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Report on implementation of Code on Corporate Governance Practices

Regulatory
30 Mar 2007

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), today (Friday) published a report on the findings from its review of the corporate governance practices disclosed in listed issuers’ 2005 annual reports. The report is available under the Listing Matters and Listed Companies section of the HKEx website.

The review, which covered 621 issuers’ annual reports (515 from Main Board issuers; 106 from Growth Enterprise Market, or GEM, issuers), was aimed at determining how effectively the new Code on Corporate Governance Practices (the Code) is being implemented.

The Code became effective, with one exception, for accounting periods commencing on or after 1 January 2005. The exception, the code provision on internal controls, became effective for accounting periods commencing on or after 1 July 2005.

The Code includes two levels of recommendations: 1) code provisions; and 2) recommended best practices. Code provisions are not mandatory but issuers must disclose in their interim and annual reports whether they have complied with each code provision; where issuers deviate from a code provision, the issuer must give reasons for the deviation.  The recommended best practices are for guidance only ie issuers are encouraged, but not required, to state whether they have complied and give reasons for any deviation.

The review’s findings included the following:

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All 621 issuers met the requirement to comply or explain ie all issuers either said in their annual reports that they had complied with the code provisions or explained their deviation from one or more code provisions;
Nearly 90 per cent of the issuers complied with at least 41 of the 44 code provisions; and
Larger issuers complied with more code provisions than smaller issuers (based on market capitalisation).

“The ‘comply or explain’ approach strikes a balance between highly structured corporate governance regulations and the flexibility that allows issuers a free hand to explain their reasons for adopting, or not adopting, certain corporate governance practices,” said Richard Williams, HKEx’s Head of Listing.  “Non-compliance must be disclosed and the issuer is required to give considered reasons for deviations.  Investors can then decide whether an issuer’s corporate governance practices are consistent with their expectations” Mr Williams added.  “Failure to make the necessary disclosures is a breach of the Listing Rules and subject to sanctions.

“The Code and the significant Listing Rule amendments made in 2004 are achieving the intended objective,” Mr Williams continued.  “Corporate governance standards have been raised, directors are increasingly identifying and acknowledging any shortcomings in their corporate systems and procedures, and shortcomings are being addressed.”

Updated 30 Mar 2007