May 24, 2002

 

Ms. Karen Lee
Head - Listing, Regulation & Risk Management
Hong Kong Exchanges & Clearing Limited
11/F, One International Finance Centre
1 Harbour View Street Centre
Hong Kong

 

Dear Ms. Lee;

 

Re: Consultation Paper on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues dated January 2002.

 

The Asia Pacific Advocacy Committee (APAC) of the Association for Investment Management and Research (AIMR)¹ is pleased to comment on the Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues Consultation Paper. The APAC is a standing committee of AIMR charged with reviewing and responding to major new regulatory, legislative, and other developments that may affect investors, the investment profession, and the efficiency and integrity of the Asia Pacific region financial markets.

 

We appreciate the extension provided by the Hong Kong Exchange and Clearing Limited (HKEx) to enable APAC and others to file their comments on these proposed amendments. As requested our response follows the same format as the on-line questionnaire.

 

General Comments

 

The APAC supports the HKEx efforts to restructure the capital markets in Hong Kong. We agree that the amendments will align the rules of the Hong Kong Exchange with those of capital markets globally. Common legislative and regulatory structures will ensure that Hong Kong has equal access to efficient capital markets and lower cost of capital. Countries with barriers to the flow of capital have often found that the discount applied is significant and in some cases detrimental to businesses seeking low cost of capital.

 

Corporate Governance is an important issue and the HKEx proposals make significant strides in defining the rules to apply to the capital markets. The HKEx has done a laudable job of defining the vision underlying good corporate governance that can form the basis of a sustainable capital market in the long-term. However, in some instances the proposed rules would be ineffective if not made mandatory. We believe those recommendations should be mandatory wherever possible, particularly in dealing with the Code of Best Practices and Internal Controls.

 

Generally, the committee agreed with the proposed changes and for those areas where there was no agreement, we have made comments and have noted them below for your reference. Further, in an effort to limit the size of our response, we have omitted responses to those questions where we did not have a comment.

 

Specific Comments on Issues Addressed in the Consultation Paper

 

PART B: Protection of Shareholders' Rights

 

Voting By Shareholders (Q 1-12)
Q1. Disagree. The APAC strongly supports the principle of "one share - one vote" and that each vote should be counted. For example, a person representing many small shareholders should be permitted to file the number of votes that he/she represents and not just one vote.

 

Nonetheless, the APAC is concerned that in practice nominee shareholders do not always get proxies to the beneficial shareholders in a timely enough manner to enable the beneficial shareholders to participate in the voting. Accordingly, the committee proposes that poll voting be extended to all items requiring a vote as a way to overcome the poor turnout by shareholders at annual meetings.

 

Q3. Agree. The APAC acknowledges that companies' constitutional documents may differ and that issuers would have to comply with the rules of a publicly traded company. Accordingly, the committee supports the requirement that issuers disclose in the circulars to shareholders the procedures for demanding a poll.

 

Q5. Not applicable. We support the change from "material interest" to "any interest."

 

Q10. Disagree. We are concerned that the proposed amendment does not enhance the protection of individual or small shareholders' interests. First of all it only allows for written approval by shareholders who hold more than 50% of the nominal value of the outstanding shares. This is prejudicial to small investors and it does not ensure that shareholders are provided with the information that would be available if a general meeting were called. Furthermore, having an open meeting reduces the potential for deal making.

 

Q11. Disagree. The APAC feels strongly that shareholders' written approval in lieu of holding a physical general meeting should not be permitted. The committee believes that shareholders should have the opportunity to have a meeting where they can ask management questions relating to the matter to be voted on.

 

Dilution of Shareholders' Interests (Q 13 - 28)

 

Q13 - Q16 The APAC believes that the 20% limit is too high and, therefore, the Committee suggests the maximum is best determined by a cumulative limit of 7.5% over a rolling 3-year period. Further, the APAC does not see the effectiveness of a limit on the number of shares that can be issued if there are no restrictions on the refreshments during the financial year. Independent shareholders' approval should be required for the issuer to engage in refreshments of general mandates.

 

Q13. Disagree. We believe that a maximum of 10% of issued share capital is a more appropriate limit for the amount of securities an issuer can offer in a general mandate.

 

Q14. None. We do not believe issuers should be allowed to refresh their general mandates unless they go to their shareholders for approval.

 

Q15. Disagree. Issuers should be required to obtain independent shareholders' approval before seeking refreshments of general mandates.

 

Q16. Agree. We believe the limit should be 7.5% of issued share capital for any rolling 3-year period.

 

Q17. Disagree. The APAC disagrees with the proposed basis of the benchmarked price and discount. A more representative basis would be a weighted-average price based on trading in the 30 days prior to the decision to issue.

 

Q18. Disagree. The trigger discount level should be set at 10% or more to the benchmark price.

 

Q20. Agree. We agree with the requirement to provide added disclosure of the 10 largest placees and the number of shares subscribed individually that, in aggregate, subscribe to 50% or more of the offering.

 

Rights Issues And Open Offers
Q23. Agree. The APAC agrees with retention of the rules requiring independent shareholders' approval for rights issues or open offers that would increase the issued share capital or market capitalization of the issuer by more than 50%.

 

Exclusion Of Overseas Shareholders From Share Offers
Q28. Disagree. We disagree with the proposal because we are particularly concerned that overseas shareholders are treated differently and face dilution of their positions.

 

We did not think that time, cost or regulatory burdens are justifiable reasons to treat foreign shareholders differently. In a global economy we believe that the Hong Kong Exchange would benefit if it had similar rules for all participants who seek to access the capital markets.

 

Share Repurchases
Restrictions on pricing and bidding
Q31. Disagree. We disagree that the benchmarked price should be the average closing market price for the preceding 5 trading days. We believe it should be a weighted-average of the closing market prices recorded in the preceding 30 days.

 

Dealing restrictions
Q32. Disagree. We disagree with the proposed "black out" period on share repurchases prior to the issue of the half-year and annual results. We believe that the rules should be aligned with insider-trading rules that issuers should not be permitted to trade when they possess relevant information about the corporation.

 

We believe that the "black out" period should not only cover the time prior to dissemination of financial information but also should cover any time that the board has any relevant information as defined under the Securities and Futures Ordinance.

 

Definition of "associate"
Q64. Disagree. We disagree and believe that the definition of "associate" should be extended to cover the following:

 

• In relation to any director, chief executive or substantial shareholder being an individual, settlers and beneficiaries of any trust of which such individual or any of his family interests is a beneficiary or a discretionary object, and any companies controlled by any such trust;
  
• In relation to a substantial shareholder being a company, the ultimate beneficial owners who control 30% or more of the voting power at general meetings or control the composition of a majority of the board of directors of such company. Where the ultimate shareholders are corporations, this will also include the ultimate individual beneficial owners who control more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors of such corporations;
  
• Persons with controlling interests in companies that are controlled by a director, chief executive or substantial shareholder and other companies controlled by these persons; and
  
• Any company whose directors are accustomed to act in accordance with the directions and instructions of a substantial shareholder (being a company) of the issuer.

 

PART C: Directors and Board Practices

 

Independent Non-Executive Directors ("INEDs")
Q82. Disagree. The APAC recognizes the difficulty many companies have experienced in finding independent non-executive directors. Nonetheless, the Committee believes that the ownership by an INED should be 0% (zero) because the insignificance of such a restricted amount reduces the likelihood that the person's holdings would influence his or her duties on behalf of shareholders. Furthermore, the Committee believes that for INEDs to retain their independence, they should not rely upon the compensation earned from their directorships as a primary source of income, nor should they have significant influence on the persons who manage the company.

 

A few committee members expressed the concern that implementing a zero-ownership rule might cause practical difficulties, such as affecting the ability to recruit qualified INEDs to serve as directors. To overcome that difficulty, they suggested permitting a small direct or indirect ownership percentage, either through a mutual fund or investment trust, would be acceptable for a brief period after the director is approved.

 

Q83. Disagree. The committee believes that for the INED to be independent the limit of issued shares and share ownership in the company should be zero. Nonetheless, a few committee members recognize the need to start with minimum shareholding for the practical reasons discussed in Q82.

 

Q84. Disagree. The committee believes that the restriction period should be 5 years for an INED who previously served as a professional adviser, controlling shareholder, director or chief executive of the issuer.

 

Q88. Disagree. We disagree and believe that the INED should not have been connected to a director, chief executive, or substantial shareholder of the issuer within the preceding 5 years.

 

Q89. Disagree. We disagree and believe that those who are currently executives of the issuer, former directors of the issuer or members of the issuer's group or its connected persons cannot serve as INEDs for a period of five years after leaving those positions, and then only under the restrictions described in Q82, Q84 and Q88.

 

Minimum Number Of INEDs
Q94. 12 Months. We believe that the transition period to achieve one-third representation should be accomplished in 12 months.

 

Board Practices
Code of Best Practices
Q100. Disagree. We disagree and believe that compliance with the Code of Best Practice should be mandatory and, furthermore, that issuers who deviate from the Code should be required to disclose any deviation in their reports on corporate governance in their annual reports.

 

Remuneration committee
Q110. Agree. We agree with the proposal to recommend establishing a remuneration committee only comprising INEDs; however, we believe this should be a mandatory requirement.

 

Directors' Duties And Responsibilities
Internal controls
Q121. Agree. We agree that directors of issuers should regularly conduct a review of the effectiveness of the group's system of internal controls. We believe that this should be mandatory.

 

Securities Transactions By Directors
"Black out" period of directors' securities transactions
Q133. Disagree. We disagree with the proposed amendment limiting the "black out" period to 2 weeks immediately preceding the earlier of the date of the board meeting approving the quarterly results and the deadline of publication of the results announcement. We believe that in the interest of harmonization with other global markets, particularly as it relates to cross-listings, we support the "black out" period as defined in the UK Listing Rules. Furthermore, in the absence of a restriction on short-term trading of the issuers' stock, we believe the "black out" period should be as long as the directors possess information that is not readily available to the public.

 

PART D: Corporate Reporting and Disclosure Information 

 

Quarterly Reporting
Quarterly reports
Q144. Disagree. We believe that the Rules should require those items outlined in Appendix 1 of the consultation paper. However, we also believe that the Rules should require issuers to include the items listed in A (3) - statement of changes in equity, with comparative figures for the comparable year-to-date period of the immediately preceding financial year - and A (4) - requiring compliance with the principles of recognition and measurement as prescribed in SSAP 25 and IAS 34, where appropriate. Furthermore, companies should be required to provide a statement of cash flows.

 

We believe that the financial statements should disclose information that is directly comparable with those of company filings under other jurisdictions. Comparability of financial statements is one of the components that supports an efficient market.

 

Quarterly results announcements
Q149. Agree. We agree with the proposal that quarterly results announcements should contain the information set out in the relevant sections of Appendix I. Please refer to our comments about the contents of the minimum requirement in Q144 above.

 

Half-Year Reporting
Half-year reports
Q151. Agree. We agree with the proposal to permit issuers to distribute summary half-year reports with the information set out in Appendix II to the consultation paper. We also urge the HKEx to require statements of changes in equity, together with comparative figures for the comparable year-to-date period of the immediately preceding financial years and a statement of cash flows, as outlined in Q144 above.

 

Q152. Agree. We agree with the proposal that the summary half-year reports should contain, as a minimum, the information set out in Appendix II to this consultation paper and also should require the additional information outlined in Q151 and Q144 above.

 

Q153. Agree. We agree with the proposal that issuers be required to publish their half-year results and dispatch these reports within 2 months of the relevant period end. In the interest of harmonization with other global capital markets, the Securities and Exchange Commission has currently proposed earlier filing deadlines for both quarterly and year-end financial statements and other related disclosure documents. The committee would support a similar requirement for earlier disclosure of information for the benefit of shareholders and investors.

 

Half-year results announcements
Q154. Agree. We agree with the proposed amendment requiring issuers to disclose in their half-year results announcements the same information, in principle, as is disclosed in a summary half-year report.

 

Full-Year Reporting
Annual reports
Q160. Disagree. We believe that the annual results announcement should be in detail and not a summary report. A statement of cash flows and a statement of changes in equity should be added to the items noted in Appendix V.

 

Closing Remarks

 

The APAC appreciates the opportunity to express their views on the HKEx consultation paper on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues. If you or your staff have questions or seek amplification of our views, please feel free to contact Nazir S. Rahemtulla by phone at 434.951.5337 or by e-mail at nazir.rahemtulla@cfainstitute.org.

 

Dr. Aaron Low, CFA Chair, Asia Pacific Advocacy Committee	Linda Csellak, CFA Chair, Subcommittee
Nazir S. Rahemtulla, CFA Associate, Professional Standards & Advocacy, AIMR

 

¹ With headquarters in Charlottesville, VA, and regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional organization of 58,000 financial analysts, portfolio managers, and other investment professionals in 107 countries of which 44,800 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 106 affiliated societies and chapters in 29 countries. AIMR is internationally renowned for its rigorous CFA curriculum and examination program, which has more than 100,000 candidates from 143 nations enrolled for the June 2002 exam.