On January 30 2004, The Stock Exchange of Hong Kong Limited (the HKEX) issued an exposure paper on the proposed Code on Corporate Governance Practices (the Code) and the requirement that Hong Kong listed companies file corporate governance reports.
When implemented, the Code will replace the existing Code of Best Practice in the main board Listing Rules. The draft Code is more comprehensive and substantive than the existing Code and the HKEX considers it a "significant enhancement" of the existing Code.
The draft Code contains provisions on: (1) the board of directors, its function, composition and appointment; (2) directors' remuneration; (3) accountability and audit; (4) delegation by the board; and (5) communication with shareholders.
The draft Code is structured so that each section contains three elements: (1) principles; (2) code provisions; and (3) recommended best practices. The draft Code, when implemented, will be a non-mandatory code and non-compliance with its provisions will not be considered a breach of the Listing Rules.
One may ask how a non-mandatory code would improve corporate governance. The answer is in the comply-or-explain mechanism of the new Code. A listed company or its directors may deviate from the Code provisions, but the deviation and the reasons for it must be disclosed in the listed company's corporate governance report, which it is required to issue under the Listing Rules for inclusion in its annual reports. The deviation and reasons for deviation must also be disclosed in the listed company's half-year reports.
The disclosure of deviation and reasons for deviation from the Code will have an embarrassment effect and will subject the listed companies and their directors to the scrutiny of their shareholders and the financial markets. Failure to make the required disclosure is a breach of the Listing Rules.
Directors of listed companies should also consult the Non-Statutory Guidelines on Directors' Duties issued by the Hong Kong Companies Registry and the Guidelines for Directors and Guidelines for Independent Non-Executive Directors issued by the Hong Kong Institute of Directors.