Hong Kong Institute of Directors Speaker Dinner Meeting The - - PowerPoint PPT Presentation

Hong Kong Institute of Directors Speaker Dinner Meeting The Directors’ Role in the Hong Kong Securities Market Andrew Sheng Chairman Securities and Futures Commission 22 March 2005

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Profound changes in the Securities Landscape since 1996

Number of listed companies increased 30% from

680 to 1096

Market cap increased 1.5 times from HK$2.7

trillion to HK$6.7 trillion

Daily turnover doubled from HK$6.9 bn

to HK$15.9 bn, higher than 1997 peak

Funds raised in SEHK was HK$281.4 bn, 13.7%

higher than 1997 peak

Derivative markets considerably more developed

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Market has become much broader and deeper

Since 1996, Hong Kong stock market has

a more diversified structure from properties and banking due to:- Diversification

• f

Hong Kong companies towards international markets Entry of large Mainland companies, especially those in the energy, telecom and heavy industrial sectors

4 7.3%

Market Capitalisation by Sector (%) (Main Board)

End 1996

(Total market cap: HK$3,476.0 bn)

End 2004

(Total market cap: HK6,629.2 bn)

Industrials Hotels 2.0% Properties 31.0% Utilities 10.3% Finance 23.2% Consolidated enterprises 26.0% Miscellaneous 0.3%

Industrials 15.6% Hotels 0.9% Utilities 6.3% Properties 12.1% Finance 34.9% Consolidated enterprises 30.0% Miscellaneous 0.2%

Source : HKEx

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Family-led HSI 23% Mainland + MTRC 29% Institutional- led 25% Others 23%

Listed Companies by Market cap: end 2004

Institutional-led :

1985 – 12%

State-led (Mainland

SOEs + MTRC) :

1985 – 0%

Family-led HSI :

1985 – 37%

Others : 1985 –

51%

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Corporate Governance Successes

Improved Transparency – better disclosure

and higher scrutiny by investors and analysts

Focus on Ethics – adopting a principles-based

system that emphasizes core ethical values

Self-Regulation – onus is on companies to

devise own corporate governance regimes – standards must be visible for benchmarking

Improved Accountability - shareholders expect

directors to bear more responsibility and accountability for the performance and conformance of companies HKICS Conference 2004 Highlights

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Corporate Governance Challenges

Compliance Costs – HSBC annual compliance

costs US$400 mn, more than half of S&P500 companies’ net income

Financial Reporting – need to make financial

reports more understandable and restore credibility

Board Independence – need for INEDs to

challenge Executives on performance and conformance

Auditor Responsibility - stricter standards

with public oversight of the audit profession

Shareholder Responsibility - need greater

involvement of shareholders (including institutional investors) to exercise discipline HKICS Conference 2004 Highlights

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Does good Governance pay? - YES

McKinsey study shows premium ranging from

11-14% for US/UK companies to up to 40% for Emerging Market companies

Gompers study of 1,500 US companies show

that if fund managers “long” good companies (according to governance ratings) and “short” bad companies, funds outperform by 8.5% throughout the 1990s

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What do the directors think?

Korn-Ferry Survey: Asia-Pacific companies’ directors believe part of their fiduciary responsibilities is to continually improve the quality of governance:

89% of Asian boards (ex Japan) believe the top

factor in determining good governance is having a board committee develop and review governance guidelines.

81% of Asian boards (ex Japan) developed

formalised corporate governance guidelines (up from 61% in 2003).

Source: Korn/Ferry International 31st Annual Board of Directors Study 2004

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What do the investors think?

Excellent Good Average Below Average Poor

Australia (50 responses) 0% 64% 28% 8% 0% Mainland China (190 responses) 2% 23% 51% 22% 2% Hong Kong (139 responses) 2% 32% 53% 11% 3% Japan (85 responses) 1% 41% 48% 9% 0% Korea (62 responses) 3% 56% 34% 6% 0% Malaysia (48 responses) 4% 23% 58% 15% 0% Singapore (109 responses) 2% 36% 56% 6% 0% Total Region 2% 35% 49% 13% 1% (683 responses) Source : CFA 2004 Asia Pacific Corporate and Financial Disclosure Survey

Overall quality of financial or corporate information disclosed by listed companies

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Investors want performance + conformance

Performance relates to profitability,

robustness of earnings, financial strength and growth.

Conformance relates to being a good

corporate citizen. Traditionally, HK companies good at delivering value and performance but need to pay more attention to conformance with corporate governance standards.

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Dealing with Bad Behaviour

“People in Hong Kong recognise that you cannot eliminate bad behaviour – that’s human nature. The important thing is to have enough checks and balances to make corporate activities

• transparent. [Hong Kong] also has a very

effective enforcement system which pursues and prosecutes the culprits of bad corporate

• behaviour. At the end of the day though, it is up

to investors to steer away from companies they are not comfortable with, which is a better remedy than over-regulation.” Herbert Hui

Korn/Ferry 31st Annual Board of Directors Study 2004

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Role of Board Members

Directors (EDs, NEDs and INEDs)

Companies Ordinance fundamental principle is that all directors are responsible for a company’s affairs Individually and collectively responsible for the company’s compliance with the laws and regulations

Accordingly, Directors must conduct proper due

diligence on affairs and accounts of company because they have more liabilities and risks under current environment

Directors have to be more professional –

continuous professional education is now a must

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Division of Labour between regulators

Division of labour between SFC and

Stock Exchange is along statutory/non-statutory lines

Voluntary code and non-statutory

corporate governance rules – SEHK

Statutory disclosure requirements –

SFC, where false or misleading disclosure of information carry statutory penalties

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Moving into a Statutory Regime for Disclosure

SEHK responsible for Code on Corporate

Governance Practices as well as Listing Rules that are non-statutory

Under the Dual Filing Regime, SFC is the statutory

regulator of listed company disclosure

Building on the Dual Filing regime, the Government

proposes to codify the more important listing rules requirements into subsidiary legislation under the SFO

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Proposed statutory backing to listing requirements

The proposed amendments to the Securities and

Futures (Stock Market Listing) Rules is to codify the disclosure requirements in the Listing Rules:

Disclosure of price sensitive information and specific events Disclosure of financial reports Disclosure and shareholders’ approval for transactions

The proposed amendments does not cover:

Corporate governance related matters e.g. authorisation for general mandate, approval of share option schemes because corporate governance issue Disclosure requirements for listed debt and structured products

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Strengthening Checks and Balances

Improve the integrity of information

disclosure: fast, reliable information is the fundamental principle of investor-based capitalism

Focus on the roles of intermediaries (eg

auditors, investment banks, analysts and directors) to improve information flow and the integrity of information

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Residue Risk Problem

In the 1990s, issuers, intermediaries and

professional advisers have shifted risks to the investor

Losses by investors create political pressure for

regulatory change: More rules, laws, tougher sanctions and greater legal responsibilities and liabilities e.g. Sarbanes-Oxley.

The only way to restore balance is to have

greater corporate self-regulation: delicate balance between benefits of self-regulation and statutory regulation

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Regulation is Trade-off between Gains versus Risks or Costs

Cost of Regulation

Resources spent to apply it + Burden Imposed

• n Firms + Law of Unintended Consequences

Benefits of Regulation

Reducing market failure and externalities Preventing bad behaviour

Zingales: “necessary to do an overall calculation

• f the overall benefits of regulation versus its
• verall costs”*

Uncertainties:- Information not always available

and market response uncertain and subject to lags

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To Reform or Not Reform

No market misconduct or

• fraud. Little or no

regulation required. Market and issuers exercise self- discipline. High incidence of market misconduct and fraud. Need to enforce to punish perpetrators and deter future misconduct. Benefit of regulation

< costs of regulation

Don’t reform

Benefit of regulation

> costs of regulation

Reform

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Concluding Remarks

Ultimately the deliverers of value are the

corporate captains.

Hong Kong seeks important balance –

need to deliver better performance and better conformance

SFC will work with the HKIoD and other

professional bodies to help uplift professional standards and quality of market

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Thank you very much