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Sonia Khao reports on Hong Kong's new mandatory disclosure requirements for good corporate governance
To bring Hong Kong’s corporate governance practice in line with international development in the post-Enron era, significant changes in various aspects of the corporate and auditing regulatory environments have been initiated. Among these were amendments to the Listing Rules. The move started in early 2002 when the Hong Kong Exchanges and Clearing Limited (the Exchange) issued a consultation paper on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues. This consultation received wide support from respondents and, as a result, the Code on Corporate Governance Practices (the Code) and Corporate Governance Report were introduced in the Listing Rules for both the Main Board and the Growth Enterprise Market (GEM).
The Code and the requirement of the Corporate Governance Report are applicable to accounting periods commencing on or after
1 January 2005, except the provision relating to the company’s internal controls which will be implemented for accounting periods beginning on or after 1 July 2005. There are five sections in the Code dealing with matters relating to directors, remuneration of directors and senior management, accountability and audit, delegation by the board and communication with shareholders. In each section of the Code, which comprises the Code provisions and Recommended Best Practices, the underlying principles of good corporate governance are set out.
The Exchange adopted a “comply or explain” approach which is similar to the Combined Code on Corporate Governance in the UK. Where a listed issuer does not comply with any of the Code provisions, the board is required to give reasons for the deviation in either their interim report or in the Corporate Governance Report issued together with the annual report. This means that non-compliance with the Code would not itself constitute a breach of the Listing Rules.
However, failure to include any of the mandatory disclosures in the Corporate Governance Report will be regarded by the Exchange as a breach of the Listing Rules. The mandatory disclosure requirements for the Corporate Governance Report are set out in the Listing Rules for the Main Board as well as for GEM. In addition, the Code also requires certain issues to be disclosed in the Corporate Governance Report. Apart from the mandatory disclosure requirements, the Exchange also provides a list of recommended disclosures for listed issuers’ reference.
Mandatory disclosure requirements in the Corporate Governance Report include:
Corporate governance practices
A narrative statement of how the listed issuer has applied the principles in the Code, and a statement as to whether the listed issuer meets the Code and details of any deviation from the Code are required.
Directors’ securities transactions
According to the Code provisions, directors must comply with the Model Code for Securities Transactions by Directors of Listed Issuers set out in the Listing Rules and should establish written guidelines. As such, the listed issuer needs to report on such code of conduct regarding directors’ securities transactions in the Corporate Governance Report. In any
event of non-compliance, details of such
non-compliance and an explanation of the remedial steps taken by the listed issuer to address such non-compliance are required
to be disclosed.
Board details
Listed issuers should disclose in their reports how the board operates, including the types of decisions taken by the board and those delegated to management. As required by the Code, listed issuers should formalise the functions reserved to the board, and those delegated to the management, and conduct periodic reviews of these arrangements.
Listed issuers have also to disclose
the identity of the chairman and the chief
executive officer and whether their roles are segregated.
The terms of appointment of non-executive directors need to be included.
Nomination and remuneration
policy of directors
Although a nomination committee is not a mandatory requirement under the Code, its composition, role and function, if any - together with a summary of work performed during the year - have to be included in the Report.
Disclosure of directors’ remuneration had once been a controversial discussion. In the new Code, listed issuers are required to establish a remuneration committee with a majority of independent non-executive directors as members of the committee. In the Corporate Governance Report, listed issuers are therefore required to report on the composition, role and functions of the remuneration committee, number of meetings held, and a summary of work performed by the committee.
Auditors’ remuneration
An analysis of remuneration in respect of audit and non-audit related services provided by the auditors to the listed issuer is required. Such analysis must include, in respect of each significant non-audit service assignment, details of the nature of the services and the
fees paid.
Audit committee
A description of the role, function and composition of the audit committee, a report on the work performed during the year in discharging its responsibilities in review of the quarterly, half-yearly and annual results and a system of internal control, and its other duties set out in the Code, are required.
These requirements have already come
into effect for accounting periods commencing on or after 1 January 2005. Listed issuers will need to comply further with the Code provision that relates to internal controls for the accounting periods beginning on or after 1 July 2005. The new Code requires the board to disclose in its Report that a review of the effectiveness of the system of internal control of the issuer and its subsidiaries has been conducted. The review should cover all material controls, including financial, operational and compliance controls and risk management functions. In order to ensure compliance with the Listing Rules, listed issuers should now review their internal control procedures and establish a compliance plan in order to put the Code provision into practice.
Sonia Khao is head of technical services,
ACCA Hong Kong. | 
