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World Bank-Japan East Asia Prospects Project International Steering Committee Meeting Shanghai 28 June 2002
My thesis is very simple: the historical dual-track mercantilist model of Asian development, a globally efficient export sector with highly protected domestic agricultural and service sectors, while successful in the past, is no longer sustainable in the New Economy. The Asian models of corporate governance and financial sector strategy have to change accordingly. In the World Bank, I coined the five key factors or “P”s of financial markets. A financial market is all about People, trading financial Products across a process/Platform, under a set of Policy and Prudential framework. Now that I have had more experience in the securities markets and dealing with corporate behaviour, I like to analyze Asian financial reform issues in the four key functions of financial markets: I am grateful to Ms Lim Yam Poh for research assistance in preparing this paper, to Dr Geng Xiao and Ms Tan Gaik Looi for valuable comments and Ms Rosetta Chiu for secretarial assistance. The views expressed here are entirely the personal views of the author and not attributable to the Securities and Futures Commission, Hong Kong.
Asian Financial Reform and Corporate Governance Duality of Development
• • • •
price discovery resource allocation risk management corporate governance
The financial markets can also be broken down into seven key “I”s factors: 1. 2. 3. 4. 5. 6. 7. II. information incentives issuers intermediaries infrastructure investors; and finally, I – the regulator. Asian Policy in Financial Sector Reform
Asian policies in financial sector fundamentally and historically stemmed from its mercantilist approach to development. Given scarce resources and management skills, Asian policy makers took calculated but large bets in industrial policy, supplemented by mild financial repression to generate resources for development through an export-led growth policy, as the World Bank study on Asian Miracle demonstrated. Because Asian enterprises were initially weak, the export-led strategy selected key firms (either stateowned or politically connected families) to spearhead development in leading industries, such as iron and steel, shipbuilding and in recent years, electronic chips. These industries were fostered through a combination of direct grants, tariff protection and also cheap financing. Hence, the banking and securities sector were tightly controlled or “guided” towards backing the “winners” or priority sectors.
Asian Financial Reform and Corporate Governance Duality of Development
In North Asia, this gave rise to large industrial groups, such as Japanese keiretsus, Korean Chaebols and Chinese State-owned Enterprises (SOEs). In Southeast Asian economies, where industrial policy was not so obvious given their high natural resource base, state backing was generally for government-led companies (Singapore GLCs) or politically connected family led companies, such as Indonesia congloms. The state-enterprise nexus took different forms in different Asian economies, but by and large and to different degrees, a dual economy emerged. The export-led sectors, closest to global competitive forces, were the most efficient, with corporate governance standards to match. The more protected natural resources and services sectors were political franchises to give to favoured firms, backed by protective barriers to foreign entry. These vested interests explain largely why few of these inwardlooking firms or banks adopted international standards of corporate governance and many are still resistant to change. This basic dual nature of Asian policy thinking had huge implications on the shape of the Asian financial sector and the evolution of its corporate governance. As long as the duality exists, it will retard Asia’s migration into the New Economy. Resource Allocation Because of the export-led industrialization strategy, Asian dragons and tigers basically protected their banking systems, kept lending and deposit rates low to fund industrialization and infrastructure, without overly distorted resource allocation during the exportled phase. The result was a bank-dominated financial system. For example, Japanese households have 53% of their financial assets with the banks, compared with
Asian Financial Reform and Corporate Governance Duality of Development
11.4% for US households. Asian banking systems account for 80-140% of GDP in asset size, compared with only 60% of GDP for the US banking system. In other words, too many resources were concentrated in the banking system, and if it allocated resources inefficiently (through non-performing loans), then the high level of Asian domestic savings was actually wasted. This was exactly what happened during the Asian asset bubble. The Asian crisis economies spent as much as 50% of their GDP to resolve NPLs. In some economies, this inefficiency has neither been fully recognized nor written off. By and large, Asian policy makers did not like to encourage their domestic savers to invest abroad because this would reduce their source of cheap funds. This derived from the mercantilist policy, which can be called a “fish-trap” mentality. We like money to come in, but we do not like capital to flow out. As can be seen later, this mentality, which may not have been wrong during the early stages of development, had huge consequences for efficient resource allocation, price discovery, risk management and corporate governance. Price Discovery The dual nature of the Asian economy meant that domestic prices did not always reflect internationally competitive supply and demand conditions. While this was feasible in early stages of international trade, when transactions cost of goods, services and information were high, this cannot be sustained in a WTO and Internet world, where such transaction costs are coming down rapidly. Arbitrage in the New Economy is happening very fast, as domestic
who were basically financially and fiscally quite prudent. but Asian non-performing loans (NPLs) are between 10% to 50% of the banks’ books. Asian policy makers. Currently. As I have said elsewhere. However. led to domestic asset bubbles. many Asian banks cannot clean their NPLs through their own cash flow. but rather through NPLs. This is particularly clear in the financial system. understood that in order to keep the domestic labour force happy. interest rates and securities prices. excessively high domestic savings on top of the inflow of foreign funds when securities markets were opened up. there was protection. it is likely that the borrowers will waste their usage. in many service sectors. and this was achieved not through subsidies. but supply side efficiencies. If the cost of funds is excessively low.Asian Financial Reform and Corporate Governance Duality of Development consumers have global choice of suppliers of goods and services. Asian bank restructuring policies are currently doomed to failure if the credit risks are not priced correctly. because most of the food and consumer durables were at internationally competitive price levels. but such inefficiencies did not show up in the CPI. Clearly. particularly where there was rigidity in local planning and land use laws. Excessive liquidity did not lead to high inflation in consumer prices. Because of the “fish trap” mentality. Asian banking spreads [lending rate minus deposit rate and administrative costs before bad debt provision] are between 1. Property 35 . you needed to keep key consumer supply prices stable.5% to 2%. as can be demonstrated from two sets of Asian prices.
or by institutions that are within industry groups. In essence. insurance companies and pension funds. the majority shareholders retain their control without seceding power to minority shareholders. Moreover. First. the float in public hands tends to be low. Asian banking system suffers from inherent moral hazard. either because it is held by families. Similarly.Asian Financial Reform and Corporate Governance Duality of Development developers found that they could borrow very longterm funds at cheap rates. with a dominant banking system. such as affiliated companies. since the banks have low capital adequacy ratio. 36 . the larger the bubble. institutions. In Japan. high PE ratios would insulate the Asian corporations from being raided by foreign multinationals cheaply. hold the bulk of equity so that these cross-holdings ensure that control is kept within the same “keiretsu” or conglomerate. too many risks are absorbed in the banks. leading to a self-fulfilling asset bubble. The more the banks were willing to lend for property. Asian companies tend to be much higher leveraged than their US or European competitors. Asian PE ratios [with the exception of Hong Kong and Singapore] have tended to be high. Secondly. There are structural and policy reasons why the PE ratio in Asia tends to be high. Risk Management Financial systems are supposed to distribute risks of the real sector. the ultimate risks in Asia are absorbed by the implicit or explicit deposit insurance schemes. However. The high leverage means that with a smaller equity base. in the stock market.
fish-trap mentality was bad risk management. 37 . Asians have tended to resolve problems by “internalizing losses” through mergers of failing institutions. The principle of risk diversification is to distribute the portfolio in assets that are negatively correlated with each other. Poor accounting standards also hid the scale of losses. The late de-regulation of exchange control and rules allowing Asian investors to invest abroad meant that retail investors were not able to diversify their risks in the event the domestic market declined. Asian policy makers were concentrating risks. Trade protection and non-tariff barriers against investments by foreign strategic investors prevented weak companies from being taken over and restructured.Asian Financial Reform and Corporate Governance Duality of Development Moreover. Corporate Governance The price and resource allocation distortions described above are a manifestation of the failure of Asian financial markets to evolve as an important check and balance on domestic corporate governance. Indeed. the best way to diversify out of a domestic economy is to invest in foreign investments. Thus. By keeping savings in domestic markets. For example. But the management problems that gave rise to financial failures were not addressed. The result was that the true extent of Asian NPLs has always been debated between market analysts and the authorities. rather than diversifying them. transparency and accounting practices worked against improving corporate governance. Asian banks also did not apply generally accepted Basle loan classification standards in accounting for non-performing loans. banking problems were solved initially through mergers and consolidation into larger banks.
and when the internal checks and balances. meant that generally there was insufficient protection of minority rights for investors in Asia. But if the morality and ethics are lacking. and the transparency of disclosure do not function well. 38 . we rely on the management or controlling shareholders to exercise self-discipline. Currently. the internal and external pressures for change at the management level have not that been strong. but as NPLs in the banking system. The Three Disciplines Good corporate governance is like a three-legged stool of key disciplines. business services. institutional investors are either domestic. This works when the controlling shareholders or management are highly ethical and treat minority shareholders fairly. then you need outside forms of discipline. or foreign fund managers.Asian Financial Reform and Corporate Governance Duality of Development The historical legacy of dominance by SOEs or closelyknit bank-corporate relationships. such as independent board committees. which have close relationship with the companies. construction and real estate – were highly inefficient with poor corporate governance and transparency. who are less interested to put pressure on companies they invest in to improve corporate governance. III. internal and external audits. Consequently. These inefficiencies do not necessarily show up as bankruptcies. This is beginning to change. the bulk of the non-trade business – primarily agriculture. Although the export business was kept vibrant and highly productive by their exposure to international competition. First of all. Many succeeded by seniority or family/political connections and not necessarily by merit.
but also good enforcement. Greater transparency to global standards will force the enterprises and their management to greater accountability. But self-discipline and regulatory discipline are not enough. when protected from competition. Corporations that fail the test could find difficulty in raising new capital. Market discipline comes from two inter-related forces. Previously protected industries will have to meet challenges from international competition and have to meet global standards of quality. In well-functioning markets. the market demands professionalism and more effective management models. 39 . without market discipline. Regulatory discipline requires not only clear rules and regulations.Asian Financial Reform and Corporate Governance Duality of Development This is where regulatory discipline comes in. and eventually be competed out of the market. may develop cartels or monopolistic tendencies that do not treat consumers or investors fairly. Companies. (2) Good corporate governance requires all three disciplines to keep the checks and balances for healthy companies. These may deter foreign or minority investors from entering the market when they perceive that they are not treated equally. market competition and global standards (1) To compete globally. code of conduct and accounting and disclosure rules. the market’s assessment of corporate performance is reflected in the prices of equities and bonds.
Asian Financial Reform and Corporate Governance Duality of Development Let me now dissect Asian financial sector and corporate governance issues into the seven “I” factors. protect domestic industries and reluctance to pay for the job. including the loan classification standards. Without good information. implementation or adoption of such standards. The second “I” is incentives. timely and accessible information is a market fundamental. you need to have international accounting standards (IAS) and good auditing standards. Enron. has demonstrated clearly that without good information and good checks and balances. Currently. the incentive structure must be evenly matched. and even after the Asian crisis. For markets to function well. Accurate. which is currently the largest corporate failure in history. large companies can fail even in the best of regulated markets. the markets will be distorted by greed without the fear of the risks of failure. For example. Management cannot exercise good risk management and decision-making and investors cannot exercise market discipline on the companies they invest in. civil service salaries and salaries of many state-owned or even familydominated companies are not yet commensurate with the risk-reward structure of markets. If the risks and rewards are imbalanced. Asian incentives are skewed because of the inherent moral hazard of dual economy policies to protect depositors. The first “I” is information. has been relatively slow. Underpaid bureaucracies do not 40 . To have good information. banks have not been able to exercise good credit culture and discipline. But Asia was slow to adopt rapidly international accounting and auditing standards.
They have not been discriminating and have not exercised more discipline on the corporate governance of the issuers. Ignorant and uneducated investors can easily be cheated or be persuaded to invest in risky or bad assets by poor quality intermediaries or bad issuers. Lack of strong credit culture leading to inefficient capital allocation. The third “I” is the Investor. Asian financial markets generally face the following problems – • • • • Financial markets are too bank-dominated. banking. Stock markets tend to be speculative and have not been very successful in providing funding for small and medium enterprises (SMEs). Investor education is clearly very high priority for promoting investor protection. covering the whole range of insurance. Egalitarian pay policies do not encourage innovation and competition. Too few incentives to compete in a protected environment leading to an inability to properly handle risks. The investor benefits most from globalization because of global choice. Addressing the incentive structure is one of the most challenging of tasks in the Asian reform process. The trend in international finance is that the wholesale and retail business will be more and more dominated by 10-20 large complex financial service providers.Asian Financial Reform and Corporate Governance Duality of Development have the incentive to enforce laws that protect property rights. fund management and risk management. Currently. The fourth “I” is intermediaries. retail investors in Asia are not well educated. 41 . resulting in talent leaving for foreign companies. Underpaid bankers engender NPLs.
Asian family-led companies and SOEs are having problems re-organizing their management structures to compete effectively against non-Asian competitors. The fifth “I” is issuer. including standards of transparency and corporate governance. In practice. On the positive side.Asian Financial Reform and Corporate Governance Duality of Development As Asian financial sectors open up. lawyers. the more the financial regulators can rely on the market to exercise discipline on the market participants. At the end of the day. qualitative changes will arise from the emergence of a greater pool of foreign trained investment bankers. they have to learn to play by global rules of conduct. US management in particular have evolved matrix management styles with the use of technology to facilitate flexible and rapid response to market needs. fund managers. they have to provide an appropriate risk-adjusted rate of return to investors. The first and foremost persons responsible for the quality of a company are its management and controlling shareholders. The quality of a market is determined by the quality of the companies that raise capital from the public. competition from foreign intermediaries will result in some domestic intermediary failure or the “crystallization” of their inefficiencies through large NPLs or losses. They set the standards of ethics and performance that the company is judged by. Currently. As Asian enterprises compete globally. they will be able to have global reach and also tap global capital. accountants and other service providers operating more and more to international standards. fiscal favouritism. But to do so. The higher the quality of intermediaries. and 42 . the benefits of opening up more to globalization would be limited in Asia if there is continuing local protectionism.
the potential for Asian economies to benefit fully from global standards and processes would be constrained. complex ownership structures and insufficient disincentives against the expropriation of minority shareholders. the quality of markets must depend on the quality of I. without critical mass in technology and which are still subject to large operational inefficiencies and risks. Dealing with very inefficient domestic intermediaries in the face of rapid external “Corporate Governance Development in The Greater China: A Taiwan Perspective”. September 11 has shown so dramatically the importance of good back-up systems and contingency planning. It must also have a legal framework and efficient and fair judiciary that protects property rights of market participants. The sixth “I” is infrastructure.com/china 1 43 . the regulator. Because of the need to protect domestic intermediaries. Asian financial infrastructure currently reflects the protective nature of the dual economy. since important checks and balances are normally built into a worldclass trading. The financial infrastructure comprises the platform and processes to ensure that markets function in an orderly and robust manner. It can also determine the quality and efficiency of financial services.Asian Financial Reform and Corporate Governance Duality of Development barriers to entry. payment and settlement systems. International Conference at Hong Kong University Law School. by Lawrence Liu. November 2-3. Last but not least. The quality of the infrastructure determines the size of the operational risks. PRNews Asia at http://prnewsasia. Unless there is a change in mindset. Asian regulators have been accused of “over-regulating and underenforcing1”. This results in fragmented systems. and the regulatory framework.
Kansas City. Part of this process entails an analysis of how technology is changing markets and society. Technology is changing markets and society so fast that no one can claim any defining insights into the future.” Federal Reserve Bank. 2001 Jackson Hole Conference material. The combination of technology and entrepreneurship has re-written the old order. Questions. and hence knowledge. is extremely demanding. but through technology. Where do we go from here? It is necessary to consider the question of financial reform and corporate governance in Asia in the context of the New Economy. Information is costly to produce. What is the New Economy2 all about? • Financial markets can be likened to networks. The overall effect of technological advance on investor rights is also unclear. IV. “The New Economy: Background. Historical Perspective. it can be replicated and disseminated at very low J Bradford Delong and Lawrence H Summers. 2 • 44 .Asian Financial Reform and Corporate Governance Duality of Development competition. • Information. and how the financial sector in Asia needs to adapt to protect investor rights through more efficient financial markets and better corporate governance. eroding old franchises and elites and creating new structures where the rules are as yet unclear. The global network is a patchwork of local networks that have not been designed to operate on global capital flows. and Speculations. is a fundamental market requirement. with major pressures to bring domestic regulatory standards to global levels.
investor or manager and the institution of global standards. 3 45 . • The social costs of downsizing obsolete and inefficient “Old Economy” institutions and labour force will be large. Policy makers will have to manage this in a socially stable manner. particularly as the industry becomes obsolete when rival technology emerges. This is achieved through empowerment of the consumer. Enterprises will therefore have to reorganize their own management structures to meet challenges for global competition. marginalizing the smaller players. New entrepreneurial and market institutions are using technology to flatten structures to replace old hierarchical structures. institutional frameworks and the rules of the game that underpin a market economy. Jackson Hole Conference op cit. Technology changes so fast that a monopoly in an industry can be shortlived. These trends and issues should lead to profound changes in how policymakers should act to provide for property rights. There will be shorter industry life cycles. “High-Technology Industries and Market Structure”. Globalization of • • Hal R Varian. • Network economies of scope and size3 means that those first to achieve global name recognition [branding] obtain “winner takes all” dominance.Asian Financial Reform and Corporate Governance Duality of Development marginal costs. 2001. There will therefore be greater pressure for protectionism. worker. Liquidity begets liquidity. without provoking excessive protectionist measures and not killing innovation and ability to compete in the New Economy.
investor. and faster. In other words. social or system stability will therefore depend upon the ethics or knowledge foundations of the individual. page 132. Some of them may also have incentives to suppress or distort information for their own interests. 2001. will be less able to derive fundamental security values from raw information. Intermediaries in turn may rely on companies for information. Jackson Hole Conference. The design of national incentive structures and risk management will have to fit the New Economy model. but laws and regulatory frameworks are still national in scope and mindset. Information Production and Market Efficiency”. and Andrei Shleifer. Much depends on the quality of information and the ability of investors to digest this information4. consumer or mass education will ultimately be the key to market or social stability and sustainability. . Efi Gildor. in particular.Asian Financial Reform and Corporate Governance Duality of Development capital markets is already a reality. technological advancement can make more information available. op cit. “Technology. Inevitably. • Issuers and intermediaries may have incentives to distort the quality of information in order to raise stock prices. and in greater quantity. and to more people. the New Economy forces a major re-think of policies to grapple with issues of corporate governance and competitiveness within Asia - • Gene D’Avolio. 4 46 . The marginal investor being less experienced and less sophisticated. • Since change is so rapid and complex. • In particular.
and that the rules of game are by and large global rules according to global standards of conduct. The role of education at all levels for investors. • • • • 47 .Asian Financial Reform and Corporate Governance Duality of Development • How laws and regulations can properly prevent corporate insiders – whether managers or owners – from expropriating minority investors and from distorting information. Thus. intermediaries. Economies and entrepreneurs not geared to join the New Economy are less and less able to access either private or official capital without large spreads or additional conditionality. As Nobel Laureate Joe Stiglitz pointed out. regulators and policy makers to enable them to function and compete in the New Economy. the greatest value added comes from re-engineering global information and standards for local use. Addressing obsolete policies and institutional structures. where vested interests resist new entrepreneurial and market institutions and opening up to competition. This is no longer sustainable in the New Economy. managers. not all standards are as yet global by consensus or by legislation. For the regulatory framework to be trusted. there must be a level playing field. the regulatory and institutional structure – essentially the incentive structure – must be designed in such a way that trust is rewarded and fraudulent acts are punished. Those who refuse to do so are likely to be competed out of business. Of course. or which are involved in the capture of the decision-making process. Revisiting the historical dual-track mercantilist model of Asian development. Those who succeed will benefit.
the current Asian models of corporate governance and financial sector strategy have to change.Asian Financial Reform and Corporate Governance Duality of Development In short. Andrew Sheng 28 June 2002 48 .
Ten years actually is very young in the life of an institution but ten years is a very important landmark. but a hundred to grow man. On behalf of the Hong Kong Securities and Futures Commission. Of course. And secondly I think obviously by man we mean institution. even though for a short time. Thailand 6 September 2002 First of all. I would like to say how much we have admired the growth and maturity of the Thai SEC under the able leadership of Secretary-General Prasarn. His standing and the Thai SEC’s standing in IOSCO is exemplified by their Chair of the IOSCO Emerging Markets Committee. professionalism and tact of the Thai SEC was very well-demonstrated at the May 2002 IOSCO Annual Meeting in Istanbul when Dr Prasarn unfortunately could not be present at the final 49 . in today’s language we do not use the word man. we use the word “person” as man or woman. There is an old Asian saying that it takes ten years to grow a tree.THE FUTURE OF CAPITAL MARKET DEVELOPMENT IN EAST AND SOUTH EAST ASIA 88 10th SEC Thailand Anniversary Seminar: “How Can NBFIs Play a Greater Role in a Bank-based Economy” Bangkok. The depth of the ability. allow me to say my warm congratulations and thanks to Dr Prasarn and all members and staff of the Thai SEC on the occasion of their 10 th anniversary.
I could still remember how Ms Tipsuda very ably stood in front of this huge audience and delivered the message wonderfully and clearly on behalf of Dr Prasarn. What I really want to do this morning is to give an overview of where capital markets in Asia are today. former Governor of Bank of Thailand. I am also really grateful for Dr Prasarn’s invitation for me to be here to be amongst old friends like Chairman Herwidayatmo (Indonesia Bapenas). Alan Cameron and also the highlyrespected Khun Chavalit. and in fact nearly 10 years since I left the World Bank. showing how much has the work of the Emerging Markets Committee been carried forward under the leadership of the Thai SEC. But I want to make this important caveat. The theme of this Conference is very important because it talks essentially about a bank-based system. when I was then a young central banker.The Future of Capital Market Development in East and South East Asia Plenary Session. I would also like to thank my good friend Michael Pomerleano and World Bank for co-sponsoring this excellent conference. I think it is a good occasion to celebrate both the Thai SEC’s perspective of capital markets as well as the World Bank’s. I want to express my views as an 50 . This is the 10th Anniversary not only of the Thai SEC but ten years since I have known Mike. Lilia Bautista (Philippines SEC). Securities regulators always understand you can never talk about the market because everything they say is market sensitive. You should never listen to securities regulators talk about the future. The views that I express here are totally personal with no connection whatever to any organisation that I am associated with. who was my model central banker in the 1980s.
the whole of Asia is only 7% of global market capitalisation. Yet we are the biggest importer of capital. calculated on a free float basis. Asian Capital Markets Today Where are our capital markets today? Specifically. According to BIS statistics.The Future of Capital Market Development in East and South East Asia institutional economist. The really interesting feature is that. risk management and corporate governance? How has the global environment changed our Asian financial markets? And finally the important question: What conditions are required for regional integration? You cannot look at the future without looking at the past and the present. we account for one quarter of daily global FX 51 . if we exclude Japan. EU 17% and others 14%. Our share in global market capitalisation is shrinking. compared with US MSCI share of 55%. how has Asian growth strategy shaped our financial systems? How have our financial markets performed their four key functions of resource allocation. We have a current account surplus and more than US$1 trillion in foreign exchange reserves. more than one quarter of global exports. one third of global GDP. If we really look at the MSCI weighting of market capitalisation (Table 1). This is amazing. the share of Asia in the MSCI weighting is in fact only 13% not 16%. price discovery. how is it that we only account for 16% of global equity market capitalisation? In fact. rather than as a securities regulator. Asia has one of the highest savings rates in the world. given the fact that Asia accounts for more than half of mankind. including foreign direct investments (FDI) in the world.
0 Exports 6. 2001) PPP-GDP 7.30 17.9 4.6 100.0 MSCI Weighting 9.9 100.8 21.9 100. the rest of Asia has equity markets that are significantly smaller and bond markets that are relatively small with the exception of Japan.82 0. Table 1: Asia in Global Economy (GDP.57 13. With the exception of Hong Kong and Singapore markets.26 0.14 14.1 1.4 19.4 4. we are still dependent upon Europe and America as engines of growth.0 0.3 12.7 23.7 14. April 2002 Table 2 demonstrates that the Asian financial system is still bank-dominated. which are basically financial centres.6 4.3 3.00 Japan 4 Tigers China India Other Asia * Total ASIA * US EU Others TOTAL *Excluding Australia and New Zealand Source: IMF.5 55.12 1.8 13. Every banking system in Asia amounted to more than 100% of GDP in asset size.0 Population 2.0 16.15 55.The Future of Capital Market Development in East and South East Asia trading. There are no strong signs that we have been able to develop our internal growth engines.9 25.6 6. 52 .41 100.4 32.2 33. % of world.5 24.3 21.1 4. Given our economic strengths.7 5. including India. World Economic Outlook .38 1.6 37.0 9.
this old model has been changing. and because of this financial repression. CEIC. (New York: Oxford University Press) 1 53 . if you have read the 1993 World Bank book on the Asian Miracle1. various central banks and gover nment websites What has shaped East Asia’s financial structure? Finance is a derivative of the real sector. Bloomberg. Of course. was essentially a mercantilist growth strategy. But by and large the strategy and the mindset World Bank (1993). services and financial sectors. with certain guided lending to priority sectors at subsidised or lower than market interest rates. In doing so. and changing very fast. Essentially the strategy adopted up to the 1980s shows growth pursued through pushing exports.The Future of Capital Market Development in East and South East Asia Table 2: Asia still Dependent on Bank Financing (% of GDP) China Hong Kong India Japan Korea Singapore Taiwan Thailand Germany US Bank Assets Equity Market Bond Market 1998 2001 1998 2001 1998 139 160 25 45 12 214 215 206 313 32 69 133 24 26 21 145 139 64 55 101 233 233 35 46 53 220 243 112 135 20 226 262 97 104 41 176 134 30 32 23 273 65 155 63 51 158 58 136 97 141 2001 28 28 28 153 67 41 20 39 90 148 Rem ark: *1999 figure Sources: FIBV. the banking system was protected in order to mobilise the bulk of savings. The East Asian Miracle: Economic Growth and Public Policy. Financial strategy is a subset of overall economic strategy. since the 1950s and 1960s. This was financed by a mild financial repression of the financial sector in order to mobilise resources to support the selective export manufacturing drive. and Asian economic strategy. and protecting the domestic natural resources.
because the corporate sector is state-or family-dominated. too much collateral-based lending. Many of us are currently still paying the price of that asset bubble. the largest of the Asian equity markets. This is quite natural. the result was a lack of credit culture. We like to buy and we never like to sell. Price Discovery. as the Asian crisis has shown. and too much excess liquidity that. We love money coming in but we don’t like money going out. it is very short-term speculative and we almost have no foreign listings in our domestic market.The Future of Capital Market Development in East and South East Asia have not changed. we have too much savings locked in the banking system. But this means that if there is too much money flowing into a domestic economy without compensating outflows. Asian stock markets are essentially national stock markets. created the classic asset bubble. Moreover. i. you end up with an asset bubble.e. there are much less foreign listings than at the height ten years ago. if we really look at our stock markets. the borrowers and direct investors. I always like to go back to basics and ask – what is a capital market for? Allow me to compare Asian capital markets against the four major functions of financial markets – Resource Allocation. Risk Management and Corporate Governance. As we can see. The first is to make sure that the savings are channelled efficiently to the users of savings. we have what I call a “fishtrap” mentality in fund flows. In Asia. Even in Tokyo today. corporate governance behaviour basically reflected that ownership structure. For example. What do non-performing loans (NPLs) represent? The Asian crisis cost the crisis economies as much as 50% 54 . Because too much funds are locked up in the banking system. coupled with a “fishtrap” mentality.
The Future of Capital Market Development in East and South East Asia
of GDP in rescuing the problem banks. This means that scarce domestic savings have been unfortunately wasted in inefficient investment. Post-Asian crisis, everybody agrees that we must develop deep and liquid bond markets, deepen equity markets, create derivative markets, diversify risks from the banking system, and impose greater market discipline on the intermediation of savings. Why hasn’t this happened faster than we all would like to see? Part of the answer lies in the problem of price discovery. Because of capital controls and supply distortions, domestic fund prices get somewhat distorted from efficient market clearing. The interesting point is that this “fish-trap” mindset does not result in inflation because Asian economies are very open to trade. Asia is very efficient at the trade in consumer goods side that give rise to stable consumer prices at global prices. But the lending guidelines to priority sectors, listing guidelines and exchange controls of one form or other, meant that interest rates have been much lower relative to the credit risks and even the stock market PE ratios have tended to be speculative and high rather than reflective of the underlying overall earnings trend. If the Asian crisis showed that we had up to 50% nonperforming loans in some economies, how come the interest spreads – loan rate minus deposit rate minus the administrative costs – do not reflect that credit risk? And after the bank restructuring, why do they still not reflect the credit risk? This is a very important question we need to answer.
The Future of Capital Market Development in East and South East Asia
The listed corporate earnings yield is equal to 1/PE ratio. If the earnings yield is excessively low relative to a risk-free asset like a government bond, something is wrong. There is a price distortion somewhere. Why is there no risk premium or equity premium over and above a risk-free government bond? This distortion is partly due to the restricted free float of shares as major shareholders (state or families) liked to have high leverage and therefore control the shares tightly in order to prevent takeovers by other parties, including foreigners or competitors. Add to this bank herding into property with cheap loans fuelled the property asset bubble. Secondly, as you are aware, the bond spreads in Asia before the crisis never reflected the bond credit risks. During the Asian crisis there was an overshoot of bond spreads when bond spreads rose as high as 800 basis points over equivalent US Treasuries. But today the bond spreads are even lower than pre-crisis even though we know there remain many structural and risk issues in Asia. For example, PE ratios remained around 80 in Japan, as the Nikkei 225 plunged from a peak 38,000 to around 10,000 today. China PE ratios peaked around 60, declining to 30+ today. The point that I really want to make is that such price levels are due to the quantitative distortions. Such mispricing means that if we are not careful the large domestic savings could be wasted in channelling towards inefficient investments. The third point is all about risk management. Ten years ago I wrote a paper with Prof Yoon Je Cho at the World Bank comparing Ghana’s growth with Malaysia’s growth2. The paper pointed out that in the globalised
Andrew Sheng and Yoon Je Cho (1993), Risk Management and Stable Financial Structure, World Bank Financial Policy and Systems Working
The Future of Capital Market Development in East and South East Asia
economy today, developing economies, including large economies, need to have national balance sheets and an overall national risk management strategy. You cannot have the left hand taking risks that the right hand does not know about. Given global volatility in terms of trade or financial shocks, you have to have a strategy to manage national risks. It goes back to the old development economies debate in the 1960s of balanced growth versus unbalanced growth3. If you adopt a mercantilist approach, you are going for unbalanced growth. You are taking calculated risks in pushing growth in one direction. If you are not careful and you don’t manage these risks well, you pay for it. Bank-dominated systems with high NPLs and low capital base carried high moral hazard risks because of implicit and explicit deposit insurance. If we realise that we need to develop all these derivative markets to spread the risks, why did we not spread these risks? The answer is, if you have a “fishtrap” mindset, it runs counter to the Modigliani-Miller Theorem that tells you to diversify your risks into an asset that is negatively correlated with your domestic assets. These are clearly foreign exchange assets. If you put all your eggs into a domestic basket, if anything happens to the domestic economy, your people suffer from it. In the 1960s and 1970s, Malaysia diversified its assets into foreign assets, and diversified its production from just natural resources to manufacturing, petroleum, palm oil etc. Malaysia diversified and was therefore much better able to cushion global trade shocks than Ghana. You will
Paper WPS1109, March. 3 See Gerald M Meier, “Leading Issues in Development Economics,” Oxford University Press, 1964, - “Growth-Balanced or Unbalanced?” pp250-266 57
The Future of Capital Market Development in East and South East Asia
remember that in the 1960s, Ghana with gold and cocoa was one of the richest economies in Africa. Malaysia at that time was totally dependent on rubber and tin exports. Both economies were subject to highly concentrated terms of trade shocks. A risk diversification strategy would allow an economy to cushion global trade and financial shocks. The world is still suffering from such shocks today. Shocks from one part of the world are being transmitted to another part of the world through trade and financial links. Consequently, we should have a national risk management strategy, not just at a sectoral level but at the national level, and of course larger net foreign exchange reserves. Allowing domestic residents to invest abroad spreads the risks. This comes back to Professor Mukul Asher’s point about insurance funds or pension funds also being allowed to invest abroad in order to spread their risks. This is because if you crowd all your pension investments in your domestic economy and if your domestic economy is yielding only 0.5% to 2% per annum, when real growth in a foreign currency asset is earning 4-5% per annum, then actually you are taxing your pension-holders by the opportunity cost of higher yields and lower risks in holding high quality foreign assets. As the Cho-Sheng paper indicated, diversified economies grow faster and more stably than highly concentrated economies. If you have a domestic financial crisis then the pension fund (by implication, retiring investor or next generation) also suffers together with everybody else. So having a choice of financial instruments and markets and the participation of different types of specialist market intermediaries are extremely
All these mean that Asian corporate governance is not as strong as it should be. should allow investors to price the quality of corporate governance as well as the quality of assets in the company. and we need to disentangle corporate-bank relationship which has traditionally marginalised minority shareholder interests. Why is it that Asian capital markets do not appear to reinforce corporate governance? It is clear that post-Asian crisis we need to improve accounting. because they transmit information to investors. These factors limited the ability of investors to impose corporate discipline. If a company is doing badly. Asians prefer the strategy of merger of failing institutions rather than liquidation or opening up to foreign participation. Moreover. regulatory discipline and market discipline. its share prices fall indicating investors are not satisfied with corporate performance. What is corporate governance? Corporate governance is actually three key disciplines – selfdiscipline.The Future of Capital Market Development in East and South East Asia important in the national strategy to improve asset allocation and in hedging market risks. We all know that financial markets. you don’t allow the market discipline to ensure that the 59 . we need to begin to privatise SOEs. domestic pension funds and Asian institutional investors have close links with corporations. while entry barriers to foreign strategic investments protected companies from takeovers/restructuring. Furthermore. The fourth issue is all about corporate governance. Asia has traditionally focused very largely on selfdiscipline and regulatory discipline. But if you protect against competition by various ways and means. Financial markets should reinforce corporate governance.
What we are now seeing globally is that the network effects are growing. So it’s only a matter of time that a 60 . So if we are not careful. When one part of that network blows a fuse. First. Secondly. higher efficiency. The Asian crisis demonstrated very clearly that the global network is only as safe. there is a real danger that globalisation is being imposed on us whether we like it or not. the whole network malfunctions. greater economies of scale. as the weakest link in that network. lower transactions cost and perhaps better rules that protect the minority shareholders. So it is extremely important that you allow all three disciplines to work. It is a question of what combination of discipline is used to improve corporate governance.The Future of Capital Market Development in East and South East Asia prices reflect the risks and that the resource allocation is efficient. which sometimes happens to be a domestic network. regulatory discipline and market discipline is universal. it is being imposed by technology because telecommunications are getting better. But you have to understand that the existence of self-discipline. there is continual peer pressure on financial opening and adherence to global standards. Each country must tailor their own corporate governance framework because corporate governance cannot be divorced from the domestic cultural. legal and institutional background. under WTO and IMF rules. So what does globalisation now mean for the Asian economy in this post-mercantilist environment? What does globalisation truly mean? Globalisation really means that domestic financial markets which are networks are being linked with every other national network to form a global financial network. historical. Liquidity begets liquidity because liquidity will move from smaller markets to bigger markets as bigger markets offer deep liquidity. as risky.
Globalisation marks domestic prices to global prices. At the exchange level. Globalisation means that consolidation is happening in the financial sector. 3 December) 4 61 . At the corporate level. back-office savings alone is US$1 billion annually. Jeffrey Carmichael and Michael Pomerleano had discussed in an earlier session in this Conference. exactly as Alan Cameron. Some Latin American shares are Andrew Sheng (2001). If this is happening in Europe.The Future of Capital Market Development in East and South East Asia domestic economy must begin to open up to foreign trade and finance. what is happening in Asia? Essentially. Accenture has estimated that if they are able to integrate the EU securities market. This loss is an economic loss.8 trillion market capitalisation. Speech at the ASAF 2001 Conference (Hong Kong. better safety. mergers are happening. and liquidity is being improved4. there have been vertical and horizontal consolidations in order to extract greater efficiency. New York accounts for 50% of global market trading. we are now working in a global three time zone market. Back-office cost by the rule of thumb is sometimes four times the front-end trading cost for securities trading. better infrastructure and greater competitiveness. as it has already begun to happen in America. with US$12. What is a bancassurance company? It is the banking network linking with the insurance network and the asset management fund network to form a very large supermarket network for financial services. not always recognised in accounting terms. this shows up in the national balance sheet as a “loss”. there are huge efficiency gains for exchanges to merge or consolidate. these networks are linking together. Securing the Third Zone of the Global Markets. Consequently. If domestic prices are higher than world prices.
including the Japanese economy. Aren’t we back to the old 1950s colonial debate which argued how all the colonial monies used to go to the imperial centre and came back in the form of colonial investments? If you look at this as a financial historian. Federal Reserve Bank of Boston Conference Series. for his paper on Demographic Shocks and Global Factor Flows5. I am told some Australian shares have also begun to migrate to New York. Asia has tremendous savings but totally fragmented financial markets. However.The Future of Capital Market Development in East and South East Asia migrating to New York for trading. Jeffrey Williamson (2001). In Europe. to point this out to me. Our capital markets are very retail driven. and some South African shares have begun to migrate to London for better liquidity. One point that most people tend to forget is that the Asian miracle is demographically driven. In fact the biggest lesson to me from what is happening in Asian markets today. where liquidity is greater than in their home markets. you essentially lock away large amount of funds with very little trading. you wonder how much has changed in the flow of global funds. Our institutional markets are highly concentrated and generally conservative. Demographic Shocks and Global Factor Flows. the investor and intermediaries. It is clear that the network effects of “liquidity begets liquidity” do benefit the issuer. our liquidity is flowing to the major markets and coming back as FDI and as foreign portfolio investment. we are going to have a lot of financial problems on our hands. No. June) 5 62 . is that if we do not pay attention to this demographic factor. they are consolidating because of the EU and Euro. Under this policy. requiring the institutional funds to invest mainly in domestic government bonds and some domestic equity. 46 (Federal Reserve Bank of Boston. I am extremely grateful to Jeffrey Williamson.
of lowering tariffs. that lower return is a tax on 63 . of greater competition. Williamson. Demographic Shocks and Global Fac tor Flows In the early period. In fact. the point that Professor Mukul made yesterday which I thought was very good is that if the return to capital on the retirement fund is below the global benchmark average. But what has happened to all our savings? The Asian crisis has shown that some of us have had to use half of our savings to bail out inefficient enterprises.The Future of Capital Market Development in East and South East Asia Figure 1: East Asian Miracle is Demographically Driven Source: Jeffrey G. Our leaders had great foresight to open up to international trade. with high savings. What people have not noticed is that if we are not careful. if we stuffed all our retirement funds with inefficient bonds and equity. We entered in the post-crisis period into an era of peace. high productivity and very export competitive. bought at historically high prices. our future generation will pay for the deficits in the pension funds that have insufficient assets to meet the growing social burden as the population ages. and we benefited from it. Asia has grown faster because we have a young working population (Figure 1).
but must avoid North Asian retirement funding mistakes. derivatives market. South-east Asia is still young. we require more and more retirement funds. There is an urgent need to develop deep and well-diversified retirement institutional funds in Asia. This situation is like a young person when we are growing up. you may be digging yourself deeper and deeper into trouble in future generations. 64 . So essentially as Asia begins to age. you are going to miss a great window of opportunity when you have that growth period. In essence. If you have spent all that savings and invested wrongly. by postponing the cost to the future. which is now increasingly the case in North Asia.The Future of Capital Market Development in East and South East Asia retirees. But having these retirement funds without a deep bond market. if we keep on pumping our scarce resources into the existing systems which do not appear to be able to absorb these savings efficiently. This is exactly what I mean by the importance of market discipline in the financial sector. It is extremely important that we avoid the mistake of some policy makers who use pension funds to avoid historical policy errors. But when we begin to reach middle age. good equity market to absorb those savings. As North Asia begins to age. In the long run they will not benefit from the opportunity cost in investing in diversified global assets with global yields. then you have to save even more when you are beginning to retire. you really begin to think whether you have enough savings for your retirement. and in North Asia the population is aging very fast already. its economic growth is slowing and it will require more retirement funding. We are very happy to spend on whatever we like.
This brings me to the next question: How can Asia institutionalise our savings within Asia for better resource allocation? What then are the lessons from the above analysis? Historical problems and barriers have hindered our ability to intermediate our own savings more efficiently. how do we compete with the large markets that are integrating very fast? What therefore are the conditions for regional integration or cooperation? In my personal view. We have the Australia and New Zealand markets that have very sophisticated systems but they are not well integrated with the rest of Asia. So we must have a higher standard of transparency and disclosure with a move to 65 . but relatively domestic oriented. The Third World has labour surplus and capital shortage. But Asia in fact has both labour surplus and capital excess because it is still running current account surpluses.The Future of Capital Market Development in East and South East Asia What is the relationship between the Asian Third Time Zone and the OECD? The Third World and the OECD are in two demographic cycles. the OECD has scarce labour and capital surplus. But bank reforms cannot succeed unless corporate governance standards are raised to improve corporate efficiency. The older OECD countries are aging much faster than the Third World. If we have no integration. Essentially we are funding the OECD capital markets which rechannel these funds back to Asia. There has been too much volatility in prices. The South-east Asian markets are relatively small. as NPLs remain a drag on the domestic economy and really must be cleaned up. bank reforms must go on. The North Asian markets are large. these are clearly the following. First of all. and markets are still inward looking.
and the result is that they cannot connect except at a very high cost. This is what Europe is currently experiencing. The same is true in respect of capacity building to strengthen corporate governance and make investors more discerning and demanding. improving market liquidity is clearly a priority. You cannot build these skills domestically overnight. we have to develop common platforms. Our technology is so disintegrated as everybody is trying to protect their own domestic markets. the pricing of the spreads has to reflect the risk. Third. The segmented market fragments liquidity and the negative feedback effects of declining liquidity are bad for capital markets. international auditing standards and shortly international disclosure standards. 66 . assets management skills and risk management skills. Do you want to have cooperation or not? If you don’t want it. We still have not moved fast enough in this area. Second. First. it is political will. It is exactly like football. To improve liquidity. We need investment banking skills. This is why Europe is moving towards integration at the platform level. one may have to hire such skills from the global market. we really need to develop people skills. There are the 5 ‘Ps’ in the financial sector I think we really need to think about. we need to develop common products. With global competition. In my personal view. Why? Because you cannot get that skill overnight to be able to compete in the World Cup. you hire somebody with the necessary skills.The Future of Capital Market Development in East and South East Asia international accounting standards. there is very little any one of us can do to make it happen. If you can’t compete. And fifthly and finally. like Korea hired a Dutch coach. Fourth. we have to develop the right products for better risk management.
This is the biggest lesson from Africa and Latin America.The Future of Capital Market Development in East and South East Asia common rules and common markets. I am just posing the questions. If you follow the wrong theory that you should be inward-looking and import-substituting. big in production. If we are to have successful integration. But we have no say in shaping these standards because even though we are big in population. The questions I want to ask concern. “Can we afford marginalisation? Are we ready to adopt international accounting standards and codes? We do have competitive threats. In very crude terms. This is very clear from what Chairman Dato’ Ali Kadir from the Malaysian Securities Commission said yesterday at this Conference. such as services. but do we have common goals?” I don’t have the answers. It went totally global in export and manufacturing but did not go global in the protected dualist sectors. Actually what the Asian crisis is all about is that we have marked all these dualistic sectors to market. If we want to be part of the global market. If you have market 67 . we are very small in capital markets so our ability to influence these standards is very limited. one has to play by global rules and standards. That is what markets are all about. Isn’t that sad? Global markets must have global representation. the US and EU are setting these standards and Asia is at the moment a free rider on these standards. when we marked to market the losses and inefficiencies. Asia did the right strategy but did not move to a full global strategy. We are lucky that they are doing all the hard work in developing these standards. they emerged as NPLs in the national balance sheet. history has shown that this is the wrong strategy. we need equivalent standards. Currently.
My personal view. We need to standardise for liquidity and differentiate for value added. at least we should talk. At the moment. The answer is information intensity. And if you don’t. you have a greater say in those standards. I’m not saying that Asian standards must be unique to Asia. We should not talk in political terms but we should talk at the level of technical terms. Low intensity financial products such as 68 . ASEAN + 3 is not representative of the Asian financial markets as long as the major players like Australia and Hong Kong are not part of this round table for discussion of Asian common financial interests. In practical terms. it is not surprising that regional cooperation has been a low priority because everybody is busy focusing on their domestic issues and domestic reforms. I must confess that at the moment in Asia I do not see a common platform where this voice can be developed. But if we do not standardise. I’m saying that these standards need to be inter-operable with European and American standards because that is where the current global standards are. What we clearly need is common Asian standards. And because we currently have no common voice to influence these standards. you don’t have a say.The Future of Capital Market Development in East and South East Asia power. and I want to stress that this is only in the financial area. everybody understands that domestic considerations out-weigh regional interests. What do I mean? There is a very important article which was written by a British think tank on why products migrate globally and why some products stay domestically. we need to build critical mass to get that communication and influence through.
Mimeo. Gordon de Brouwer (2002). are traded significantly in London. So clearly we need to standardise for liquidity but differentiate for value added. For example. High intensity products like equity generally do not tend to migrate. New York is superior in information intensity in US shares. Institutions and Integration in East Asia. And New York is obviously a deeper and larger market. If we have a phased approach. Asian bonds and currencies. providing an excellent overview of issues on regional integration. because Hong Kong people and international traders understand that liquidity and knowledge in these shares is concentrated in Hong Kong. He basically suggested that some of the slightly more developed markets like Australia. Work out the technical issues before you think about the political issues. the liquidity of these shares traded in Hong Kong is actually three to four times higher than in New York. I am grateful for his comments on this paper. May. Hong Kong. My personal opinion is that I’m not sure if this phased approach will work in practice. On the other hand. Australian National University. we can cause greater market differences and tensions. 6 69 . New York and elsewhere. Financial Markets. However. Japan and Singapore work at free trade in services in the financial area first and then talk about integration with others.The Future of Capital Market Development in East and South East Asia bonds and foreign currency are very easily traded in other markets. which are relatively straightforward products with the information intensity. I think my point today is very simple. We need a common forum for technical discussions first. Can we have a phased approach to regional integration? Gordon de Brouwer6 from the Australian National University has written a very good paper. Hong Kong has got more than 30 – 40 shares that are traded both in New York and Hong Kong.
We are all friends. The conduct of research on issues with strategic significance for Asia 70 . This is the lesson from Europe in the 1950s and 1960s where they began this kind of common platforms for common discussion. we should lower transaction costs. There are chapters in every market who are interested. But it is clear to me that the right approach is clearly a “win-win” situation and not a “win-lose” situation. we should work on inter-operability. you cannot get agreement. whether we agree or not. Clearly any talk about Asian financial cooperation and even integration is. We are all masters of our own destiny. a long journey. I am just posing these questions so that we can put them forward for better debate. I believe. the debate on issues. the previous proposals such as the Asian BIS and the Asian Monetary Fund were too politically charged. So what are the conditions for increasing the liquidity? Clearly we should work on common products.The Future of Capital Market Development in East and South East Asia As I said. we should work on interconnectivity. before they even think about working together technically. What I am proposing here. I don’t have the solutions. standards. We can sit down and talk technically what are the issues. What we need is actually an independent and nonprofit making research institute that studies these areas from an Asian perspective. so that we don’t have to fight over where to establish the headquarters. goals and processes. Europe’s experience is that cooperation is not possible unless there are not only common goals. With such different regional perspectives. but also common channels of discussion at the operational level. tentatively. is that we should establish an Asian Financial Institute. There will be no physical headquarters.
and fraudulent behaviour is punished. We should cooperate to set our own standards. To conclude. where markets perform their functions much more efficiently. have a say in these global standards. The quality of all our markets and players must be enhanced to improve the quality of our markets. In my personal opinion. 71 . Thank you very much. So one priority is to improve corporate governance. basic to what I am saying today is that the Asian growth model which was based on a dualist model of development must be re-written in order to have a globally efficient and regionally “fitting” model. Knowledge is no longer domestically exclusive and the whole idea of discussions of the Asian Financial Institute is to strengthen our capacity building. And we can attract the best and brightest from around the world to work on this. As we mature. we could afford large bets and more risks. non-integration is not an option. and the inherent risks from imbalanced growth need to be addressed. Personally. Either we do this or we continue with our individual agenda and see continued marginalisation of our individual markets. and work together to improve the liquidity of our markets. we need to move towards more balanced growth and better national risk management. where trust is rewarded.The Future of Capital Market Development in East and South East Asia would deepen our understanding of the implications of global developments and provide a basis for an objective debate on win-win solutions for us all. When we were younger economies. I do believe that the future of Asian financial markets is very very bright indeed. To me that would not be the optimal future for Asia. but we have to play by global rules and standards.
Distinguished Guests. is no easy feat. as well as the Chief Executive Officer of the Hong Kong Science and Technology Parks. errors and omissions are those of the author. Ladies and Gentlemen. but I want to stress that these views are not necessarily those of the Commission7. I am extremely honoured to be invited to deliver the third of the Vocational Training Council’s 20th Anniversary Distinguished Lecture Series. I want to start this lecture with the usual caveat as a securities regulator. The views expressed in this lecture are totally personal. since I believe that we have reached an important crossroad in our objective of promoting investor protection in Hong Kong. 7 72 . including non-executive directors. I want to put these views out for airing.POST-ENRON IMPACT ON REGULATION OF FINANCIAL MARKETS Vocational Training Council 20th Anniversary Distinguished Lecture Series “Post-Enron impact on regulation of financial markets” 23 September 2002 89 Professor Lee Ngok. I am grateful to Ashley Alder and other colleagues in the Commission for valuable comments and to Rosetta Chiu for secretarial assistance. Professor David Lim. I have consulted some of my colleagues in the preparation of this lecture. All opinions. Following a distinguished scientist and new Chancellor of HKU.
I propose to divide this lecture into three parts: • • • An overview of what went wrong and what the major markets are doing to fix it. Corporate governance has failed because the various checks and balances within the system have been weakened by the conflicts of interest that exist at different levels.Post-Enron Impact on Regulation of Financial Markets As you are all aware. and The role of the SFC in tackling corporate misconduct. In other words. WorldCom and others are still unwinding. the “perfect storm” of corporate governance failure in the United States. Post-Enron change in regulations The importance of good corporate governance came sharply into focus after the Asian crisis. The current structure of regulation of listed companies in Hong Kong. as one senior US regulator told me. but it would appear to be. and attention to this became universal after the tech bubble of 2000. In the last year. Because the United States is the largest and deepest 73 . corporate failure and the failure of corporate governance has become a household topic. the hangovers (or rocks) begin to appear. Reasons for their failure are still being debated. roughly equivalent to the drop in the whole Hong Kong market capitalization during the same period. the total market cap loss for Enron and WorldCom was US$80 billion (HK$624 billion). post-Enron and WorldCom. The stories of Enron. when both US and European regulators realized that the bubble may have been partly fuelled by bad accounting and corporate misconduct. after the party (or when the tide goes out).
there are in fact four important lines of defence against corporate misconduct. with the most sophisticated regulatory structure. legal and market history. and Retrieval system. The first line of defence against corporate misconduct is clearly the management or Board of Directors itself. US Senate “The Role of the Board of Directors in Enron’s Collapse”. Committee on Governmental Affairs. The US securities framework stems from the 1929 Wall Street crash. Analysis. now under the famous EDGAR8 system. including the independent non-executive directors. by allowing Enron to engage in high risk accounting.Post-Enron Impact on Regulation of Financial Markets of securities markets. This rules-based system is based on “caveat emptor”. In the US. It is premised on statutory disclosure. Report 107-70. Corporate governance is steeped in each jurisdiction’s financial. which led to the 1933 and 1934 securities legislation that founded the SEC. and which is presumptively material. who should represent the public interest. The US Senate report on the role of the Board of Directors in Enron’s Collapse9 clearly stated that there was fiduciary failure – “The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States. it is worth spending some time to explain the differences between the US system and the Hong Kong system (which is broadly based on the UK and Australian common law framework). 8 July 2002 8 9 74 . with a set of rules that specify the disclosure that issuers must make to investors and the public. with companies seeking public funding being required to file statutory information with the SEC. inappropriate Electronic Data Gathering. or buyer beware.
ranging from fines to jail sentences. extensive undisclosed off-the-books activities. the US exchanges closely monitor companies listed on their exchanges and frequently delist companies that do not perform. bankers and rating agencies who should provide independent and professional advice on corporate performance. 75 . lawyers. The third line of defence is the regulatory framework for listed companies. willful violation of securities regulations is a criminal offence. In the United States. including compliance with the relevant codes of conduct. Generally. whereas in UK. For example. For example. As the recent cases show. The question whether underpaid non-executive directors can stop important corporate misconduct is still being debated in many jurisdictions. in the US and some parts of Europe. but all the issuers must file statutory information with the SEC. investment bankers. This is where the regulatory oversight of such professionals comes in. the profession is by and large still self-regulatory. The second line of defence lies with the corporate advisers. professional valuers. the exchanges such as NYSE and NASDAQ assess eligibility according to their rules and quantitative criteria. the question of independence of opinion has sometimes been called into question.Post-Enron Impact on Regulation of Financial Markets conflict of interest transactions. NASDAQ delisted 770 companies last year. The US has a huge range of sanctions. other parts of Europe and Hong Kong. sponsors. and excessive executive compensation”. on the provision of false or misleading information. In addition. rules and laws. the auditing profession comes under public oversight. such as auditors. when these professional advisers draw substantial fees from their clients.
nearly 2. I want to point out that such class action-contingency fee system is not available in the UK. controlling shareholders and their advisers are more careful to act without provoking costly class action suits. Nevertheless. Such a powerful weapon in the hands of minority shareholders ensures that directors. whereby shareholders can jointly undertake direct legal action against management or majority shareholders where they feel that they have been disadvantaged. Strengthening the independence of firms that audit public companies by having the SEC prohibit the provision of consulting services to • 76 . which seeks to strengthen corporate governance and auditing oversight by: • Creating an independent Public Company Accounting Oversight Board to enforce professional standards. cheating or fraud. the US authorities have quickly enacted the Sarbanes-Oxley Act on 30 July.Post-Enron Impact on Regulation of Financial Markets of which 390 were delisted for non-compliance with listing requirements. because of a different legal tradition and the view that it would encourage a litigious society. the US state and federal prosecutors’ offices can take severe action against corporate stealing. In addition. Australian and Hong Kong legal systems. 2002. Finally. To be fair. the three lines of defence are buttressed by the class action-contingency fee system.7 times more than the 145 companies that were newly listed. even under such powerful checks and balances the cases of Enron and WorldCom have slipped through. ethics and competence for the accounting profession.
the Market Abuse 77 . Protecting the independence and objectivity of securities analysts by directing the SEC to review rules ensuring their independence. notably in the areas of offbalance sheet transactions and insider trading. the Investment Services Directive. I have spent some time on the US system because market analysts who are familiar with the US system often wonder why we cannot adopt US-type legislation and rules into the Hong Kong system. and Increasing the resources available to the SEC. These include the development of the Prospectus Directive. and the role of rating agencies. the separation of audit and nonaudit work. the European Commission has issued a series of major reform directives aimed at harmonizing and strengthening the securities markets in Europe. As I hope to show later. Directing the SEC to undertake comprehensive reviews of corporate governance. This is founded on a popular misconception.Post-Enron Impact on Regulation of Financial Markets • • • • • audit clients. the Transparency Obligations Directive. In Europe. Requiring CEOs and CFOs to personally vouch for the veracity of their financial statements and providing much stiffer penalties for fraud. and we need to understand how best to protect shareholder rights within our own legal and regulatory framework. Strengthening disclosure requirements for public companies. each system is very different. when these services create conflicts of interest.
Discussion Paper 14. which lay down the requirements that issuers of securities to the UK primary markets need to meet. following the final report of the Steering Group of the Company Law Review. which modified the common law action and Financial Services Authority. On 16 July 2002. • • In Australia. Amongst the major reforms were: • The introduction of a statutory derivative action against corporate wrongdoing. and On 30 July 2002. the FSA issued a consultation paper on the review of the listing regime10. the UK Government issued a White Paper indicating that the companies law would be simplified and modernized for all companies.Post-Enron Impact on Regulation of Financial Markets Directive and the amendment of the Admissions to Listing Directive. July 2002 10 78 . The Competent Authority for Listing is responsible for making the Listing Rules. It is also responsible for admitting securities to the UK’s Official List. the function of the Competent Authority for Listing was transferred from the London Stock Exchange (which had held this role since 1984) to the Financial Services Authority (FSA). the Corporate Law Economic Reform Program Act was passed in October 1999 and came into force on 13 March 2000. and for policing compliance with these Rules. “Review of the Listing Regime”. The United Kingdom has also been upgrading its company law and securities regulatory framework: • In May 2000.
are actively reforming their corporate governance and their securities market regulatory structure. ensuring that those investing in Hong 79 .Post-Enron Impact on Regulation of Financial Markets circumstances under which shareholders can enforce their rights. the China Securities Regulatory Commission has also made impressive strides in corporate governance measures for listed companies. and Strengthening enforcement by closer cooperation with the police. All these go to show that major markets. Corporate Governance & Protection of Investor Rights in Hong Kong Hong Kong has not been idle in pushing for reforms in corporate governance. Delisting of poorly performing companies. • The clarification of directors’ duties of care and diligence. our primary objective is “to establish Hong Kong as a paragon of corporate governance. As the Financial Secretary said in the 2001-02 Budget Speech. such as: • • • • Rules requiring the appointment of independent non-executive directors. Quarterly reporting. In the Mainland. and • The establishment of new institutional arrangements for the Australian accounting standard setting process. including the Mainland market.
• SCCLR is now forging ahead with the second phase of the review to examine the role and functions of Audit Committees. A Consultation paper on specific proposals relating to directors’ duties. The Administration is looking at how best to take forward these recommendations. and the efficiency of our present corporate reporting regime. February. Much of the material in this section is taken from the report by the Financial Services Bureau to the Legco Panel on Financial Affairs. shareholders rights and corporate reporting enhancements was issued in July 2001. “Continuous Efforts to Strengthen Corporate Governance: Review of Listing Rules and Other Initiatives”. which are very close to measures being adopted in the major markets. • A comprehensive review of corporate governance by the Standing Committee on Company Law Reform (SCCLR) began in 2000. and the results of that consultation are awaited.Post-Enron Impact on Regulation of Financial Markets Kong are afforded the best protection and that our listed companies are managed with excellence11”. and corporate reporting and disclosure of information. The major initiatives include the following: • A major consultation paper by HKEx on changes to the Listing Rules relating to corporate governance. directors and board practices. 2002 11 80 . The SCCLR has received widespread support from the community on many subjects. The consultation was completed in May. which covers protection of shareholders’ rights. developing financial reporting standards for different companies.
establish a Market Misconduct Tribunal. NASDAQ or NYSE) handles the listing. Hong Kong has also begun to witness its fair share of corporate incidents. While these initiatives are being pushed forward. • The consultation paper on May 6. It will enhance the transparency of listed companies.g. the SFC has cochaired with the Italian securities regulator. If these are adopted by IOSCO. as well as providing investors with a private cause of action for false or misleading public communications. Recently. CONSOB. where the exchange (e. but the statutory regulator can enforce if listed companies disclose information that is false or misleading. This moves Hong Kong closer to the US SEC model. • The Securities and Futures Ordinance (SFO) was passed in March and is expected to be in force in early 2003. which called for regulators to intervene in corporate transactions. and • On the international front. we could readily apply them for Hong Kong.Post-Enron Impact on Regulation of Financial Markets This work is expected to be completed by the end of 2002. and augment the SFC’s investigatory power. there has been a spate of minority shareholder activism. a Task Force on Transparency and Disclosure to develop a set of International Ongoing Disclosure Standards. Minority shareholder activism in Hong Kong is a very healthy sign. 2002 on subsidiary legislation to be made under amendments to the regulations under the SFO was issued to empower the SFC under the SFO to become the statutory regulator of listed company disclosure. and there is a very good reason why 81 .
minority investors are concerned that majority shareholders may enter into transactions that may dilute their interests or that are prejudicial to their rights. ICAC in corruption and CCB in fraud and theft]. during a bear market. and in insider dealing and market manipulation. we have one regulator in charge of the entry requirements for listed companies [Stock Exchange]. Hence. their conduct in transactions [under the Takeovers & Mergers Code and Listing Rules] and the enforcement of applicable legislation. because all investors hope that asset prices would rise. such as the Companies Ordinance and the SFO.Post-Enron Impact on Regulation of Financial Markets there are currently more investor complaints. and many more with oversight over the conduct of their business [such as the Stock Exchange under Listing Rules. the rules covering corporate behaviour comprise both codes and rules. whereas the latter can include statutory sanctions. Under the current regulatory regime in Hong Kong. for example. The Financial 82 . as well as legislation. There is a need to regulate listed companies because entities that raise funds from the public have a duty to the public to be honest and fair in their dealings. Suspicious transactions are less obvious during a bull market. a Code of Conduct governing the behaviour of corporate finance advisers. As you can see from Figure 1. listed companies are normally regulated through entry requirements [under the Listing Rules]. However. There is. such as the non-statutory Listing Rules for listed companies. such as the Companies Ordinance. The main difference between codes and legislation is that sanctions for breach of the former do not have statutory backing. ranging from civil damages to jail sentences. the SFC under the Takeovers Code.
as the recent Standard & Poor’s review of Hong Kong Corporate Governance12 says. Corporate misconduct can be divided into different levels of seriousness. The exit of companies from the Exchange depends upon the Listing Rules and also on the liquidation process. Second. the fundamental principle of full and fair disclosure is that the listed entity should provide all information that would be material or relevant to an investor’s investment decision as to its financial condition and future prospects. Hong Kong is a leader in the corporate governance domain. I would like to make three relevant points: • • • First.Post-Enron Impact on Regulation of Financial Markets Secretary can appoint special inspectors under Section 143 of the Companies Ordinance.” We do have some of the best run companies in Asia. the core issue is whether there should be a single lead corporate regulator or co-ordinating body that ensures a consistent. ranging from incompetence. the regulators’ involvement in transactions of companies after they are listed come in two areas – a “middle Standard & Poor’s. 15 February.standardpoor. available on http://www.com 12 83 . This is where enforcement against false and misleading information comes in. “compared with other Asian countries. most listed companies in Hong Kong obey the law. Third. and unfair transactions to outright stealing. 2002. Indeed. Since corporate misconduct cuts across many areas and the jurisdiction of several regulators. coherent and firm response to corporate misconduct in Hong Kong. “Corporate Governance in Hong Kong”.
Then there are the “after-the-transaction” enforcement actions. • Firstly.Post-Enron Impact on Regulation of Financial Markets ground” of transactions where the regulators are often involved in ensuring that their own rules are complied with before the transaction happens. which governs the entry of listed companies. This is because the Stock Exchange administers the Listing Rules. These involve our Enforcement Division. A disclosure-based regulatory system was adopted for the Growth Enterprise Market (GEM) when it was established in 1999. the perception of the nature of its regulatory role began to change. The Stock Exchange basically operated a merit-based regulatory system in vetting the entry of listed companies for the Main Board. After demutualization and listing of the exchange in 2000. which are largely the preserve of the Exchange and the SFC. Under the 1991 Memorandum of Understanding between the SFC and Stock Exchange of Hong Kong. the Police and sometimes the ICAC. I shall elaborate on our enforcement functions. I shall concentrate in this section on the “middle ground” of corporate transactions. a large part of the conduct of listed companies and their exit or delisting. In the next section. the Stock Exchange (now part of HKEx) is the frontline regulator of listed companies. Its 84 . which require investigation and prosecution of wrongdoing. a for-profit exchange could not be given statutory enforcement powers.
there is a widely held view that a listed company should not regulate other listed companies. The bulk of these transactions do not involve regulators because. Hong Kong has overall a good corporate governance framework. the market perceives. The bulk of these corporate governance attributes. Listed companies in Hong Kong engage in thousands of commercial transactions every day. unlike in the US or UK where the SEC or FSA can impose civil fines. and their auditors. Others are regulated by self-regulatory organisations. 85 . Third. administered by the SFC. Tough enforcement cases can lead to lawsuits that hurt corporate value. sponsors and investment bankers. legal advisers. as I said. that a for-profit exchange has a commercial incentive to encourage listings. Secondly. rightly or wrongly.Post-Enron Impact on Regulation of Financial Markets • • relationship with other listed companies is contractual in nature. administered by the Exchange. therefore. which carry no statutory sanctions. in the middle ground of day-to-day corporate transactions. the Board committees. but tackling corporate misconduct involves cost and risk. Thus. As I explained earlier in describing the US regulatory system. the first and second lines of defence against corporate misgovernance lie in the integrity and conduct of the management of the company. and the Takeovers Code. fall to be regulated within the purview of the Listing Rules. the third line of defence depends on the role of the regulators in overseeing such transactions. the Listing Rules. and often no commercial gain. This middle ground is currently covered by two sets of codes.
When these transactions fall under the Listing Rules or the Takeovers Code. requiring voting by independent shareholders. which would involve considering whether the applicant or their advisers had done their work properly.Post-Enron Impact on Regulation of Financial Markets There are. which is the fourth line of defence. litigation is expensive in Hong Kong. Under our common law system. transactions that can be disputed by shareholders. whether there is full and fair disclosure. which would then go through the appropriate market consultation and due process. requests for clarification and independent valuations. The issue really boils down to whether corporate behaviour can be effectively regulated through nonstatutory rules or codes. At the controversial end of the spectrum of transactions are those that appear unfair but comply with the non-statutory rules. Such due diligence may include requirements for greater disclosure. Codes of conduct can work where breaches can be disciplined as conditions of exit. quite properly. creditors and other corporate stakeholders that should fall under the purview of the courts. However. it is only the courts that are. the responsible regulator does the due diligence on compliance. These should lead to rule changes. where private/public reprimands or censures are seen at best as slaps on the wrist. But in the case of 86 . entrusted with deciding whether a transaction is legitimate. or where those who do not comply can effectively be excluded from the market. so it is not surprising that shareholders call for the regulators to intervene in disputed transactions. and there is no class action/contingency fee system. such as the threat of withdrawal of licences. and in specific cases. however. as in the Takeovers Code.
under the SFO subsidiary legislation. In order to strengthen the sanctions on disclosure. Injunctions to restrain breaches of the SFO. the SFC can exercise its Section 182-3 SFO investigatory powers to investigate. such as: • • • • • • • Suspending trading in listed securities. It also has a range of enforcement options. if disclosure is materially false or misleading. we consulted the market in May on “dual filing”. revocation and suspension of 87 . unfair prejudice or crime or misconduct in a listed company. which would make the Commission the statutory regulator of listed company disclosure. Winding up applications. reprimands. For example. Criminal prosecution for disclosing false or misleading information about securities. We are pleased that the results of the consultation exercise supported the suggested rule changes. which should be effective at the beginning of next year. Consequently.Post-Enron Impact on Regulation of Financial Markets listed companies. Recommending to the FS civil actions before the Market Misconduct Tribunal for disclosing false or misleading information about securities. and Disciplinary action (including fines up to $10 million. inadequate disclosure. particularly with respect to the disclosure-based regulatory framework for the GEM. delisting has so far not been used as a disciplinary tool. The Commission has identified this gap in the enforcement of corporate disclosure. Applying for court orders to remedy oppression. and the Government has approved this move. all information to be filed with HKEx will be required to be dual filed with the SFC too.
The problem is that. much to the frustration of minority shareholders. despite reforms like these. and quick delisting action by the Exchanges. in SEC powers and remit. The need to coordinate regulatory roles leads to delays in regulatory response. the present Hong Kong model is very different from the “US model” of regulation and minority protection. where the US legal system enables aggrieved shareholders to sue on bad disclosure and other grounds through class action/contingency fee arrangements. the corporate governance structure and transactions under the Listing Rules. But there the Listing Rules are 88 . Legal action is also costly to pursue there. The SFC is directly responsible for the Takeovers Code and is also tasked to monitor and supervise that front-line regulator. In sum. such as the Takeovers Code. The UK is closer to Hong Kong so far as minority shareholder suits are concerned. the company may try a modified transaction with a similar motive under the Listing Rules. There are also many other differences. we currently have a middle ground that has a front-line regulator looking after entry and exit. regulatory arbitrage can occur since if one transaction fails the regulatory test under one set of regulations. This is where the current dual or split regulator roles lack clarity and add complexity and costs to the whole process. because no one regulator has the total picture of what the perpetrator is up to.Post-Enron Impact on Regulation of Financial Markets licences) against a listed company's SFC licensed corporate finance advisers. institutional investor pressure. as some recent cases have shown. Indeed.
It is the main bulwark against corporate misconduct when.Post-Enron Impact on Regulation of Financial Markets administered by the FSA as statutory regulator and it has the ability to impose fines for breach of the rules. All I can do is to point out that there is ample international experience and debate on these issues that we can draw upon. is able to function at its full potential. First. generates public confidence and is checked by administrative appeals and the possibility of judicial review. there are no other compensating mechanisms and the result is that the whole area of investor protection cannot operate at its full potential. 89 . Stern administrative sanctions enforced by a strong independent agency covering the full range of core listed company regulation is a credible deterrent – it is quick. efficient. In other words. whether the present “middle ground” regulatory structure and processes should be simplified so as to avoid duplication and delays in regulatory response to corporate misconduct. in practice. whether we should move to a statutory regime to improve corporate governance to protect shareholders’ rights. nor do we underestimate the resources and expertise that are needed to undertake this task. If the middle-ground regulators are weakened. These are important questions that only wide public consultation and the government and legislature can answer. two major policy issues need to be addressed. currently administered by the Exchange and the Commission. I personally. It is vital in Hong Kong that this “middle ground” of regulation. and second. My colleagues and I do understand that there are complexities involved in making such policy choices. legal remedies are hard to pursue.
The Role of misconduct SFC in combating corporate Finally. for voting by shareholders. there is no single corporate regulator in Hong Kong. the legal and financial advisers. The SFC also administers the Code on Takeovers and Mergers. accountants. as well as overseas regulators to investigate and pursue enquiries. It is important to understand that we cannot normally intervene in commercial transactions. and inspecting the books and records of listed companies if impropriety is suspected.Post-Enron Impact on Regulation of Financial Markets therefore. allow me now to describe how the SFC is combating corporate misconduct in the enforcement area. the SFC cooperates with other regulators. The Stock Exchange is the front-line regulator of listed companies. and administers the Listing Rules. The SFC shares the regulation of conduct of the listed company sector in the policing of insider dealing. the SFC must also act within its powers under the law. such as the Stock Exchange. to determine. the CCB and ICAC. As explained earlier. and cases outside the jurisdiction of Hong Kong. It is the gatekeeper in allowing companies to be listed. 90 . fraud and theft. In areas such as corruption. welcome the announcement by the Financial Secretary that the Government is considering appointing an expert group to look at these complex issues. statutory disclosure of interests in securities (SDIO). and professional valuers and in specific cases. This is for the Board of Directors. As a statutory regulator safeguarding the rule of law in the securities field.
any announcement of investigation can lead to a sharp drop in the share price of the company being investigated. Mr. • Many of the listed companies in Hong Kong also have operations outside Hong Kong. leading to the destruction of evidence or abscondment. our Executive Director of Enforcement. Some of you may wonder why we have stayed silent on a number of high profile cases. The reason is that section 59 of the SFC Ordinance imposes an obligation of secrecy on SFC personnel in conducting investigations. Alan Linning. Whilst we cannot comment on live cases or investigations. Third. I can say categorically that we are currently investigating a number of cases that have received high media profile in recent months.Post-Enron Impact on Regulation of Financial Markets Three significant factors unique to the Hong Kong market govern our approach to combating corporate misconduct: • Nearly three quarters of the companies listed in Hong Kong are incorporated outside Hong Kong. First. There are good reasons for this. and • We therefore must cooperate closely with Hong Kong and overseas regulators to investigate companies listed in Hong Kong. causing potential losses to the shareholders. Second. has already in his press briefing on 24 June stated that the top priority in 2002-2003 will be 91 . any information leakage may tip off those under investigation. The same restrictions apply under section 378 of the new SFO. such leaks may prejudice subsequent criminal trials.
1 fined.2 million in penalties (involving shares in Tysan Holdings. we had 4 people convicted in 3 cases last year (Good Fellow Group. Perfectech International and The Hong Kong Parkview Group). We have 19 active cases that we are discussing with the CCB. We have one of the best records in insider dealing prosecutions outside the United States.8 million in profits and $23. In the disclosure of interests prosecutions. which require increased transparency regarding insiders’ share dealings. 4 more cases are under investigation and 8 are awaiting referral to the Insider Dealing Tribunal. 14 92 . In the first quarter of 2002. we had 3 major successes. disgorging $22. including 7 cases that involve listed companies.Post-Enron Impact on Regulation of Financial Markets corporate governance investigations.2 jailed. The courts are getting tougher . with full cooperation with the CCB. The CCB has charged 2 more persons in the Gay Giano case. 4 persons were convicted in 2 cases (Grand Field Group and Gay Giano International Group). statistics should suffice: • A few simple • • • • • We have already initiated 4 section 29A investigations and 3 section 33 investigations into listed companies since March this year alone. Indesen Industries and China Apollo). In the area of market manipulation activities. 1 given suspended a sentence and community service. Last year.
but we persevered to successful settlement. I wish to state that the Government has taken the advice of the SCCLR and asked the Commission to look into the possibility of developing a statutory derivative action. This investigation and case took 6 years. but the Commission is actively studying the matter. 4 persons and 2 companies have been prosecuted under SDIO. As the SCCLR Consultation document pointed out. In the matter of derivative actions. I would like to warn all those who engage in corporate misconduct that we will not hesitate to use our powers under the SFO to pursue them to court. My Enforcement colleagues are already actively looking. including 4 section 33 investigations. and In the last 12 months. As you are all aware. we imposed 2 “cold shoulders” under the Takeovers Code. and 16 warning letters were issued. The Commission is currently beefing up its enforcement and corporate finance resources to tackle 93 . with 72 warning letters issued. in which we withdrew our section 45 SFCO winding up application only after the defendant agreed to buy out the minorities at fair value. the common law derivative actions for shareholders are complicated. In the first quarter of this year.Post-Enron Impact on Regulation of Financial Markets • persons and 8 companies were successfully prosecuted and fined in the year to March 2002. with 4 active investigations involving serious breaches of the Code. the Commission successfully undertook the first legal suit under section 37A SFCO in the case of Mandarin Resources for unfair prejudice.
The opportunities are huge. those who break the securities law are now warned. We will pursue them without fear or favour. 94 . but so are the pains of adjustment. In exercising regulatory functions. In short. If Hong Kong is to maintain its role as an international financial centre and the leading overseas fund raising centre for Mainland and other regional companies. The lessons of Enron and WorldCom are quite clear. the Commission has strengthened its cooperation with both the CCB and the CSRC in the investigation of corporate misconduct in Hong Kong and also the activities of Hong Kong listed companies in the Mainland. We will increase our vigilance and we will strive to complete our investigations as fast as we can work together with our regulatory counterparts.Post-Enron Impact on Regulation of Financial Markets these areas as a matter of priority. I am always reminded of the line that Dr Goh Keng Swee. They will be investigated and prosecuted in accordance with the law. we can stifle the entrepreneurship of the majority of listed companies that are law abiding and seek to raise funds from the public as efficiently and with as low costs as possible. former Deputy Prime Minister of Singapore used in paraphrasing an old Chinese saying. It will add 15 staff to this area by the end of the year.” If we over-regulate. “regulation [governance] is like frying small fish – it must not be overdone. honest and fair. then we must press ahead with our reforms in the regulatory and infrastructure areas. Ladies and Gentlemen. Those who seek capital from the public have a fiduciary duty to the public – to be truthful. In addition.
Thank you very much. Irrespective of these factors. the Commission is committed to defending the integrity of our markets. There are clearly structural issues in the Hong Kong regulatory framework that need to be addressed. Under the new SFO. Securities and Futures Commission 95 . and punishing those who break the law. I want to thank the Vocational Training Council once again for giving the opportunity to present these personal views.Post-Enron Impact on Regulation of Financial Markets Hong Kong has always prided itself as the freest of markets. Each market must find its own right balance. a small minority that exploit loopholes or deliberately skirt the law can do huge damage to the integrity of our markets. which has finally come into being after more than a decade in the making and which has strengthened our ability to do our job. On the other hand. We all share the same objective to protect the integrity of our markets and the rights of shareholders. Enron and WorldCom have already demonstrated what can happen in the largest and best regulated of markets. There is no easy solution. the Commission will work closely with the Stock Exchange and all the other regulators in Hong Kong and abroad to tackle corporate misconduct as a matter of top priority. if we under-regulate. The regulation of financial markets needs to walk that delicate tightrope between rewarding trust and efficiency.
Post-Enron Impact on Regulation of Financial Markets 23 September 2002 96 .
Figure 1 Corporate Governance: Entry.Prospectus law Criminal Law .statutory .Fraud AntiCorruption Laws Corrupt ion Delisting . Conduct & Exit ENTRY CONDUCT & TRANSACTIONS EXIT Post-Enron impact on regulation of financial markets Code.Regulation of acquisitions & mergers Securities and Futures Ordinance Investi gation Insider dealing Market manipulation Protec tion of shareholders’ rights Statutory Companies Law . Rules and Law Listing Rules Listing Rules Corpor ate disclosure Direct or & board practices Protec tion of shareholders’ rights Takeovers & Mergers Code .Listing Rules Insolvency Legal Status Nonstatutory Non-statutory Non-statutory Statutory Statutory Statutory LR – Nonstatutory Companies Ordinance .Stealing .Special investigation .
Police ICAC HKEx Official Receiver 98 .安然事件對金融市場監管的影響 Regulator HKEx HKEx SFC SFC FS Registrar of Companies CCB.
240 億港元)，約相等於香港同期股市市值的總 跌幅。 我打算將這次演講分成三部分： • 首先，我會概述企業管治問題的癥結和各主要市場 正採取的補救行動； • 目前監管香港上市公司的架構；及 • 證監會在處理企業失當行為方面所擔當的角色。 我很感謝歐達禮先生與其他證監會同事就這篇講稿向我提供寶貴的意見，亦多 謝趙雅賢女士在秘書事務上為我提供協助。本講辭內一切觀點、錯誤及遺漏完全 屬於作者本身的責任。 13 99 .安然事件對金融市場監管的影響 職業訓練局二十周年 傑出學者／企業家講座 2002 年 9 月 23 日 90 李鍔教授、林麟書教授、各位傑出學者、各位嘉賓： 大家好！我很榮幸獲邀在職業訓練局二十周年的第三場 傑出學者／企業家講座上發表演說。不過，緊隨國際知名的傑 出科學家兼香港大學新任校長以及香港科技園行政總裁之後發 表演講並不輕鬆。 我想在演說的開首作出證券監管者一般會作出的聲明： 今次演說的內容純屬個人意見。雖然我在預備講稿時曾徵詢若 干同事的意見，但我想強調，以下意見不一定代表證監會(包 括證監會非執行董事)的立場 13。我希望發表這些意見，是因為 我相信在完善香港投資者的權益保障這個目標的進程上，我們 正處於一個重要的轉折點。 眾所周知，自美國發生 Enron(安然) 及 WorldCom(世 界通訊)事件後，企業倒閉和企業管治失當事件已成為熱門的 話題。去年，安然及世界通訊事件所涉及的市值損失總額達 800 億美元(6.
Analysis and Retrieval System。 14 100 .安然事件對金融市場監管的影響 安然事件發生後的規例修訂 亞洲金融危機爆發後，良好的企業管治的重要性立即備 受注目。 2000 年科技股泡沫的破裂，使歐美的市場監管機構 理解到，科技股泡沫在某程度上可能是因差劣的會計帳目和企 業失當行為所導致的，而這亦使到企業管治成為全球關注的課 題，換言之，歡呼聲過後(或潮水退後 )，問題(或礁石)便開始 顯露和呈現。 安然、世界通訊及其他有關公司事件的始末正逐 步揭 露 。 人們仍在爭論這些公司的倒閉原因，但情況似乎是，正如一名 美國監管機構高層人員向我表示，美國出現了有史以來最嚴重 的企業管治失當事件。企業管治之所以失當，是由於有關制度 的若干制衡機制被不同層面的利益衝突削弱所致。由於美國擁 有規模最大、最具深度的證券市場，並且設有最嚴密的監管架 構，因此 值 得我花點時間解釋美國與香港的制度 (香港的制度 大致上建基於英國和澳洲的普通法制度)之間的分別。 企業管治攙合於每個司法管轄區的金融、法律和市場歷 史 之 中 。 美 國 於 1929 年 發 生 的 華 爾 街 股 災 ， 促 使 當 局 在 1933 及 1934 年訂立有關的證券法規及成立美國證券交易委 員會(SEC)，形成了美國現行的證券監管制度。該制度是以法 定的信息披露為基礎，規定任何打算向公眾集資的公司都必須 透過著名的電子數據收集、分析及檢索系統(EDGAR)14，向美 國證券交易委員會呈交法定資料存檔備案。這個以規則為本的 制度是以 “買方自負 ”原則 (caveat emptor)為基礎，設有一 套規則以指明發行人必須向投資者和公眾披露按推定理應是重 要的的信息。 事實上，美國設有四道遏止企業失當行為的重要防線。 很明顯，第一道阻止企業失當行為的防線是企業的管理 層或董事局本身，包括應該代表公眾利益的獨立非執行董事。 美國參議院在《董事局在安然倒閉事件中所擔當的角色報告 書》 15中，清楚指明安然事件涉及有關方面未有履行受信責任 ： EDGAR 的英文全稱是 Electronic Data Gathering.
7 倍。另外，美國各州及聯邦檢察部門 亦可採取嚴厲的行動來打擊企業盜竊、行騙或欺詐罪行。 最後，上述三道防線以集體訴訟及勝訴收費制度作後盾 任何股東若認為利益受損，均可聯手對有關公司的管理層或大 股東直接採取法律行動。小股東掌握這項強力武器後，便可確 保公司的董事、控權股東及其顧問加倍謹慎行事，以避免引發 費用高昂的集體訴訟行動。 美國參議院政府事務委員會，《董事局在安然倒閉事件中所擔當的角色報告書》， 頁 107-70，2002 年 7 月 8 日。 15 101 .安然事件對金融市場監管的影響 “安然的董事局未有保障公司股東的權益，並因允許安然 進行高風險的會計帳目活動、進行存在利益衝突的不恰 當交易、大量未經披露的帳外活動以及向行政人員支付 過高薪酬，導致這美國第七大上市公司倒閉。” 很多司法管轄區仍在討論薪酬偏低的非執行董事是否可 以阻止嚴重的企業失當行為的發生。 第二道防線為企業顧問，例如審計師、律師、專業估值 師、保薦人、投資銀行、銀行家和信貸評級機構等，他們應就 企業的表現(包括其遵守相關操守準則、規則及法例的情況)提 供獨立專業意見。近期的個案顯示，由於上述專業顧問向其客 戶收取巨額費用，因此人們便會質疑他們所提供的意見的獨立 性。這就是為何上述專業人士本身亦須受到規管。例如，在美 國和若干歐洲國家，審計師受到公眾監督。然而，在英國、歐 洲其他國家和香港，審計行業仍普遍實行自我監管。 第三道防線是上市公司的監管制度。美國的交易所 (例 如紐約證券交易所和納斯達克)按照其相關規則和數量準則來 評審公司的上市資格，而所有發行人必須向美國證券交易委員 會呈交有關的法定資料以作存檔備案。美國的制度設有由罰款 以至判監等不同形式的制裁，從而懲處提供虛假或具誤導成分 信息的人士。一般而言，蓄意違反證券法規屬刑事罪行。此外， 美國的交易所會密切監察在其上市的公司，並經常將表現欠佳 的公司除牌。例如，去年有 770 家公司在納斯達克被除牌， 其中有 390 家因未有遵從上市規定遭除牌，數目接近新上市 公司總數(145 家)的 2.
安然事件對金融市場監管的影響 我想指出英國、澳洲及香港的法制並不設有上述集體訴 訟及勝訴收費制度，原因是這三個司法管轄區採用另一套法律 制度，並認為此舉會促使社會上形成動輒興訟的風氣。 然而，縱使設有上述強大的制衡機制，仍然難以避免安 然和世界通訊事件的發生。為秉持公平行事的原則，美國當局 迅速在 2002 年 7 月 30 日制定《塞巴尼斯－奧克斯雷法案》 (Sarbanes-Oxley Act)，透過以下措施加強企業管治及審計監 管： • 成立獨立的上市公司會計審察委員會以強制執行會計 業的專業標準、操守準則和專業能力； • 美國證券交易委員會禁止有關方面向審計客戶提供 涉 及利益衝突的顧問服務，從而加強上市公司帳目審 核的獨立性； • 規定公司的行政總裁和財務總監須親自認證公司的財 務報表的真確性，以及就欺詐行為訂立更嚴厲的 罰則； • 加強上市公司的信息披露要求，尤其是 涉 及帳外交 易和內幕交易等範疇的規定； • 指示美國證券交易委員會檢討確保證券分析員的獨立 性的規則，以保障其獨立性和客觀性； • 指示美國證券交易委員會全面檢討企業管治、審計與 非審計工作的分隔，以及信貸評級機構的角色；及 • 增加美國證券交易委員會可動用的資源。 以上我花了點時間講解美國的制度，是因為熟悉美國制 度的市場分析員往往會質疑，為何我們不能將美國模式的法規 納入香港的制度。他們有此想法是因為他們普遍存有某種誤解。 我將於稍後解釋這兩個制度其實截然不同，而我們亦需要了解 在我們本身的法律和監管制度之下保障股東權益的最佳方法。 在歐洲，歐洲委員會發表了連串重大的改革指令，旨在 協調和鞏固歐洲各證券市場，當中包括制定《招股章程指令》、 《透明度責任指令》、《投資服務指令》、《打擊市場舞弊指 令》以及對《上市准入指令》的修訂。 102 .
安然事件對金融市場監管的影響 英國亦正完善其公司法和證券監管制度： 在 2000 年 5 月，英國上市主管當局的職能由倫敦證 券交易所(該所自 1984 年起擔當這項職責)轉移至 英國金融事務管理局(FSA)。上市主管當局負責制 訂英國《上市規則》，即證券發行人及英國一級市 場需符合的規定，並監督該規則的遵從情況。上 市主管當局亦負責批准證券納入作為英國的正式 上市證券； • 在 2002 年 7 月 16 日，繼公司法檢討督導委員會發 表總結報告後，英國政府發表了白皮書，指出公 司法將予以精簡和現代化，以便適用於所有公司； • 在 2002 年 7 月 30 日，英國金融事務管理局就上市 機制的檢討發表諮詢文件16。 • 澳洲於 1999 年 10 月通過《企業法經濟改革計劃法案》， 並於 2000 年 3 月 13 日生效，當中提出以下的主要改革： • 引入遏止企業失當行為的法定衍生訴訟制度，以修訂 在普通法下實施的訴訟制度和規定股東可強制行使 其權利的情況； • 釐清董事應謹慎行事及勤勉盡責的責任；及 • 為澳洲的會計準則釐定過程設立全新的制度性安排。 在內地，中國證券監督管理委員會 (“中國證監會”)為上市 公司訂立企業管治措施的工作亦有顯著的進展，例如： • • • • 引入規定上市公司必須聘請獨立非執行董事的規則； 推出提交季度報告的規定； 規定表現差劣的公司須退市；及 中國證監會與公安部門更緊密合作，加強執法行動。 由此可見，各主要市場，包括內地市場，都正就本身的 企業管治和證券市場監管架構積極進行改革。 16 英國金融事務管理局，《上市機制的檢討》，第 14 號討論文件， 2002 年 7 月。 103 .
安然事件對金融市場監管的影響 香港的企業管治和保障投資者權益的情況 香港一直對企業管治的改革進程未有怠慢。正如財政司 司長在 2001-02 年度的財政預算案中表示，我們的首要目標是 “希望香港在企業管治方面成為典範，遠超區內的競爭對手。 我們要為投資香港業務的人士提供亞洲區內最佳的保障，讓本 港上市公司的企業管治水平……符合最高標準” 17。 香港就此所採取的主要措施包括以下各項： • • • • • 香港交易及結算所有限公司(“ 香港交易所 ” )發表重要 的諮詢文件，提出有關企業管治事宜的《上市規 則》修訂建議，當中涉及股東權益保障、董事及董 事局常規及企業匯報及資料披露。諮詢工作於 5 月 結束，市場正等待有關的諮詢結果； 公司法改革常務委員會(“ 常委會 ” )於 2000 年開始全 面檢討企業管治事宜，並於 2001 年 7 月發出諮 詢文件，載述有關董事責任、股東權益及加強企 業匯報的具體建議。常委會在多個範疇所提出的建 議都獲得社會人士的廣泛支持，而有關建議亦與 各主要市場的措施十分接近。政府當局正研究如何 盡量採納該等建議； 常委會正穩 步 邁向第二階段的檢討，以研究審計委 員會的角色與職能、制定各類公司的財務匯報準 則，以及研究現行企業匯報制度的效用。上述工作 預期於 2002 年底完成； 《證券及期貨條例》(“ 該條例 ” )於 2002 年 3 月獲得 通過，並預期將於 2003 年初生效。該條例將可提 高上市公司的透明度，而市場失當行為審裁處亦 將根據該條例成立。此外，該條例可增強證監會的 調查權力，並賦予投資者就向公眾作出的虛假或具 誤導成分的信息披露提起私人訴訟的訴因； 在 2002 年 5 月 6 日發表諮詢文件，建議根據對該條 例的有關規例作出的修訂訂立附屬法例，以賦權 證監會根據該條例成為上市公司的信息披露事宜 的法定監管機構。此舉使香港更接近美國證券交易 17 本段內容大部分摘錄自由財經事務局於2002年2月向立法會財經事務委員會提 交的題為《 致力加強企業管治：〈上市規則〉的檢討及其他措施 》的報告。 104 .
安然事件對金融市場監管的影響 委員會的運作模式，即由交易所(例如納斯達克或 紐約證券交易所)處理上市事宜，但若上市公司披 露虛假或具誤導成分的信息，則法定監管機構可 以採取執法行動；及 • 至於國際方面，證監會與意大利的證券監管機構，即 意大利全國證券交易所監察委員會(CONSOB)共同 主持透明度與信息披露專責小組，負責制定一套國 際持續披露準則。若國際證監會組織採納該套準則， 我們日後將可以直接因應香港的情況而採用該套準 則。 在推行上述措施期間，香港亦開始經歷若干企業事件。 最近，香港的小股東採取了連串主動爭取權益的行動，要求監 管機構干預有關企業的交易。在香港，小股東採取行動以爭取 權益是良好的徵兆，而近日投資者的投訴日漸增多亦不無原因。 市況暢旺時，鑑於所有投資者都期望資產價格上升，因此可疑 的交易會較難察覺。然而，在跌市期間，小投資者會關注到大 股東或會進行某些交易，使小股東的權益被攤薄或使其權利受 到損害。 鑑於凡向公眾籌集資金者，都向公眾負有以竭誠公正的 態度行事的責任，因此我們有必要對上市公司進行監管。上市 公司通常透過以下途徑受到規管：它們必須首先符合《上市規 則》所規定的上市準則才可獲准上市、其進行交易的手法須符 合《公司收購及合併守則》及《上市規則》的規定，並且需符 合例如《公司條例》及《證券及期貨條例》等適用法例的規定。 正如圖 1 所示，涵蓋企業行為的規則，包括守則及規則(如 規管上市公司、非法定的《上市規則》 )及法例(如《公司條 例》)。此外，舉例而言，有關規則亦包括管限企業融資顧問行 為的《企業融資顧問操守準則》。守則與法例的主要分別，在 於守則所施加的制裁並無法定權力，而法例則可施加由民事賠 償以至監禁的法定制裁。 105 .
安然事件對金融市場監管的影響 在香港的現行監管制度之下，除了由一家監管機構[聯合 交易所(“聯交所”)]負責執行上市公司需符合的上市要求之外， 另外亦有多家機構同時負責規管上市公司經營業務的手法[例如 聯交所依據《上市規則》進行監管、證監會根據《收購守則》 實施規管和監察有否內幕交易及市場操縱活動、廉政公署負責 處理貪 污 個案，而商業罪案調 查 科則處理欺 詐及盜竊個案]。 財政司司長可以根據《公司條例》第143條委任特別審 查 員進 行調查。至於上市公司是否需要退出香港交易所營辦的市場， 則取決於《上市規則》的規定以及有關公司的清盤程序。 鑑於企業失當行為跨越多個範疇及不同監管機構的司法 管轄權，因此當中涉及的核心課題，在於香港應否設立單一的 主要企業監管機構或統籌部門，確保有關當局對在香港發生的 企業失當行為採取貫徹一致及堅定不移的回應措施。 企業失當行為可按不同的嚴重程度加以劃分，當中包括 缺乏管治能力及不公平的交易以至明顯的盜竊行為。現就此提 出以下三大要點：首先，大部分的香港上市公司都遵守法紀。正如近期 標準普爾就香港的企業管治作出的檢討 18所指出： “與其他亞洲國家比較，香港在企業管治方面表現 卓著。”我們的確有若干上市公司躋身亞洲區內運 作得最良好的公司的行列； • 其次，所謂充分及公平的信息披露的基本原則，是指如 果有任何信息對於投資者就有關公司的財政狀況及 未來業務展望作出的投資決定屬關鍵或相關的資 料，那麼該上市公司便應該提供所有這些信息。 這便是執行遏止提供虛假及具誤導成分的資料的法 規的作用； • 第三，在公司成功上市後，監管者在這些上市公司進 行的交易方面的參與涉及兩個範疇 – 交易的“監管 地帶”，即監管者往往為著確保本身執行的有關規 則在有關交易進行之前已獲得遵從而介入該等交 易。此外，另一些執法行動屬於在 “ 交易完成後 ” 才採取的，當中需要監管者就有關失當行為進行調 • 標準普爾，“香港的企業管治”， 2002 年 2 月 15 日，載於 http://www.standardpoor.com。 18 106 .
安然事件對金融市場監管的影響 查及檢控，並會牽涉證監會的法規執行部、警方 及在有些情況中，廉政公署。 我將在本節集中講述企業交易中的“監管地帶”的情況， 即屬於香港交易所及證監會專責管轄的範圍。在下一節，我將 會詳述我們的執法職能。 根據證監會與聯交所在1991年簽署的《諒解備忘錄》， 聯交所(目前附屬於香港交易所 )是上市公司的前線監管機構。 這是因為聯交所負責執行規管上市公司的上市、大部分有關上 市公司行為操守的事宜及退市或除牌規定的《上市規則》。 聯交所基本上是採用以素質審核為本的監管制度來審批 主板的上市申請，而於 1999 年設立的創業板則採用以信息披 露為本的監管制度。香港交易所於 2000 年進行股份化改革及 上市後，市場對其監管角色的性質的看法開始有所改變。 • 首先，一家以盈利為目標的交易所不能獲賦予法 定執法權力，而其與其他上市公司之間存在屬合約 性質的關係。 • 第二，市場認為(不論是對或錯)，基於商業上的誘 因，以盈利為目標的交易所會積極鼓勵更多公司上 市，但打擊企業失當行為 涉 及成本和風險，而且 通常不會帶來任何商業利益。一些棘手的個案可能 會引致訴訟行動，繼而損害公司價值。 • 第三，各界普遍認為不應讓一家上市公司監管其 他上市公司。 正如我剛才在講述美國的監管制度時所解釋，遏止企業 失當行為的第一及第二道防線分別是公司管理層、董事局委員 會，以及其審計師、法律顧問、保薦人及投資銀行的廉潔穩健 和持正操守。在香港，監管上述各方的企業管治的規範，主要 屬於缺乏法定制裁的《上市規則》的範疇，而與美國或英國比 較，前者的證券交易委員會及後者的金融事務管理局則可以施 加民事罰款。不屬上述範疇的 其他界別則由自我監管組織加以 監察。 因此，在日常企業交易的 “ 監管地帶 ” 中，第三道防線取 決於監督這些交易的監管者的角色。目前，上述監管地帶由兩 107 .
安然事件對金融市場監管的影響 套準則所規範，分別是香港交易所執行的《上市規則》及由證 監會執行的《收購守則》。 香港的上市公司 每 日進行數以千計的商業交易。正如我 所說，由於香港整體上具備良好的企業管治架構，所以這些交 易大多無需監管者介入。 然而，某些可能會被股東、債權人及企業的其他關 涉 各 方提出爭議的交易，應該受到法院的管轄。這就是第四道防線 。 根據我們的普通法制度，只有法院才獲賦最適當的權力決定一 宗交易是否合法。可是，在香港，訴訟費用十分高昂，而且缺 乏集體訴訟／勝訴收費制度，所以不難想像會有股東要求監管 者介入有關的爭議性交易。 若這些交易屬於《上市規則》或《收購守則》的監管範 圍，負責的監管機構便會進行盡職審查，以確定有關法規有否 獲得遵守。當中涉及查證有關申請人或其顧問是否已妥當地完 成本身的工作，以及有否作出全面而公平的披露，而在特殊情 況下，更需要由獨立股東作出表決。上述盡職審查工作可能包 括要求有關方面披露額外資料、作出澄清及進行獨立估值。 最可能會引起爭論的，就是那些看來不公平但卻符合有 關的非法定規則的交易。這方面應透過適當地進行市場諮詢及 其他必要的程序，從而在規則上作出修訂。 其實，問題的關鍵在於非法定的規則或準則能否有效地 監管企業行為。在這些準則之下，私下／公開譴責或嚴厲譴責 被認為充其量只屬於輕微的處罰。若能夠對違規行為處以被驅 逐離場的懲罰，例如撤銷牌照，或訂明違規者實際上會被勒令 退市(如《收購守則》的規定 )，操守準則才能發揮作用。然而， 退市機制迄今尚未被用作為制裁上市公司的紀律處分手段。 證監會已發現這個問題構成執行企業信息披露規定的漏 洞，尤其是對於採用以信息披露為本的監管制度的創業板，有 關問題更為嚴重。為了加強信息披露的制裁措施，我們在 5 月 就“雙重呈報規定”諮詢市場意見，建議訂立證監會作為上市公 司信息披露的法定監管者。 108 .
安然事件對金融市場監管的影響 我們很高興看到諮詢結果支持建議中的規則修訂，而政 府亦已經給予有關批准。所以，根據應該會在明年初生效的該 條例的附屬法例，所有呈報香港交易所的資料，都必須同時呈 交予證監會。 舉例來說，如果有關方面所披露的資料存在嚴重的虛假 或誤導成分，證監會可行使該條例第 182-3 條所賦予的權力 展開調查，並從一系列的執法途徑中選擇採取適當的行動，當 中包括： • 暫停上市證券的交易； • 申請法庭頒令，以便就上市公司出現的壓迫小股 東情況、不充分披露、不公平地損害股東的利益的 行為、形事罪行或失當行為作出補救； • 發出禁制令以制止違反該條例的行為； • 建議財政司司長就披露涉及證券的虛假或誤導性 資料的個案，在市場失當行審裁處進行民事訴訟； • 就披露涉及證券的虛假或誤導性資料的行為作出 刑事檢控； • 申請將有關公司清盤；及 • 對上市公司的證監會持牌企業融資顧問採取紀律處分行 動(包括處以最高為 1.000 萬元的罰款，作出譴責 及暫時吊銷或撤銷牌照)。 現行制度的問題在於縱使進行了這些改革，我們的監管 地帶目前仍是由一家前線監管機構根據《上市規則》來監察上 市及除牌事宜、企業管治架構及各類交易，而 證監會則直接負 責執行《收購守則》的事宜，並監察和監督該前線監管機構。 這就是目前由兩家監管機構進行監管的制度或割裂的監 管制度有欠清晰之處，也使到整個監管過程更形複雜並增加額 外成本。由於沒有單一的監管機構能夠全面瞭解犯案者的最終 意圖，因此需要協調監管角色，結果導致監管工作受到阻延。 事實上，近期的一些個案亦顯示出，監管套 戥 的情況是 有可能發生的。這是因為如果某宗交易未能符合其中一套規則 (例如《收購守則》 )的規定，有關公司可對交易加以修改，然 109 .
安然事件對金融市場監管的影響 後嘗試根據《上市規則》進行另一宗動機類同的交易，因而令 致小股東感到相當失望。 總而言之，就監管及保障小股東權益而言，香港的現行 模式與“美式制度”有很大差別。在美國的法制下，受屈的股東 可以透過集體訴訟／勝訴收費的訴訟安排，就差劣的信息披露 或以其他理由提起訴訟。除此之外，兩者之間還有很多其他差 異，包括美國證券交易委員會的權力及職權範圍、機構投資者 對企業施加的壓力，以及美國的交易所可迅速地將上市公司除 牌等。 在小股東進行訴訟方面，英國與香港的情況較為相近。 在英國，法律訴訟費用亦甚為高昂，但英國的金融事務管理局 則以法定監管機構身分負責執行《上市規則》，更有權就違反 該規則的行為施加罰款。由強而有力的獨立組織執行全面涵蓋 上市公司監管重點的嚴厲行政制裁，可起到最有效的阻嚇作用 － 其優點是迅速、有效率、可增加公眾的信心，並以行政上訴 作為制衡機制及提供司法覆核的機會。 在香港，這個目前由香港交易所及證監會管理的“監管地 帶”必需能夠充分發揮其應有的作用。這是因為當有關方面實際 上難以借助法律上的補救措施時，這個“監管地帶”便構成我們 對付企業失當行為的主要防線。假如“監管地帶”的監管者的權 力受到削弱，那麼在沒有其他補償機制的情況下，整個投資者 保障制度也無法全面發揮其應有的作用。 換言之，我們必需首先處理兩項主要的政策事宜。第一 ， 我們應否改變現行的法定監管制度，以完善企業管治及保障股 東的權益；第二，現行的涉及“監管地帶 ”的監管架構及程序應 否簡化，以免在就企業失當行為作出監管回應時出現工作重疊 及延誤的情況。 這些問題事關重大，只有透過廣泛的諮詢才可由政府當 局及立法機構加以解答。我可以在此提出的，就是國際上已就 這些事宜提供充足的經驗及進行充分的討論，值得我們參考借 鑑。 110 .
安然事件對金融市場監管的影響 我在證監會的同事和我本人當然明白，有關政策決定涉 及極其繁複的考慮因素，再者，我們也沒有低估承擔有關工作 所需的資源和專業知識。因此，我個人歡迎財政司司長最近公 布政府正在考慮委任專家小組，以研究這個複雜的課題。 證監會在打擊企業失當行為方面的角色 最後，讓我 說 明證監會如何透過執法行動打擊企業失當 行為。正如我剛才所解釋，香港並沒有單一的企業監管機構。 聯交所除擔任上市公司的前線監管者，負責執行《上市規則》 之外，亦是批准公司上市的審批機關。證監會亦分擔監管上市 公司操守的責任，所涉及的範疇包括打擊內幕交易、監管證券 權益的法定披露(《證券(披露權益)條例》)，以及在懷疑有不 當情況時審查上市公司的簿冊和紀錄。此外，證監會亦負責執 行《公司收購及合併守則》。至於涉及貪污、詐騙及盜竊的案 件，以及超越香港司法管轄權的個案，證監會會與其他監管機 構合作進行調查及跟進查訊，當中包括聯交所、商業罪案調查 科、廉政公署及海外監管機構。 作為保障證券業的法治情況的法定監管機構，證監會亦 必須在法律所賦予的權力範圍內行事。大家必須明白，我們一 般不能干預商業上的交易，而該等交易的事宜有賴公司的董事 局、有關法律及財務顧問、會計師及專業估值師作出判斷，而 在個別情況下，亦需要由股東來作出表決。 香港市場獨有的三個重要因素，決定我們打擊企業失當 行為的方法： • • • 在香港上市的公司，有接近四分之三是在香港境外 註冊成立的； 香港大部分上市公司都同時在香港境外經營業務； 及 我們因此必需與香港或其他海外監管機構緊密合作， 以進行涉及香港上市公司的調查。 有人可能會對我們在多宗矚目個案中保持沉默感到疑惑 。 背後的原因，是由於《證券及期貨事務監察委員會條例》 (“ 111 .
安然事件對金融市場監管的影響 《證監會條例》”)第59條對進行調查的證監會人員施加的一項 保密責任。 這項保密責任背後的理據是非常充分的。首先，若將調 查公開，可能會導致受調查公司的股價急跌，使股東可能蒙受 嚴重損失。第二，泄露調查的資料會使受調查人預早知悉有關 的調查行動，引致相關證據可能會被銷毀或這些人畏罪潛逃。 第三，泄露調查資料可能會影響其後進行的刑事審訊。 新訂立的《證券及期貨條例》第 378條亦訂有相同限制 。 然而，雖然我們不能評論當前的個案或調查，但我可以明確地 告訴大家，最近數月被傳媒廣泛報道的多宗個案，我們現正進 行調查。 我們的法規執行部執行董事李顯能先生已在6月24日的記 者招待會上表明，對企業管治案件的調查將會是證監會20022003年度的首要工作。以下一些簡單數據應是最佳的說明： • • • • 自今年3月開始，我們根據《證監會條例》第29A 條對上市公司展開的調 查 個案已達 4宗，而根據 《證監會條例》第33條展開調查的個案亦有 3宗； 我們與警方商業罪案調查科共同商討並在調查中的 個案達19宗，其中7宗涉及上市公司； 我們是在美國以外在內幕交易檢控工作方面最成功 的地區之一。去年，我們的主要成功檢控個案有3 宗(涉及泰昇集團、永德信實業及中國太陽神的股 份)，當中導致有關方面被勒令交回利潤2.280萬 元及繳付罰款2.320萬元；另外有4宗調 查 仍在進 行中，另有8宗正等待轉交內幕交易審裁處審理； 至於操縱市場活動，我們的調 查 去年導致 4人在3 宗個案(金威集團控股、威發國際集團及僑福企業) 中被定罪，而法院對有關犯案者的懲處亦日漸嚴厲 – 當中有2人被判監禁、1人獲判緩刑並需進行社 會服務，另一人則被判罰款； 112 .
安然事件對金融市場監管的影響 • • • 在2002年度首季，在商業罪案調查 科全力合作之 下，4人在2宗證監會的調查個案(涉及鈞濠集團及 Gay Giano International Group)中被定罪，而 該科亦在Gay Giano的案件中對另外2人提出檢控； 至於涉及披露權益的檢控個案，即旨在要求掌握內 幕消息者增加其股份交易的透明度的案件，我們 在截至2002年3月為止的一年 內 ，除成功檢控 14 人及8家公司(當中有些被判罰款)之外，亦發出72 封警告信。在本年首季內，我們根據《證券(披露 權益)條例》檢控 4人及2家公司，並發出 16封警 告信；及 在過去12個月以來，我們根據《收購守則》施加2 項“冷淡對待令”，而目前正調查4宗涉及嚴重違反 該份守則規定的個案，當中包括4宗根據《證監會 條例》第33條展開調查的個案。 關於衍生訴訟的建議，我謹指出，政府當局已接納常委 會的建議，要求證監會研究能否訂立一套法定的衍生訴訟制度。 正如常委會的諮詢文件所述，在普通法下的股東衍生訴訟行動 是頗為複雜的。儘管如此，證監會目前正積極研究該項事宜。 相信在座各位都知道，證監會在德智發展有限公司的個 案中，成功根據《證監會條例》第 37A 條以不公平損害股東利 益為理由提起首宗法律訴訟。在有關個案中，證監會使辯方同 意按公平價值購入小股東的全部股份，然後才撤回本會先前根 據《證監會條例》第 45 條就該公司向法院提出的清盤呈請。 該宗調查及個案歷時 6 年之久。由於我們努力不懈，最終能夠 與有關人士達成和解協議。我謹此警告所有從事企業失當行為 的違規者，我們將會毫不猶疑地運用《證券及期貨條例》賦予 我們的權力，將其繩之於法。我在證監會法規執行部的同事已 經積極注視有關活動。 為配合上述的目標，證監會現正加強法規執行及企業融 資部門的資源，以便重點對付這類個案。本會將在今年年底前 為這些部門增添15名職員。 113 .
安然事件對金融市場監管的影響 此外，我們亦與商業罪案調 查 科及中國證監會加強合作 ， 以便調查在香港發生的企業行為失當個案，以及調查香港上市 公司在內地的活動。我們將會提高警覺，致力取得我們監管同 行的合作，盡快完成有關的調查。 簡單來說，我們現已向所有違反證券法規者發出警告。 我們將會不徇私、不畏懼地向其採取行動。違規者必定會依法 受到調查和加以檢控。 各位，安然和世界通訊事件所帶來的教訓清楚不過：任 何人如要從公眾取得資金，便要對公眾負上受 信責任 – 即其本 身必須真誠、信實及行事公正。假如香港要維持其作為國際金 融中心及內地和其他地區企業首要海外集資中心的角色，我們 便必須繼續推動在監管和基礎設施方面的改革。我們面對的機 遇很多，但調整所帶來的痛楚亦是不可小覷的。 在履行監管職能時，我時刻都謹記新加坡副總理 吳 慶瑞 博士引用中國古籍所說的一句話，就是“治大國 [機構]若烹小 鮮 – 不能過火。 ” 假如我們監管過度，便會扼殺大部分上市公 司的企業家精神，而這些上市公司都是奉公守法的，以及尋求 以最有效和最低成本的方法從公眾集資。香港經常以作為全球 最自由的市場自豪。另一方面，假如我們監管不足，小部分利 用制度的漏洞或規避法規的人可以對本港市場的廉潔穩健構成 重大的損害。安然和世界通訊事件已顯示出這些人對全球最大 和監管最嚴格的市場所帶來的傷害。 金融市場的監管工作需要在既獎勵信實和效率又懲處違 法份子這個困難而微妙的取向上謀取平衡。每個市場必須找出 本身適當的平衡點。在這方面並沒有任何簡單的解決方法。 經過逾10年的制訂工作後，新的《證券及期貨條例》終 於快將生效。該條例加強了證監會的能力，以便我們可以更有 效地工作。在該條例之下，證監會矢志捍衞香港市場的廉潔穩 健。香港的監管架構明顯存在一些必需處理的結構性問題。然 而，不論這些因素存在與否，證監會都會與聯交所及香港和境 外的所有其他監管者並肩合作，重點對付企業失當行為個案。 我們全都有一個共同目標，就是保護市場的廉潔穩健和保障股 東的權益。 114 .
安然事件對金融市場監管的影響 我謹此再次多謝職業訓練局給予我這次機會發表上述個 人意見。 多謝各位。 證券及期貨事務監察委員會 2002 年 9 月 23 日 115 .
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