08-05-2019

3. Discussion and analysis of jurisdictions studied. 3.1.5 Cost-benefit considerations

Any system of regulatory controls on a market can be considered from various angles according to the standpoint one assumes and the interests that one wishes to prioritize over others. One possibly neutral standpoint is the question of the overall cost/benefit assessment of a regulatory system or any changes proposed to be made to a regulatory system. This certainly includes questions related to CG standards.

Although somewhat dated, estimates (in 2005) of the «adjusted regulatory costs» in terms of the cost of securities regulation per billion dollars of stock market capitalization put Hong Kong and the United States on a roughly equal footing ($73,317 and $83,943, respectively) compared with other jurisdictions - for example, the UK stood at $138,159, Singapore at $95,406). On the basis of those numbers, Hong Kong is doing well, however, the estimate predates a number of significant changes. In Hong Kong, the SFO had only just been introduced and the period since has witnessed a significant growth in the size of the SFC workforce, an increased level of surveillance and enforcement activity of the SFC in part in response to a significant growth of the stock exchange and the composition of companies listed on it. In the UK, the listing function had only been transferred away from the exchange to the UK Listing Authority in May 2000, and a twin peaks model of regulation later came into effect in April 2013. In Singapore, many initiatives have been taken since 2012 that may have increased the regulatory compliance cost. It may also be noted in Mainland China, where there have been many legislative and regulatory changes since 2005, e.g. the Company Law 2014.

As noted, the above figures are somewhat out of date and it is not one of the purposes of the present study to undertake an update of the same. However, the point is that any system of CG operates within a wider regulatory framework such that proposing changes to CG regulation will bring with it a greater or lesser impact on the overall regulatory costs of a system.

The SEC have for a long time been subject to requirements to provide cost-benefit analyses. However, there are different views on the overall utility of the requirement given the delays and costs involved in undertaking the analysis as well as the selection of the appropriate metric used to measure cost-benefit. Whether or not it is correct to regard it as a burdensome obstacle to implementing productive change, rules implemented by the SEC are sometimes challenged on the basis of the analysis the SEC has undertaken. For example, the SEC's Rule 14a-11 that was designed to facilitate the rights of shareholders to nominate directors to a company's board was successfully overturned on this basis, as discussed in Section 3.4 and Appendix III.7.2.

The SFC has in the past year or so been increasingly bringing focus to listed companies- related issues such as the risks posed by corporate fraud and misfeasance, and has cited a figure of HK$200 billion as the cost to market capitalization. This is not merely about the setting or enforcement of CG standards but is very much concerned with the establishment of effective mechanisms that enable the identification and rectification of CG shortcomings.

When considered in terms of cost/benefit to the system, enforcement is resource intensive and ultimately expensive, particularly when assessed against the potential damage already done to the integrity of the market. This is perhaps one reason why regulatory agencies, including the SFC, have increasingly been turning their attention to gatekeeping or ex ante mechanisms, which are systemically more cost effective than enforcement. There are a number of potential gatekeepers. For example, the SEC regards outside directors as gatekeepers that are important links in the preservation of quality information in the market. The SFC has utilized its role as an overseer of intermediaries to increase its regulatory focus on sponsors of new listing applicants as well as the roles performed by financial advisers to listed issuers. A focus of these efforts is the quality of information and management's role in relation to the same.

There are many possible approaches to improving CG standards that are consistent with the protection of shareholders and the integrity of a marketplace. This may involve changes to laws or regulatory requirements that impact on board processes, the transparency, quality and timeliness of information, shareholder involvement, shareholder rights, or any of the other matters discussed in Section 3.1.1 «Thematic topics». An important consideration in any of these alternative approaches must be: what is the likelihood that the change will facilitate the objectives sought (for example, as compared to box-ticking), and what is the overall cost to the system in light of the benefits it is expected to deliver. Certainly, the mere addition of more rules does not, without clear justification, represent taking a step forward.