Hong Kong May Force Unveiling Of Directors' Pay

by Mary Swire, Tax-News.com, Hong Kong

23 January 2002

A consultation document issued yesterday by Hong Kong Exchanges and Clearing aimed at giving small investors better protection includes rules to oblige companies to reveal how much each director earns.

Companies may also have to set up remuneration committees to supervise and approve the amounts boardroom members pay themselves. The proposals will also require companies to obtain shareholder approval in granting contracts of more than three years to directors. Such sweeping changes would bring Hong Kong into line with other major international markets, which have stricter rules concerning directors' pay.

Under current stock exchange rules, listed companies must detail the pay of directors in bands of $500,000 but need not identify recipients. For example, the last annual report from Li Ka-shing's Hutchison Whampoa revealed its highest-paid director earned between $120 million and $120.5 million in 2000.

It did not name the director but it was widely believed to be Canning Fok Kin-ning, group managing director. The report also disclosed the pay of the 16 other directors, but only in bands and without individual details.

"We would mandatorily require the companies to give full details of the directors' remuneration in a bid to increase market transparency," said Kwong Ki-chi, chief executive of Hong Kong Exchanges and Clearing.

The consultation paper is divided into 3 main sections: (1) protection of shareholders’ rights; (2) directors and board practices; and (3) corporate reporting and disclosure of information.

Protection of shareholders’ rights

The Rules adopts the general principle that all shareholders have the same right to vote as long as they do not have different interest from other shareholders i.e. their interest is solely by virtue of a shareholding in the issuer concerned. The exceptions are in areas which have material impact on the listed group and there were significant previous cases of abuse of minority interest. Given that the majority of the board of directors of issuers in Hong Kong is dominated by controlling or majority shareholders, one of the main objectives of our proposals is to ensure protection of shareholders’ rights. The Exchange looks at the issue of protection of shareholders’ rights from the perspective of voting process, dilution impact, nature of transactions and significance of value of transactions.

The principal proposals relating to Protection of Shareholders’ Rights are:

to require voting by poll for connected transactions and all resolutions requiring independent shareholders’ approval (i.e. where controlling shareholders are required to abstain from voting);
to require issuers to satisfy the Exchange that they are in severe financial difficulties or that there are other exceptional circumstances if they wish to issue shares under a general mandate and the placing price or the subscription price under the top-up arrangements represents a discount of 20% or more to the benchmarked price set out in the consultation paper;
to require shareholders’ approval for a placing and top-up arrangement unless the number of new securities subscribed by a connected person does not exceed the number of securities he had before placing of securities to an independent third party;
to amend the definitions of “very substantial acquisition” and “reverse takeover” and the respective shareholders’ approval requirements;
to introduce a new type of transaction, namely “very substantial disposals”;
to replace the “net assets test” by the “total assets test” and to adopt the "turnover test" to substitute for the "profits test" when the "profits test" produces anomalous results due to exceptional circumstances;
to adjust the threshold levels for categorising notifiable transactions under all size tests and de minimis thresholds for connected transactions;
to treat any valuation of assets or businesses acquired by the issuers based on discounted cash flows or projections of profits, earnings or cash flows as a profit forecast;
to amend the GEM Rules to follow the definition of “connected person” in the Main Board Rules, which includes persons who are connected by virtue of their relationship at the subsidiary level;
to expand the definition of “connected person” under the Rules to cover any associated companies over which the listed group together with the connected person(s) of an issuer have control;
to treat transactions between connected persons of the issuer and an associated company of an issuer in which the listed group together with the connected person(s) of such issuer have control as connected transactions;
to amend the GEM Rules in relation to the annual review and shareholders’ approval requirements for continuing connected transactions, and to introduce a new category of “continuing connected transactions” to the Main Board Rules; and
to expand the definition of “subsidiary” under the Rules to include any entity which is accounted in the audited consolidated accounts of an issuer as a subsidiary under applicable accounting principles under SSAP 32 or IAS 27.
Directors and board practices

Board practice is an important aspect of good corporate governance. To ensure that issuers in Hong Kong achieve a minimum standard of good board practices, the Exchange proposes to set out the minimum standard it would recommend all issuers to meet in the Code of Best Practice. Issuers will be required to disclose their own codes of board practice in their annual reports and to explain any deviation of their own codes from the minimum standard in the Code of Best Practice. The Exchange also proposes to amend the Rules to strengthen the role of independent non-executive directors and to enable them to contribute their independent view and perform their functions more effectively in the issuers' decision making process.

The principal proposals relating to Directors and Board Practices are:

to introduce further guidance regarding independence of independent non-executive directors (“INEDs”);
to require issuers to appoint INEDs representing no less than one-third of the members of their boards and not less than 2 in any event;
to set out the minimum standard of board practices in the Code of Best Practice the Exchange would recommend all issuers to meet;
to require issuers to include a report on corporate governance practices in their annual reports, which contain details of their corporate governance practices and any deviation from the minimum standard in the Code of Best Practice;
to make establishment of an audit committee a mandatory requirement;
to recommend issuers to establish a remuneration committee and nomination committee;
to recommend segregation of the roles of chairman and chief executive officer as a good practice;
to recommend issuers to regularly conduct a review of the effectiveness of the group’s internal control systems;
to shorten the “black out” period of directors’ securities transactions for quarterly reporting from 1 months to 2 weeks;
to require shareholders’ approval for directors’ service contracts of more than 3 years or directors’ service contracts that require issuers to give a period of notice of more than 1 year or to pay compensation of more than 1 year’s remuneration (other than solely on account of an early termination by the issuer of a fixed term contract); and
to require issuers to disclose directors’ remuneration and compensation packages by individual director showing the name of each director and his remuneration and compensation.
Corporate reporting and disclosure of information

Enhancing the quality of information in corporate reporting and the timely disclosure of information by issuers are also essential for good corporate governance and would improve transparency of issuers’ business and operations. This would allow the public to make informed investment decision and ensure that affairs of issuers are conducted with transparency. The Exchange looks at the issue of corporate reporting and disclosure of information from the perspective of frequency of timely disclosure of financial information, and adequacy and quality of information disclosed in issuers’ documents including financial reports, announcements and circulars.

The principal proposals relating to Corporate Reporting and Disclosure of Information are:

to require Main Board issuers to publish quarterly reports and issue quarterly results announcements within 45 days after their quarter-end;
to amend the contents of the disclosure requirements for quarterly reports and results announcements of the GEM Rules, which will be the same for the Main Board Rules;
to allow issuers to distribute summary half-year reports;
to set out the contents of the disclosure requirements for summary half-year reports and amend the disclosure requirement for half-year results announcements;
to require issuers to publish their half-year results and despatch their half-year reports within 2 months of the relevant financial period end;
to require issuers to publish and despatch their annual reports within 3 months of their financial year end; and
to set out the contents of the disclosure requirements for summary financial reports and annual results announcements.
General

The Exchange has set out above only the principal proposals on the amendments to the Rules relating to corporate governance issues. Please refer to consultation paper for other proposals on amendments to the Rules aimed at enhancing corporate governance of issuers.

The consultation paper raises some issues that are potentially controversial. The Exchange expects there will be different views from various sectors of the market on the proposals in the consultation paper. It is the Exchange's objective to receive comments on the proposals from a diverse number of respondents. To facilitate this, the Exchange will provide a hotline service to respondents during the consultation period at 2840 3800 or 2830 3400 for the Exchange to respond to any queries that they may have relating to the proposals. In addition, the Exchange proposes to hold seminars for issuers to discuss the proposals set out in the consultation paper.

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