The ‘Report on Improving Corporate Governance in Hong Kong’, published by the Hong Kong Institute of Certified Public Accountants on 2 May 2018, assesses the strengths and weaknesses of Hong Kong’s corporate governance (CG) system, based on a study of the CG systems in the United Kingdom, the United States, Mainland China and Singapore.
The objective of the study was to produce implementable recommendations to improve Hong Kong’s CG system in a manner consistent with overarching objectives of fostering regulatory efficiency and long-term market competitiveness. For this purpose, it was important to recognize that the CG system in each jurisdiction has emerged in consequence of developments and experiences, successes and failures shaped by historical, political, legal, market, and social and cultural contexts—what works, or fails, in one jurisdiction might fail, or work, in another. Divergences in the concept of CG and how to measure it were also discussed.
Hong Kong’s dual responsibilities model in which the statutory regulator (SFC) and the stock exchange both have regulatory oversight of the listed market is somewhat unique. Overall, the model has worked well in response to significant developments including Hong Kong’s global position in the IPO market and the highly significant shift to the listing of Mainland enterprises that now account for the majority of market capitalization and trading. Yet, Hong Kong must do significantly better in a number of areas to protect its market and the shareholders who invest in it. The recommendations seek to address these concerns.
Board processes and standards: While each jurisdiction studied is dealing with similar types of issues the experience in each jurisdiction is markedly different, with some reforms having a positive effect, others not. In some instances, the market response to reform can be to game it to bring about an alternative outcome from the one intended by regulators, thus producing unexpected consequences. Hong Kong should adopt better mechanisms to protect shareholders from potential abuses of the board by strengthening the functions of the audit committee and independent directors, and requiring greater CG-related transparency.
Enforcement by shareholders: Shareholders’ rights are well established in Hong Kong law but are subject to important caveats as regards the ability of a shareholder to acquire information relevant to the identification of the infringement of a right, and to pursue that right in practice. Hong Kong has not followed the adoption by the UK and Mainland China of group/joint litigation. Shareholders also have no rights in relation to breaches of listing rule disclosure requirements, despite having (together with regulators) an expectation that directors and issuers will comply with them. This is important since breaches of CG standards in listing rules currently do not amount to legal causes of action, yet shareholders qua investors do consider the CG practices of an issuer in the total mix of information available to them.
Enforcement by regulators: The weak position of shareholders is exacerbated by the existence of an enforcement lacuna between the stock exchange and the SFC, whose powers are either too weak and ineffective, or too strong and insufficiently graduated in relation to a wrongdoing that does not warrant (or may not give rise to) court action. This represents a serious shortcoming in regulatory efficiency as compared to all the other markets studied and leaves many important CG standards set by the listing rules subject to ineffective enforcement. A number of the recommendations would enable earlier behaviour correction via more effective and graduated means of consequence management without requiring changes to the dual responsibilities model of regulatory oversight.
Non-Hong Kong incorporated companies: Cross-border enforcement issues and potential conflicts of law are not unique to Hong Kong. However, the preponderance of Mainland enterprises listed in Hong Kong lends a different emphasis to the problem and establishing more effective means of enforcement against these companies has become essential. Improving ex ante mechanisms of enforcement that provide for more effective early warning identification and correction mechanisms can work well in this regard. New cross-border enforcement arrangements with the Mainland specifically tailored to the public capital market may also need to be considered.
CG system architecture and policy: The Report observed significant differences in the way policy is developed and enforced in the different jurisdictions, and notes that the development of the Hong Kong market has in various ways outpaced policies on market development.
Many of the 28 recommendations made in the Report are relatively straightforward to implement, others require further work to be undertaken as to their more specific details and potential ramifications. A few specifically contemplate a further consultation or enquiry process. An important interim purpose is to generate discussion that may lead to an enhanced recognition and understanding of areas in need of reform when Hong Kong is examined against best practices internationally.
Syren Johnstone is a Principal Lecturer and the Executive Director of the LLM (Compliance & Regulation) programme at the Faculty of Law, University of Hong Kong, a Fellow of the Asian Institute of International Financial Law, a Director of Keel Consulting, and a Solicitor (England & Wales and Hong Kong) and a guest contributor to the Oxford Business Law Blog.
Say H Goo is Professor of Law at the University of Hong Kong and a guest contributor to the Oxford Business Law Blog.