3. Discussion and analysis of jurisdictions studied. 3.1.1 Thematic topics

The topic of shareholder rights, remedies and protections, and the position of overseas companies listed in Hong Kong naturally brings within the reach of a comparative study of CG a number of considerations that range from the regulatory architecture of the jurisdiction, to the specific provisions of the system, to the cultural context against which the foregoing must be read. The 3 C's of the investor base in each jurisdiction - composition, CG culture and characteristics - is a relevant factor in relation to each of the foregoing.

Thematic topics that have been identified from the key differences and observations of interest, a subset of which have informed the discussion in Sections 3.2 to 3.7 and the recommendations in Section 4, are as follows.

The CG system:

The fundamental design of the CG systems studied vary in important ways that have an impact on the more specific tools used to implement good CG, as further discussed in Section 3.1.2 "Trends in regulating CG standards". This includes factors such as:

the presence or absence of a dedicated CG standards body;

the basis of the model being shareholder-centric as compared to board-centric; and

the extent of gaps and overlaps in the oversight and development of CG.

The comparative roles of the exchanges, the industry regulator and oversight and review bodies, and their structural position within the regulatory architecture and legal system, are notably different, and this has an impact on the means by which CG standards are developed as well as the available mechanisms of enforcement. A good example of this can be seen when one compares the systems in the United Kingdom (UK) and the United States. Although the UK's Financial Reporting Council (FRC) performs an important CG standard-setting role that is entirely non-statutory, decision of the Financial Conduct Authority (FCA) to incorporate, by reference, FRC CG standards into the listing rules serves to create potential legal consequences for certain types of breaches of those standards - while the architecture does not itself provide for CG standards, the regulator is sufficiently empowered to bring about that consequence. In contrast, in the United States (which does not possess any CG-standard setter equivalent to the FRC) CG standards are primarily developed and enforced by Federal and State mechanisms that include legislative bodies, courts and the statutory regulator the Securities and Exchange Commission (SEC) - while the listing requirements set by the exchanges do impose CG standards, they are only introduced with the approval of the SEC and are typically dovetailed with other requirements that bring them within the scope of Federal liability. Hong Kong is different yet again - unlike the UK the listing rules in Hong Kong themselves set out CG standards, the Securities and Futures Commission (SFC) as statutory regulator has powers over the listing rules similar to the SEC, but unlike either the SEC or the FCA the SFC's powers in relation to breaches of the CG standards are relatively limited. Development is also particularly prone to the characteristics the 3 C's of the investor base and the influence they are able to exercise on the development process, and at what stage of the process their influence bites.

Enforcement / remedies

The degree and types of power given to regulators and the presence or absence of laws and regulations that can be and are actively enforced varies considerably across the jurisdictions. The prospective liabilities vary considerably, ranging from relatively less severe sanctions such as private or public censures, to director disqualification, fines in limited or unlimited amounts, trading suspension, shareholder compensation, and criminal offences. The body that is empowered to impose the same also varies, from regulatory agencies, to administrative tribunals, to the courts. The SFC has less power than some of its leading international counterparts, certainly less than either the FCA or SEC, for example, as regards the power to make regulatory law and to impose administrative sanctions. The powers of the regulatory bodies also vary in relation to the origination and enforcement of listing rules, as shown in the following Table:

One might expect that where an enforcement agency has weaker powers this is compensated by shareholders having greater powers, however, this is not the case. The ability of shareholders to bring an action, and the basis on which an action can be brought vary considerably - here some emphasis must be lent to the ability to bring an action in practice, not merely the enabling laws. An important distinction in this regard is the availability of some form of collective redress. The class action lawsuit in the United States is regarded by the Organisation for Economic Co-operation and Development (OECD) as an effective "ex-post means of redress". The UK has also has introduced, since 2000, group litigation orders, although they operate as a case management tool rather than as a class action right per se. Mainland China has introduced very similar joint litigation adjudication procedures. Shareholders in Hong Kong have a range of remedies available under the law but do not have access to any means of collective redress. The Table below provides a brief comparison of the jurisdictions studied:

From the point of view of an issuer and its directors, the foregoing considerations provide a form of risk map in different jurisdictions of not engaging in good CG practices. This profile also may evolve over time as regulators shift their enforcement priorities. It also appears to evolve in response to the perception of imminent danger, that is, whether an enforcement action is likely to be meted out swiftly or subject to lengthy procedures that may take some years before it is finalized. Timeliness (and to some extent the inevitability) of enforcement actions varies significantly across the jurisdictions according to a number of factors including the mechanism of enforcement (for example, a fine swiftly imposed by a regulator as opposed to a tribunal or court after a more lengthy process) and the CG culture and accessibility to legal representation.

Board processes

While all the jurisdictions studied give considerable importance to the processes by which the board undertakes its responsibilities, the particular means by which this is managed toward improved CG standards varies. This includes matters such as: the degree to which executive remuneration is managed by processes internal to the board or by shareholders; the requirements attaching to director education and induction; the frequency of director re-election; whether the board should be subject to self-evaluation and, if so, whether this should be an internal or externally facilitated process; the other mechanisms of internal control required to be implemented by the board.

The role expected to be undertaken by the board member has always been subject to progressive change. Over recent years it has become more clearly understood that the directors need to interrogate the business and ask the difficult questions. However, the operations of the boardroom remain something of a black box. The increasing frequency of boardroom matters becoming items of front page news is causing a wider range of shareholders (and regulators) to ask who appoints and removes the board, and what transparency over board functions stakeholders are to be provided with.

A feature of all jurisdictions is the recognition that independent directors are an important component to board effectiveness. However, the details of their role and by what means they are to be empowered or held accountable is an area of considerable variance across the jurisdictions, including: how independent directors are appointed; how their independence is to be assessed; what roles they are expected to perform on sub-committees of the board; and whether or not their function is restricted to be an internal one that solely reports to the board. Of these issues, independence and competence of independent directors are of considerable interest, particularly as they directly impact on the ability of the individual to properly perform the role expected of them. An important differentiator is the extent to which independent directors are appointed and undertake their functions pursuant to mandatory requirements (at law or non-statutory regulation) or non-mandatory recommendations, and this has a consequential knock-on effect as to their liabilities where they do not properly undertake their role.

Shareholders

Closely connected to the foregoing topic, all jurisdictions are evolving new approaches to bringing better mechanisms of board accountability to shareholders. The means by which this is pursued on an ongoing basis is primarily through two mechanisms: the disclosures required to be made to shareholders, and the occasions on which shareholders are able to exercise their voice and their vote. A notable distinction across the jurisdictions is the attitude toward the voting rights attaching to shares, including what rights are permitted to be created and sold into the market as well as the circumstances in which public regulatory considerations are permitted to override the private rights that may otherwise be created and attach to shares.

A third mechanism, relevant on an event-driven basis, is the ability to bring a legal action against directors engaging in poor CG practices and whether or not breaches of non-statutory regulations amounts to some form of misfeasance relevant to legal remedies.

In each case, it is recognized in all jurisdictions that information disclosure through appropriate shareholder communication is essential to shareholder protection and the exercise of shareholder rights.

Gateway controls

While the different jurisdictions recognize that the CG practices of an issuer may (legitimately) vary considerably, different approaches are taken to the controls placed on issuers being admitted to the market, and the controls placed on information being released into the market. Ex ante controls are generally regarded as more cost effective than relying on ex post actions, however, the nature of the regulator's role in ex ante controls vary widely, in part reflecting their position in the legal and regulatory architecture as well as their preparedness to exercise their incumbent powers. There is also an apparent relationship between ex ante and ex post actions - where steps taken in relation to the former have failed to be effective, increased recourse may need to be had to the latter.

Non-local companies

The position of non-local companies in each jurisdiction varies across a number of dimensions including: what listing rules are to apply (or be disapplied); the means by which directors are brought under responsibilities on par with directors of local issuers; the protections afforded to shareholders, including in particular the exercise of their voting rights; and the enforcement mechanisms in practice available in respect of each of the foregoing.