Corporate governance as defined in the Cadbury Report, published in the UK in 1992, is the system by which companies are directed and controlled. At the heart of this system is the board of directors who are responsible for the proper running of their companies.
In so doing, the directors have to conform to the rules and regulations of the jurisdictions in which their companies operate and take into consideration the interests of the various stakeholders. The shareholders have the right to appoint the directors and the auditors and ensure that an appropriate governance structure is established. There are mechanisms for shareholders to remove directors and auditors and to fill up the casual vacancies so created.
Directors of Hong Kong incorporated companies owe their companies a fiduciary duty and a duty of care. They have to manage in the best interests of the company and to avoid any conflict of interest. There are disclosure requirements under the Companies Ordinance if they are having interests in any contracts to be entered into by the companies. Loans to directors are either prohibited or subject to stringent disclosure requirements.
If companies do not have their own code of practise, those listed on the Main Board of the Hong Kong Stock Exchange are expected to follow the code of best practice as laid down in Appendix 14 of the Main Board Listing Rules. Appendix 14 prescribes that the board of directors should hold board meetings at least once in every six months, with the agenda and relevant materials being circulated to all members at least two days before the board meeting is to be held.
Full minutes of the meetings should be kept and any contrary points of view expressed by an independent non-executive director should be reflected in the minutes. A listed company must have at least two independent non-executive directors who: should hold not more than 1% of the issued shares of a company; should not be past or present executives and; should not be connected to any director, chief executive or substantial shareholder.
These directors should not rely on their remuneration as director for their livelihood. Companies can also appoint non-executive directors for fixed terms to draw on their expertise or business skills for the benefits of the companies. Non-executive directors may or may not be independent, depending on whether they can meet with the aforementioned criteria for independent non-executive directors.
Directors who deal in the shares of their own companies have to comply with the Listing Rules, Securities (Disclosure of Interests) Ordinance, Securities (Insider Dealing) Ordinance, as well as the Hong Kong Code on Takeovers and Mergers. Directors in possession of unpublished price sensitive information relating to the shares or are aware of any negotiations on disposals or acquisitions which would constitute either notifiable transactions or connected transactions should not deal in shares until a formal press announcement is made.
They should not divulge any undisclosed information which may have material impact on share price to others. They should not deal in shares one month before the announcements of the finals results and publication of interim or quarterly accounts (applicable to companies listed in GEM only). Before a director can deal in shares, written notice has to be given to the chairman of the board of directors or to a designated director and should receive a written acknowledgement first before dealing. Once dealing is made, disclosure has to made the company and to the Stock Exchange within five days.
Companies listed on the Main Board have to publish interim and final results in a timely manner. Such companies have to set up audit committees with a minimum of three members, a majority of them should be independent non-executive directors. The primary functions of the audit committees are to ensure proper internal control and financial reporting procedures. Companies have to disclose the compliance or non-compliance on the formation of the audit committees in the interim and final reports and the reasons for non-compliance.
Companies listed in the Growth Enterprise Market ("GEM") are subject to certain additional requirement laid down in the GEM Listing Rules. They have to appoint one of their executive directors as the compliance officer to ensure that the GEM listing rules and any other laws and regulations are complied with and to deal with any enquiries from the Stock Exchange in a timely manner.
They have to appoint two authorised representatives from among the executive directors and secretary either to assist the sponsor in its role as the principal channel of communication with the Stock Exchange or, if the company is not required to have a sponsor, act as the principal channel of communication. They have to appoint a qualified accountant to supervise the accounting reporting procedures and internal control.
Companies listed in GEM need to publish quarterly accounts in addition to the publication of annual results and interim reports.
In his March budget speech, the Financial Secretary, Mr. Donald Tsang, announced that there would be a comprehensive study on corporate governance to identify and plug any gaps in the corporate governance regime. Immediately after his speech and in May this year, the Hong Kong Monetary Authority issued guidelines on corporate governance of locally incorporated authorised institutions.
The guidelines spelt out the responsibilities of the board and legal obligations of the directors as well as the roles of the internal and external auditors. On 1st July 2000, the Companies (Amendment) Ordinance came into effect. One of the changes introduced is that members now holding one-twentieth (previously one-tenth) of the paid-up capital or voting rights of a company can now requisition for an extraordinary general meeting. All these show that Hong Kong is slowly evolving its own corporate governance regime. There may be more of such guidelines and laws relating to corporate governance in the near future.
Belinda Wong, Senior Manager, Corporate Services of PricewaterhouseCoopers.
Email: [email protected]
