Corporate governance is the foundation of our capital market and one of the key elements in maintaining investor confidence. Markets with good corporate governance standards attract quality issuers to come and to raise capital, and that companies with good corporate governance standards attract investors.

Hong Kong's success as an international financial centre to a considerable extent hinges on the concerted efforts we have made in the past to enhance our corporate governance regime. Corporate governance has always been high on my policy agenda. How important is corporate governance to Hong Kong? It is so important that I broke off my vacation leave to participate in this important conference.

Hong Kong is widely recognised as both an international financial centre as well as a premier capital formation centre for the Mainland, which is one of the fast-growing major economies in the world. Our stock market is one of the world's top 10 stock markets, with a market capitalisation of over $7.2 trillion as at the end of July 2005.

Since the introduction of H-shares in 1993, Mainland enterprises have raised over $970 billion in Hong Kong. As at the end of June 2005, 311 Mainland enterprises with a total market capitalisation of about $2.2 trillion have been listed here. In June 2005 alone, the newly-listed companies, including three Mainland mega-enterprises, raised over $53 billion - a record monthly figure.

Why have so many enterprises sought listing in Hong Kong? A key factor is that investors have confidence in the quality of our market, and are willing to invest in the enterprises listed here. This, in turn, attracts quality enterprises to come to raise capital.

In fact, 35% to 40% of the total trading volume of our markets in the past three years came from overseas investors, including well-established large-scale international institutional investors which have profound knowledge in the regulatory systems and standards of different major financial markets and a lot of expertise in analyzing and assessing the quality and potential of listed corporations.

The fact that these investors actively participate in our financial markets is testimony to our robust regulatory regime and good corporate governance standard.

In recognition of the importance of good corporate governance, considerable efforts have been devoted by various parties in the past few years to ensure that our corporate governance regime is on a par with the best international practices.

In 2003, I, together with our market regulators, the Securities & Futures Commission and the Hong Kong Exchanges & Clearing Limited, drew up an action plan to identify priority areas, assign ownership and devise a timeframe for implementation.

As a result of the collective and concerted efforts made by relevant stakeholders including directors, company executives, auditors, Government and regulators, shareholders, professional bodies, the academia and the business community at large, Hong Kong now has:

* an enhanced corporate governance regulatory regime;

* an investing public with greater awareness of the benefits of corporate governance; and

* a pool of directors, accountants and company secretaries dedicated to improving corporate governance.

Hong Kong's progress on the corporate governance front is well recognised by bodies such as the International Monetary Fund, which in its 2004 report, commended Hong Kong for its corporate governance improvements. 

The action plan helps to promote Hong Kong's corporate governance under the "three Es", namely:

* enhancing the regulatory regime;

* equipping directors; and

* empowering shareholders.

Our major task under the first "E" is to enhance our regulatory regime to underpin the corporate governance culture and to act as the gatekeeper in maintaining a fair and orderly market. On this front, the Securities & Futures Ordinance has been rolled out to modernise our securities regulations and move us firmly into a disclosure-based regime. It renders the filing and disclosure of false or misleading listing documents and materials a criminal offence.

As most, if not all, of you here will agree, transparency is an essential ingredient of good corporate governance. Besides, the SFO provides the SFC with enhanced powers to obtain explanations and documents from persons relating to listed companies, such as banks, auditors and transaction counterparts. All these have enabled the SFC to combat corporate misconduct more effectively, and provide a level playing field among market participants.

Auditors play a watchdog function by ensuring that the financial accounts give a "true and fair" view of a company and alerting the investing public to any irregularities therein. It is thus of great importance to maintain a proper public oversight of the accounting profession. The Professional Accountants (Amendment) Ordinance 2004 was enacted to provide for the opening up of the governance body and disciplinary system of the Hong Kong Institute of Certified Public Accountants, the regulatory body of the profession in Hong Kong.

More lay persons have been appointed to the Council as well as the Investigation and Disciplinary Panels of the Institute to enhance their independence and transparency in operation.

Good corporate governance starts from the boardroom of a company. Directors are responsible for overseeing the affairs and activities of a company and thus should be equipped to discharge their duties diligently and responsibly. The Standing Committee on Company Law Reform, our adviser on company-law matters, has drawn up a set of Guidelines of Directors' Duties to enhance the awareness of directors' obligations.

The Guidelines set out the general principles of directors' duties, including acting in good faith for the company's benefit; exercising care, skill and diligence; and avoiding conflict of interests.

In parallel with the Committee's efforts, our Listing Rules have also been amended to introduce improvement measures, such as an increase in the minimum number of independent non-executive directors from two to three, with at least one having appropriate professional qualifications or accounting or related financial management expertise.

Shareholders, by definition, are owners of their company. They have legitimate rights to say how the company should be run. Schedule 3 to the Companies (Amendment) Ordinance 2004 has become operative in July 2005 to provide an avenue for shareholders to take statutory derivative action on behalf of a company against, say, directors or management on expropriation or other wrongs done.

The court is also now given power to award damages to shareholders whose interests have been unfairly prejudiced. All these new measures aim to empower investors in exercising their rights over company affairs, and thus afford them better protection.

Of course, there is no room for complacency and, in this fast-developing world, we must continue to be vigilant of new challenges and keep up our improvement efforts. Building on the past achievements, we will pursue various corporate governance initiatives through a three-C approach - strengthening compliance, promoting corporate governance culture and enhancing collaboration.

With a view to strengthening compliance, we will continue with our efforts to enhance the regulatory framework. We are spearheading two important legislative amendment exercises.

Firstly, we aim to give statutory backing to major listing requirements such as disclosure of price-sensitive information, financial reporting and other periodic disclosure, and shareholders' approval for certain notifiable transactions. These legislative amendments, when enacted, will further enhance the standard of corporate disclosure in Hong Kong.

Secondly, we aim to establish the Financial Reporting Council to investigate auditors' irregularities concerning listed corporations, and to enquire into any non-compliance concerning financial reports of such listed entities. The relevant legislative proposals are now being scrutinised by our Legislature.

Let us face it: We cannot legislate ethics. While a robust legal and regulatory framework is important, very often it is the people who determine success or failure. Good value-based corporate governance requires strong commitment of the stakeholders. This is the next C, "culture".

Various stakeholders will continue with their work on various fronts, such as investor education; professional development programs and code of conduct for the professionals, engagement of corporate governance leaders and institutional investors; promotion of research into corporate governance and so on, to foster the corporate governance culture in the community.

The success of building up good corporate governance culture and achieving satisfactory compliance hinges very much on the concerted efforts of relevant stakeholders including regulatory authorities, enforcement agencies, professional bodies, business organisations, academia and research organisations.

The action plan collectively drawn up by the Government, SFC and HKEx is a vivid example of collaboration, and I can assure you that these collaboration efforts, in spirit and in action, will continue on the corporate governance front.

In parallel with the developments in Hong Kong, we are aware that our counterparts in other parts of this region are also making a lot of efforts to improve corporate governance in their jurisdictions. I understand that Japan has introduced some legal reforms to enhance the external monitoring of its corporations such as strengthening the independence of auditors.

Other examples include the newly operative legislation in South Korea to provide for class-action lawsuits against listed companies; and the requirement imposed in Malaysia to make directors' training mandatory. All these speak for the importance that has been accorded to corporate governance in various parts of the Asia Pacific region.

We note that, from time to time, attempts have been made by some organisations to compare the standards of corporate governance across different jurisdictions in the region by way of certain quantifiable indicators. However, I want to point out that corporate governance is more than purely a "box-ticking" exercise. Therefore, when we come to "corporate governance benchmarking", the difficulties lie in how we can measure accurately both the outward conformance and the performance within.

So, corporate governance survey findings would need to be read in a proper context, particularly the methodologies and assumptions. In any event, the vote of confidence cast by market players and investors in our markets, as illustrated by the number of companies listed and the capital raised, is perhaps a much better reflection of the corporate governance situation in Hong Kong.

The Government's policy direction is clear - we must maintain our market quality and continue to enhance our corporate governance. Our statutory and frontline regulators are determined to fulfill its gate-keeping role and will not compromise quality for quantity. In fact, we understand that the relevant authorities in the Mainland also encourage the Mainland enterprises to seek listing in Hong Kong as a means to enhance their corporate governance.

To maintain and further strengthen our position as an international financial centre and the premier capital formation centre for the Mainland, we will spare no efforts in continuing to upgrade our corporate governance standards so as to demonstrate to the local and international investors our commitment to enhance market quality.

Secretary for Financial Services & the Treasury Frederick Ma gave this address at the Asia-Pacific Corporate Governance Conference.