The notion of CG is clear enough when discussed in very general terms. However, for the purposes of any study of CG it should be recognized that there is no one all¬encompassing agreed definition of CG and its parameters, or what constitutes «good CG» in its detailed implementation. Instead, the approaches of different regulatory agencies, the views of different participants and stakeholders, and the theories put forward by academics reveal a profusion of conceptual and value-laden variations in how CG is to be understood, the variables that are relevant to CG, and the objectives it is seeking to achieve.
The divergent values different parties assign to discrete variables that are recruited to the CG debate ranges from a relatively contained issue, such as quarterly reporting, to commercial questions as to the relative weight that should be given to the voices of short-term investors versus long-term shareholders, to more socially complex issues, such as gender and racial diversity on the board.
The Organisation for Economic Co-operation and Development Principles of Corporate Governance discuss CG around six themes, each of which are expanded upon by sub-principles: ensuring the basis for an effective corporate governance framework; the rights and equitable treatment of shareholders and key ownership functions; institutional investors, stock markets, and other intermediaries; the role of stakeholders; disclosure and transparency; and the responsibilities of the board. In general, Hong Kong's regulatory system addresses each of these themes reasonably well, the notable exceptions being: the articulation of regulatory responsibilities, particularly between the Securities and Futures Commission and the Hong Kong Exchanges and Clearing Limited, the role of the board, the role of broader stakeholder groups that are largely ignored in Hong Kong's laissez-faire economic and legal structure, and the quality of disclosure and transparency.
One may also refer to «good CG» in various prescriptive ways, for example, in terms of behaviour that is considered desirable based on a set of assumed a priori values, or to those aspects of a CG system that serve to foster that behaviour and deter undesirable behaviour, or to the ability of a stakeholder (however defined) to perform a role in CG outcomes (whether ex ante or ex post). Conversations about CG frequently sometimes fail to make such distinctions and often fail to identify the underlying assumed values on which a viewpoint is based.
Accordingly, it is necessary to provide some sort of framework around how this study will, having regard to the overarching purposes of this study as set out in Section 1 above, approach the concept of CG and how «good CG» is to be understood. As a study directed toward practical suggestions as to how CG can be improved in Hong Kong, this study does not dwell on CG theory, except where to do so is relevant to an explanation as to why a change has been made and why it has worked or failed etc. The comparative aspect of this study requires an approach that is to some extent jurisdiction-neutral.
In view of the foregoing considerations, this study has adopted the following approaches to understanding «good CG»:
good CG is assumed to underpin shareholder rights, remedies and protections;
good CG is assumed to underpin an appropriate level of oversight of the management by the owners of the company;
good CG is assumed to be desirable as a means of fostering market integrity and market confidence;
CG mechanisms (see below) that are designed to bring non-locally incorporated companies within a local CG framework are regarded as supporting good CG;
the viewpoint of a minority shareholder is adopted (as opposed to, for example, board members or other stakeholders in a company's operations);
to the extent possible, the «good CG» concept ignores the reality that different minority shareholders in practice may attach different priorities to their shareholding interest (e.g.: share price performance over a shorter versus longer term; improvements in corporate social responsibility; dividend performance; etc), except where it has been necessary to take into account, for example, in relation to shareholder activism;
to the extent possible, other matters related to the CG debate are in general excluded, such as stakeholder governance, stewardship, gender and racial board diversity, corporate social responsibility, and various aspects of internal governance processes by which the board directs and controls the undertaking of the company's business;
no examination is undertaken as to whether there is any relationship between good CG and share price performance or management performance.
The above list is of course not designed to form any comprehensive definition of what is good CG - as already noted, there are a number of different approaches to the CG question and the foregoing merely serves as a framework around the restricted purposes of this study.
For the purposes of organizing material generated by the study the CG concept is understood as being dependent on five key variables:
Information - Involvement - Equality - Accountability - Effectiveness.
These variables are not mutually exclusive. For example, the ability of a shareholder to exercise or enforce their rights may depend on what they know (information), their ability to influence (involvement/equality), and the means by which they can hold management responsible (accountability), which together reflect the efficacy of a CG system (effectiveness). With this complexity in mind, these five variables also serve as a structure for the discussion and analysis in Section 3:
Information - Whether the information flow to shareholders of CG-related matters is adequate. For example: the timeliness and adequacy of disclosure and when mandated by laws or regulations; whether information as to the effectiveness of the board including its subcommittees such as the audit committee in undertaking its operations is adequate; whether the mechanisms that support such information are adequate. This is discussed in Section 3.3.
Involvement - Whether shareholders are given adequate opportunity for involvement in the affairs of the company. For example: shareholder involvement in decision making generally as well as specific issues of CG concern such as executive compensation; what circumstances trigger shareholder involvement. This is discussed in Section 3.4.
Equality - Whether shareholders are treated equally. For example: the principle of one-share-one-vote as compared to weighted voting rights/different share classes; equality of voting power in specific transaction scenarios (such as takeover and other offers); when shareholders are excluded via a disinterested shares concept. This is discussed in Section 3.5.
Accountability - The mechanisms that hold the exercise of management power to account. For example: mechanisms of redress in relation to the disclosure of information; compliance with the listing rules; accountability to shareholders individually or as a class or via regulatory agencies; the appointment of directors and board refreshment. This is discussed in Section 3.6.
Effectiveness - Whether the CG system is effective with regard to procuring desired behaviours and deterring behaviour considered inconsistent with good CG. For example: the overall adequacy of the CG system design; adequacy of legal remedies; effectiveness of regulatory bodies; whether independent non¬executive directors (INEDs) are effective. This is discussed in Section 3.7.
The topic of non-locally incorporated companies is discussed in Section 3.2.