1. 1 PRACTISING CORPORATE GOVERNANCE IN HONG KONG Speech to American Chamber of Commerce in Hong Kong, 12 December 2003 By Paul M Y Chow, Chief Executive Hong Kong Exchanges and Clearing

2. 2 Agenda International background Development of corporate governance in Hong Kong Revised Code on Corporate Governance Practices Conclusion 1. 2. 3. 4.

3. 3 What is corporate governance? The system by which corporations are directed and controlled The processes used to direct and manage the business and affairs of the company with the objective of balancing : the attainment of corporate objectives the alignment of corporate behaviour with the expectations of society the accountability to recognised stakeholders OECD 1998 International Capital Markets Group 1995

4. 4 International developments on corporate governance Cadbury Report (UK) Further UK committees ­ Greenburg (on executive pay) ­ Hampel (on combined code) ­ Turnbull (on internal control) Over 30 other countries develop own codes Asian financial crisis highlights importance of governance 1992 1990s 1997/98 Key Developments

5. 5 International developments on corporate governance (cont’d) OECD seeks universal standard for corporate governance International Corporate Governance Network (ICGN) 1999 Key Developments

6. 6 Current global focus on corporate governance Enron, Tyco US Corporate scandals Intermediary governance Exchange governance Statutory regulation Exchange corporate governance rules Fund managers, investment banks NYSE Sarbanes-Oxley Act NYSE / Nasdaq listing rules Examples Areas

7. 7 Agenda International background Development of corporate governance in Hong Kong Revised Code on Corporate Governance Practices Conclusion 1. 2. 3. 4.

8. 8 Development of corporate governance in Hong Kong Code of Best Practice Disclosure of directors’ emoluments and MD&A Guidelines on INEDs Statement of compliance with Code of Best Practice Audit Committees SCCLR corporate governance proposals 1993 1994 1995 1998 2001 & 2003 Key Milestones

9. 9 HKEx consultation on corporate governance amendments to Listing Rules FSTB Corporate Governance Action Plan HKEx consultation conclusions Release of revised Code of Best Practice Release of new corporate governance Listing Rules Development of corporate governance in Hong Kong (cont’d) 2002 2003 2004 (planned) Key Milestones

10. 10 Agenda International background Development of corporate governance in Hong Kong Revised Code on Corporate Governance Practices Conclusion 1. 2. 3. 4.

11. 11 Rationale of introducing the Code on Corporate Governance Practices Existing code very brief ­ need for more detailed, operational guidance Public expectations of issuers have risen substantially Need to catch up with international standards Draws on revised UK Combined Code (issued July 2003) Code in final stage of drafting To be released for public exposure

12. 12 Overall structure of corporate governance Rules and Code Voting by poll Disclosure of directors’ remuneration Quarterly reporting [GEM Board only] Report on Corporate Governance Practices ­ Required to include in Annual Report ­ Explain compliance with the Code in half yearly report (Can be cross referenced to the last annual report if there have not been any changes) Listing Rules Coverage

13. 13 Overall structure of corporate governance Rules and Code (cont’d) Coverage Draft Code on Corporate Governance Best Practices Principles Code Provisions ­ Comply or explain ­ Issuers may develop their own more stringent codes Recommended Best Practices ­ Recommended only, but issuers are encouraged to comply or explain non- compliance

14. 14 Covered areas Content of draft Code – Overview A.Directors Section Board composition & responsibility Access to information Level Remuneration Committee B.Directors’ remuneration Financial reporting Internal controls Audit Committee C.Accountability & Audit

15. 15 Coverage Content of draft Code – Overview (cont’d) Section Management functions Committees Effectiveness Voting by poll D.Delegation by Board E.Communication with shareholders

16. 16 Section A - Directors Frequency of meetings Dealing with conflicted matters Chairman and CEO INEDS Nomination committee Professional development for directors IssuesKey Code provisionsKey recommended best practice Quarterly meeting Should be dealt with by board meeting with INEDs present Roles of Chairman & CEO separated INEDs comprise 1/3 of the board INEDs identified in all corp. communications Should be established with a majority of INEDs Continuous trainingTraining upon appointment

17. 17 Section B – Directors’ remuneration Directors’ remuneration Remuneration Committee IssuesKey Code provisionsKey recommended best practice Formal and transparent remuneration policy Should be established with majority of INEDs Significant proportion of executive directors’ remuneration linked to performance Disclosure of details of remuneration of senior management on a named basis

18. 18 Section C – Accountability and Audit Responsibility for accounts Quarterly reporting Internal controls Audit Committee IssuesKey Code provisionsKey recommended best practice Directors to acknowledge responsibility for preparing the accounts Should be published within 45 days of quarter end (Main Board) Directors to review effectiveness of internal control at least annually Should comply with the required duties as set out in the Code

19. 19 Section D – Delegation by Board Management’s exercise of delegated powers Board committees IssuesKey Code provisionsKey recommended best practice Board to give clear directions to management on how to exercise the delegated powers Disclosure of the division of responsibility between the Board and management Should prescribe clear terms of reference Committees should report back to Board on their decisions or recommendations

20. 20 Section E – Communication with Shareholders Effective communication Voting by poll IssuesKey Code provisionsKey recommended best practice Chairman of the Board should attend AGM Notice of general meetings should be sent to shareholders at least 21 days before meeting Chairman should explain the procedures for demanding and conducting a poll

21. 21 Agenda International background Development of corporate governance in Hong Kong Revised Code on Corporate Governance Practices Conclusion 1. 2. 3. 4.

22. 22 Comments Conclusion Follows leading international practice Disclosure-based approach allows flexibility to accommodate issuers of different natures Will help address concerns on corporate governance of listed issuers Will help develop quality of issuer management Some issuers will have difficulty complying, hence a transition period Enhanced Code is a substantial step forward

23. 23 Comments Conclusion (cont’d) Other elements include Exchange rules and statute In addition to the Exchange, the SFC and Government bodies play a part And good corporate governance practice depends also on directors and advising professionals The support of the market community is needed Code is only one element of Corporate Governance framework