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Consultation Paper on Corporate Governance Review

5 October 2001

Mr J. W. Bush
Secretary, Standing Committee on Company Law Reform
Companies Registry
Queensway Government Offices (High Block), 15^th Floor
66 Queensway
Hong Kong

Dear Sir,

We are responding with our comments to the above consultation paper, dated July 2001, on Phase I of the review.

We welcome the attention the Standing Committee has devoted to the problem of corporate governance abuse in Hong Kong. Poor corporate governance is a major concern in the Hong Kong stock market, damaging to our future prospects as a financial centre. Most companies are controlled by major shareholders, and abuse of minorities is all too common. Regulators appear to be able to do little about it. These abuses exacerbate inequality and the sense of unfairness in our society. Given the depth of the problems, we would expect radical proposals from the Committee. We would expect nothing less than the "root and branch review" promised in section 1.03.

It is therefore a disappointment to us, on reading through the paper, to find that most of the proposals are merely incremental amendments to the existing regime. The foundation of this regime, the Companies Ordinance, is based on the UK Companies Act 1948, and is completely inadequate for modern capital market conditions. It should be completely and fundamentally revised, in accordance with the Financial Secretary’s commitment in 1994 to produce "an ordinance for the twenty-first century". The twenty-first century has arrived, and we still labour with an ordinance that has its roots in the early twentieth, if not the nineteenth, century.

Generally, we find that the Committee’s arguments, though erudite, do not reflect a grasp of Hong Kong realities. In the detailed discussion of the role of independent non-executive directors in section 11, for example, we could not find mention of the fact that all of these directors are appointed by boards which are dominated by executive directors, who in most cases are also major shareholders. The supposedly independent directors are therefore not independent. Little can be expected of them, with or without the Committee’s proposals.

Nonetheless, we found some proposals that appeared to us interesting, and worthy of support.

• The introduction of a statutory derivative action (8.02)
• The extension of the unfair prejudice remedy to oversea companies (9.02)
• Enabling the SFC to conduct derivative actions on behalf of investors, albeit that we believe it would be far better for the investor to be empowered to conduct actions on his own account.
• Requiring private companies to file accounts. Among other benefits, this will enable any monitoring body (currently the Hong Kong Society of Accountants) to draw a sample for practice review from the population of all company accounts, rather than having to rely on information provided to them by the accounting firms that they are reviewing.
• Introducing more forward-looking disclosure (15.04)
• Establishing a Financial Reporting Review Panel (19).

We hope that the above comments are helpful. We look forward to a rather more vigorous approach to Phase II of the review.

Yours sincerely,

Alan Lung Ka-lun
Chairman