Truong Tan Trung_ FA 2011 B 56

8/12/2019 Truong Tan Trung_ FA 2011 B 56

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CORPORATE GOVERNANCE IN HONG KONG

A GENERAL VIEW

Truong Tan Trung

Vietnamese - German University

[email protected]

06/06/2014


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Table of content

Table of content .................................................................................................................... 2

List of Abbreviations .............................................................................................................. 3

I/Introduction ......................................................................................................................... 4

II/Overview ............................................................................................................................ 4

III/Corporate Governance Practices ...................................................................................... 6

1/ Boards of Directors ........................................................................................................ 6

2/Remuneration of directors and senior management ....................................................... 6

3/Accountability and audit .................................................................................................. 7

4/Delegation by the board of directors ............................................................................... 7

a/Management functions ................................................................................................ 7

b/Board Committees ...................................................................................................... 7

5/Communication with shareholders .................................................................................. 8

6/Company Secretary ........................................................................................................ 8

IV/Hong Kong Corporate Governance Status ........................................................................ 8

V/Conclusion ......................................................................................................................... 9

Bibliography ........................................................................................................................ 11


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List of Abbreviations

CEO Chief Executive Officer

HKSA Hong Kong Society of Accountants

HKSE Hong Kong Stock Exchange

HWL Hutchison Whampoa Limited

INEDs Independent Non-executive Directors

NEDs Non-executive Directors

UK United Kingdom

US United States


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I/Introduction

Corporate governance is defined as overall control of activities in a corporation thatinvolves the formulation of corporate objectives, strategies, and plans and the proper

management structure in order to be responsible to its various stakeholders (Steiner and

Steiner, 2006)1. Without the right corporate governance, many collapses happened to even

the enormous companies in the world like Baring Banks (1995), Enron (2000), Parmalat

(2003) (Mallin, 2010)2.

Before 1997, Hong Kong was a colony of the British Empire and inherited the governance

structure of the West. It brought to a difference between Hong Kong and other countries in

Asia by the appliance of corporate governance regime prior to the financial crisis in 1997.

With that, Hong Kong was not suffer much damage to their businesses (Simon S.M.Ho,

2003)3.

This paper will give the insight information about Hong Kong corporate governance. First,

the writer will say about the overview of Hong Kong corporate governance and then discuss

generally about practices of Hong Kong corporate governance. Lastly, the case about good

corporate governance company and the comments on Hong Kong will be presented to show

the status of Hong Kong corporate governance.

II/Overview

According to Tricker, in Hong Kong, corporate governance is a fascinating melange of

Anglo American and Asian ideas.4. Also from a research of Simon S.M.Ho (2003), he said:

At a country level, Hong Kong adopts the US/UK model to some extent, as its legal and

accounting systems are similar to the British model and its market regulatory framework to

1Steiner, John F., and George A. Steiner. Business, Government, and Society: A Managerial

Perspective. New York: McGraw Hill/Irwin, 2006. 597. Print.2Mallin, Christine A. "1/Introduction." Corporate Governance. Oxford: Oxford UP, 2010. N. pag. Print.

3Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects . Working

paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network

Electronic Paper Collection. Web. 3 June 2014. .4Tricker, R. Ian. "17/Corporate Governance Around The World." Corporate Governance: Principles,

Policies, and Practices. 2nd ed. Oxford: Oxford UP, 2009. 457. Print.


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the American model. At the corporate level, the Family Control Model is dominant. 5. In

Anglo American side which Hong Kong corporate governance inherited, we can see a stable

common law legal system and independent judiciary, active advocacy of improved corporate

governance by regulators, international accounting standards, good overall standard on a

global basis and a trend of improvement, and leadership in Asia. These five observations is

concluded by Standard and Poors (2002) (data taken from the report of Simon S.M.Ho,

2003)6. Nevertheless, because of being a territory in Asia, Hong Kong also share the norm to

have large proportion of companies are owned by families. HKSAs Corporate Governance

Working Group (CGWG) reported that over 70% of Hong Kong listed companies were

controlled by a family or an individual (Hong Kong Society of Accountants, 1996)7. Not only

that, in 2002, 33 listed companies were controlled by ten wealthiest families in Hong Kong

with a total market value at 31 Dec 2002 of HK$933 billion (approx US$120 billion) (data

extracted from Adrian Lei and Frank Songs working paper, 2005)8. As the government of

Hong Kong acknowledge about the tradition in its companies, they have tried to establish a

good corporate governance that work well along with family firms. According to Donald

Tsang (1999), a former financial secretary, our aim is to establish Hong Kong as a paragon

of corporate governance, ensuring that those investments in Hong Kong are afforded the best

protection and that our listed companies are managed with excellence, complying with the

highest international standards including those related to risk management and disclosure of

information9. Therefore, in 2002, Hong Kong is ranked in second place out of ten East Asian

countries in quality of corporate governance and transparency by Political and Economic

Risk Consultancy10.

5Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects . Workingpaper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research NetworkElectronic Paper Collection. Web. 3 June 2014. .6Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects . Working

paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research NetworkElectronic Paper Collection. Web. 3 June 2014. 7Hong Kong Society of Accountants, Hong Kong Accountants Special Issue on Corporate

Governance, September/October 1996.8Lei, Adrian C.H, and Frank M. Song. Corporate Governance, Family Ownership, and Firm

Valuations in Emerging Markets: Evidence from Hong Kong Panel Data. Working paper. N.p.: n.p.,2005. SSRN. Web. 3 June 2014. .9Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects . Working

paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research NetworkElectronic Paper Collection. Web. 3 June 2014. 10

ibid


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III/Corporate Governance Practices

To ensure the best practices for corporate governance, Hong Kong Stock Exchange (HKSE)

published the Code on Corporate Governance Practices (the Code)11on 30th January, 2004

which includes 5 sections: Directors (1), Remuneration of directors and senior management

(2), Accountability and audit (3), Delegation by the board of directors (4), Communication

with shareholders (5) and Company Secretary (6)

1/ Boards of Directors

There are many provisions about this sections of Code on Corporate Governance Practices.

Therefore, to simplify, Deloitte12made a summary of the code. Based on Deloitte summary,

the Code required each board of directors has executives and non-executive directors. In

order to maintain the fairness, to stop the major owners from manipulating the decisions of

the company to exploit the benefits as expense of minority shareholders, every board of

directors of a listed company must have at least one-third13of it fill with independent non-

executive directors (which can be call as INEDs) (Note). INEDs is required to have

obligations like other executive directors. Not only that, the Code also made clear that

chairman and chief executive officer (CEO) cant not be the same person due to a need of

clear division of the responsibilities of the management of the board and the day-to-day

management of the company's business. Moreover, board meetings should be held at least

four times a year at approximately quarterly intervals.

2/Remuneration of directors and senior management

To avoid managers and directors taking advantage from unreveal compensations, a code

about this was established. The general idea of this code provisions is to disclose all the

information related to remuneration for directors and managers in a company.14

11Look up the Code Provisions and Principles at "Corporate Governance." Hong Kong Exchange

Stock, 2013. Web. 4 June 2014..12

"Hong Kong SAR." Center for Corporate Governance. Deloitte Touche Tohmatsu, n.d. Web. 06June 2014. .13

Amendment in Code Provision. "HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014..14

Based on the Principles of Remuneration in Code on Corporate Governance, Hong Kong


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3/Accountability and audit

The collapse of one of the top ten US Fortune in 2000, Enron due to the lack of effective

auditing was a huge shock to the financial world. (Mallin, 2010)15Therefore, to prevent the

similar case to happen, HKSE required each company to follow their instructions in 3

aspects:

financial reporting - to present a balanced, clear and comprehensible assessment of

the companys performance, position and prospects16

internal controls - to safeguard shareholders investment and the issuers assets17

Audit Committee - to oversight financial reporting, monitor accounting policies,

oversight any external auditors, regulatory compliance, and discuss about risk

management policies with management. (Investopedia)18

4/Delegation by the board of directors

We approach this section by considering its principles to have a general idea about the

delegation by the board of directors

a/Management functions

An issuer should have a formal schedule of matters specifically reserved for board approval.

The board should give clear directions to management on the matters that must be approved

by it before decisions are made on the issuers behalf.19

b/Board Committees

Board committees should be formed with specific written terms of reference which deal

clearly with their authority and duties20

15Mallin, Christine A. "1/Introduction." Corporate Governance. Oxford: Oxford UP, 2010. N. pag. Print.

16Based on the Principles of Accountability and audit in Code on Corporate Governance, Hong

Kong, HKEx17

ibid18

"Audit Committee Definition | Investopedia." Investopedia. Investopedia, n.d. Web. 04 June 2014..19

Principles of Delegation by board of directors in Code on Corporate Governance, Hong Kong,HKEx20

ibid


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5/Communication with shareholders

In modern corporations, it is really important to know how treat the shareholders. However,

in Hong Kong, family owned companies is a trend. Therefore, this code is established to

maintain the effective communication and somehow protect the minority shareholders.21

6/Company Secretary

The company secretary plays an important role in supporting the board by ensuring good

information flow within the board and that board policy and procedures are followed. The

company secretary is responsible for advising the board through the chairman and/or the

chief executive on governance matters and should also facilitate induction and professional

development of directors.22

IV/Hong Kong Corporate Governance Status

Hong Kong government tries its best to maintain the good corporate governance. Hong Kong

Stock Exchange made amends on the Corporate Governance Code and Listing Rules

frequently from 2004 till now. The latest amends were published in 2011 23. Not only the

government knows that good corporate governance makes the financial markets better but

companies also acknowledges that high quality corporate governance will increase the firms

value in the perspective of investors, especially when most firms in Hong Kong is ownership

concentrated. Moreover, a data collected from Simon report shows that, Standard and Poors

indicates that investors are willing to pay a premium for shares in well- governed

companies24.

For examples, Hutchison Whampoa Limited (HWL), a Hong Kong based Fortune Global

500 firm and also owned and managed by a well-known family group in Hong Kong. Li Ka-

shing, one of the top 20 billionaires in the world (Forbes)25. Although HWL has a

concentration in ownership, it still disclose all the information for users needs. Not only that,

21Based on Principles of Communication with shareholders in Code on Corporate Governance,

Hong Kong, HKEx22

Principles of Company Secretary in Code on Corporate Governance, Hong Kong, HKEx23

"HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014.

.24

Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and Prospects. Workingpaper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social Science Research Network

Electronic Paper Collection. Web. 3 June 2014. 25"Li Ka-Shing." Forbes. Forbes Magazine, n.d. Web. 06 June 2014.

.


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Hong Kong made its governance better by improve their corporate governance frequently. It

even applied the US/UK market model into its corporate governance rules. This made

corporate governance in Hong Kong better than many countries in Asia. Nevertheless, Hong

Kong still has to put more effort in order to made it better.


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Bibliography

"Audit Committee Definition | Investopedia." Investopedia. Investopedia. Web. 04 June

2014. .

Chau, Gerald, and Patrick Leung. "The Impact of Board Composition and Family

Ownership on Audit Committee Formation: Evidence from Hong Kong." Journal of

International Accounting, Auditing and Taxation15.1 (2006): 1-15. Web.

"Corporate Governmance." Hong Kong Exchange Stock, 2013. Web. 4 June 2014.

.

"HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014.

.

Ho, Simon S.M, PhD. Corporate Governance in Hong Kong: Key Problems and

Prospects. Working paper. 2nd ed. Hong Kong: Chinese U of Hong Kong, 2003. Social

Science Research Network Electronic Paper Collection. Web. 3 June 2014.

.

"Hong Kong SAR." Center for Corporate Governance. Deloitte Touche Tohmatsu. Web.

06 June 2014. .

Interim Report. Rep. Hong Kong: HWL, 2013. Web. 6 June 2014.

.

Lei, Adrian C.H, and Frank M. Song. Corporate Governance, Family Ownership, and

Firm Valuations in Emerging Markets: Evidence from Hong Kong Panel Data. Working

paper. 2005. SSRN. Web. 3 June 2014. .


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"Li Ka-Shing." Forbes. Forbes Magazine. Web. 06 June 2014.

.

Lin, Bing. "Bing Lin: Accounting Abuse Among Listed Chinese Companies Still

Widespread." Interview. China Money Network. China Money Podcast, 16 Apr. 2014.

Web. 6 June 2014. .

Mallin, Christine A. "1/Introduction." Corporate Governance. Oxford: Oxford UP, 2010.

Print.

Shea, Hubert. "Corporate Governance and Social Responsibility of Family Firms in

Hong Kong: A Case Study of Hutchison Whampoa Limited (HWL)." SSRN. Web. 3 June

2014. .

Steiner, John F., and George A. Steiner. Business, Government, and Society: A

Managerial Perspective. New York: McGraw Hill/Irwin, 2006. 597. Print.

Tricker, R. Ian. "17/Corporate Governance Around The World." Corporate Governance:

Principles, Policies, and Practices. 2nd ed. Oxford: Oxford UP, 2009. 457. Print.

Truong Tan Trung_ FA 2011 B 56

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