HONG KONG SAR, CHINA Trends and Developments Contributed by: Vincent Lung and Mike Yeung, Parkside Chambers
The Development of Good Corporate Governance in Hong Kong Corporate governance refers to the system by which companies are directed and controlled, ensuring that the affairs of the company are conducted in such a way that they balance corporate prosperity and accountability. This system is essential when owner - ship of a company is distinct and separated from man - agement, who would be put under the microscope to act in the best interests of the company and to not abuse their position as fiduciaries, securing protec - tion for owners (shareholders), employees and busi - ness counterparts (such as suppliers, customers, and creditors) and local communities. What is brought about is the free flow of information, capital and talent; integrity of the market and its participants; transpar - ency; and a level playing field. The existence of good corporate governance principles and frameworks in a jurisdiction therefore generates substantial investor confidence in such jurisdiction, promoting long-term patient capital and supporting economic growth and financial stability. Good corporate governance is an important competitive advantage, particularly so for Hong Kong. This is because Mainland China is surg - ing ahead of Hong Kong by many measures such as market capitalisation and trading volume and, in order to compete, Hong Kong will have to continue to add value and differentiate itself from Mainland China, and good corporate governance provides a key answer, particularly for foreign investors and institutions. Good corporate governance in Hong Kong is assisted by the existence of a number of factors which are to some extent lacking in Mainland China. These include: • transparency of legal and regulatory frameworks and institutions; • full-fledged company and securities law and regu - lations which are amongst the best in the Asia- Pacific Region (if not globally); • a fiercely independent and highly respected judici - ary; • strong, independent statutory regulators like the Securities and Futures Commission (SFC); • highly motivated professional organisations who are fully convinced of the importance of good cor - porate governance; and • an independent press and broadcasting media.
That said, one must appreciate that Mainland China is also undergoing robust corporate governance reforms and many Mainland China companies (particularly the H-share companies listed on HKEx) are increasingly complying with international standards and best cor - porate governance practices. To this extent the Main - land China regime is a serious competitor whilst at the same time a complimentary teammate of the Hong Kong market. It is common (although unfortunate) that serious and far-reaching corporate governance and regulatory reforms in Hong Kong (and also globally) have almost invariably depended on catastrophic corporate melt - down. Thus, serious reform of securities regulation in Hong Kong in the form of the creation of the SFC had to await “Black Monday” on 19 October 1987, although the deficiencies of the previous regulatory system had long been known. The financial crisis in 1997–1998 and then in 2007–2008 subjected the then existing corporate governance structures and pro - cesses to a far greater degree of stress and testing than would normally have been the case in more sta - ble economic circumstances. These crises exposed many examples of conflicts of interest, incompatible objectives and lack of oversight. Some issues are linked to regulation but, one way or another, most are corporate governance-type problems (such as risk management, board practices and exercise of share - holder rights). In 2000–2001, the Standing Committee on Compa - ny Law Reform was tasked to undertake an overall review of corporate governance in Hong Kong. Three sub-committees were established to consider the specific areas of directors, shareholders and corpo - rate reporting. These, followed by subsequent further reviews and consultations, led to the rewrite of the Companies Ordinance (CO) and various amendments to the Securities and Futures Ordinance (SFO) which enhanced, among other things, information disclosure requirements to provide for more transparency to the stakeholders and accordingly the need for adequate and effective internal controls for such purpose. The legislative framework gives the SFC significant pow - ers to monitor, patrol and raise the bar on corporate governance standards in Hong Kong. In addition, a few key non-statutory documents were also estab -
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