Highly recommended: Standing Committee on Company Law Reform Chairman Mr Justice Rogers releases the final recommendations from Phase II of the Corporate Governance Review.

The Standing Committee on Company Law Reform today issued its final recommendations from Phase II of the Corporate Governance Review.

The committee said conflict of interest on the part of the directors and major shareholders is a major aspect of corporate governance involving basic integrity and honesty.

It recommends that listed companies disclose individual director's remuneration packages; the Listing Rules make audit committees mandatory; and, controlling shareholders should be a person controlling 10% or more of the voting power at any general meeting of a company.

The Government welcomed the recommendations, saying they will help bring Hong Kong's corporate governance regime up with best international standards.

Registrar of Companies Gordon Jones said: "We will consider how best they should be taken forward in consultation with the relevant parties such as the Society of Accountants and the Stock Exchange. Recommendations that involve statutory amendments will be taken forward as part of a Companies Amendment Bill.

"As a first step, the Companies Registry has published Non-statutory Guidelines on Directors' Duties, as drawn up by the committee. The Guidelines will help directors better understand their duties of care and skill and fiduciary duties."

On June 11, the committee published the Consultation Paper for the Phase II review. The proposals relate to different aspects of directorship (including directors' roles, duties, qualifications, training and remuneration, as well as connected transactions, board procedures and board committees); shareholders' rights and conflicts of interest; corporate reporting with focus mainly on external auditors; and, corporate regulation.

Some 25 submissions have been received, 17 from market regulators and operators/professional organisations and trade bodies, and eight from individuals or firms. 

Committee Chairman Mr Justice Rogers said: "Most proposals have the strong support of the respondents. They have been included in the committee's final recommendations to the Government subject to some refinements. Together with recommendations made in Phase I, this concludes the four years' work by the committee on Corporate Governance Review."

He said the consultation is a success in view of the useful responses received, hoping that things will move fast.

The committee drew up a set of Non-statutory Guidelines on Directors' Duties which were published today to help company directors better understand their roles. It also confirmed its proposals in the Consultation Paper to improve the general legal position on self-dealing by directors, as well as proposals on shareholders' approval for significant transactions involving directors.

For transactions between directors or connected parties with an associated company, the committee recommended that, in relation to the definition of 'associated company', the test of control through the exercise of dominant influence to determine whether the company was associated with another company should be adopted. The approval of disinterested shareholders would be required in relation to such transactions.

The committee also included in its final recommendations extensive proposals on board procedures, the structure of the board and the role of non-executive directors in the Consultation Paper. The Listing Rules should make audit committees mandatory, with at least one independent non-executive director on the committee having financial expertise.  The establishment of nomination and remuneration committees should remain as a best practice.

To address increasing public concern over directors' remuneration, the committee recommended that listed companies disclose individual director's remuneration packages by name in their annual financial statements. The Code of Best Practice (of the Listing Rules) should contain a requirement that a listed company should disclose the arrangements made to train its directors in view of the importance of directors' qualifications and training.

The committee adopted in its final recommendations the proposals on self-dealing by controlling shareholders in the Consultation Paper and that 'controlling shareholders' should be defined for the purpose of connected transactions using the same criterion as that under the Listing Rules for "substantial shareholder", i.e. a person controlling 10% or more of the voting power at any general meeting of the company. The committee also adopted the proposals in the Consultation Paper to enhance the effectiveness and transparency of company general meetings.

The committee included in its final recommendations a number of proposals in the Consultation Paper to enhance and strengthen the functioning and quality of external auditors. These include imposing a duty on employees (in addition to directors) to provide information to auditors.

A number of other proposals relating to auditing have been referred to either the Society of Accountants or the Law Reform Commission for further consideration and follow-up action. These include: improving the supervision of audit firms; provision of material information by an outgoing auditor to his successor; mandatory rotation of lead and concurring audit partners every five years with a 'time-out' period of five years; and the introduction of proportionate liability for civil torts.

The committee recommended that statutory backing should be given to the relevant Listing Rules together with tougher statutory sanctions including fines against non-compliance. In addition, the regulation of unlisted companies should be improved by enhancing the Companies Registry's capability as a corporate regulator on an incremental basis.

"Hong Kong's corporate governance has been of a high standard, but like everything else it needs to be looked at and improved as time goes by. The proposals are part of this process, which to a greater or lesser extent has to be continuous," Mr Justice Rogers said.

In view of the limited support expressed by the respondents, the committee dropped proposals to prohibit a retired partner of the company's auditing firm from acting as a member of an audit committee; provide for a deposit system to deal with members' resolutions; and require directors of a company and directors or auditors of the company's subsidiaries to volunteer material information to the auditor of the company.

Copies of the Guidelines will be available at the respective offices of the Companies Registry, Financial Services & the Treasury Bureau, Official Receiver's Office, Securities & Futures Commission, HK Monetary Authority and the Stock Exchange, as well as their websites.

The committee, tasked with undertaking the Corporate Governance Review in 2000, published its Phase I Consultation Paper in July 2001. The 2001 Consultation Paper contained a total of 21 proposals regarding directors, shareholders and corporate reporting. Some of these proposals relating to shareholder remedies have been included in the Companies (Amendment) Bill 2003 which is being scrutinised by the Legislative Council.

For details on the major recommendations, click here.