The development of CG in Hong Kong did not occur in isolation to the global scene but was often triggered by events and developments elsewhere, in particular the UK and the United States. The collapse of wallpaper group Coloroll and Polly Peck in the UK led to the establishment of the Committee on the Financial Aspects of Corporate Governance chaired by Sir Adrian Cadbury, popularly known as the Cadbury Committee in May 1991. As the Committee got down to business, two further scandals - the collapse of BCCI and Maxwell Communications Corp - heightened the sense of urgency behind the Committee's work. The report of the Committee published in 1992, «Financial Aspects of Corporate Governance», usually referred to as the Cadbury Report, has had a profound influence not only in the UK but globally, including Hong Kong.
Many of the recommendations made in the Cadbury Report have found their way to the CG system in Hong Kong. For example, it recommended that the board of directors, as opposed to the Chief Executive Officer, should be the decision-making body for major transactions and that the board should have sufficient number of INEDs to carry significant weight in board decisions. It also recommended that the board should be supported by three committees - the nomination committee, the remuneration committee and the audit committee. These recommendations were later implemented by the London Stock Exchange by way of an appendix to the listing rules on the basis that compliance was not compulsory but non-compliance required explanations, i.e. the «comply or explain» approach. Amongst other influences, these changes led to the recommendation by the Hong Kong Society of Accountants (later renamed as the Hong Kong Institute of Certified Public Accountants) Corporate Governance Committee in 1995 that an audit committee be introduced as part of the SEHK's Code of Best Practice and the formal endorsement of the recommendation by the SEHK in 1998 in the form of Appendix 14 to the listing rules.
Subsequent undertakings of committees in the UK also had significant impacts on Hong Kong. This included: the Greenbury Committee's report in 1995 (on directors' remunerations), the Hampel Committee's report in 1998 (to review the Cadbury principles and Greenbury principles which led to the Combined Code), the Higg's Review in 2003 (on independent non-executive directors), the Smith Report in 2003 (on audit committee) following the collapse of Enron in the US in December 2001, and the Walker Report in 2009 (on CG of financial institutions) following the global financial crisis of 2008. To this influence can be added: the introduction of the UK Corporate Governance Code 2010 (which replaced the Combined Code), the Stewardship Code 2010, the new Companies Act 2006, the Financial Services and Market Act 2000 and its amendments by the Financial Services Act 2012, and the Bank of England and Financial Services Act 2016. These are further considered in subsequent sections of this Report.
Across the Atlantic, the collapse of Enron, WorldCom and Tyco between 2000-2002 led to the passage of the Sarbanes-Oxley Act of 2002 (SOX) in the United States, which resulted in many significant CG changes. These changes have spurred the CG debate in Hong Kong, sometimes in different directions. For example, whether there should be an independent oversight body of auditors such as the Public Company Accounting Oversight Board in the United States established under SOX, whether auditors who provide auditing service to a listed company should be banned from providing non auditing services to the company at the same time, and so on. On the other hand, while SOX may have helped improve investor confidence, it also produced unintended consequences as it significantly increased liability and compliance costs for listed companies. Reflecting the increasing cost of compliance, the annual cost of a public listing in the U.S. increased from around US$1.2 million in 2004 to around US$2.8 million in 2005. It also led to an increase in the number of companies delisting (from 48 in 2003 to 80 in 2004) and a significant decrease in the number of foreign issuers seeking a listing on the market. One of the authors of SOX, Congressman Oxley, has admitted that SOX may be causing companies to be excessively risk averse, and this concern speaks to the need for balance in a CG system, and to steer clear of the risk of examining companies to death such that they would not have any breathing room to innovate or to take risks.
Similarly, the changes introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 also provided the foundation for raising numerous CG discussions in Hong Kong. However, few of the requirements have been implemented and many of them may not be progressed under the current United States Government leadership, including relating to executive remuneration and shareholder rights and proxy rules, as discussed in subsequent sections of this Report.
Global trends in CG have also influenced developments in Singapore and Mainland China. This encompasses the use of a code of corporate governance, the appointment of board committees, and the use of independent directors. Experience in these markets not only provides opportunities for Hong Kong to understand how these measures work in different markets under different market and institutional conditions but also the nature and operation of the companies listed in Singapore and Mainland companies listed in Hong Kong and Singapore.
That global trends have also taken hold in developing the CG system in Mainland China is particularly noteworthy in the Hong Kong context. Since the first mainland company, Tsingtao Brewery, listed its H shares in Hong Kong on 15 July 1993, Mainland enterprises have come to dominate the SEHK. Mainland Chinese enterprises now account for more than half of the companies listed on the SEHK. For the years ended 2015 and 2016, around 90% of total funds raised in initial public offerings (IPOs) and around 70% of average daily turnover are attributable to Mainland enterprises. This is a dramatic change since the 1990s - from 57 Mainland enterprises accounting for 9% of total turnover in 1994, by end 2004 these figures had respectively risen to 304 and around 50%. Milton Friedman has also attributed Hong Kong's free market capitalism as a "major factor in encouraging Mainland China... to move away from centralized control toward greater reliance on private enterprise and the free market».
This dominance has facilitated Hong Kong's position as a leading global market for IPOs - in this regard being positioned second in the world over a consolidated ten-year period, as shown in the diagram below.
The trend of Mainland enterprises coming to list on the SEHK is likely to continue as the HKEX continues to target technology startups, Mainland firms looking for expansion overseas, and Belt and Road initiative-related companies for further growth in IPOs. This presents huge opportunities for Hong Kong as a fund raising centre. It also presents challenges in regulating CG to maintain and improve standards, transparency, and investor protection, as witnessed by a number of corporate scandals involving Mainland enterprises listed in Hong Kong over the past two decades.