Regulation is not only about enforcement, argues Securities and Futures Commission (SFC) Chairman Carlson Tong. In an interview with CSj, he talks about the SFC’s new emphasis on guiding, as well as policing, the market.

How would you describe the general corporate governance level of listed companies in Hong Kong? How is Hong Kong benchmarked against other major markets?

‘Every major market has issues of concern that fall within the umbrella of corporate governance. What people regard as good corporate governance is a constantly evolving concept. It changes in the light of market developments and perceived failures of corporate governance. Hong Kong has its own individual challenges but could never be regarded as having poor corporate governance standards. The corporate governance regime in Hong Kong has been consistently regarded as one of the best in the region.

Credit Lyonnais Securities Asia in collaboration with the Asian Corporate Governance Association produces a biennial corporate governance report covering the Asia-Pacific region. Hong Kong has consistently occupied first or second place in the rankings set out in these reports.

However, we should not be complacent as Hong Kong should compare itself with the best in the world and also people remember when something goes wrong.’

The SFC has recently stepped up its oversight of corporate behaviour – do you see this trend continuing?

‘As an international financial centre, Hong Kong cannot afford to fall behind global corporate governance standards and best practices. We will continue to take as proactive approach as possible for a regulator of corporate behaviour.

The setup of our dedicated Corporate Regulation team is the first step in our renewed emphasis on corporate behaviour. This new team monitors disclosures and conducts periodic in-depth reviews of listed companies selected against risk-based criteria such as transaction anomalies or disclosure irregularities. The team also carries out thematic reviews which look at a specific activity across a range of companies. This is an ongoing process and hopefully we will improve our process over time.’

Does this new approach means a drastic change in the regulatory role of the SFC?

‘Our new approach does not require a radical departure from what we have been doing. Rather, it is an extension of our existing work under the Securities and Futures Ordinance, with the aim of taking a more holistic approach to influencing corporate conduct.

For example, our focus on corporate behaviour also reinforces the statutory disclosure regime for inside information which promotes more meaningful and timely dissemination of important information for investors. While the frequency and content of disclosures are improving, companies can still do more to provide the market with more meaningful information on a timely basis to allow investors to properly price their securities.’

There have been concerns about the overlapping of work between the SFC and the Stock Exchange in overseeing corporate activities of listed companies. Do you think the division of duties between the Exchange and the SFC works well for Hong Kong?

‘Such concerns are understandable given both the SFC and the Exchange are looking at corporate behaviour of listed issuers. That is also why we work very closely with the Exchange to reduce any unnecessary duplication between our corporate regulation work and their ongoing monitoring duties.

In short, the Exchange’s monitoring activities aim to ensure compliance with the listing rules and to maintain a fair and orderly market. In contrast, the SFC reviews announcements made by companies and raises appropriate enquiries at an early stage with a view to facilitate timely and better-quality disclosure,  and to detect possible corporate misconduct for potential enforcement action hopefully before too much damage is done.’

Corporate governance codes started life as guidance to directors on best practice but today many areas of corporate governance are subject to mandatory regulation – is this the right approach?
‘Listed companies come in many shapes and sizes. The advantage of using codes and best practices to promote good corporate governance is that these are a more flexible regulatory tool and can be amended and adapted more quickly in the light of experience. What is appropriate for a very large prudentially regulated company may not be appropriate for a small manufacturing company. However, as a general consensus is reached on minimum standards that should apply to all listed companies, when the opportunity arises these standards can be more hard coded into rules or even legislation. The best approach is therefore an appropriate combination of legislation, rules, codes and guidance.’

Do you think the role of directors has become more complex in today’s regulatory environment – particularly in terms of directors being expected to make complex judgements rather than simply following the rules?

‘Although there are generally accepted elements of good corporate governance, such as a sound control function and processes and high transparency and accountability, we do not believe a box-ticking approach to compliance is of much value.

Sound and effective corporate governance cannot rely solely on the legislative framework, but rather requires self-discipline and the proper execution of duties by directors, checks and balances and the promotion of a clean corporate culture. I believe that ‘tone at the top’ is the key because it drives the behaviour of the whole organisation all the way through from the chairman, the board and down to the front line. Good market conduct is as much driven by good behaviour as by rules and regulations.’

Regulators often stress the checks and balances function of independent directors, but does this system actually work in Hong Kong where most listed companies have a controlling shareholder?

‘All markets have their own domestic challenges. Where the shareholding in a company is held very widely there are agency problems which may make it quite difficult for shareholders to hold directors to account in a coherent way. Where there is a controlling shareholder one needs different tools to address the legitimate corporate governance concerns that can arise in such circumstances. The presence of a controlling shareholder does not mean that the company will have poor corporate governance.

Many such companies are run well, have good succession planning and can be less short term in outlook. Nevertheless the presence of independent directors is an important part of the internal challenge process that needs to exist in any well run and successful company. To function well, this means that the independent directors need to have the necessary skills and be truly independent. A company where the management surround themselves with likeminded yes-men is unlikely to be successful in the long term.’

In the context of the increasing focus on good governance, is the role of the company secretary becoming more important? What advice would you give to company secretaries in carrying out their duties?

‘Company secretaries play a vital role in ensuring that listed companies have the systems and controls necessary to meet their regulatory obligations, whether these relate to the Companies Ordinance, the listing rules or the Securities and Futures Ordinance. They should act as the conscience of the company and be prepared, for example, to keep the director’s feet to the fire regarding whether there is something that should be announced to the market.’


Carlson Tong is the keynote speaker of the Institute’s Corporate Governance Conference 2014. His biography is available in the Conference Guide section of this month’s journal (see page 32).

The Credit Lyonnais Securities Asia (CLSA)/ Asian Corporate Governance Association (ACGA) corporate governance reports ‘CG Watch’ can be found on the CLSA and ACGA websites ( and