Corporate misgovernance causes epidemic of damage to economy (7

							                                            Press Release



            Corporate misgovernance causes epidemic of damage to economy
                                 Friday, November 7



The Government, regulators, directors, shareholders and professional advisers all have an important
role to play in promoting healthy market development, the Permanent Secretary for Financial
Services and the Treasury (Financial Services), Mr Tony Miller, told a group of students at an
economic forum at the City University.


"Just as a disease not dealt with can become an epidemic, so corporate misgovernance left
unattended can cause great damage to an economy," he said.


Speaking on the theme "Strengthening the HK Economy: Role of Corporate Governance", Mr
Miller said, "With the experience of the SARS crisis fresh in our memories, it seems a good
opportunity to remind ourselves about another disease, 'Enronitis'. There are many parallels: both
have an immediate effect on individuals as well as a wider psychological community effect, and
they excite a global reaction. Also the lessons are too easily forgotten."


Citing the Enron case, Mr Miller said the damage was not confined to the corporation that failed, as
its impact had spilled over to other corporations and the market as a whole.


"It rippled through the whole market place because this spate of high-profile corporate failures
undermined investor confidence domestically and overseas. The result of such scandals is an
increase in the cost of raising capital for other firms, as investors begin to charge a higher risk
premium," he added.


Mr Miller noted that increasing globalisation of financial markets means that markets of all
countries are becoming more interdependent. This brings with it certain consequences: firstly,
resources can be allocated and rapidly reallocated cross international boundaries, as investors are
looking for decent investment returns; secondly, we are constantly benchmarked against global
standards and global performance, thus capital could flow out if our market muddies its reputation;
and thirdly, measures taken by others to protect themselves can have a negative impact on us.


Thus governments the world over have been compelled to level the playing field by legislating
greater corporate transparency as the price paid for the privilege of raising money in the market
place, he said.
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"However, when we talk about 'Corporate Governance' we move immediately beyond legislation
and into the less well-defined, more subjective areas of responsible behaviour and best practice. We
move out of the area of enforceable law and into the area of ethics," Mr Miller said.


He stressed that the Government and regulators, directors, professional advisers, the media as well
as shareholders all have a role to play in promoting an ethic of good corporate governance.


"As an international financial centre, we have to keep a watchful eye on overseas developments and
make sure our regulatory regime is on par with international standards. Government cannot simply
let things drift, it has a clear responsibility for driving reforms," he said.


For directors, Mr Miller said, "They are a company's soul and the Chinese saying, "Water can carry
a boat; it can also sink a boat" applies. They have to understand the nature of the trust shareholders
place in them and not for one moment absolve themselves of the fiduciary duties which flow from
it."


He believed that independent non-executive directors played a pivotal role in overseeing the
internal control and financial reporting systems of issuers, and providing checks and balances over
the board's decision-making on significant transactions.


For professional advisers, Mr Miller said their privileged position carries with it special
responsibilities. He said that under a tradition of self-regulation, the professions had to demonstrate
their ability to monitor adherence of their members to professional and ethical standards. Any
self-regulatory regime has to be effective, transparent and accountable.


Noting that free flow of information through the media has been vital to both our own healthy
market development and the confidence of overseas investors in our market, Mr Miller said, "The
media also has a particular responsibility for the fairness and accuracy of the information and the
assessments it publishes."


Mr Miller said shareholders, as owners of companies, should have a legitimate interest in how their
company behaves; and legitimate rights in expressing their views. "Empowering them and
facilitating their exercise of their rights are indispensable elements of ensuring good corporate
governance," he said.


Mr Miller said in view of the multitude of players involved in corporate governance, the


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Government, together with the Securities and Futures Commission and the Hong Kong Exchange
had earlier this year drawn up a Corporate Governance Action Plan to identify priority areas, assign
ownership and devise a time frame for implementation of various corporate governance measures.
He also briefly took the audience through the progress that had been achieved so far.


"In conclusion, corporate governance, by definition, should not and cannot solely be a matter for
the government and regulators. No matter how comprehensive the rules and regulations are,
ultimately they are only as good as those who implement them. Directors, shareholders and
professional advisers all have an important role to play in the corporate governance regime," Mr
Miller said.


He urged the young audience to continue to take an active interest in promoting and nurturing a
culture of healthy corporate governance.




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