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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Суббота, 25 мая 2019 апдейт:

3. Discussion and analysis of jurisdictions studied. 3.7.13 Whistle-blowing

Both the UK and the United States have made provisions for whistle-blowing. In both jurisdictions, the provisions have initially been driven by protective labour laws and subsequently extended into a wider range of issues that cover, inter alia, CG concerns.

In the UK, CG issues will be covered by the Public Interest Disclosure Act 1998 (PIDA) if it involves a failure to comply with a legal obligation to which the person is subject - this will therefore cover not only CG matters established under primary legislation, but potentially also many of the detailed CG requirements established by regulatory bodies, as discussed in Appendix II.4.1.

As discussed in Appendix III.6.7, whistle-blowing has been in place in the United States for almost half a century. Initially introduced as a means of protecting the labour market, it is increasingly being recognized as a mechanism that can provide an important source of information on breaches of CG-related concerns, such as relate to disclosure, misfeasance, and so on that may facilitate actions undertaken by the SEC, PCAOB or privately.

Whistle-blowing in relation to breaches of securities laws by publicly traded companies, including breaches of regulatory laws promulgated by the SEC, is specifically recognized in SOX. There were problems with s 806 of SOX, e.g. it does not apply to extraterritorially to employees of Mainland Chinese companies listed in the United States, and it has been narrowly interpreted by the Department of Labour. The provisions of section 922 of the Dodd-Frank developed whistle-blowing further by introducing monetary rewards for whistleblowers that provide original information that leads to successful enforcement actions involving monetary sanctions of over US$1 million. The SEC implemented the relevant rules that became effective in August 2011. The SEC has also established the Office of the Whistleblower to administer the SEC's whistleblower program.

A significant difference between the jurisdictions is that the United States but not the UK provides financial incentives, although the UK does allow for a compensation order to be made. Some research in the United States has shown that whistle-blowing detects far more fraud than regulatory agencies like the SEC, and increases firm value by reducing self-dealing, providing companies with strong incentives to detect and prevent self-dealing among corporate executives, owners and directors. This is also the case in the international level as reported by the Global Economic Crime Survey and Transparency International. Providing employees and others with whistle-blowing mechanisms before they use external channels (like regulatory agencies and the media) also allows companies to tackle self-dealing. The merits of introducing financial incentives were considered by the PRA and FCA in 2014 for the Treasury Select Committee, which concluded that it would not encourage whistle-blowing or increase the integrity and transparency in financial markets. Given the UK FCA had collected evidence through visits to SEC and Federal Trade Commission in fall 2013 only two years after the measures came into effect in the United States, it may be premature to reach a conclusion. Nevertheless, the FCA does see the benefit in having internal whistle-blowing mechanism and considers it to be the responsibility of senior management to put the mechanism in place.

As mentioned in Appendix IV.4.6, Mainland China has a body of law, including its Constitution that protects citizens' right to whistle-blow. This is recently further enhanced by new regulations, which are a strong signal that whistle-blowing continues to play an important role in the Mainland Chinese government's anti-corruption campaign against government officials which may include managers and directors of SOEs. Singapore, in this regard, is rather behind the curve (see Appendices V.1.3, V.3.1 and V.4.1), like Hong Kong.

Hong Kong

Hong Kong does not have any specific whistle-blowing law, however, certain statutes do provide limited protections in relation to persons reporting suspected wrongdoing, as discussed in Appendices I.3.1 and I.4.1. For example, section 381 of the SFO provides immunity to auditors of listed issuers for whistle-blowing disclosures to the SFC in good faith and various anti-money-laundering laws provide some protection in those contexts. The Prevention of Bribery Ordinance (Cap. 201) also guarantees whistle¬blowers (private and public sector) anonymity in relation to offences committed under the ordinance. However, there is no statutory protection against retaliation in Hong Kong.

Whistle-blowing is the subject of the HK CG Code that is addressed to audit anomalies but as that is merely a non-mandatory recommended best practice limited in scope it represents a very light touch approach to regulation.While more companies are introducing audit whistle-blowing policies and procedures, less than half of listed companies in Hong Kong do not comply with that recommended practice. The HKMA's Supervisory Policy Manual mentions the concept of whistle-blowing but this is couched in language that an authorized institution should have a well communicated policy allowing staff «to communicate, in confidence and without risk of reprisal» observations of any violations.

The SFC appear to support whistle-blowing as a key step that directors of listed issuers should take to protect their company from corporate misconduct and to foster a culture of good CG.

Discussion

While all global systemically important financial institutions have set up whistle-blowing hotlines, whistle-blowing hotlines do not appear to be an effective means to identify breaches of law or regulation. Globally, there is a lower number of whistle-blowing events in Asia, possibly due to a cultural reluctance to speak up against persons in a position of seniority or power. To the extent complaints are made, they often pertain to human resources matters rather than to breaches of regulatory compliance violations. Nevertheless, whistle-blowing hotlines were considered relevant to creating a proper risk culture of «doing the right thing» across the institution.

It appears to be common ground that whistle-blowing plays an important role in uncovering and possibly preventing fraud and wrongdoing. Some even argue that without whistle-blowing from employees, independent directors and auditors cannot do their job properly, which is why despite the best corporate governance practices, companies continue to fail, and shareholders continue to wonder why independent directors and auditors could not prevent corporate failures. The main reason for lack of whistle-blowing from employee is the fear of retaliation from the wrongdoers who are often in position of power, and the feeling that they have nothing to gain but everything to loose by whistle-blowing. Thus, protection against retaliation is crucial in order for the system to work, and financial incentives may encourage some employees to take the risk and trouble to whistle-blow.

It has been suggested that effective compliance programs and culture are key to preventing corporate abuses and fraud, and that an effective whistle-blowing programme is an important component to a successful compliance program. The collapse of Enron, WorldCom, and Tyco in the United States revealed massive corporate fraud that was exposed through the reports of whistle-blowing employees concerning internal accounting fraud and other abuses. What was more alarming was that employees were well aware of the fraudulent activities well before the onset of the companies' collapse. Employees were reluctant to come forward because of fear of retaliation, or in other words, a lack of whistleblower statutory protection from retaliation. It has been suggested that if whistleblower legislation had been in place prior to these companies' collapse that compelled disclosure while at the same time protecting employees from retaliation and liability, these insolvencies may have been avoided. As already noted, Hong Kong has no overarching law to protect whistle¬blowers. There is no requirement under the Main Board listing rules, only a recommended best practice in the CG Code, similar to the UK CG Code, that listed companies put in place arrangements for employees to report, in confidence, concerns about possible improprieties. A number of well-established companies have implemented a whistle-blower system, for example, HSBC Confidential received more than 1,100 cases in 2016. Smaller companies have not established such systems.

Hong Kong's approach to whistle-blowing can be characterized as piecemeal because it provides for whistle-blowing in specialized contexts and because the framework of protection varies across each of those contexts. This raises the question, in the context of this study, whether the implementation of whistle-blowing in relation to CG practices should also adopt a specialized-context approach. Given that many of the CG standards that apply in Hong Kong do not have legal standing, there is little justification for introducing whistle-blowing requirements beyond what the HKEX might propose in relation to, for example, the CG Code. On the other hand, the topic of CG and the potential consequences arising from poor CG extend far beyond non-statutory codes relating as they do to serious legal matters such as director misfeasance and corporate fraud that can have far reaching consequences on investors and the market more generally. The latter concern does provide some basis on which to ask whether whistle¬blowing protection in Hong Kong should be placed on a basis that is not limited to a highly specialized context. Such a question invokes a much wider range of social issues.

The foregoing leads to Recommendation E4.9.2 «Whistle-blowing».

 

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
Introduction
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
Introduction
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
Introduction
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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