Consulting editors: Benita Yu and Laurence Rudge, Slaughter and May

With a foreword from David Graham,Chief Regulatory Officer and Head of Listing, HKEx

Hong Kong Corporate Governance: a practical guideH

ong Kong C

orporate Governance: a practical guide

White Page Ltd would like to thank the following organisations for their contributions to Hong Kong Corporate Governance: a practical guide

Hong Kong Corporate Governance:

a practical guide

Consulting editors: Benita Yu and Laurence Rudge Slaughter and May

Published by White Page Ltd

Hong Kong Corporate Governance:a practical guide

Consulting editors Benita Yu and Laurence Rudge, Slaughter and May

Publisher Tim Dempsey

Publishing editor Nigel Page

Production editor Matt Rosenquist

Design White Page Ltd

Printing and binding 1010 Printing Limited

Hong Kong Corporate Governance:a practical guideis published by:White Page Ltd 17 Bolton StreetLondon W1J 8BHUnited KingdomPhone: ! 44 20 7408 0268Fax: ! 44 20 7408 0168Email: mail@whitepage.co.ukWeb: www.whitepage.co.uk

First published: May 2014ISBN: 978-0-9565842-5-0www.hkcg2014.comHK$775 / 60 (plus postage & packing)

Hong Kong Corporate Governance:a practical guide May 2014

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The information in this publication is not offered as advice on any particular matter and must not be treated as a substitute for specific advice. In particular, information in this publication does not constitute legal, professional, financial or investment advice. Advice from a suitably qualified professional should always be sought in relation to any particular matter or circumstances. The publishers and authors bear no responsibility for any errors or omissions contained herein.

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Hong Kong Corporate Governance: a practical guide

Hong Kong Exchanges and Clearing Limited Foreword

Hong Kongs financial market has enjoyed tremendous success, and few would disagree with its status as a major international financial centre. Over the past decade, the Stock Exchange of Hong Kong (SEHK) has been consistently within the top five listing markets in the world. The aggregate market capitalisation of the companies listed on the SEHK is the second largest in Asia and the sixth largest in the world, at more than US$2.8 trillion as of the end of 2012. It was also the most active market for initial public offering funds raised globally in 2009, 2010 and 2011. As of December 2013, 1,643 companies were listed on the SEHK, with a growing number coming from mainland China, as well as overseas.

Hong Kongs stock market is an efficient and preferred capital-raising centre. Hong Kong continues to be the primary capital-raising centre for mainland China companies. From 2008 to the end of 2012, 247 mainland companies were listed, raising around US$84.1 million.

Hong Kong is also a developed and international market that has attracted investors from around the world. Recent SEHK surveys show that local and overseas investors have similar levels of contribution to the total turnover in the Hong Kong securities market. Local institutional and retail investors each account for about 20 per cent of total turnover. Overseas investors, mainly institutional investors, are the largest contributors, representing over 40 per cent of total turnover.

Hong Kong has been ranked first in terms of economic freedom for 18 consecutive years (1995-2012), according to the Heritage Foundation. It has also been ranked first for the second consecutive year in the Financial Development Index released by the World Economic Forum in its Financial Development Report 2012. The rankings are based on more than 120 variables spanning institutional and business environments, financial stability and size and depth of capital markets. Furthermore, the Xinhua-Dow Jones International Financial Centers Development Index (IFCD) has ranked Hong Kong in third place for 2013 (after New York and London) as an international financial hub, surpassing Tokyo. The IFCD ranks the top 10 cities based on their comprehensive competitiveness. This is the first year that Hong Kong has placed in the top three.

Contributing factors to Hong Kongs strengthsThe reasons most cited for Hong Kongs success are the quality of its corporate governance regime, the transparency and fairness of its regulatory

Hong Kong Corporate Governance: a practical guide

ForewordDavid Graham, Chief Regulatory Officer and Head of Listing Hong Kong Exchanges and Clearing Limited

Hong Kong Corporate Governance: a practical guide

Foreword Hong Kong Exchanges and Clearing Limited

Settlements in 2010, Hong Kong was the worlds sixth-largest foreign exchange market in turnover.

In the banking sector, 70 out of the worlds 100 largest banks operate in Hong Kong, according to the Hong Kong Monetary Authority. Nearly all sizeable global and regional investment banks have operations in Hong Kong.

Corporate governance

Early initiativesIn Hong Kong, the first formal corporate governance initiative was launched in 1992, when the SEHK introduced the Corporate Governance Project to enhance and promote a higher standard of corporate governance for Hong Kongs issuers. Influenced by international developments, the SEHK introduced its first Code of Best Practice in 1993. This first incarnation of the Code of Best Practice served as a non-mandatory guideline for issuers to devise their own codes of board practices. In the years that followed, Hong Kongs corporate governance regime evolved steadily.

In 2005, following a lengthy consultation process from January 2002 to November 2004, the SEHK adopted the Code on Corporate Governance Practices in place of the Code of Best Practice. This included a new set of Listing Rules requiring issuers to include a corporate governance report in their annual reports. The comply or explain approach was adopted.

Current corporate governance frameworkOne of the roles of the SEHK is to provide a sound and effective corporate governance framework for issuers in the furtherance of investor protection. The SEHK achieves this through a combination of the Listing Rules and other provisions in the Corporate Governance Code.

The Listing Rules require a mandatory standard of corporate governance for all issuers. Breaches may lead to sanctions.

The Corporate Governance Code is divided into principles, code provisions and recommended best practices. This combination is designed to allow flexibility for issuers while protecting investors and the integrity of the market. Principles enshrine the key elements of good corporate governance, but do not provide specifics as to how it is achieved. Code provisions are not

and legal system and its unrestricted foreign exchange policy. These strengths are described in detail in the next sections.

Good corporate governanceStudies indicate that investors place significant importance on the corporate governance of a market or company when it comes to valuing the market or the companys stock. Hong Kong continues to enjoy good corporate governance ratings in international surveys. The World Banks Doing Business 2012 rated Hong Kong third in the world in the category of investor protection. For minority investor protection, Hong Kong achieved a full 10 out of 10 in the same survey.

In the Asian Corporate Governance Associations CG Watch 2012, Hong Kong was again in the top spot for enforcement. For corporate governance rules and practices, Hong Kong ranked second in Asia. The newly revised Corporate Governance Code and related Rules Governing the Listing of Securities on the SEHK (Listing Rules) only became effective in 2012. The long-term effect of these changes remains to be assessed.

Reliable, transparent and fair regulatory and legal systemHong Kong has a strong and well-regulated securities sector. The Securities and Futures Commission (SFC) and the SEHK believe in achieving a good balance between regulating the market; upholding the principles of accountability, fairness and transparency; and allowing normal business operations to thrive. The SFC has won praise for its enforcement efforts. The SEHK has been active in reforms, conducting nearly 30 consultations since 2008.

One of the most important considerations for businesses that choose to operate in Hong Kong is its legal system it is well-founded and has proved dependable and fair. Businesses entering into commercial contracts have the confidence that their rights will be protected under the legal system.

Free foreign exchange policy and world-class banking systemHong Kongs capital account is fully convertible, and there are no restrictions on foreign exchange dealings. According to a triennial global survey conducted by the Bank of International

Hong Kong Corporate Governance: a practical guide

Hong Kong Exchanges and Clearing Limited Foreword

Several key changes to the Listing Rules resulted from the review. One of the most significant of these changes was to upgrade the provision that INEDs should comprise one third of the board from a recommended best practice to a rule. In addition, the code provision on the establishment of a remuneration committee with a majority of INEDs as members and an IN