1

CORPORATE GOVERNANCE IN HONG KONG

A GENERAL VIEW


Truong Tan Trung
Vietnamese - German University
tantrung2811@gmail.com

06/06/2014
2
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


3

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 that
involves 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

1
Steiner, John F., and George A. Steiner. Business, Government, and Society: A Managerial
Perspective. New York: McGraw Hill/Irwin, 2006. 597. Print.
2
Mallin, Christine A. "1/Introduction." Corporate Governance. Oxford: Oxford UP, 2010. N. pag. Print.
3
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. <http://ssrn.com/abstract=440924>.
4
Tricker, R. Ian. "17/Corporate Governance Around The World." Corporate Governance: Principles,
Policies, and Practices. 2nd ed. Oxford: Oxford UP, 2009. 457. Print.
5
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
information
9
. 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 Consultancy
10
.

5
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. <http://ssrn.com/abstract=440924>.
6
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. <http://ssrn.com/abstract=440924>
7
Hong Kong Society of Accountants, Hong Kong Accountants Special Issue on Corporate
Governance, September/October 1996.
8
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. N.p.: n.p.,
2005. SSRN. Web. 3 June 2014. <http://ssrn.com/abstract=1100710>.
9
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. <http://ssrn.com/abstract=440924>
10
ibid
6
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)
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on 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, Deloitte
12
made 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-third
13
of 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


11
Look up the Code Provisions and Principles at "Corporate Governance." Hong Kong Exchange
Stock, 2013. Web. 4 June 2014.
<https://www.hkex.com.hk/eng/exchange/corpgov/Documents/compliance_checklist.pdf>.
12
"Hong Kong SAR." Center for Corporate Governance. Deloitte Touche Tohmatsu, n.d. Web. 06
June 2014. <http://www.corpgov.deloitte.com/site/ChinaEng/hongkong-governance-profile/>.
13
Amendment in Code Provision. "HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014.
<https://www.hkex.com.hk/eng/newsconsul/hkexnews/2011/111028news.htm>.
14
Based on the Principles of Remuneration in Code on Corporate Governance, Hong Kong
7
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)
15
Therefore, 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 prospects
16

internal controls - to safeguard shareholders investment and the issuers assets
17

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.
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b/Board Committees
Board committees should be formed with specific written terms of reference which deal
clearly with their authority and duties
20


15
Mallin, Christine A. "1/Introduction." Corporate Governance. Oxford: Oxford UP, 2010. N. pag. Print.
16
Based on the Principles of Accountability and audit in Code on Corporate Governance, Hong
Kong, HKEx
17
ibid
18
"Audit Committee Definition | Investopedia." Investopedia. Investopedia, n.d. Web. 04 June 2014.
<http://www.investopedia.com/terms/a/audit-committee.asp>.
19
Principles of Delegation by board of directors in Code on Corporate Governance, Hong Kong,
HKEx
20
ibid
8
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
companies
24
.
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,

21
Based on Principles of Communication with shareholders in Code on Corporate Governance,
Hong Kong, HKEx
22
Principles of Company Secretary in Code on Corporate Governance, Hong Kong, HKEx
23
"HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014.
<https://www.hkex.com.hk/eng/newsconsul/hkexnews/2011/111028news.htm>.
24
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. <http://ssrn.com/abstract=440924>
25
"Li Ka-Shing." Forbes. Forbes Magazine, n.d. Web. 06 June 2014.
<http://www.forbes.com/profile/li-ka-shing/>.
9
the board structures of this company also has the good governance. The board of directors in
HWL consists of 15 directors, including Li Ka-shing and his elder son, the group managing
director, deputy group managing director, group finance director, 3 executive directors, 6
independent non-executive directors (more than one-third of the board) and 1 non-executive
director (Based on the interim report 2013 of HWL)
26
.
However, there are still cases that some companies use some loopholes or secretly going
against the rules by using fraud or bribing. In a recent interview
27
by China Money Network
with Bing Ling, a portfolio manager at Hong Kong-based US$1.4 billion-under-management
hedge fund, he said that from his experience and observation, there was still so many
accounting abuse in even large companies (Hong Kong) due to the fact that there was no
strong forces to go against those companies. He also criticized the Hong Kong Stock
Exchange with the relaxed attempt to deal with independent directors rules. Not only that,
with more than seventy-five per cent of listed companies are domiciled outside of Hong
Kong and are not subject to some relevant local laws (Simon S.M.Ho, 2003)
28
, it is hard for
Hong Kong governors to deal with the violations in these companies.
This points out that the corporate governance in Hong Kong still has many to improve though
it is good compared to other Asian countries as stated in (II).
V/Conclusion
Corporate governance has been becoming the focus of regulators, shareholders and various
stakeholders in the world (Chau & Leung, 2006)
29
. Hong Kong, like other Asian countries,
has a paradigmatic feature of organisational form, the family (ownership concentration)
firms (Hubert Shea, 2008)
30
, which made many difficult in corporate governance. However,

26
Interim Report. Rep. Hong Kong: HWL, 2013. Web. 6 June 2014.
<http://202.66.146.82/listco/hk/hutchison/interim/2013/intrep.pdf>.
27
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.
<http://www.chinamoneynetwork.com/2014/04/16/bing-lin-accounting-abuse-among-listed-chinese-
companies-still-widespread>.
28
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. <http://ssrn.com/abstract=440924>
29
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 Taxation 15.1 (2006): 1-15. Web.
30
Shea, Hubert. "Corporate Governance and Social Responsibility of Family Firms in Hong Kong: A
Case Study of Hutchison Whampoa Limited (HWL)." SSRN. N.p., n.d. Web. 3 June 2014.
<http://ssrn.com/abstract=935101>.
10
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.

11

Bibliography
"Audit Committee Definition | Investopedia." Investopedia. Investopedia. Web. 04 June
2014. <http://www.investopedia.com/terms/a/audit-committee.asp>.
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 Taxation 15.1 (2006): 1-15. Web.
"Corporate Governmance." Hong Kong Exchange Stock, 2013. Web. 4 June 2014.
<https://www.hkex.com.hk/eng/exchange/corpgov/Documents/compliance_checklist.pdf
>.
"HKEx News Release." HKEx, 28 Oct. 2011. Web. 6 June 2014.
<https://www.hkex.com.hk/eng/newsconsul/hkexnews/2011/111028news.htm>.
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.
<http://ssrn.com/abstract=440924>.
"Hong Kong SAR." Center for Corporate Governance. Deloitte Touche Tohmatsu. Web.
06 June 2014. <http://www.corpgov.deloitte.com/site/ChinaEng/hongkong-governance-
profile/>.
Interim Report. Rep. Hong Kong: HWL, 2013. Web. 6 June 2014.
<http://202.66.146.82/listco/hk/hutchison/interim/2013/intrep.pdf>.
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. <http://ssrn.com/abstract=1100710>.
12
"Li Ka-Shing." Forbes. Forbes Magazine. Web. 06 June 2014.
<http://www.forbes.com/profile/li-ka-shing/>.
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. <http://www.chinamoneynetwork.com/2014/04/16/bing-lin-
accounting-abuse-among-listed-chinese-companies-still-widespread>.
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. <http://ssrn.com/abstract=935101>.
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.