Section 3, which is the main body of this Report, presents the substantive analysis of the study with a view to identifying potential recommendations for changes in Hong Kong's CG system that are supported by the analysis of the data. The analysis considers each jurisdiction's legal and regulatory system and, where relevant, the other characteristics of its market including political, historical, cultural and social factors. These circumstances vary considerably from one jurisdiction to another in ways that fundamentally interact with the likelihood of successful CG reform and the manner in which it might be implementable. The analysis in Section 3 identifies recommendations that are subsequently presented in Section 4.
Section 3.1 sets out in some detail the thematic topics, and trends in regulating CG. It also identifies some of the important background considerations to CG, including the role of culture, assessing the costs and benefits of CG, and the methodology of assessing CG. The section concludes with an exploration of what is meant by «effectiveness» and discusses the potential disjunct between a right-minded principle, the practice that in fact subsequently evolves in response, and the outcome that eventuates.
Sections 3.2 to 3.7 comprise the substantive analyses that give rise to specific recommendations - where a recommendation is made, a cross reference is provided to each recommendation in Section 4. These sections are intended to serve as largely self contained discussions of 28 different topics of interest grouped together under six concept-driven headings. Inevitably, no topic on CG is self-contained because each topic interacts with the broader CG system it is located within.
Section 3.2 considers the issue of how to regulate non-locally incorporated companies listed in Hong Kong. Over half of the all listed issuers fall into this category. There are two major challenges with the regulation of these companies: setting the appropriate CG standards for these companies in view of the conditions imposed in the jurisdiction of their incorporation, and the enforcement of standards imposed in Hong Kong against the companies and their directors and senior management. The enforcement of the standards is particularly challenging with Mainland companies as many of them have no meaningful physical presence in Hong Kong - their business operations, assets and directors and officers may all be located in Mainland China. Such non-domestic companies present various difficulties, including investigation and the collection of evidence, and the enforcement of sanctions and other orders such as investor compensation orders.
Section 3.3 discusses the role of information in a CG system. This covers its disclosure and, importantly, the enforcement mechanisms where applicable requirements are not met, some of which arise out of the law and others arising out of non-statutory codes, which gives rise to different levels of enforcement effectiveness. This section, therefore, also explores practical ways in which compliance can be better secured.
Section 3.4 explores the concept of shareholder involvement and the mechanisms by which the voices of shareholders are facilitated in relevant governance concerns of the company. This includes the concept of shareholder stewardship, the rights attaching to shareholder votes, specific issues related to executive compensation, and event driven matters relating to changes of control.
Section 3.5 explores the issue of equality of voting rights, in particular the one-share- one-vote principle, the question of weighted voting rights (or dual class shares), and the relationship between public market concerns and private law rights.
Section 3.6 focuses on the mechanisms by which directors are held accountable to shareholders. An important issue in this regard is board refreshment, as well as whether INEDs should be directly appointed by minority shareholders. Section 3.6 also analyzes the difficulties faced by minority shareholders in Hong Kong in pursuing legal remedies, including the absence of class action rights and contingency fees in Hong Kong, which is sometimes seen as a significant impediment to shareholders law suits.
Section 3.7 explores the question of the effectiveness of the CG system. This is longest of the analysis sections and also leads to the largest number of recommendations. This is no surprise since, ultimately, rules and regulations concerning CG will only achieve their purpose if they are effective. Whether the system is effective depends on a broad spectrum of factors that, as already noted, are interrelated. At the level of CG system design, this concerns matters such as the tools used to develop policy, the effectiveness of enforcement agencies, and the oversight of public auditors. At the more specific level, it concerns matters such as the operation of gateway mechanisms designed to filter out issuers that are not ready for life as a public company, managing the relationship between controlling shareholders and the company, and the characterization of INEDs and the role they are expected to perform. In particular the dual responsibilities model of oversight of the listed market undertaken by the HKEX and the SFC has been the subject of much discussion. As there is inadequacy in the current system particularly with regard to enforcement, this Report explores a number of mechanisms that improve the effectiveness of the system without disruption to the dual responsibilities model.