*******************************************************
Following is a question by the Hon Sin Chung-kai and an oral reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (May 24):
Question:
At the end of last month, the Financial Secretary appointed three persons to the Board of Directors of the Hong Kong Exchanges and Clearing Limited (HKEx). One of them, who was also a non-executive director (NED) of eight listed companies, was subsequently appointed Chairman by the Board, and the appointment has been approved by the Chief Executive (CE). About the prevention of conflict of interest of HKEx Board members, will the Government inform this Council:
(a) whether it will ask the proposed candidates about their offices in other listed companies and the relevant details before appointing them to the Board of HKEx; and whether it has ever asked such candidates to resign from their offices in the listed companies concerned first in order to avoid conflict of interest;
(b) whether CE had, before approving the appointment of the incumbent Chairman of HKEx, considered the fact that he was a NED of eight listed companies; if this fact had been considered, why he still approved the appointment; if not, of the reasons; and
(c) whether it has assessed if there is any conflict of identity or interest in the situation that a person is concurrently a member of the Board of HKEx, which has the functions to regulate listed companies, and a NED of listed companies; and of the provisions under the existing legislation, Listing Rules and HKEx's Memorandum and Articles of Association which ensure that members of the Board of HKEx shall avoid conflict of interest and exercise due impartiality when dealing with matters involving the listed companies of which they are NEDs?
Reply:
Madam President,
(a) The Board of Directors of the Hong Kong Exchange and Clearing Limited (the Exchange) comprises 13 members. These include six directors elected by the Exchange's shareholders, six directors appointed by the Financial Secretary (FS), and the Chief Executive of the Exchange.
Section 77 of the Securities and Futures Ordinance (SFO), together with the Exchange's Articles of Association, empowers the Financial Secretary to appoint not more than six persons to be members of the Board of Directors of the Exchange where the Financial Secretary is satisfied that it is appropriate to do so in the interest of the investing public or in the public interest.
Our policy is to appoint the best available persons to serve on the Board of the Exchange. Each appointment is made on the basis of the merit of the individual concerned, taking into account the candidate's expertise and experience in the financial market, and his or her integrity and commitment to serve the public. All the Exchange directors, including those appointed by the FS and those elected by HKEx's shareholders, are not statute-barred from being non-executive directors (NEDs) of other companies. There are well established checks and balances adopted by the Exchange Board to deal with any conflict of interests. In general, appointment as NEDs of other companies is not a major factor for consideration in identifying suitable candidates for serving as the directors of the Exchange.
(b) The power to appoint the chairman rests with the Exchange Board. Under section 69(1) of the SFO, the Government may approve the appointment made by the Exchange Board.
As stated in our reply to (a) above, all the Exchange directors including the Chairman, be they appointed by FS or elected, are not statute-barred from being the NEDs of other companies. In view of the comprehensive checks and balances on the Exchange Board and the members of the Board to address any real or perceived conflict of interests. Therefore, there is no cogent reason for any party to require the chairman or any director of the Exchange to resign from the posts as NEDs of other listed companies.
(c) There are comprehensive checks and balances on members of the Exchange Board to address any real or perceived conflict of interests. At the board level, such checks and balances include -
* Statutory provision: Section 63 of the SFO provides for the statutory obligations of the Exchange directors to act in the interest of the public having regard to the interest of the investing public, and to ensure that the interest of the public prevails where it conflicts with the interests of the Exchange. The directors of HKEx also owe fiduciary duties to the company. The fiduciary duties are: to act bona fide for the benefit of the company; to exercise their powers for their proper purpose; and not to allow any conflict between their duties as directors and their personal interests.
* The Exchange's Listing Rules: The Exchange has arranged for all of its powers and functions in respect of all listing matters including listing disciplinary matters to be discharged by the Listing Committee. The Listing Committee which is responsible for approving listing applications and disciplinary matters is independent from the Exchange Board. The Board is responsible for matters that have commercial and operational implications on the Exchange and is not involved in decisions relating to listing matters.
* Regulation by Securities and Futures Commission (SFC): The Exchange is subject to SFC's regulatory oversight.
As for individual Exchange directors, they are subject to the checks and balances set out in the Exchange's Director's Handbook. The Handbook sets out, among others, the guidelines to deal with potential conflict of interests on the part of the Exchange directors, including the Chairman. The guidelines include, among other things, the declaration of conflict of interests of the Exchange Chairman to the Exchange Board. If necessary, the Board may require the individual to withdraw from the Board meeting. The Chairman who fails to make the declaration of conflict of interests to the Board shall be liable to account to the Exchange for any profit made or benefit received from the failure. The Exchange's 2005 Annual Report provides detailed information on its practices for managing conflict of interests of directors.
The Exchange directors, including the Chairman, are defined as "public servants" for the purpose of section 4 of the Prevention of the Bribery Ordinance which deals with solicitation or acceptance of advantage, and are hence subject to the relevant statutory provisions.
As demonstrated by the above, a number of checks and balances have been built into the system to ensure that the Exchange directors act in accordance with the interest of the public, including those of the investing public. Appointment to the Board, whether by Government appointment or shareholders' election, is a heavy commitment. All directors of the Exchange Board are required to execute and deliver to the SFC a Declaration and Undertaking With Regard to Directors that they will, among others, comply to the best of their ability with the SFO.
Thank you, Madam President.
Ends/Wednesday, May 24, 2006
Issued at HKT 12:08
NNNN
