TESTer

Corporate Governance & Regulatory Updates

Date: 13 October 2011, ThursdayTime: 9:00 a.m. - 12:30 p.m.Venue: Grand Ballroom, Conrad Hong Kong Pacifi c Place, 88 Queensway, Hong Kong

9:00 a.m. - Opening Address Dr David K P Li 9:20 a.m.

Rundown

Time Agenda Speaker

8:30 a.m. - Light Breakfast and Registration 9:00 a.m.

9:20 a.m. - Tricor Update Mr Julian Chow 9:35 a.m.

9:35 a.m. - 10:05 a.m.

Building and Maintaining an Effective Board:Challenges of Asian Listed Companies

10:05 a.m. - 10:25 a.m.

Maintaining a Healthy Degree of Professional Scepticism

10:25 a.m. - 10:45 a.m.

Sponsor’s Role in IPO Due Diligence

10:45 a.m. - 11:15 a.m.

Tea Break

12:15 p.m. - 12:30 p.m.

Closing Address Mr Johnny Ng

Dr Roger King

Mr Paul Go

Ms Mo-Yee Lam

11:15 a.m. - 11:45 a.m.

Management of Price Sensitive Information Disclosure

Ms Eva NgaiMs Wendy Kam

11:45 a.m. - 12:15 p.m.

Proposed Listing Rule Amendments on Corporate Governance

Ms Kitty ChanMs Winnie Yuen

Opening Address

Dr David K P Li Chairman and Chief Executive The Bank of East Asia

Dr David K P Li is Chairman and Chief Executive of The Bank of East Asia.

Dr Li plays an active role in the development of Hong Kong’s fi nancial infrastructure. He has represented the Finance Constituency in the Legislative Council of Hong Kong for over 25 years. He is a member of the Banking Advisory Committee and is also a director of a number of prominent public companies, both in Hong Kong and overseas.

Dr Li is a strong supporter of educational causes, and is currently the Pro-Chancellor of The University of Hong Kong, Chairman of the Council and Executive Committee of The Hong Kong Management Association, and Chairman of the INSEAD East Asia Council. He is also the Founder and Chairman of the Friends of Cambridge University in Hong Kong and the Prince Philip Scholarship Scheme.

Dr Li is Chairman of The Salvation Army Hong Kong and Macau Command Advisory Board, and Chairman of St. James’ Settlement.

Dr Li holds a Master’s degree in Economics and Law from University of Cambridge, England.

1

Tricor Update

Mr Julian Chow Group Managing Director Tricor

Mr Julian Chow is Group Managing Director at Tricor. Prior to joining Tricor in 2002, Mr Chow was a Partner at Ernst & Young in Hong Kong, leading a major practice in the provision of Corporate, Trust and Investor Services. He has over 35 years of experience in these professional service areas.

Mr Chow graduated from the Hong Kong Polytechnic (now The Hong Kong Polytechnic University). He is a Fellow of The Hong Kong Institute of Chartered Secretaries (HKICS) and The Institute of Chartered Secretaries and Administrators (ICSA). Mr Chow was a Council Member of HKICS in the 1990’s. Currently, he is a Council Member and Secretary of the Hong Kong Committee for UNICEF.

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Building and Maintainingan Effective Board:Challenges of Asian Listed Companies

Presentation by:Dr Roger King

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Building and Maintaining an Effective Board:Challenges of Asian Listed Companies

Dr Roger KingAdjunct Professor of FinanceHong Kong University of Science and Technology

Dr Roger King is Adjunct Professor of Finance; Director of the Center for Asian Family Business and Entrepreneurship Studies; and Director of the Center for Business Case Studies at Hong Kong University of Science and Technology (HKUST).

Currently, Dr King is a Supervisory Board member of TNT Express NV, listed on Amsterdam Exchange; Non-Executive Director of Overseas Orient International Limited and Independent Non-Executive Director of Sincere Watch (Hong Kong) Limited, both listed on the Hong Kong Stock Exchange; and Honorary Consul for the Republic of Latvia in Hong Kong. He is a recipient of the 2011 Honorary Fellowships from HKUST.

Dr King was Chairman and Founder of ODS System-Pro Computers Limited; Chairman of Euro-Asia Shipyard Limited; Chairman of Pacifi c Coffee Limited; Chief Operating Offi cer of Orient Overseas (Holdings) Limited and President and Chief Executive Offi cer of Sa Sa International Holdings Limited, both listed on the Hong Kong Stock Exchange; Independent Non-Executive Director of Arrow Electronics Corporation, listed on the New York Stock Exchange; and an Executive Member of the Zhejiang Province People’s Political Consultative Conference.

Dr King is a graduate of the University of Michigan, BSEE; New York University, MSEE; Harvard Business School, AMP; and HKUST, PhD (Finance).

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1

Building and Maintaining an Effective Board: Challenges of Asian Listed Companies

Roger King, PhD

Adjunct Professor of Finance

Director of Center for Asian Family Business Studies

Director of Center for Business Case Studies

2

Background:

Global Convergence of CG System driven by the interdependency of economies between the developing and developed; East and West

New York and London are no longer the only capital markets to raise funds

Globalization of capital markets – 1/3 of the global IPO in 2011 from Greater China

Globalization of accounting standards

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5

3

International institution investors seeking better returns

Mimicking securities regulations of the West

Peer‐rating on directors’ performance

Box ticking – too many regulatory rules

ISS or Risk Metrics’ role if any

3

4

Asia specific issues:

Concentrated ownership– SOEs and FCBs

Shareholder interests vs. Stakeholder interests

China Securities Regulatory Commission = SEC

State‐owned Assets Supervision and Administration Commission = overseer of all SOE

CSRC and SASAC can override economic interests – acting in the interest of the people, the Party and the State and can appoint chief executives

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6

5

Complexity of FCB – family conflicts

Most listed firms’ boards are dominated by executive directors and many are family members

Given the diversity of culture, tradition, ownership and legal structures, is it practical to expect a single unified corporate governance system?

Which CG system best serves Asians: Unitary vs. 2‐tiered board; Principle (discretionary) vs. rule (mandatory)

Universally acceptable CG principles: Transparency, Accountability and Integrity 5

6

Director specific issues:

Outside directors or INEDs bring outside experience and perspective

Keep a watchful eye on the way the organization is managed

Ideal requirement – time commitment, balances views; broad knowledge of dynamics of the industry; knowledge of the culture and relationships; and common value system

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Interlocking or Cross‐directorship – prevalent in Asia

Formal or informal training for directors – general and specific

Appointment of INED ‐ relationship and trust

INEDs’ own reputation protection or seeking

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Current Challenges for Asian INEDs:

Low monetary incentives

Globally, investors are becoming more litigious

Subsidiary boards of MNCs

Pyramid ownership structure particularly FCBs

Dual listings in different jurisdictions – ADR in the States

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Moving forward:

Increase the pool of available quality INEDs – HK is moving towards a mandatory requirement of 1/3 INEDs

Improve the overall quality of directors with formal training

Insure commitment of INED

Reduction or removal of unnecessary burdensome regulations – no more box ticking

Improve incentive ‐ especially compensation and D&O coverage

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THANK YOU

10


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Presentation by:Mr Paul Go

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Mr Paul GoPartner, AssuranceErnst & Young

Mr Paul Go is a Senior Client Service Partner responsible to oversee some of the largest accounts of Ernst & Young in both the Hong Kong and mainland markets.

Mr Go has been involved in many IPO projects in the reporting accountant’s role, and is also very experienced in working with companies on transactions support advisory and corporate governance advisory including risk management and internal controls.

Mr Go was a Listing Committee member of the Hong Kong Exchanges and Clearing Limited between 2007 and 2009. He graduated from the London School of Economics in 1986 and is a Fellow of the Institute of Chartered Accountants in England and Wales (ICAEW) and member of the Hong Kong Institute of Certifi ed Public Accountants (HKICPA).

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Paul GoPartner, Assurance

13 October 2011

The views expressed in this presentation slides are those of the presenter and may not necessarily reflect the views of Ernst & Young.

Page 1

► Auditors’ roles and responsibilities

► Red flags of fraudulent activities and accounting

► Get yourself prepared


12

Current Fraud Risk Environment - China

Page 3

16 September 2011

China is not alone…

6 September 2011

16 December 2010

9 June 2011

26 October 2010

11 September 2011


13

They resign?

So what do auditors do when they come across suspicious fraudulent activities or accounting?

Page 5

Current Fraud Risk Environment - China


14

“The auditor is a watchdog and not a bloodhound”.

By Lord Justice Lopes

Case Re: Kingston Cotton Mills Co. (1896)

“…An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion, or with a foregone conclusion

that there is something wrong…”

Responsibilities of Auditors

Page 7

Responsibilities of Auditors

According to HKICPA HKSA240 Para. 21-22

“An auditor conducting an audit in accordance with HKSAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. ”

“When obtaining reasonable assurance, an auditor maintains an attitude of professional scepticism throughout the audit, considers the potential for management override of controls and recognizes the fact that audit procedures that are effective for detecting error may not be appropriate in the context of an identified risk of material misstatement due to fraud.”“The subsequent discovery of a material

misstatement of the financial statements resulting from fraud does not, in and of itself,

indicate a failure to comply with HKSAs.”


15

► Upon the acceptance of an auditor’s appointment, there is a level of trust on the company’s owners and management’s integrity by the auditors

Basic Premise of Audit - Trust

Page 9

Nature of fraud

Misstatements in the financial statements can arise from

underlyingaction

More difficult to detect because may involve sophisticated and carefully organisedschemes designed to conceal, or intentional misrepresentations being made to the auditor, and even more difficult to detect when accompanied by collusion

Error Fraud

Unintentional Intentional


16

HKSA240 – The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial Statements

► Duty of confidentiality would ordinarily preclude reporting noncompliance to a third party

► May need to seek legal advice…, giving due consideration to the auditor’s responsibility to the public interest

Auditors should report noncompliance to:

► Management in charge of governance

► Next higher level of authority

► Where no higher authority exists, the auditors would consider seeking legal advice

Section 381 of the Securities and Futures Ordinance (SFO) provides immunity to the auditors of a listed company, who reports to the SFC suspected fraud or misconduct committed by a listed company.

Client confidentiality

Page 11

Audit vs Fraud Investigation


17

Types of Fraud

CorruptionAsset

MisappropriationFraudulent Statements

► Conflicts of Interest► undisclosed interest

► purchase or sales scheme

► Bribery► Kickbacks

► bid rigging

► bribing government officials

► Illegal Gratuities► rewards

► Economic Extortion► employee demands payments

from vendor

► Fraudulent Disbursements► payroll scheme► expense reimbursement

► Skimming► unrecorded sales► understated sales and AR► lapping

► Larceny of Assets► cash on hand/ bank deposit

► Misuse of Inventory or Fixed Assets

► “borrowed”

► false sales & shipping, purchasing & receiving

► Financial► timing difference► fictitious revenues► concealed liabilities and

expenses► improper disclosures► improper asset valuation

► Non-Financial► employment credentials

► internal documents

► external documents

Page 13

Two types of fraud are relevant to the auditors, they are misstatements resulting from:

► misappropriation of assets; and

► fraudulent financial reporting

Fraud consideration by auditors


18

Auditors’ Responses to Challenges

► Stricter client acceptance procedures

► Internal quality control review

► Fraud investigation specialist to support audit teams

► Ongoing training to the audit engagement teams

► Industry knowledge

► Require Audit Committee to appoint independent investigation professionals

► Review and monitor independent investigation

► If dissatisfied with company’s response, consider resign and withdraw previous opinions

► Leverage on IT applications, controls and testing techniques

Page 15

Recent Experiences of Fraud

Q: Has your organization experienced a significant fraud in the last two years? Base: All respondents globally (1,409), in Central and Eastern Europe (353), Far East (150), Japan (50), Latin America

(100), Middle East and Africa (152), North America (102), Oceania (52), Western Europe (450), 2008 survey (1,186)

Ernst & Young 11th Global Fraud Survey (2010)


19

Red Flags

Opportunities

► Familiarity with operations

► Close association with suppliers and other key people

► Rapid turnover of key employees

► No mandatory vacations, periodic rotations, or transfers of key employees

► Inadequate segregation of duties

► Inadequate screening policies in hiring

► Inadequate documentation of personnel records of dishonest acts or disciplinary actions

Internal Control

► No emphasis on the role of strong internal controls

► Management does not prosecute or punish identified embezzlers

► Management does not have a clear position about conflicts of interest

► Lack of prudence and restraint on expenditures relating to travel and entertainment

► Internal audit does not have authority to investigate certain high-level executives

► Loose accounting policies and procedures

Page 17

Red Flags

► Unfavorable economic conditions within the industry

► Insufficient working capital

► Severe obsolescence

► Extremely rapid expansion through new business or product lines

► Reduced ability to acquire credit or loans

► High personal debts or financial losses

► Extensive stock market or other speculation behavior

► Excessive gambling

Situational Pressure Behavior of Top Management

► Success to them means financial success not professional recognition

► Highly self centered

► Eccentric in the way they display wealth or spend money

► Most of their time at work is spent scheming and designing short cuts to get ahead or beat the competition

► Speak of their cunning achievements and winnings more than their losses


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Red Flags - Financial

B/S warning signs

► “Reinvestment” of profits into capex and working capital

► Staff advance accounts

► Expenditure accounts that have been capitalized

► Accounts that are not in line with the nature of the business

► Directors’ loan accounts

► Dramatic increase in allowance for doubtful accounts in view of positive economic events

► Shortages in bank balances

► Significant accrued liabilities

P&L warning signs

► Non-cash profits

► Amortization expenses

► Asset write offs and disposals accounts

► Trade debtors write offs

► Loan write offs

► Consultancy and professional expenses

► Entertainment expenses

► Marketing and promotions

► Unusual spikes in salaries and bonuses

Page 19

Factors That Can Help Mitigate Fraud Risk

Q: On a scale of 1 to 10, where 1 is 'not at all likely' and 10 is 'extremely likely', how likely are each of the following factors to prevent fraud? Show: all percentage giving 8, 9 or 10 scores.Base: All respondents (1,409)



21

Strong and effective internal controls can be used to deter potential fraudulent activities

Page 21

Frequency of Fraud Risk Assessments

Q: When did your organisation last carry out a fraud risk assessment?Base: All respondents (1,409)

1 in 8 companies have never carried out a fraud risk assessment


% never

Total 15

North America 7

Latin America 6

Western Europe 10

Central and Eastern Europe 20

Middle East and Africa 15

Far East 25

Australia 6

Japan 30


22

New Meanings of INED

I Independent ► Duty to warrant the arm's length character of related parties transactions

► Independent judgment

N No ► Say “No” to dissatisfied answers from CFO/executives

► Need to know company’s business operations and underlying risks

► Challenge management assumptions, plans and performance

E Expertise ► Industry or accounting knowledge

► Equip yourselves with accounting standards relevant to the company

D Discharge ► Duty of care and fiduciary duty to the shareholders

► Don’t just rely on CFO and external auditors

► Constant communications with external auditors

► Spend time reviewing internal controls

► You are still a director!

Page 23

Questions to CFO and Board of Director

► Is the company adequately resourced and know how to respond in the event of a significant fraud coming to light?

► What steps has the Board taken to support the Internal Audit team in fraud prevention? Does the Internal Audit team have the resources it needs to successfully perform the duties expected of it?

► Do you know what kind of fraud your organization is susceptible to within specific business functions or locations?

► Is the audit committee keeping a watching brief on the ongoing risks the organization is exposed to?

► Do all employees receive regular and relevant anti-fraud training?

► Can your company demonstrate the effectiveness of your anti-fraud program to shareholders, employees and regulators?

► Do you have a strategy to handle media/regulator interest in the event of fraud to demonstrate you are taking robust, independent and positive action?


23

In summary

► Fraud and financial misstatements are not China specific problems, under the current economic climates, more corporate irregularities are expected to come into light.

► Company management (Directors, CFO, Legal, Company Secretary) play key roles to prevent, monitor, identify and report on significant fraudulent activities.

► External professionals (e.g., accountants, lawyers, valuers) are here to advise the company on the most appropriate course of action.

Page 25

Maintain a healthy degree of scepticism

“If it’s too good to be true, then it probably is.”


24

Thank you!

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information about our organization, please visit www.ey.com

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

© 2011 Ernst & Young, China.All Rights Reserved.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intendedto be a substitute for detailed research or the exercise of professional judgment. Neither the Ernst & Young nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

www.ey.com/china


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Sponsor’s Role in IPO Due Diligence(Note: PowerPoint presentation not available)

Presentation by:Ms Mo-Yee Lam

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Sponsor’s Role in IPO Due Diligence

Ms Mo-Yee LamExecutive Director, Investment Banking DepartmentUBS AG

Ms Mo-Yee Lam, Executive Director at UBS AG, has delivered many signifi cant transactions across a diverse range of industries. In terms of recent IPOs, she led high profi le deals such as the US$1.2bn IPO of Sun Art Retail Group Limited, US$1.3bn IPO of Samsonite International S.A., and US$787m listing of French skincare company L’Occitane International S.A. (Best Hong Kong Deal, Finance Asia 2010). These successes were built on the foundation of groundbreaking deals such as US$3.2bn China Merchants Bank Co. Ltd. A+H share rights issue and US$1.4bn privatization IPO of MTR Corporation Limited (MTRC), which was the fi rst Hong Kong Government privatization.

Ms Lam has also been involved in many signifi cant merger and acquisition (M&A) transactions, including US$4.7bn sale of Wing Lung Bank to China Merchants Bank Co. Ltd., landmark merger of MTRC and Kowloon-Canton Railway Corporation (KCRC), and US$38bn acquisition of Cable & Wireless HK Telecom by PCCW Limited, which was the largest Asian M&A deal at the time.

Ms Lam graduated from University of Cambridge with an MPhil in Management.

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Presentations by:Ms Eva NgaiMs Wendy Kam

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Ms Eva NgaiSenior ManagerTricor Hong Kong

Ms Eva Ngai is Senior Manager of Corporate Services at Tricor. Prior to joining Tricor in 2000, Ms Ngai was Manager with Deloitte Touche Tohmatsu in Hong Kong, providing corporate and share registration services to clients.

Ms Ngai has over 20 years of experience in the corporate services fi eld, servicing Main Board and GEM listed companies (including dual listed companies) on the Hong Kong Stock Exchange, and other multinational, private and offshore companies. Expert in corporate governance and regulatory compliance, Ms Ngai is currently the named company secretary of three Hong Kong listed companies.

Ms Ngai is a Chartered Secretary and an Associate of HKICS and ICSA. She holds a Practitioner’s Endorsement Certifi cate from HKICS.

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Ms Wendy KamSenior ManagerTricor Hong Kong

Ms Wendy Kam is Senior Manager of Corporate Services at Tricor. Prior to joining Tricor in 2002, Ms Kam was Manager of Company Secretarial Services at Ernst & Young and Tengis Limited in Hong Kong.

Ms Kam has over 18 years of corporate secretarial experience, working with private and listed companies as well as offshore companies. Her expertise extends from corporate advisory and regulatory compliance, corporate restructuring, to liquidation/dissolution of companies. Ms Kam is named company secretary to four Hong Kong listed companies, all of which she has been servicing since their IPOs in Hong Kong.

Ms Kam is a Chartered Secretary and an Associate of HKICS and ICSA. She graduated from City Polytechnic of Hong Kong (now City University of Hong Kong). She holds a Practitioner’s Endorsement Certifi cate from HKICS.

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Eva NgaiWendy KamCorporate ServicesTricor Services Limited13 October 2011


Copyright © 2011 Tricor Services Limited. All rights reserved.

Price Sensitive Information (PSI)Disclosure: Statutory Codification

� Securities and Futures (Amendment) Bill 2011 (Bill)

� Enactment in process

� As part of Securities and Futures Ordinance (SFO)

� Addition of Part XIVA (Disclosure of Inside Information)

� Other provisions & amendments

� Aim

� To promote effective compliance

� To allow effective enforcement

– Securities and Futures Commission (SFC)to institute proceedings

– Market Misconduct Tribunal (MMT) to deal with cases


31


Facilitating Compliance with PSI Disclosure Requirements

� Guidelines on Disclosure of Inside Information (PSI Guidelines)

� Published by SFC as guidance

� As illustration of operation of Part XIVA

– Discussing issues

– Providing examples

� To be revised pending enactment of Bill

� To take effect on the same day as Bill

� SFC informal consultation service

� 24 months initially

� To begin 1 month before effective date of Bill


Current Provisions Governing PSI Disclosure

Price sensitiveinformation (PSI)

(Listing Rule 13.09)

What constitutes PSI?

� Information, which is not publicknowledge, and which is � Necessary to enable appraisal of

group position; or� Necessary to avoid false market

in securities; or� Likely to materially affect market

activity & price of securities

Who are responsible for disclosure?

� Issuer� Directors of issuer

When to disclose?

� As soon as reasonably practicable


32


Current PSI Disclosure Framework



• Issuer• Directors

Duties of directors

� To comply with disclosure obligations

� To ensure PSI is kept strictly confidential until formal announcement

Note 2 to LR 13.09



Timely,accurate &complete

disclosure

Non-compliance




Disciplinary action


33




disclosure

Non-compliance




Disciplinary action

Disciplinary action from HKEx:� Warning letter� Private reprimand� Public criticism/censure� Report to SFC/other authorities� Suspension/Cancellation of listing� “Cold shoulder” order (no access to market facilities)� Other remedial action


Contractual relationship



disclosure

Non-compliance




Disciplinary action


34


New Provisions Governing PSI Disclosure

What constitutes“inside information”?

� Definition based on concept of “relevant information” in insider dealing regime in SFO

� 3 key elements� Specific information on

– Issuer– Shareholder/Officer– Securities/Derivatives

One interpretation of specific information:

Information on a transaction contemplated or at a preliminary state of negotiation can be specific , if substantial commercial reality is expected.

PSI Guidelines

Inside information

(Part XIVA of SFO)





� Not generally known to persons accustomedor likely to deal in securities


– Issuer– Shareholder/officer– Securities/derivatives

One interpretation of information not generally known:

Media comments, though widely spread, cannot be takenas information generally known.

PSI Guidelines

Inside information

(Part XIVA of SFO)


35


Inside information

(Part XIVA of SFO)





� If generally known, likely to materially affect the price of the securities



Some issues in assessing likely material change in price:� Hypothetical assessment when information is available � Variation case by case, depending on securities &

circumstances at the timePSI Guidelines


Inside information

(Part XIVA of SFO)









36


Inside information

(Part XIVA of SFO)








Examples of possible inside information

� Changes in financial condition

� Changes in control

� Takeovers & mergers

� Changes in directors

� Changes in value of assets

� And so on …PSI Guidelines


Inside information

(Part XIVA of SFO)


Who are responsiblefor disclosure?

� Issuer

� Officers of issuer

� Manager– Under immediate authority of the board– With management responsibility for the whole/substantial

part of the issuer

� Person involved in management of the issuer– In the role of manager

PSI Guidelines

� Officer– Director, manager, or secretary of the issuer– Any other person involved in management of the issuer

Part 1 of Schedule 1, SFO


37


Inside information

(Part XIVA of SFO)


When to disclose?

� As soon as reasonably practicable,after inside information

� Exceptions: Safe harbours

… ought reasonably to have come to the knowledgeof an officer …

What does this mean?

� Has come

� Ought reasonably to have come

to the knowledge of an officer in performing his functions


New PSI Disclosure Framework


disclosure

• Issuer• Officers

Inside information

(Part XIVA of SFO)

Duties of officers� To comply with disclosure obligations� To take all reasonable measures to ensure safeguards exist to

prevent breach

Point to note:Officers, whose intentional, reckless or negligent conduct results in issuer’s breach of disclosure obligations, are also in breach

Part XIVA of SFO


38




disclosure

Non-compliance

Civil sanctions


Safeharbours

Inside information

(Part XIVA of SFO)



Civil sanctions = 1 or more of the following:

� Fine/Costs

� Fine up to HK$8m on issuer, each director/chief executive

� Payment of costs of inquiry/investigation

� Compensation to persons who suffer loss of money

� Non-participation Order

� Offending person disqualified from being director/manager up to 5 years

� “Cold shoulder” order up to 5 years

� “Cease & desist” order

� Recommendation order for offending person to be disciplined by any body of which such person is member

� Order for preventing similar breach

� Training & independent professional advice


39


Statutory obligations



disclosure

Non-compliance

Civil sanctions


Safeharbours

Inside information

(Part XIVA of SFO)


Safe Harbours underNew PSI Disclosure Framework

Safe harbours that allow non-disclosure of inside information:

� Where disclosure is prohibited under laws/court orders

� Where ALL the following conditions apply

� Reasonable precautions taken by issuer to preserve confidentiality of inside information

� Confidentiality of inside information preserved

� Any of the following circumstances

– Incomplete proposal/negotiation

– Trade secret

– Liquidity support from Exchange Fund/central bank

– Disclosure waived by SFC


40


Application of Safe Harbours:Case 1

Issuer A

Leakage of inside information re. significant acquisition

Breach ofdisclosure obligations

Safe harbour applies

Non-disclosure

1. Incomplete proposal

Inside information:Negotiations for

significant acquisition

Confidentiality not kept

2. Confidentiality measures taken

3. Confidentiality kept



Issuer A

Leakage of inside information re. significant acquisition

Breach ofdisclosure obligations

Safe harbour applies

Non-disclosure

1. Incomplete proposal

Inside information:Negotiations for

significant acquisition

Confidentiality not kept

Fulfilment of 2 conditions:

2. Confidentiality measures taken

3. Confidentiality kept

No breach ofdisclosure obligations

• Confidentiality measures taken• Disclosure as soon as

reasonably practicable after being aware of leakage


41


In financial difficulties


Issuer BSafe harbour

applies

Non-disclosure

Inside information:Negotiations for financing

Safe harbourdoes not apply

Disclosure

Inside information:Material change in financial position

1. Incomplete proposal2. Confidentiality

measures taken3. Confidentiality kept


No profit warning

Delayed profit

warning

Before & After Statutory Codification:A Case of PSI Disclosure

HKExenquiry

on delayeddisclosure

HKExenquiry


Issuerreply

Issuerreply

HKExfurtherenquiry

HKExfurtherenquiry

Issuerfurtherreply

Issuerfurtherreply

Before Results Announcement

Results Announcement

(Significant profit drop)

Before Statutory Codification

HKExdisciplinary

action

HKExdisciplinary

action


42


No profit warning

Delayed profit

warning


HKExenquiry


HKExenquiry


Issuerreply

Issuerreply

HKExfurtherenquiry

HKExfurtherenquiry

Issuerfurtherreply

Issuerfurtherreply

Before Results Announcement



HKExdisciplinary

action

HKExdisciplinary

action

If the same situation occurs afterStatutory Codification, what would happen?


HKExenquiry


HKExenquiry


Issuerreply

Issuerreply

HKExfurtherenquiry

HKExfurtherenquiry

Issuerfurtherreply

Issuerfurtherreply

HKExdisciplinary

action

HKExdisciplinary

action No profit warning

Delayed profit

warning


Before Results AnnouncementHKEx refers

cases to SFC

SFC initiatescases

MMT deals with cases

Non-compliance

Civil sanctions



After Statutory Codification


43


Issuerreply

Issuerreply

Issuerfurtherreply

Issuerfurtherreply

HKExdisciplinary

action

HKExdisciplinary

action




Disclosure as soon as there is material change in financial position



Ongoing process of monitoring PSI disclosure


44


Management of PSI Disclosureunder Statutory Framework

DecemberJanuary

Events/matters arising on a continuing basis

Internal Matters� Financial information

� Operational information

� Transaction information

3rd Party Reports� Analysts’ reports

� Media comments

� Rumours

� Regulators’ publications

External Events� Economic

developments

� Other developments



DecemberJanuary

Events/matters arising on a continuing basis

Internal Matters� Financial information

� Operational information

� Transaction information

3rd Party Reports� Analysts’ reports

� Media comments

� Rumours

� Regulators’ publications

External Events� Economic

developments

� Other developments

How do issuers ensure compliance with PSI disclosure requirements?

� How to identify PSI?

� How to preserve confidentiality?

� Who will monitor on regular basis?

� Who will escalate to the board?

� How to ensure timely disclosure?

� And so on …


45



Internal Mechanisms

Internal Mechanisms

DesignatedTeams

DesignatedTeams

ProfessionalTraining

ProfessionalTraining


Where do we stand?

Change of Mindset

Change of Outcome=

Good Corporate Governance


46


Thank you


47


Presentations by:Ms Kitty ChanMs Winnie Yuen

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Ms Kitty ChanSenior ManagerTricor Hong Kong

Ms Kitty Chan is Senior Manager of Corporate Services at Tricor. Prior to joining Tricor in 2002, Ms Chan was Manager of Corporate Secretarial Services at PricewaterhouseCoopers in Hong Kong.

Ms Chan has extensive experience in corporate secretarial practice, servicing clients of listed and private companies incorporated in Hong Kong and various offshore jurisdictions. Her expertise extends from corporate advisory and regulatory compliance, corporate restructuring, to dissolution of companies.

Ms Chan is a Chartered Secretary and an Associate of HKICS and ICSA. She holds an Honours Bachelor’s degree in Accountancy from City University of Hong Kong and a Bachelor of Laws degree from the University of London.


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Ms Winnie YuenSenior ManagerTricor Hong Kong

Ms Winnie Yuen is Senior Manager of Corporate Services at Tricor. Prior to joining Tricor in 2002, Ms Yuen was Manager of Corporate Secretarial Services at Ernst & Young and Tengis Limited in Hong Kong.

Ms Yuen has over 18 years of corporate secretarial experience, servicing clients of listed and private companies incorporated in Hong Kong and various offshore jurisdictions. She is currently the named company secretary of a Hong Kong listed company.

Ms Yuen is a Chartered Secretary and an Associate of HKICS and ICSA. She holds an Honours Diploma in Company Secretaryship and Administration from Lingnan College in Hong Kong (now Lingnan University).

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Kitty ChanWinnie YuenCorporate ServicesTricor Services Limited13 October 2011


Strengthening Corporate Governance

� Review of the Code on Corporate Governance Practices (CG Code) & Associated Listing Rules

� Public Consultation completed, March 2011

� Consultation Conclusions, to come

� Focus of Proposed Rule Amendments

� To enhance input of directors

� To emphasize leadership of chairman

� To strengthen communication with shareholders

� To define eligibility & function of company secretary


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Overview

RevisionUpgrading Addition

Code Provisions

(CPs)

Recommended Best Practices

(RBPs)

CG Report(Appendix 23)

From RBPs

CG Code (Appendix 14)

MandatoryDisclosures

(MDs)

RecommendedDisclosures

(RDs)

FromRDs

� �

� �

�

�

FromCPs & RBPsListing Rules (LRs)


Overview

RevisionUpgrading Addition

Code Provisions

(CPs)

Recommended Best Practices

(RBPs)

From RBPs

MandatoryDisclosures

(MDs)

RecommendedDisclosures

(RDs)

FromRDs

CG Code & CG Report

(Appendix 14)

� �

� �

�

�

FromCPs & RBPsListing Rules (LRs)


52


Proposed Rule Amendments:Parties Involved & Implications

DirectorsDirectors

Board Commit tees

Board Committees

ShareholdersShareholders

CompanySecretary

CompanySecretary

Listing Rules (LRs) →→→→ Must comply


DirectorsDirectorsBoard

Committees ShareholdersCompany Secretary

Proposed Rule Amendments:Expanding on Directors’ Duties

Current

� Duties of skill, care & diligence from directors

Proposed

� Expanding on above duties

� To take an active interest in issuer’s affairs

� To understand issuer’s business

� To take action in case of anything improper

� The following expected standard of duties

– To delegate duties to colleagues/management

– To attend to issuer’s affairs only at formal meetings

Revised LR 3.08

≠≠≠≠


53


Board Committees Shareholders

Company SecretaryDirectorsDirectors

Proposed Rule Amendments:Specifying Proportion of INEDs

Current

� 3 independent non-executive directors (INEDs) on board

LR 3.10

� INEDs to make up at least 1/3 of board RBP

Proposed

� Upgrading RBP to LR

� Transitional period for compliance: 31 Dec 2012

New LR 3.10A




Proposed Rule Amendments: Removing Exception for Directors’ Voting

Current

� Directors’ voting on interested transactions

� No voting in general, with 5 exceptions

� 1 of 5 exceptions: Voting allowed on transactions where interest of director/associate in company concerned < 5%

Proposed

� Removing above exceptionRevised LR 13.44


54


Board Committees

ShareholdersCompany SecretaryDirectorsDirectors

Proposed Rule Amendments: Extending Directors & CEO Disclosures

Current

� Announcement for appointment, resignation & re-designation of directors

Proposed

� Extending disclosures

� ‘Retirement’ & ‘removal’ of directors also to be announced

� Same disclosures applicable to chief executive officer (CEO) who is not a director

Revised LR 13.51(2)


Board Committees

ShareholdersCompany SecretaryDirectorsDirectors

Proposed Rule Amendments: Extending Remuneration Disclosures

Proposed

� Extending disclosures in Annual Report (AR)

� Remuneration of CEO (who is not a director)by name

Revised para. 24, Appendix 16

� Remuneration of senior management by band

New para. 25A, Appendix 16


55


Directors Board Committees

Board Committees

Shareholders Company Secretary

Proposed Rule Amendments: Requiring the Setting Up of RC

Current

� Remuneration Committee (RC) to be set up� INEDs in majority� Written terms of reference CPs

Proposed

� Upgrading CPs to LRs

� Extending requirements� INED to act as chairman� Board to approve & provide written terms of reference� In the case of non-compliance

– Immediate disclosure with reasons – Compliance within 3 months

New LRs 3.25 – 3.27


Directors Board Committees ShareholdersShareholders

Company Secretary

Proposed Rule Amendments: Allowing Exception to Voting by Poll

Current

� Voting by poll on ALL resolutions

Proposed

� Allowing exception for procedural & administrative matters, at chairman’s discretion

� Note to Rule : Defining above matters

� Items not in agenda / supplementary circular

� Matters relating to chairman’s duties to maintain orderly conduct of meeting

Revised LR 13.39(4)


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Directors Board Committees

Company SecretaryShareholdersShareholders

Proposed Rule Amendments: Requiring Shareholders’ Approval re. Auditors

Proposed

� Appointing auditors

� At AGM

� Term of office: End of AGM – next AGM

� Removing auditors before expiry of term

� Shareholders’ approval at general meeting

� Issuer to propose in a circular to shareholders, with auditors’ representations

� Issuer to allow auditors to attend meeting & make verbal representations

New LR 13.88


Company SecretaryDirectors Board

Committees ShareholdersShareholders

Proposed Rule Amendments: Enhancing Communication with Shareholders

Proposed

� Ensuring access to issuer information

� Procedures for election of directors by shareholders on issuer’s website

New LR 13.51D

� Up to date, consolidated, constitutional documents on both HKEx and issuer’s websites

New LR 13.90


57


Directors Board Committees Shareholders Company

Secretary

Company Secretary

Proposed Rule Amendments: Clarifying Requirements for Company Secretary

Current

� Requirements for company secretary� Qualifications: HKICS Member / Solicitor or Barrister / Accountant � Experience acceptable to HKEx� Ordinarily resident in Hong Kong LR 8.17

Proposed

� Note to Rule: Clarifying relevant experience� Length of employment with issuer / other issuers� Familiarity with LRs� Relevant training (on top of 15 hours’ minimum)� Professional qualifications in other jurisdictions New LR 3.28

� Adding training requirement� 15 hours’ minimum per financial year New LR 3.29

� Removing Hong Kong residence requirement


Proposed Code Amendments: Parties Involved & Implications

DirectorsDirectors

Board Commit tees

Board Committees


CompanySecretary

CompanySecretary

Code on Corporate Governance Practices (CG Code)

Code Provisions (CPs)�� Comply or Explain

Recommended Best Practices (RBPs)�� Encouraged to Comply


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Proposed Code Amendments: Ensuring Directors’ Insurance Cover

Current

� Appropriate insurance cover for directors in respect of legal action

RBP

Proposed

� Upgrading RBP to CP

� Adding “adequate general” cover to insurance requirement

New CP A.1.8




Proposed Code Amendments: Ensuring Chairman’s Interaction with NEDs/INEDs

Current

� Chairman’s meeting with non-executive directors (NEDs, incl. INEDs)

� No executive directors present

� Once a year, at leastRBP

Proposed


� Specifying separate meetings

� Chairman with INEDs only

� Chairman with NEDs only New CP A.2.7


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Proposed Code Amendments: Increasing Transparency

Current

� List of directors on issuer’s website

� Up to date

� To specify directors’ roles & functions

� To identify INEDsRBP

Proposed


� Publishing above list on HKEx & issuer’s websites New CP A.3.2




Proposed Code Amendments: Ensuring Independence of INEDs

Current

� Conditions for retaining INEDs with > 9 years’ service

� Shareholders’ approval to be obtained

� Acceptance of continued independence to be explained

RBP

Proposed


New CP A.4.3


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Proposed Code Amendments: Ensuring Directors’ Time Input

Current

� Sufficient time & attention on issuer’s affairs from directors

CP

Proposed

� Ensuring directors’ time input

� Each director to limit the no. of professional commitments (esp. other directorships)

� Each director to acknowledge sufficient time is available for duties

� Each NED to confirm to Nomination Committee, annually, of sufficient time spent on duties

Revised CP A.6.3




Proposed Code Amendments: Specifying NEDs’ Time Input

Current

� Letter of appointment for directors

� Terms & conditions

� No time input suggested RBP

Proposed


� Specifying in letter of appointment for NEDs

� Expected time inputNew CP D.1.4


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Proposed Code Amendments: Specifying Directors’ Training Time & Focus

Current

� Directors’ continuing professional developmentRBP

Proposed


� Specifying directors’ training time & focus

� ≥8 hours’ training per financial year

� Focus on role, function & duties of a listed company director

� Note to CP

� Total training = 8 hours, even if >1 directorshipNew CP A.6.5




Proposed Code Amendments:Strengthening Financial Reporting

Proposed

� Management to provide monthly updates to board (e.g. management accounts)

� Issuer performance data

� Issuer position

� Prospects New CP C.1.2

� Board to include basis of business operation in MD&A (AR)

� Long term business model

� Corporate strategy New CP C.1.4


62


Directors Shareholders Company Secretary

Board Committees

Board Committees

Proposed Code Amendments: Enhancing AC’s Role re. External Auditors

Current

� Audit Committee (AC) as key representative body to oversee issuer’s relations with external auditors RBP

� AC to meet with external auditors

� Once a year, minimum

Proposed

� Upgrading RBP to CP New CP C.3.7(b)

� Increasing AC meetings with external auditors

� Twice a year, minimum

CP

Revised CP C.3.3(e)(i)


Shareholders Company SecretaryDirectors Board

Committees

Board Committees

Proposed Code Amendments: Enhancing AC’s Role re. Improprieties

Current

� AC to handle improprieties in financial reporting, internal control, etc.

� Arrangements for employees to raise concerns

� Arrangements for investigation & follow upRBP

Proposed

� Upgrading RBP to CPNew CP C.3.7(a)


63



Committees

Board Committees

Proposed Code Amendments: Revising RC’s Terms of Reference

Current

� Remuneration packages of Executive Directors (EDs) & senior management (SM)

� To be determined by RC CP

� To disclose disagreement between board & RC RBP

Proposed

� Clarifying decision making for above remuneration packages� Model (i): To be determined by RC� Model (ii): To be determined by board, based on RC proposals

Revised CP B.1.2(c)

� Requiring disclosure of disagreement between board & RC (model ii)New CP B.1.6 (Upgrading RBP)

� Clarifying role in management’s remuneration proposals � RC to review & approve against corporate goals New CP B.1.2(b)



Board Committees

Board Committees

Proposed Code Amendments: Tightening Requirements for NC

Current

� Nomination Committee (NC) to be set up� INEDs in majority� Written terms of reference RBPs

Proposed

� Upgrading RBPs to CPs

� Adding requirements � INED as chairman� New duties

– Review of time required for directors’ duties against actual time spent

– Review of NEDs’ annual confirmations of sufficient time spent New CPs A.5.1 – A.5.2


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Committees

Board Committees

Proposed Code Amendments: Increasing Transparency of Board Committees

Current

� Availability of terms of reference (e.g. on issuer’s website)

� Audit Committee & Remuneration Committee CPs

� Nomination Committee RBP

Proposed

� Publishing terms of reference on HKEx & issuer’s websites

� Audit Committee Revised CP C.3.4

� Remuneration Committee Revised CP B.1.3

� Nomination Committee New CP A.5.3 (Upgrading RBP)


Proposed Code Amendments: Increasing Transparency via Websites

��+ Constitutional documents

---��+ Procedures for election of directors

��+ Updated list of directors

(Stating roles & functions; identifying INEDs)

��+ Nomination Committee: Terms of reference

��+ Remuneration Committee: Terms of reference

��+ Audit Committee: Terms of reference

��

Corporate communications (including financial announcements, circulars, notices, proxy forms, etc.)

HKExWebsite

Issuer Website

Proposed Documents to be Published on Websites


65



Board Committees

Board Committees

Proposed Code Amendments: Specifying Requirements for CG Function

Proposed

� Setting up of Corporate Governance Committee (CGC) New RBP D.3.3

� Specifying terms of reference for CGC / committees with CG function

� Specifying composition for CGC / committees with CG function

� INEDs in majority

� Note to CP :At least 1 ED/NED with sufficient knowledge of issuer’s operations

New CPs D.3.1 – D.3.2


Company SecretaryDirectors Board

Committees ShareholdersShareholders

Proposed Code Amendments: Enhancing Communication with Shareholders

Proposed

� Facilitating communication between shareholders & external auditors

� Auditors to attend AGM

� Auditors to answer shareholders’ questionsRevised CP E.1.2

� Ensuring effective communication between shareholders & issuer

� Board to set up communication policy

� Board to review policy on regular basisNew CP E.1.4


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Directors Board Committees Shareholders Company

Secretary

Proposed Code Amendments: Clarifying Requirements for Company Secretary

Proposed

� 2 sources of company secretary

� Issuer’s employee (with knowledge of its affairs)

� External service provider (with senior level contact provided by issuer)

� Board to select, appoint or dismiss company secretary

� Company secretary to report directly to chairman/CEO

� All directors to have access to advice & services of company secretary

� Company secretary to maintain training record of directors

New CPs F.1.1 – F.1.5


Proposed CG Report Amendments: Parties Involved & Implications

DirectorsDirectors

Board Commit tees

Board Committees


CompanySecretary

CompanySecretary

Corporate Governance Report (CG Report)

Mandatory Disclosures (MDs)�� Must comply

Recommended Disclosures (RDs)�� Encouraged to Comply


67


Proposed CG Report Amendments: New Mandatory Disclosures (1)

� Work of CGC or committees with similar CG function

Corporate Governance Committee

� Review of NEDs’ annual confirmations of time spent

Nomination Committee

� Model for determining remuneration of EDs & SM

Remuneration Committee

Board Committees

� Directors’ attendance at general meetings

� Directors’ attendance by alternate at board & committee meetings

Directors

Note : Attendance of alternate ≠≠≠≠ Attendance of director


Proposed CG Report Amendments: New Mandatory Disclosures (2)

� Procedures– Convening EGM

� Procedures with contact details – Submitting enquiries– Putting forward proposals

at general meetings

� Articles of association– Significant changes

Shareholders

� For external service provider – senior level contact provided by issuer

� Disclosure of non-compliance with 15 hours’ training

Company Secretary


68


Where do we stand?

Systemic Change

vs.

Mechanical Implementation

=

Competitive Edge


Thank you


69

Closing Address

Mr Johnny Ng Group Chief ExecutiveTricor

Mr Johnny Ng is Group Chief Executive at Tricor. Prior to joining Tricor in 2003, Mr Ng was a Partner at PricewaterhouseCoopers in Hong Kong, heading up the Business Services Division. He has over 35 years of public accounting and commercial experience in Hong Kong and overseas, and has also lectured at universities and colleges.

Mr Ng is a Chartered Accountant and a Certifi ed Public Accountant. He holds a Bachelor’s degree in Economics & Statistics from The University of Hong Kong and a Juris Doctor degree from The Chinese University of Hong Kong. Currently he is pursuing a doctoral degree in business administration and his research interests are in the areas of corporate governance and independent directors.

Mr Ng is the Vice Chairman of the Hong Kong Committee for UNICEF. He also served as member of the Accountancy Training Board of the Vocational Training Council for 6 years prior to his retirement earlier this year.

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Notes

71

Notes

72

Notes

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