Truong Tan Trung Vietnamese - German University tantrung2811@gmail.com
06/06/2014 2 Table of content
Table of content .................................................................................................................... 2 List of Abbreviations .............................................................................................................. 3 I/Introduction ......................................................................................................................... 4 II/Overview ............................................................................................................................ 4 III/Corporate Governance Practices ...................................................................................... 6 1/ Boards of Directors ........................................................................................................ 6 2/Remuneration of directors and senior management ....................................................... 6 3/Accountability and audit .................................................................................................. 7 4/Delegation by the board of directors ............................................................................... 7 a/Management functions ................................................................................................ 7 b/Board Committees ...................................................................................................... 7 5/Communication with shareholders .................................................................................. 8 6/Company Secretary ........................................................................................................ 8 IV/Hong Kong Corporate Governance Status ........................................................................ 8 V/Conclusion ......................................................................................................................... 9 Bibliography ........................................................................................................................ 11
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List of Abbreviations
CEO Chief Executive Officer HKSA Hong Kong Society of Accountants HKSE Hong Kong Stock Exchange HWL Hutchison Whampoa Limited INEDs Independent Non-executive Directors NEDs Non-executive Directors UK United Kingdom US United States
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I/Introduction Corporate governance is defined as overall control of activities in a corporation that involves the formulation of corporate objectives, strategies, and plans and the proper management structure in order to be responsible to its various stakeholders (Steiner and Steiner, 2006) 1 . Without the right corporate governance, many collapses happened to even the enormous companies in the world like Baring Banks (1995), Enron (2000), Parmalat (2003) (Mallin, 2010) 2 . Before 1997, Hong Kong was a colony of the British Empire and inherited the governance structure of the West. It brought to a difference between Hong Kong and other countries in Asia by the appliance of corporate governance regime prior to the financial crisis in 1997. With that, Hong Kong was not suffer much damage to their businesses (Simon S.M.Ho, 2003) 3 . This paper will give the insight information about Hong Kong corporate governance. First, the writer will say about the overview of Hong Kong corporate governance and then discuss generally about practices of Hong Kong corporate governance. Lastly, the case about good corporate governance company and the comments on Hong Kong will be presented to show the status of Hong Kong corporate governance. II/Overview According to Tricker, in Hong Kong, corporate governance is a fascinating melange of Anglo American and Asian ideas. 4 . Also from a research of Simon S.M.Ho (2003), he said: At a country level, Hong Kong adopts the US/UK model to some extent, as its legal and accounting systems are similar to the British model and its market regulatory framework to
1 Steiner, John F., and George A. Steiner. Business, Government, and Society: A Managerial Perspective. New York: McGraw Hill/Irwin, 2006. 597. Print. 2 Mallin, Christine A. "1/Introduction." Corporate Governance. Oxford: Oxford UP, 2010. N. pag. Print. 3 Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects. Working paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network Electronic Paper Collection. Web. 3 June 2014. <http://ssrn.com/abstract=440924>. 4 Tricker, R. Ian. "17/Corporate Governance Around The World." Corporate Governance: Principles, Policies, and Practices. 2nd ed. Oxford: Oxford UP, 2009. 457. Print. 5 the American model. At the corporate level, the Family Control Model is dominant. 5 . In Anglo American side which Hong Kong corporate governance inherited, we can see a stable common law legal system and independent judiciary, active advocacy of improved corporate governance by regulators, international accounting standards, good overall standard on a global basis and a trend of improvement, and leadership in Asia. These five observations is concluded by Standard and Poors (2002) (data taken from the report of Simon S.M.Ho, 2003) 6 . Nevertheless, because of being a territory in Asia, Hong Kong also share the norm to have large proportion of companies are owned by families. HKSAs Corporate Governance Working Group (CGWG) reported that over 70% of Hong Kong listed companies were controlled by a family or an individual (Hong Kong Society of Accountants, 1996) 7 . Not only that, in 2002, 33 listed companies were controlled by ten wealthiest families in Hong Kong with a total market value at 31 Dec 2002 of HK$933 billion (approx US$120 billion) (data extracted from Adrian Lei and Frank Songs working paper, 2005) 8 . As the government of Hong Kong acknowledge about the tradition in its companies, they have tried to establish a good corporate governance that work well along with family firms. According to Donald Tsang (1999), a former financial secretary, our aim is to establish Hong Kong as a paragon of corporate governance, ensuring that those investments in Hong Kong are afforded the best protection and that our listed companies are managed with excellence, complying with the highest international standards including those related to risk management and disclosure of information 9 . Therefore, in 2002, Hong Kong is ranked in second place out of ten East Asian countries in quality of corporate governance and transparency by Political and Economic Risk Consultancy 10 .
5 Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects. Working paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network Electronic Paper Collection. Web. 3 June 2014. <http://ssrn.com/abstract=440924>. 6 Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects. Working paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network Electronic Paper Collection. Web. 3 June 2014. <http://ssrn.com/abstract=440924> 7 Hong Kong Society of Accountants, Hong Kong Accountants Special Issue on Corporate Governance, September/October 1996. 8 Lei, Adrian C.H, and Frank M. Song. Corporate Governance, Family Ownership, and Firm Valuations in Emerging Markets: Evidence from Hong Kong Panel Data. Working paper. N.p.: n.p., 2005. SSRN. Web. 3 June 2014. <http://ssrn.com/abstract=1100710>. 9 Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects. Working paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network Electronic Paper Collection. Web. 3 June 2014. <http://ssrn.com/abstract=440924> 10 ibid 6 III/Corporate Governance Practices To ensure the best practices for corporate governance, Hong Kong Stock Exchange (HKSE) published the Code on Corporate Governance Practices (the Code) 11 on 30th January, 2004 which includes 5 sections: Directors (1), Remuneration of directors and senior management (2), Accountability and audit (3), Delegation by the board of directors (4), Communication with shareholders (5) and Company Secretary (6) 1/ Boards of Directors There are many provisions about this sections of Code on Corporate Governance Practices. Therefore, to simplify, Deloitte 12 made a summary of the code. Based on Deloitte summary, the Code required each board of directors has executives and non-executive directors. In order to maintain the fairness, to stop the major owners from manipulating the decisions of the company to exploit the benefits as expense of minority shareholders, every board of directors of a listed company must have at least one-third 13 of it fill with independent non- executive directors (which can be call as INEDs) (Note). INEDs is required to have obligations like other executive directors. Not only that, the Code also made clear that chairman and chief executive officer (CEO) cant not be the same person due to a need of clear division of the responsibilities of the management of the board and the day-to-day management of the company's business. Moreover, board meetings should be held at least four times a year at approximately quarterly intervals. 2/Remuneration of directors and senior management To avoid managers and directors taking advantage from unreveal compensations, a code about this was established. The general idea of this code provisions is to disclose all the information related to remuneration for directors and managers in a company. 14
11 Look up the Code Provisions and Principles at "Corporate Governance." Hong Kong Exchange Stock, 2013. Web. 4 June 2014. <https://www.hkex.com.hk/eng/exchange/corpgov/Documents/compliance_checklist.pdf>. 12 "Hong Kong SAR." Center for Corporate Governance. Deloitte Touche Tohmatsu, n.d. Web. 06 June 2014. <http://www.corpgov.deloitte.com/site/ChinaEng/hongkong-governance-profile/>. 13 Amendment in Code Provision. "HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014. <https://www.hkex.com.hk/eng/newsconsul/hkexnews/2011/111028news.htm>. 14 Based on the Principles of Remuneration in Code on Corporate Governance, Hong Kong 7 3/Accountability and audit The collapse of one of the top ten US Fortune in 2000, Enron due to the lack of effective auditing was a huge shock to the financial world. (Mallin, 2010) 15 Therefore, to prevent the similar case to happen, HKSE required each company to follow their instructions in 3 aspects: financial reporting - to present a balanced, clear and comprehensible assessment of the companys performance, position and prospects 16
internal controls - to safeguard shareholders investment and the issuers assets 17
Audit Committee - to oversight financial reporting, monitor accounting policies, oversight any external auditors, regulatory compliance, and discuss about risk management policies with management. (Investopedia) 18
4/Delegation by the board of directors We approach this section by considering its principles to have a general idea about the delegation by the board of directors a/Management functions An issuer should have a formal schedule of matters specifically reserved for board approval. The board should give clear directions to management on the matters that must be approved by it before decisions are made on the issuers behalf. 19
b/Board Committees Board committees should be formed with specific written terms of reference which deal clearly with their authority and duties 20
15 Mallin, Christine A. "1/Introduction." Corporate Governance. Oxford: Oxford UP, 2010. N. pag. Print. 16 Based on the Principles of Accountability and audit in Code on Corporate Governance, Hong Kong, HKEx 17 ibid 18 "Audit Committee Definition | Investopedia." Investopedia. Investopedia, n.d. Web. 04 June 2014. <http://www.investopedia.com/terms/a/audit-committee.asp>. 19 Principles of Delegation by board of directors in Code on Corporate Governance, Hong Kong, HKEx 20 ibid 8 5/Communication with shareholders In modern corporations, it is really important to know how treat the shareholders. However, in Hong Kong, family owned companies is a trend. Therefore, this code is established to maintain the effective communication and somehow protect the minority shareholders. 21
6/Company Secretary The company secretary plays an important role in supporting the board by ensuring good information flow within the board and that board policy and procedures are followed. The company secretary is responsible for advising the board through the chairman and/or the chief executive on governance matters and should also facilitate induction and professional development of directors. 22
IV/Hong Kong Corporate Governance Status Hong Kong government tries its best to maintain the good corporate governance. Hong Kong Stock Exchange made amends on the Corporate Governance Code and Listing Rules frequently from 2004 till now. The latest amends were published in 2011 23 . Not only the government knows that good corporate governance makes the financial markets better but companies also acknowledges that high quality corporate governance will increase the firms value in the perspective of investors, especially when most firms in Hong Kong is ownership concentrated. Moreover, a data collected from Simon report shows that, Standard and Poors indicates that investors are willing to pay a premium for shares in well- governed companies 24 . For examples, Hutchison Whampoa Limited (HWL), a Hong Kong based Fortune Global 500 firm and also owned and managed by a well-known family group in Hong Kong. Li Ka- shing, one of the top 20 billionaires in the world (Forbes) 25 . Although HWL has a concentration in ownership, it still disclose all the information for users needs. Not only that,
21 Based on Principles of Communication with shareholders in Code on Corporate Governance, Hong Kong, HKEx 22 Principles of Company Secretary in Code on Corporate Governance, Hong Kong, HKEx 23 "HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014. <https://www.hkex.com.hk/eng/newsconsul/hkexnews/2011/111028news.htm>. 24 Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects. Working paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network Electronic Paper Collection. Web. 3 June 2014. <http://ssrn.com/abstract=440924> 25 "Li Ka-Shing." Forbes. Forbes Magazine, n.d. Web. 06 June 2014. <http://www.forbes.com/profile/li-ka-shing/>. 9 the board structures of this company also has the good governance. The board of directors in HWL consists of 15 directors, including Li Ka-shing and his elder son, the group managing director, deputy group managing director, group finance director, 3 executive directors, 6 independent non-executive directors (more than one-third of the board) and 1 non-executive director (Based on the interim report 2013 of HWL) 26 . However, there are still cases that some companies use some loopholes or secretly going against the rules by using fraud or bribing. In a recent interview 27 by China Money Network with Bing Ling, a portfolio manager at Hong Kong-based US$1.4 billion-under-management hedge fund, he said that from his experience and observation, there was still so many accounting abuse in even large companies (Hong Kong) due to the fact that there was no strong forces to go against those companies. He also criticized the Hong Kong Stock Exchange with the relaxed attempt to deal with independent directors rules. Not only that, with more than seventy-five per cent of listed companies are domiciled outside of Hong Kong and are not subject to some relevant local laws (Simon S.M.Ho, 2003) 28 , it is hard for Hong Kong governors to deal with the violations in these companies. This points out that the corporate governance in Hong Kong still has many to improve though it is good compared to other Asian countries as stated in (II). V/Conclusion Corporate governance has been becoming the focus of regulators, shareholders and various stakeholders in the world (Chau & Leung, 2006) 29 . Hong Kong, like other Asian countries, has a paradigmatic feature of organisational form, the family (ownership concentration) firms (Hubert Shea, 2008) 30 , which made many difficult in corporate governance. However,
26 Interim Report. Rep. Hong Kong: HWL, 2013. Web. 6 June 2014. <http://202.66.146.82/listco/hk/hutchison/interim/2013/intrep.pdf>. 27 Lin, Bing. "Bing Lin: Accounting Abuse Among Listed Chinese Companies Still Widespread." Interview. China Money Network. China Money Podcast, 16 Apr. 2014. Web. 6 June 2014. <http://www.chinamoneynetwork.com/2014/04/16/bing-lin-accounting-abuse-among-listed-chinese- companies-still-widespread>. 28 Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects. Working paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network Electronic Paper Collection. Web. 3 June 2014. <http://ssrn.com/abstract=440924> 29 Chau, Gerald, and Patrick Leung. "The Impact of Board Composition and Family Ownership on Audit Committee Formation: Evidence from Hong Kong." Journal of International Accounting, Auditing and Taxation 15.1 (2006): 1-15. Web. 30 Shea, Hubert. "Corporate Governance and Social Responsibility of Family Firms in Hong Kong: A Case Study of Hutchison Whampoa Limited (HWL)." SSRN. N.p., n.d. Web. 3 June 2014. <http://ssrn.com/abstract=935101>. 10 Hong Kong made its governance better by improve their corporate governance frequently. It even applied the US/UK market model into its corporate governance rules. This made corporate governance in Hong Kong better than many countries in Asia. Nevertheless, Hong Kong still has to put more effort in order to made it better.
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Bibliography "Audit Committee Definition | Investopedia." Investopedia. Investopedia. Web. 04 June 2014. <http://www.investopedia.com/terms/a/audit-committee.asp>. Chau, Gerald, and Patrick Leung. "The Impact of Board Composition and Family Ownership on Audit Committee Formation: Evidence from Hong Kong." Journal of International Accounting, Auditing and Taxation 15.1 (2006): 1-15. Web. "Corporate Governmance." Hong Kong Exchange Stock, 2013. Web. 4 June 2014. <https://www.hkex.com.hk/eng/exchange/corpgov/Documents/compliance_checklist.pdf >. "HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014. <https://www.hkex.com.hk/eng/newsconsul/hkexnews/2011/111028news.htm>. Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects. Working paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network Electronic Paper Collection. Web. 3 June 2014. <http://ssrn.com/abstract=440924>. "Hong Kong SAR." Center for Corporate Governance. Deloitte Touche Tohmatsu. Web. 06 June 2014. <http://www.corpgov.deloitte.com/site/ChinaEng/hongkong-governance- profile/>. Interim Report. Rep. Hong Kong: HWL, 2013. Web. 6 June 2014. <http://202.66.146.82/listco/hk/hutchison/interim/2013/intrep.pdf>. Lei, Adrian C.H, and Frank M. Song. Corporate Governance, Family Ownership, and Firm Valuations in Emerging Markets: Evidence from Hong Kong Panel Data. Working paper. 2005. SSRN. Web. 3 June 2014. <http://ssrn.com/abstract=1100710>. 12 "Li Ka-Shing." Forbes. Forbes Magazine. Web. 06 June 2014. <http://www.forbes.com/profile/li-ka-shing/>. Lin, Bing. "Bing Lin: Accounting Abuse Among Listed Chinese Companies Still Widespread." Interview. China Money Network. China Money Podcast, 16 Apr. 2014. Web. 6 June 2014. <http://www.chinamoneynetwork.com/2014/04/16/bing-lin- accounting-abuse-among-listed-chinese-companies-still-widespread>. Mallin, Christine A. "1/Introduction." Corporate Governance. Oxford: Oxford UP, 2010. Print. Shea, Hubert. "Corporate Governance and Social Responsibility of Family Firms in Hong Kong: A Case Study of Hutchison Whampoa Limited (HWL)." SSRN. Web. 3 June 2014. <http://ssrn.com/abstract=935101>. Steiner, John F., and George A. Steiner. Business, Government, and Society: A Managerial Perspective. New York: McGraw Hill/Irwin, 2006. 597. Print. Tricker, R. Ian. "17/Corporate Governance Around The World." Corporate Governance: Principles, Policies, and Practices. 2nd ed. Oxford: Oxford UP, 2009. 457. Print.