Madam President,
Ladies and Gentlemen,

I am honoured to have this opportunity to speak to you at the opening of this important conference on Corporate Governance organised by the Hong Kong Institute of Company Secretaries. Before I go on, I would like to convey the apologies of the Honourable Charles Lee, Chairman of Hong Kong Exchanges and Clearing Ltd, who cannot be here today to address you in person as he is at this moment probably touching down at Chek Lap Kok.

Introduction

I will begin my speech with some general reflections on the importance and relevance of corporate governance today. This will be followed by a description of the involvement of HKEx in the corporate governance of listed companies, and the role corporate governance plays in the overall regulatory regime, as well as in the development of Hong Kong as a global securities market.

We live in a world today where globalization has become a major driver of change, with the economies of nations and regions becoming increasingly inter-dependent and inter-twined. Investment flows, fueled by the explosive advance in communication technology, have transcended national borders, seeking new opportunities wherever they are. As a result, companies, particularly listed companies, are experiencing increasing interest from global investors in their performance and how their business behaviour is governed. Cross-continent mergers and acquisition of companies have become commonplace, and the trading of stocks of many companies have assumed an international dimension.

In this environment, corporate governance and transparency is becoming an increasingly important and topical issue in investment decisions and investor protection. Governments and professionals around the world have recognized that greater corporate transparency is vital to national economic welfare, sound investment activities, and the maintenance of a stable global economic environment.

Hong Kong Exchanges and Clearing Ltd

As a major securities market with a global orientation, Hong Kong has continually addressed the needs of the market and the introduction of measures for good corporate governance. Emphasis and reliance on corporate governance have formed a cornerstone of our regulatory philosophy.

The primary mission of HKEx is to ensure an orderly and fair market. It aims to oversee that risks are managed prudently and that affairs of listed companies are conducted with transparency consistent with the interests of the investing public. Prior to 1987, Hong Kong may be described as operating a merit-based regulatory regime. However, in line with emerging world trends in recent years, the principal regulatory mechanism in Hong Kong has gradually moved towards a disclosure-based system. Under this regime, investors' interests will be protected through the public availability of timely, fair and detailed information in the forming of their investment decisions. The rationale behind the disclosure based regime is that the investing public should be entitled to access company information that may affect their investments in a timely manner. Corporate governance therefore contributes to the establishment of an efficient securities market and enhances the protection for investors by ensuring that corporations observe an equitable and fair standard of behaviour, and that relevant and timely information is available to the public to make informed investment decisions.

With globalization, and increasing cross border trades and investment, corporate governance has also assumed international significance. Institutional and world investors are increasingly insisting on high standards of corporate governance and business practice in enterprises in which they invest. Companies must respond to these demands in order to attract investor interest and enhance their ability to raise capital.

The Exchange's Initiatives

The Stock Exchange of Hong Kong, a wholly owned subsidiary of HKEx, has undertaken many initiatives to develop standards of corporate governance. The rules and guidelines issued have assisted in raising the status of listed companies in Hong Kong. Let me give some examples of these initiatives.

Main Board

In the Main Board, the exchange's effort to promote corporate governance culminated in the introduction of regulations governing conflict of interests between connected parties and the company in 1992. This addressed a unique feature of Hong Kong companies, that is the rather common phenomenon of substantial control by family shareholders.

To reflect the influence of directors of listed companies and to highlight their responsibilities, a Code of Best Practice was established in 1993 to enhance the accountability of directors to shareholders. Guidelines on the qualifications and roles of independent non-executive directors were also promulgated, in 1994.

To strengthen the observance of this Code of Best Practice, listed companies are required to include a statement in their interim and annual reports on compliance with the Code as well as information on the work of their audit committees. These provisions bring increased transparency, and enable the Exchange to ensure greater accountability of listed companies to the investing public.

In considering corporate governance issues and formulating measures, the Exchange has always taken into account the realities and expectations of the market. Guidelines were devised with a practical perspective, thus ensuring that they are realistic and achievable and would bring real benefit to investors. This prudent and pragmatic approach is inherent in the Exchange's development of rules and practices in the pursuit of good corporate governance.

GEM

A prime example of the Exchange's efforts to devise practical guidelines to respond to the special needs of a particular market, can be found in the corporate governance guidelines designed for the Growth Enterprise Market or GEM before its launch in end-1999.

GEM is an important market for the raising of capital for the development of growth enterprises, with innovative business models and growth potential. These new start ups form an important part of the new economy and are the engine spearheading economic growth in the new century. GEM was created to facilitate the development of this new economic sector by providing a means for the listing of growth companies. The establishment of GEM also brought into focus associated corporate governance issues reflecting the special needs of this market.

Due to the "high growth" and "high risk" profile of new innovative ventures, the GEM was designed primarily for informed investors, and works on the basis of caveat emptor or buyers beware. To respond to the "let the market decide" philosophy, a greater degree of disclosure was required by GEM as a means of good corporate governance. It was recognized that, in order to attract investors and ensure the success and competitiveness of GEM-listed companies, investors should be given added protection in the light of the increased risks involved.

The GEM Listing Rules, in addition to mandating quarterly financial reporting, require a listed company to have adequate and effective systems of internal control covering financial and compliance requirements. In particular, they are required to have:

• an executive director designated as the compliance officer;

• a qualified accountant to supervise the accounting and financial reporting procedures and internal control; and

• an audit committee to be chaired by an independent non-executive director.

These provisions serve to create greater transparency in the market and ensure that directors are accountable to the company and its shareholders.

Conclusion

I have outlined above some examples of the initiatives taken by HKEx to promote corporate governance. I would like to conclude by making some observations.

I believe that corporate governance will become an issue of growing importance in the future for several reasons:

• first, a trend is emerging in many world markets, that corporate governance and disclosure standards will become more important and increasingly as the primary means for regulating the securities markets;

• second, globalization and the globalized trading of securities in integrated or linked trading systems will become inevitable and could materialize within the next decade. This has important implications for corporate governance, and highlights the need for unifying or harmonizing the diverse regulatory and disclosure standards for listed companies among different jurisdictions. Many influential international bodies are currently engaged in the study of this problem, including the promotion and implementation of international accounting standards and practices across the world. Convergence of national corporate governance and disclosure standards around the world will bring many positive benefits to the economy including that of Hong Kong. Uniform disclosure rules will greatly facilitate the mutual recognition of listing requirements between markets, and help the advancement of Hong Kong as a global market for the trading of international securities. The development of harmonized corporate governance and disclosure standards will greatly simplify and assist company operations across different jurisdictions; and

• third, high corporate finance standards will create greater wealth for both companies and society as a whole. The price of a company's shares as well as the cost of its capital in the secondary market, are affected by investor interest and their perception of the quality of its corporate governance. International investors supported by informed professional analysts, are increasingly focusing on standards of management and corporate governance. Companies with a consistent record of good governance will find it easier to raise capital on more competitive terms, let alone the enhancement of the value of their shares.

To conclude, corporate governance is not only an effective means of investor protection, but also carries wide implications for the operations and fund raising ability of companies themselves, the development of globalized trading of securities, as well as the world economy as a whole. I hope that we can all work together to raise the standards of corporate governance to enhance the status of our companies in the globalized economy, as well as the attractiveness and competitiveness of Hong Kong as an international securities market and financial centre.

Thank you.

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