Blueprint for tougher governance in Hong Kong

4 February 2004

Improvements in Hong Kong's corporate governance are in train following consecutive announcements by the Securities and Futures Commission (SFC) and the Hong Kong Stock Exchange (HKSE).

While both the voluminous SFC blueprint and news stock exchange rules mark a substantial step forward, critics have suggested investors are still left out in the cold. There is still some uncertainty as to whether the HKSE will be forced to relinquish its regulatory role to the SFC, as had been planned by the government until it opted for more consultation.

The SFC blueprint adopts many of the best practices recommended by the OECD and adopted in Western countries like the United States and much of the European Union.

It has said that key elements such as disclosure of information and details of transactions between interested parties in all listed companies and IPOs should be taken out of the HKSE's voluntary codebook and made enforceable by law, with heavy penalties for miscreants. The HKSE wants only some disclosure rules handed over to the SFC. But the SFC has softened its approach on other issues, saying it would be happy to let the exchange continue to operate the other listing rules, and to supervise corporate governance standards.

The HKSE is still weighing up toughening the rules for:

• disclosing directors' pay packages;

• tightening the deadlines for yearly and half yearly corporate reporting;

• introducing quarterly financial reporting or quarterly trading statements for large companies;

• a requirement for boards to have more than three independent directors.

So far it has ruled out making these requirements mandatory or more than 'recommended'. The government is expected to make a final decision on what should be regulated and by whom in the next few months.