Directors beware as regulator seeks to stem misconduct | South China Morning Post
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POINT OF LAW

Directors beware as regulator seeks to stem misconduct

Alan Ewins, head of APAC Regulatory at Allen & Overy in Hong Kong, talks about corporate governance and corporate risk

PUBLISHED : Wednesday, 09 January, 2013, 12:00am
UPDATED : Wednesday, 09 January, 2013, 4:08am

Isn't corporate governance just legal mumbo-jumbo?

"Corporate governance" can sound remote from reality - consultancy-speak that is designed to confuse and frustrate.

In fact, it is an important part of the financial markets, setting out how companies should be run, not just for the benefit of shareholders but also to keep them on track under various regulations.

International financial bodies, including the Group of 20, have homed in on the fact that how companies and institutions are run is crucial to a well-managed corporate environment.

The Securities and Futures Commission (SFC) has been keen to press the message home in Hong Kong, citing the concept as one of its areas of focus for targeting wrongdoing in the markets.

There has been a range of legal and regulatory developments in recent times designed to enhance various duties of directors under the general law and to target potential areas of misconduct for listed companies and institutions.

 

So, what as a practical matter is changing or has changed for listed companies?

Listed companies will, from the beginning of this year, be required by statute (rather than only the listing rules) to publish into the market price-sensitive information affecting them and their business as soon as reasonably possible.

That is designed to level the playing field in a more immediate and forceful way than at present for all investors in the market. Failure on the part of the directors and officers to comply could open them up to personal liability.

It remains to be seen how that will dovetail with the existing market misconduct regime in relation to insider dealing, which itself remains an area enthusiastically enforced by the SFC.

Prospective new entrants into the initial public offering market will need to be more vigorously vetted by their sponsors before they are listed. The idea is principally to ensure that sponsors are more keenly aware of what is expected of them, and will have the knock-on effect of hopefully ensuring that listing applicants and their directors take utmost care in preparing their case for listing, and provide full disclosure to prospective investors.

Sponsors will potentially be made expressly liable for failings in the prospectus under the proposals. The response to the commission's consultation exercise is awaited.

Corporate law is also being updated and modernised to ensure the standards for running a Hong Kong company are more fully spelt out.

For example, the duties of directors to their company are now set in the statute law rather than relying on case law. That will probably come into effect in 2014.

 

What about for banks and brokers?

The Monetary Authority has indicated that directors and chief executives of banks may well be invited to meetings with the regulators to demonstrate that they are fit and proper holders of office, and have a firm grasp of the local regulatory environment, the bank's business and how it will operate.

In the dark world of electronic trading, algorithms and the like, again there is a consultation process under way, with an SFC response in due course to the initial reaction of industry participants and the public.

Among the range of areas of proposed enhanced regulation, there is an expressed intention on the part of the SFC to hold specified senior management responsible for the proper working of algorithms etc, which have been released into the market.

That is intended to concentrate the minds of senior executives in charge of this type of trading.

 

Is this all talk and no action by the regulators?

On top of these statutory and regulatory issues that need to be borne in mind in a focused way by senior management of banks and listed companies etc, there is a heightened enforcement risk that cannot be ignored.

This takes in the increased focus on management processes and senior management knowledge and involvement when things go wrong, and the regulators' appetite to pursue failings within corporate organisations, particularly where investor protection or shareholders' rights appear to have been violated or are threatened.

The regulators are not afraid to use whatever they can in the regulatory toolbox available to them to achieve outcomes that are intended to protect the markets and market participants.

There is currently a wide range of measures and powers available to regulators and aggrieved investors which, combined with the incoming changes and the heightened will to make use of them, provide a clear demonstration of how corporate governance should be a part of the present agenda for corporations, as part of their overall risk management systems and controls for operating in Hong Kong. All of this is designed to enhance the city's reputation as an international financial centre.

 

WRITE TO US Send your legal questions to bizpost@scmp.com.

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