Report on Improving Corporate Governance in Hong Kong

Оригинал на английском языке.
Гонконгский институт лицензированных публичных бухгалтеров
Hong Kong Institute of Certified Public Accountants
Авторы: Syren Johnstone и Say H Goo
Обзор текущего состояния (дата издания отчета 15.12.2017) корпоративного права Гонконга, основанного на Ординансе "О компаниях" 2014 года (Hong Kong Companies Ordinance) и Ординансе "О ценных бумагах и фьючерсах" 2003 года (Hong Kong Securities and Futures Ordinance). Исследование недостатков действующего режима и предложения о направлениях развития.

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Воскресенье, 19 мая 2019

3. Discussion and analysis of jurisdictions studied. 3.6.3 Board refreshment

For the purposes of this section, which is concerned with mechanisms of management accountability to shareholders, board refreshment provides shareholders with a more frequent and direct means of exercising their oversight of the board's effectiveness and capabilities. Refreshment helps to address concerns that boards become «clubby». This could be defined as being where the entrenchment of directors overshadows the interests of the company, or is founded on a belief that long-standing board memberships constitute the essential fabric of the company. The recent Wells Fargo scandal has been cited as an example of the need to refresh clubby boards and the dangers of not doing so to the perspicacity of the board and its sub-committees.

Looked at more positively, refreshment of the board is concerned with ensuring the spread of skills, knowledge and experience on a board remain appropriate to the evolving challenges faced by a company. The agility required to deal with these challenges may be hampered by a board that was formed at a different stage of the company's development. Indeed, as discussed in Appendix III.7.2, research undertaken in the United States suggests that while many directors regard board refreshment as important to CG standards, some regard it as critical. It works to avoid «group-think» and complacency, or boards that are out-of-touch with new realities. Arguments against board refreshment are usually raised by management linked to the board (e.g. chairman and CEO) or controlling shareholders. Nonetheless, the overriding consensus is that board refreshment is a core principle that serves to foster good CG via increased accountability.

A number of approaches have been undertaken to address mechanisms of refreshment. The research cited above returned a significant finding, namely that over 84% of respondents regarded board assessment/evaluation as the most effective tool. The 2009 Walker Review in the UK, discussed in Appendix II.2.1, also suggested that a formal board evaluation was a desirable contributor to good CG. Board evaluation was discussed in Section 3.3.3 «Board evaluation» and led to Recommendation C4.1.1 «Board evaluation».

Board refreshment is recognized as a core principle of good CG in the UK. The approach there has been to focus on the power of shareholders to exercise their votes. The UK CG Code has recently introduced a provision that directors should be subject to re-election by the shareholders at regular intervals, that this should be an annual exercise in respect of directors of FTSE350 issuers, and that relevant information should be provided to shareholders to facilitate their decision-making. Most FTSE350 issuers have implemented this provision, as discussed in Section 3.4.2 «Shareholder votes». This brings directors to account before shareholders on a regular basis. As regards INEDs, the Code suggests that terms of more than six years should be subject to rigorous review. Together with the other changes made in the UK to the appointment of independent directors (discussed in Section 3.6.4 «Appointment of independent directors» below) this helps to address concerns that boards can become «clubby».

In the United States, the National Association of Corporate Directors (NACD) runs programs to help directors improve, inter alia, board diversity and director recruitment, its aim being to «help directors move beyond the traditional approaches to board refreshment and develop a continuous-improvement plan that keeps board skill sets and processes in tune with the company's strategic needs.» Staggered boards in the United States are used to entrench the board and is a major problem and prevents board refreshment. In a staggered board, the board is divided into three classes. Each year, only one class (i.e. one third of the board) is up for election. So it would take longer to refresh the board composition. Empirical evidence suggests that staggered boards are bad for value-creating takeovers.

In Singapore, the SGX listing rules mandate that all listed companies have articles providing that where a managing director or a person holding an equivalent position is appointed for a fixed term, the term shall not exceed five years. This provides an opportunity for the company to review the suitability of the director at intervals. Otherwise, there is no other general legal requirement governing the length of a director's tenure or the number of terms that a director may hold office. The Singapore Code of Corporate Governance has nevertheless suggested that all directors submit themselves for re-nomination and re-election at regular intervals, and at least once every three years. The Singapore Institute of Directors recommends in its Statement of Good Practice that all companies should have articles that require at least one-third of the board to retire from office at each general meeting. This is said to be a usual provision in the articles of many companies and a matter of good practice, though there is no further elaboration as to why (see Appendix V.7.3).

The Code of CG in Mainland China does not contain any provision for board refreshment, only their appointment (see Appendix IV.7.3). As the appointment of directors of many SOEs are often subject to the control of the CCP, board refreshment may be less important in Mainland China as directors are likely to be replaced with individuals holding comparatively similar views as regards the implementation of State policy in the operations of the SOE. For mainland companies listed in Hong Kong, they are subject to the HK CG Code. However, whether such requirement is likely to be meaningful in practice is not certain given the controlling stake of the State in many of the companies listed in Hong Kong. For a similar reason, nor is there certainty that the requirement in Singapore will be meaningful, i.e. due to the influence of the Singapore Government via its investment vehicles.

Hong Kong

The HK CG Code does provide for board refreshment insofar as it states that directors should be subject to retirement by rotation at least once every three years. However, as a code provision, this is not mandatory and an issuer is free to deviate from it provided an explanation for the deviation is given in its annual report.


The obvious if bland question the foregoing considerations raise is whether a higher refreshment frequency should be imposed under the HK CG Code. However, there must be a clear shareholder mandate to warrant it. For example, in the UK there have been a number of high profile examples where shareholders have taken action, a recent case being the shareholder pressure placed on HSBC to replace the Chairman because the lack of pace of change within the bank, which led to the bank announcing a change on 12 March 2017. BP, WPP, and Smith & Nephew represent other high profile instances of shareholder action leading to boardroom changes, as discussed in Appendix II.1.2, although these had been driven by concerns over executive compensation.

In the absence of such a shareholder mandate in Hong Kong, there seems little in favour of making a recommendation, bearing in mind the context of the present Report.

Topics that are more supportable to explore in this regard concern (1) board evaluation as a mechanism - discussed in Section 3.3.3 «Board evaluation» (which led to Recommendation C4.1.1 «Board evaluation») and (2) the role and appointment of independent directors and the assessment of their independence - discussed in Section 3.6.4 «Appointment of independent directors» and Section 3.7 Part C «Independent directors». Indeed, both these topics gave rise to considerable discussion in all the interviews.


Содержание отчета

Executive summary
Executive Summary I Key Findings
Executive Summary II Summary of Recommendations
Executive Summary III Approach to the Study
Executive Summary IV Abridged Text of the Analysis

1 Introduction to the study and its purposes
1.1 Purpose of this Report
1.2 The development of CG in Hong Kong
1.2.1 Domestic drivers
1.2.2 Global drivers
1.3 Structure of this Report
1.3 Structure of this Report
1.3.1 Methodology
1.3.2 Analysis
1.3.3 Recommendations
1.4 Scope and limitations of this Report
1.5 Next steps

2 Methodology
2.1 Scope
2.1.1 CG concepts
2.1.2 CG Geographic reach
2.1.3 CG mechanisms
2.2 Work process
2.2.1 Data collection
2.2.2 Initial data organization
2.2.3 Oral evidence
2.2.4 Parity check
2.2.5 Analysis
2.2.6 recommendations

3 Discussion and analysis of jurisdictions studied
3.1 Overarching considerations
3.1.1 Thematic topics
3.1.2 Trends in regulating CG standards
3.1.3 The role of culture
3.1.4 The methodology of assessment
3.1.5 Cost-benefit considerations
3.1.6 Maintaining competitiveness
3.1.7 Effectiveness
3.2 Non-locally incorporated companies
3.2.1 Application of local laws and regulations
3.2.2 Cross border enforcement and cooperation
3.3 Information
3.3.1 Legal status of CG disclosures
3.3.2 Disclosure of listing rule compliance
3.3.3 Board evaluation
3.3.4 Audit committee
3.4 Involvement
3.4.1 Shareholder stewardship
3.4.2 Shareholder votes
3.4.3 Remuneration
3.4.4 Changes of control
3.5 Equality
3.5.1 Voting rights generally
3.5.2 Weighted voting rights
3.6 Accountability
3.6.1 Information disclosures generally
3.6.2 Listing rules
3.6.3 Board refreshment
3.6.4 Appointment of independent directors
3.7 Effectiveness
Part A - CG system design
3.7.1 Impact of regulatory design
3.7.2 Policy development agencies
3.7.3 Enforcement agencies
3.7.4 Audits of public companies
3.7.5 Duties of directors
3.7.6 Role of fiduciary law
Part B - Specific actions
3.7.7 Differentiation of CG requirements
3.7.8 Listing regime standards upon entry
Part C - Independent directors
3.7.9 Determination of independence
3.7.10 Requirements relating to INED performance
3.7.12 Empowerment of INEDs - controlling shareholders
Part D - Other items
3.7.13 Whistle-blowing
3.8 Coda

4 Recommendations
Introduction and approach to the recommendations
Part A - The board
4.1 Processes
4.2 Independent directors
4.3 CG standards
Part B - Enforcement
4.4 Shareholders
4.5 CG disclosures
4.6 Regulators
4.7 Ex ante mechanisms
Part C - Architecture and policy
4.8 Architecture
4.9 Policy
4.10 Summary tables

5 Concluding remarks
5.1 The Recommendations
5.2 The Hong Kong market

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