain high standards of directorship and governance in Hong Kong.

• Listed Companies (SEHK—Hang Seng Index Constituents)
• Listed Companies (SEHK—Non-Hang Seng Index Constituents)
• Private Companies
• Statutory/Non-profit-distributing Organizations

Case Studies of Country’s Top Corporations Company

1. Balanced composition of executive and non-executive directors. Established the Corporate Governance Steering Committee to foster Corporate Governance
2. Issued Guidelines on Internal Control System and Corporate Governance Manual to ensure related rules and regulations are fully complied.

The codes on corporate governance practice in the UK and HK have been combined.

1. Balance of executive and non-executive directors. Establish the Corporate Sustainability Committee.
2. Key procedures established by the Directors help provide effective internal control.
3. Communication with shareholders is highly prioritized. Shareholders are well-informed about HSBC’s activities.

The company conducts regular assessments of its Corporate Governance system to ensure compliance with global and regional regulations. Furthermore, it maintains a clear separation of duties between Management staff and Board members.

The commonalities shared by these five companies that display outstanding Corporate Governance are:

• Implement their own Corporate Governance policies, beyond the minimal Code of Best Practice
• Focus strongly on internal control and communication with their shareholders
• Ensure that their boards and committees have distinct roles and responsibilities to prevent conflicts of interest which might undermine the credibility of companies.

Promote Good Corporate Governance Culture

The expression of opinions by minority shareholders during general meetings in Hong Kong is impeded by various factors, such as the prevalence of family-based companies, high litigation costs and the tendency for controlling shareholders to out-vote them.

Promoting Shareholder Activism

In Hong Kong, shareholder activism through group formation is not common. However, the Asian Corporate Governance Association (ACGA) has taken steps to encourage it by establishing an investor discussion group. This forum allows shareholders to discuss important matters.

Before approaching institutional investors for financial aid, companies need to ensure their boards have directors who are credible. The Hong Kong Institute of Directors provides

various services, including matching companies with qualified members from their director register.

CEO’s Compensation

To comply with Hong Kong accounting and auditing standards, which align with the International Accounting Standards and International Standards on Auditing, companies located in Hong Kong are obligated to retain and publicize their financial details.

Audit Committee and Internal Controls

Transparency and Disclosure

The law mandates that a public register of information must be accessible for scrutiny by any listed company.

Private Companies

Collaborative efforts are underway from government, professional organizations, and chambers of commerce to educate and enable private enterprises, with a specific focus on Small and Medium Enterprises (SMEs), regarding corporate governance.

Conclusion

The implementation of effective governance practices in Hong Kong has led to significant progress in corporate governance, making companies more competitive and attractive to global investors.

References

1. http://www.nws.com.hk/html/eng/
2. http://www.ethicalcorp.com/
3. http://www.tax-news.com/asp/newstax.asp
4. http://hub.hku.hk/
5. http://www.lemonxl.com/
6. http://www.ipd.gov.hk/eng/intellectual_property/copyright/LegCo_Brief_2014_e.pdf
7. http://www.ecgi.org/codes/documents/cadbury.pdf
8. https://www.adb.org/documents/procurement-guidelines
9. http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB17-Report.pdf
10. https://www.hkex.com.hk/
11. http://www.asia.jlt.com/
12. http://www.hg.org/article.asp?id=25444