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, 02 июня 2019

5. Concluding Remarks. 5.2 The Hong Kong market

5.2.1 Characteristics

The SEHK is now the third largest stock exchange in Asia, the sixth largest in the world in term of its market capitalisation, and it is often the largest initial public offering marketplace. However, this growth has been relatively recent when compared to well- established markets such as the United Kingdom (UK) and the United States. Hong Kong's CG system can today be characterized as having significantly caught up with, and in some cases exceeded, international best practices. Nevertheless, it remains subject to distinct features. Its regulatory architecture of listed company oversight via the dual responsibilities model is somewhat unique, requiring some caution when considering developments in the UK and the United States, each of which possess regulatory architectures different from the other in important ways. While Hong Kong has in the past lacked depth in its corporate and securities laws and court rulings that develop them, this can no longer be said to be the case. Statutory laws and the rulings or determinations of the courts and the Market Misconduct Tribunal, as well as non- statutory codes and the activity of regulatory agencies, have developed at a pace that has in general been adequate to keep abreast of the growth of the market, although some intractable difficulties remain in relation to enforcement against non-Hong Kong incorporated issuers that have engaged in egregious wrongdoing. The specific issue of shareholder rights and protections is also subject to characteristics of the Hong Kong market that are distinct from other markets, including the following.

First, as already noted above, over three-quarters of listed issuers are incorporated in a jurisdiction outside of Hong Kong. The CG standards of listed companies established under the laws of another jurisdiction will be partly set by those other laws, and partly by Hong Kong's laws and regulations. This includes the listing rules (and its CG Code), the relevant provisions of the SFO, and the parts of the CO concerning derivative actions and unfair prejudice. The SEHK is active in enforcing the listing rule requirements, though is subject to regular criticism from different segments of the market that its approach is too light handed, possibly as a result of inadequate conflict management by HKEX. The SFC has been active in bringing many successful actions under the SFO against non-Hong Kong incorporated issuers, for example, in relation to disclosures and director misfeasance. To date, there has already been one case successfully commenced by way of statutory derivative action under the CO unfair prejudice provisions against a listed issuer incorporated in the Cayman Islands. While in general Hong Kong has adopted approaches to non-local companies equivalent or better than international best practices, the question remains as to whether the approach in Hong Kong is adequate to ensure Hong Kong and non-Hong Kong incorporated companies are subject to minimum acceptable CG standards.

Second, it is significantly dominated by Mainland enterprises in terms of number of issuers and their contribution to turnover and total market capitalization. Mainland enterprises are coming from a jurisdiction where the market ideology, political system and political economy, legal institutions and legal system, CG culture, and regulatory system are very different from Hong Kong. This presents challenges in understanding how these companies will respond to the CG standards of Hong Kong. For example, Hong Kong law requires directors to act in the best interest of the shareholders but in state-owned enterprises (SOEs) the Chinese Communist Party can exercise influence over them through the state council and State-owned Assets Supervision and Administration Commission of the State Council by appointing and removing them - accordingly there is likely to be political interference in the board's decision-making process that may not be in the interests of the shareholders as a whole. Indeed, SOEs are now primarily regarded by the central Government as «party organs in leadership and political affairs.»

Third, many non-Hong Kong incorporated issuers do not have a physical presence in Hong Kong, which presents additional hurdles in enforcing Hong Kong standards against these companies without the co-operation of relevant overseas agencies - such co operation is needed if relevant individuals or assets are located in another jurisdiction. Enforcement in the Mainland is difficult in this regard owing to the absence of an applicable cross border enforcement arrangement.

Fourth, the majority of listed issuers in Hong Kong are characterised by dominant majority shareholders who are either the founders of the companies, or the State. This is commonly known as an «insider» system. Yet, as discussed in Sections 1 and 3 of this Report, Hong Kong has in the past adopted many of the CG practices from the UK and the United States where many of the listed companies in their respective traded stock markets do not have dominant shareholders - they are markets commonly described as an «outsider» system. In the outsider system, there is more likely to be managerial abuses given that there is no dominant shareholder to watch over the managers. Whereas in the insider system, managerial abuse is unlikely to occur where the dominant shareholders are the individual founders, what tends to happen instead is the diversion of company assets to the hands of dominant shareholders through related party transactions. Where the dominant shareholder fails to monitor the managers, managerial abuse may be more likely to occur. This raises interesting questions whether the practices from an outsider system can fit in well with the insider system and be effective to achieve the regulatory objectives. For example, is an independent director system transplanted from an outsider system likely to work in an insider system? UK and United States practices may work in companies that are dominated by a controlling shareholder that fails to monitor but may not work well in enterprises with controlling shareholders that control the enterprises.

Finally, many shareholders in Hong Kong listed issuers who are in need of the greatest protection have very little interest in CG standards and instead regard their shareholding as an investment in the business acumen of the founding shareholder and/or the directors. A not insignificant portion of these trade on the basis of rumour and gossip. In both cases they implicitly rely to some extent on transparency in order to exercise their investment decision. To a large extent they expect that regulators are keeping the market in check to make it fair. In short, they do in fact rely on an effective CG system. However, corporate wrongdoing is unlikely to be met with shareholder lawsuits seeking redress. Many investors either consider that regulators are acting as their proxy to identify and deal with wrongdoing, or instead appear to have become accustomed to treating CG failings that impact on share price as a bad investment that needs to be sold. Larger institutional investors are of course different, and to the smaller investor they may represent a different proxy for shareholder interests more generally.

These characteristics lead to complex questions that directly and indirectly affect shareholder rights and protections. Are board processes of issuers (wherever incorporated) sufficiently subject to shareholder oversight? In what ways are directors of issuers accountable to shareholders, and is this effective and operational? What other checks on a board's powers are required and effective? Is the dual responsibilities model of regulatory oversight fit for purpose? Are the regulatory agencies appropriately empowered and effective? Are the standards in the listing rules adequate and subject to effective mechanisms of enforcement? Is the comply or explain approach appropriate in the East Asian context? How well, or poorly is cross border cooperation working to achieve shared objectives? Many of these questions have been considered by this Report, which has led to recommendations intended to improve Hong Kong's CG system.

The trend of admitting Mainland and other non-Hong Kong incorporated enterprises to listed status in Hong Kong will continue as HKEX seeks to tap into technology and new economy businesses, Mainland enterprises look for expansion overseas, and Belt and Road Initiative-related companies seek capital. Thus, it will be an ongoing priority for Hong Kong as an international financial and fund raising centre to examine and develop its CG system in tandem with the continued evolution of the market.

5.2.2 Work in progress

While this Report has considered many issues in the areas of shareholder rights, remedies and protections and regulation of non-Hong Kong incorporated companies, it has not been possible to provide an answer or recommendation for all the issues discussed. It has also not been possible to render this Report as a complete treatise on all issues of relevance to the CG discussion. The study has focused on key differences and observations of interest between Hong Kong's CG system and the systems in four other jurisdictions. The scope of this Report has also meant that other matters which to greater or lesser degrees directly or indirectly affect shareholders have not been discussed, such as board diversity, environmental and social governance and the relationship between CG standards and share price performance.

As this Report has engaged in a comparative analysis focused on the current regulatory position and recent developments, it has not touched on all the factors required for change to occur. Instead, the classification of each recommendation incorporates concepts of market reaction and complexity of implementation in recognition of the reality that some of the changes proposed will require more political will and a greater degree of market support than others.

Going forward, while no major overhaul of the system has been recommended, the 28 recommendations in Section 4 would, if implemented, go some distance to improving the standards and effectiveness of Hong Kong's CG system. While no amount of reform can prevent corporate scandals altogether, one can strive to make them less likely, less damaging and subject to more effective means of redress. Agreeing on acceptable standards of good CG and developing an effective CG system that supports them remains, as ever, a work in progress.


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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