Survey on Corporate Governance and Directors & Officers Liability of Listed Companies in Hong Kong. October 2004

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1 Survey on Corporate Governance and Directors & Officers Liability of Listed Companies in Hong Kong October 2004 O t b 2004 Conducted by: Commissioned by:

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3 Executive Summary... 3 Survey Objectives... 6 Survey Methodology... 7 Profile of Survey Respondents...7 Profile of the Companies Enumerated...7 Corporate Governance... 9 Standard of Corporate Governance...9 Measures to Strengthen Corporate Governance...14 Views on Changes in the Regulatory Environment...21 Directors and Officers Liability Sources and Nature of Risk...23 Directors and Officers Liability Insurance...30 Views on D & O Insurance...34 Appendix List of Figures...37 List of Tables...38 Page 1

4 Disclaimer While every care has been taken in the preparation of this report, no claim is made to the accuracy of the data. The two organisations shall not be held liable for anything appearing in this report. The use and interpretation of the data and analysis in the report is solely at the risk of the party making use of this data. The data and analysis from the report may be quoted with proper acknowledgement of both of the organisations. Page 2

5 Executive Summary Introduction This is the second survey conducted in Hong Kong to obtain views of publicly listed companies on corporate governance and Directors and Officers Liability (D & O) insurance. The survey was conducted on a random sample of 514 publicly listed companies in Hong Kong. A total of 256 companies have been successfully enumerated and returned the questionnaires, representing a response rate of 50%. Corporate governance Of the 256 publicly listed companies enumerated in the survey, 41%, compared to last year s 40%, considered that Hong Kong s standard of corporate governance was comparable to that of the USA and UK. On the other hand, the majority (78%) of respondents considered that the Hong Kong s standard was high among Asian countries. 90% of the respondents, considered that there was substantial diversity in the standards of corporate governance amongst companies in Hong Kong. Only about 22% considered that minority investors in family-controlled companies were being treated equitably by the controlling family shareholders. On the other hand, as high as 94% of respondents were of the view that shareholders and regulatory authorities were demanding higher standards of corporate governance. And about 76% considered that good corporate governance would have a beneficial effect on the financial performance of the company. Regarding Red Chip listings in Hong Kong, over half (64%) considered that these companies faced greater corporate governance challenges than other Hong Kong listed companies. And about 66% believed that these companies were at a greater risk of incurring major corporate scandals than other Hong Kong listed companies. 67% of the respondents, up from 57% in last year s survey, considered that the majority of companies in Hong Kong were taking measures to strengthen corporate governance. And over half of the respondents (67%) were of the view that the standards of corporate governance in most companies in Hong Kong had improved over the past 12 to 18 months. The majority of the respondents considered that the proposed strengthening of the listing rules announced by the Government in March 2004 represented a positive development in Page 3

6 protecting the interests of investors and minority shareholders (accounting for 81% of respondents) and strengthening corporate governance standards (87%). Directors and Officers Liability Insurance Only about 11% considered that the risk of potential claims against directors and officers of public companies in Hong Kong was high or very high nowadays. On the other hand, 39% of respondents considered that the risk of potential claims against directors and officers in the future was high or very high. About 60.5% (58.5% in 2003) of the respondents had D & O insurance. The percentage was lower for those with smaller market capitalizations. When analyzed by economic sector, a higher proportion of respondents from the conglomerates, information technology, utilities, financials, services and properties & construction sectors had bought D & O insurance. Among those who had D & O insurance, 30% had insurance coverage below HK$ 50 million, a further 38% in the range of HK$50 million to HK$199 million. Around 41% paid an annual insurance premium below HK$200,000 and another 17% paid premium in the range of HK$200,000 to HK$499,999. About 32% of those who had D & O insurance had their insurance provided by AIG/AIU, 19% by the ACE Group and 16% by Chubb. About 39.5% of respondents did not have any D & O insurance. The main reasons given included the fact that very few claims had been filed against directors and officers (accounting for 26% of those who did not have D & O insurance), the view that coverage provided did not justify paying for the insurance premium (27%) and the assumption that since shareholders of their companies were mostly friends and family members, they would not make any claim against the company (3%). In the survey, the respondents expressed the following views: - The majority of the respondents (62%) agreed with the Higgs Report of the UK that companies should inform non-executive directors of their insurance coverage before they were appointed; - About 67% agreed that D & O insurance was an essential part of a listed company s insurance program; - More than half, 62% agreed that having D & O insurance would help retain experienced directors; Page 4

7 - Less than half (43%) considered that D & O insurance premium was good value for money; - Only a small proportion (16%) were of the view that purchasing D & O insurance would increase the likelihood of claims; - About 43% considered D&O insurance to be an essential component of corporate governance; - About 41% considered that D&O insurance policy wordings too restrictive; and - About 26% indicated that they would consider paying higher D&O insurance premium for wider coverage. Page 5

8 Survey Objectives This is the second survey conducted in Hong Kong to obtain views of publicly listed companies on corporate governance and Directors and Officers Liability (D & O) insurance. The objectives of the survey are as follows: To obtain information on the purchase of D & O insurance by publicly listed companies in Hong Kong; To gather views from directors and officers of publicly listed companies on corporate governance and its implications for the liabilities faced by directors and officers. To compare: - The results of this year s study with those of last year s. - The results of this study with those of a similar survey conducted in Singapore in April 2004, also commissioned by Jardine Lloyd Thompson. Page 6

9 Survey Methodology Profile of Survey Respondents This preliminary report presents the findings of the survey on a random sample of 514 publicly listed companies in Hong Kong. A total of 256 companies have been successfully enumerated and returned the questionnaires, representing a response rate of 50%. The positions of respondents who have completed the questionnaires on behalf of these 256 companies are shown below. Nearly half of them are company secretaries. Figure 1: Percentage of respondents by position Financial Controller 12% Chief Financial Officer 15% Chairman/CEO 2% Compliance Officer 3% Director 15% Others 4% Company Secretary 49% Profile of the Companies Enumerated Of the 256 companies participating in the survey, about 24% had a market capitalization of HK$1.5 billion or above, and a further 20% had a market capitalization of HK$ billion. Around 44% had a market capitalization of HK$ billion. About 12% had a market capitalization below HK$0.1 billion. Page 7

10 Figure 2: Percentage of respondents by company market capitalization $ billion 9% $10 billion or above 8% Below $0.1 billion 12% $ billion 7% $ billion 7% $ billion 13% $ billion 44% When analyzed by economic sector, about 23%, belonged to the consumer goods sector; 18%, the property and construction sector; 15%, the services sector; 13%, the industrial goods sector; 11%, the financial sector; 9%, the information technology sector; 7%, conglomerates, 2%, the oil and resources sector; and 2%, utilities. There was a good spread of economic sectors represented in the survey. Figure 3: Percentage of respondents by economic sector Information Technology 9% Conglomerates 7% Oil & Resources 2% Industrial Goods 13% Properties & Construction 18% Consumer Goods 23% Financials 11% Utilities 2% Services 15% Page 8

11 Corporate Governance Standard of Corporate Governance Of the 256 publicly listed companies enumerated in the survey 41%, compared to last year s 40%, considered that Hong Kong s standard of corporate governance was comparable to that of the USA and UK, and 43%, compared to last year s 45%, believed that it was not. Figure 4: The standard of corporate governance in Hong Kong is comparable to that in the USA and the UK 80% % of respondents 60% 40% 20% 0% 2% 39% 39% 4% Strongly agree Agree Disagree Strongly disagree 8% No opinion On the other hand, the majority (78%) of respondents in the 256 publicly listed companies enumerated in the survey considered that the Hong Kong s standard was high among Asian countries. Page 9

12 Figure 5: The standard of corporate governance in Hong Kong is high when compared with other Asian countries 80% 69% % of respondents 60% 40% 20% 0% 9% 10% 1% Strongly agree Agree Disagree Strongly disagree 11% No opinion More specifically, the majority of respondents considered that Hong Kong s standard compared substantially better or better with that of China, Indonesia, India, Malaysia, the Philippines, Thailand, South Korea and Taiwan. On the other hand, about 66% of respondents from the 256 publicly listed companies enumerated in the survey considered that Hong Kong s standard was about the same as that of Singapore. Interestingly, while about 16% considered Hong Kong s standard was better than that of Singapore, another 16% considered that it was lower. Around 66% of respondents considered that Hong Kong s standard was higher than that of South Korea; about 78% considered Hong Kong s standard was higher than that of Taiwan; and about 37% considered Hong Kong s standard was higher than that of Japan. Page 10

13 Table 1 : Comparison of corporate governance standards in Hong Kong with other Asian countries Substantially better Better About the same Worse Substantially worse China 59% 32% 2% 5% 2% India 46% 44% 5% 5% 0% Indonesia 61% 31% 2% 5% 2% Japan 5% 32% 48% 11% 5% Malaysia 21% 58% 15% 6% 1% Philippines 47% 41% 4% 7% 1% Singapore 2% 14% 66% 16% 2% South Korea 12% 54% 26% 7% 2% Taiwan 24% 54% 16% 6% 0% Thailand 30% 56% 8% 6% 1% Note: Respondents with no opinion are excluded. According to the findings of a similar survey conducted in Singapore, a relatively higher proportion of listed companies in Singapore considered that their country s standard of corporate governance was higher than those of China, India, Indonesia, Japan, the Philippines, South Korea and Taiwan. While 16% of Hong Kong listed companies considered that the standard of corporate governance in Hong Kong was higher than that of Singapore, about 40% of listed companies in Singapore considered that the standard of corporate governance in Singapore was higher than that of Hong Kong. On the other hand, about 66% of companies in Hong Kong, compared to 58% of companies in Singapore as reported by the survey conducted in Singapore, considered that the corporate governance standard in Hong Kong was at more or less the same level as that of Singapore. Page 11

14 Care, however, should be taken in comparing the findings of the two surveys, as the findings of the former are based on a response rate of only 22% while the findings of the Hong Kong survey are based on a response rate of 50%. Table 2: Comparison of corporate governance standards in Singapore with other Asian countries Substantially better Better About the same Worse Substantially worse China 72% 22% 2% 3% 1% Hong Kong 6% 34% 58% 2% 0% India 49% 43% 6% 2% 1% Indonesia 81% 15% 1% 2% 1% Japan 10% 29% 58% 3% 0% Malaysia 17% 59% 22% 2% 0% Philippines 50% 42% 6% 3% 0% South Korea 19% 51% 29% 1% 0% Taiwan 29% 50% 21% 1% 0% Thailand 32% 53% 11% 3% 0% Source: Corporate Governance and Financial Reporting Centre, National University of Singapore (2004), Corporate governance and Directors and Officers Liability Survey of Listed Companies in Hong Kong. 90% of the respondents, compared to 88% of last year s survey, strongly agreed or agreed that there was substantial diversity in the standards of corporate governance amongst companies in Hong Kong. Figure 6: There is substantial diversity in corporate governance standards among companies in Hong Kong 100% % of respondents 80% 60% 40% 20% 0% 23% 19% Strongly agree 71% 65% 7% 7% Agree Disagree Strongly Disagree 0% 0% 3% 1% No opinion Page 12

15 Only about 22% considered that minority investors in family-controlled companies were being treated equitably by the controlling family shareholders. On the other hand, as high as 93% of respondents were of the view that shareholders and regulatory authorities were demanding higher standards of corporate governance. And about 76% considered that good corporate governance would have a beneficial effect on the financial performance of the company. However, with regards to market malpractice and manipulation, less than half (47%) considered that this was not a significant problem in Hong Kong. About 87% considered that higher standards of corporate governance demanded by shareholders and regulatory authorities increased liability for Directors and Officers. Figure 7: Percentage of respondents who agreed with statements on corporate governance Good corporate governance has a beneficial effect on a company financial performance 76% Market malpractice/ manipulation is not a significant problem in Hong Kong 47% Minority investors in family-controlled companies are equitably treated by controlling family shareholders 22% Shareholders and regulatory authorities are demanding higher standards of corporate governance 93% Higher standards of corporate governance demanded by shareholders and regulatory authorities have increased liability for Directors & Officers 87% 0% 20% 40% 60% 80% 100% Regarding Red Chip listings in Hong Kong, over half (64%) considered that these companies faced greater corporate governance challenges than other Hong Kong listed companies. About 66% believed that these companies were at a greater risk of incurring major corporate scandals than other Hong Kong listed companies. This finding is significant in view of the fact that Hong Kong has become the preferred venue for the overseas listing of Mainland enterprises. For example, as at the end of 2003, there were 94 overseas Page 13

16 listings of Mainland companies, of which 93 were listed in Hong Kong as H-shares. 1 H-shares are shares issued by companies incorporated in Mainland China and listed on the Hong Kong Stock Exchange. Measures to Strengthen Corporate Governance 67% of the respondents, compared to 57% of last year s survey, considered that the majority of companies in Hong Kong were taking measures to strengthen corporate governance. This increase can be attributed more to those with relatively smaller capitalization (e.g. companies with a market capitalization of below $0.5 billion). In general, the percentage was higher for larger companies than smaller companies as shown in the chart below. Figure 8: Respondents who agree that the majority of companies in Hong Kong are taking measures to strengthen corporate governance % of respondents 100% 80% 60% 40% 20% 0% 63% 60% 51% 49% Below $0.1 billion $ billion 67% 58% $ billion 79% 73% 77% 70% $ billion Company market capitalization $1.5 billion or above 1 Securities and Futures Commission Research Paper no. 11 (December 2003), Page 14

17 Over half of the respondents (67%) were of the view that the standards of corporate governance in most companies in Hong Kong had improved over the past 12 to 18 months. As shown in the following figure, the percentage of respondents holding such a view was higher for larger companies. Figure 9: Respondents who considered that the majority of companies in Hong Kong had improved corporate governance standards over the past months % of respondents 80% 60% 40% 20% 53% 63% 67% 74% 79% 0% Below $0.1 billion $ billion $ billion $ billion $1.5 billion or above Company market capitalization About 52% agreed that Hong Kong should follow the USA in adopting more stringent regulations such as the Sarbanes Oxley Act whereas 47% of respondents did not agree. Figure 10: Hong Kong should follow the USA in adopting more stringent regulations such as the Sarbanes Oxley Act % of respondents 60% 50% 40% 30% 20% 10% 0% 50% 41% 2% 6% Strongly agree Agree Disagree Strongly Disagree Note: Respondents with no opinion are excluded. Page 15

18 About 60% considered that more stringent regulations such as the Sarbanes Oxley Act were affecting their business in Hong Kong whereas 40% did not think there was an impact. Figure 11: Corporate governance standards such as the Sarbanes Oxley Act are impacting my business in Hong Kong % of respondents 60% 50% 40% 30% 20% 10% 0% 56% 38% 4% 2% Strongly agree Agree Disagree Strongly disagree Note: Respondents with no opinion are excluded. The various measures taken by the respondents to strengthen corporate governance included improving transparency (adopted by 83% of respondents), establishing checks and balances within the company (73%), strengthening the role of independent non-executive directors (62%), increasing oversight by outside, independent professionals (47%), improving disclosure of director s remuneration by position and contingency liabilities (45%) and provision of training on corporate governance issues and/or joining associations/organization to work towards enhancing corporate governance (38%). There was a twofold increase in improving the disclosure of CEO s and director s remuneration by position, details concerning their stock options and contingency liabilities from 20% in 2003 to 45% in Page 16

19 Figure 12: Measures taken to strengthen corporate governance* Training on corporate governance 38% Improve remuneration disclosure 20% 45% Increase oversight by outside, independent professionals 47% 44% Strengthen role of independent nonexecutive directors 62% 65% Establish checks and balances Improve transparency 73% 72% 83% 80% 0% 20% 40% 60% 80% 100% % of respondents * Training on corporate governance was added in the 2004 survey Nevertheless about 94% of respondents still considered that most companies could be doing more to strengthen corporate governance. Figure 13: Most companies could be doing more to strengthen corporate governance % of respondents 80% 60% 40% 20% 0% 81% 13% 5% 0% Strongly agree Agree Disagree Strongly disagree Note: Respondents with no opinion are excluded. Page 17

20 In the case of Singapore, various measures taken by the respondents included: improving transparency (adopted by 93% of respondents), establishing checks and balances within the company (92%), and improving disclosure of director s remuneration by position and contingency liabilities (75%). As for the measures taken to strengthen corporate governance standards in 2004, 82% of the Singapore companies, compared to 45% of the Hong Kong companies, improved their remuneration disclosure. Figure 14: Measures taken to strengthen corporate governance in Hong Kong compared to Singapore in 2004 Training on corporate governance 38% 40% Improve remuneration disclosure 45% 82% Increase oversight by outside, independent professionals 47% 63% Strengthen role of independent nonexecutive directors 62% 75% Establish checks and balances 73% 92% Improve transparency 83% 93% 0% 20% 40% 60% 80% 100% % of respondents Singapore Hong Kong Concerning measures related to the board of directors, the majority of respondents considered that the independent directors should be independent of both major shareholders (93%) and the management (81%). And more than half considered that: There should be a limit on the number of non-executive directorships held by any person; The Code of Corporate Governance should contain different guidelines for companies of different sizes; The audit committee should consist entirely of independent directors; and Page 18

21 The Chairman of the Board should not also be the CEO. On the other hand, less than half agreed that: The remuneration committee should consist entirely of independent directors; The nominating committee should consist entirely of independent directors; The majority of directors on the board should be independent directors; The Chairman of the Board should be an independent director. The major differences between the respondents in Hong Kong and Singapore include: The majority of directors on the board should be independent directors, (Hong Kong 25% Vs. Singapore 54%); The Chairman of the Board should be an independent director, (Hong Kong 16% Vs. Singapore 31%); and The nominating committee should consist entirely of independent directors (Hong Kong 36% Vs. Singapore 47%). Page 19

22 Figure 15: Measures related to the board and independent directors The Chairman of the Board should be an independent director 16% 31% The majority of directors on the board should be independent directors The nominating committee should consist entirely of independent directors The remuneration committee should consist entirely of independent directors The Chairman of the Board should not also be the CEO The audit committee should consist entirely of independent directors The Code or Corporate Governance should contain different guidelines There should be a limit on the number of nonexecutive directorships held by any person There should be a limit on the number of nonexecutive directorships held by a person with fulltime employment 25% 54% 47% 36% 48% 47% 55% 66% 68% 71% 72% 74% 80% 77% 82% 81% Independent directors should be independent of both management and major shareholders 93% 93% 0% 20% 40% 60% 80% 100% % of respondents who agree Hong Kong Singapore Page 20

23 Views on Changes in the Regulatory Environment The majority of the respondents considered that the proposed strengthening of the listing rules announced by the Government in March 2004 (e.g. codifying in the statute of the more important listing requirements such as financial reporting and other periodic disclosure, disclosure of price-sensitive information and shareholders' approval of modifiable transactions) represented a positive development in protecting the interests of investors and minority shareholders (accounting for 81% of respondents), and strengthening corporate governance standards (87%). Only about 49% considered that such enhancements would attract additional foreign investment to listed companies in Hong Kong. Figure 16: The proposed enhancements to the regulation of listing were a positive development % of respondents who agree 100% 80% 60% 40% 20% 0% 81% Protecting interests of investors and minority shareholders 87% Increasing corporate governance standards 49% Attracting additional foreign investment to listed companies in HK Page 21

24 Regarding the current arrangement of sharing the responsibility for regulating listed companies between the Hong Kong Exchanges and Clearing Ltd. (HKEx) and the Securities and Future Commission (SFC), only about 23% the respondents believed that it was too cubersome to keep pace with changing international standards. A much higher proportion (63%) considered that there was still the potential for conflict of interest. Nevertheless, nearly half (47%) were of the view that the arrangement suited Hong Kong s particular environment and market. Furthermore, the majority (70%) considered that this was acceptable from the perspective of a listed company and slightly over half (56%) considered it acceptable from the perspective of an investor / shareholder. Figure 17: Views on shared responsibility of HKEx and SFC on regulatory control of listed companies Acceptable from the perspective of an investor / shareholder Acceptable from the perspective of a listed company Still allowing for a potential conflict of interest A good balance given the Hong Kong environment and market Too weak to keep pace with changing international standards 23% 56% 70% 63% 47% 0% 20% 40% 60% 80% % of respondents who agreed Page 22

25 Directors and Officers Liability Sources and Nature of Risk While only about 11% (14% in 2003) considered that the risk of potential claims against directors and officers of public companies in Hong Kong was high or very high nowadays, some 44% (35% in 2003) considered the risk low or very low. Figure 18: Risk of potential claims against directors and officers in Hong Kong today, 2004 compared to 2003 % of respondents 60% 40% 20% 0% 51% 46% 44% 35% 11% 14% Very high/ high risk Moderate Very low/ low risk Note: Respondents with no opinion are excluded. About 11% (11% in Singapore) considered that the risk of potential claims against directors and officers of public companies in Hong Kong was high or very high, some 44% (33% in Singapore) considered the risk low or very low. Page 23

26 Figure 19: Risks of potential claims against directors and officers today, Hong Kong compared to Singapore 60% 56% % of respondents 40% 20% 11% 11% 46% 44% 33% 0% Very high/ high risk Moderate Very low/ low risk Hong Kong Singapore Note: For Hong Kong, respondents with no opinion are excluded. On the other hand, 39% of respondents, compared to 41% of last year, considered that the risk of potential claims against directors and officers in the future was high or very high. Figure 20: Risk of potential claims against directors and officers in Hong Kong in the future, 2004 compared to 2003 % of respondents 60% 40% 20% 0% 43% 39% 41% 42% 18% 17% Very high/ high risk Moderate Very low/ low risk Note: Respondents with no opinion are excluded. Page 24

27 In Singapore, about 35% of the respondents indicated that the risk against directors and officers in the future was high or very high while a relatively small percentage (12%) considered that the risk was low or very low. Figure 21: Risk of potential claims against directors and officers in the future, Hong Kong compared to Singapore % of respondents 60% 40% 20% 39% 35% 43% 52% 18% 12% 0% Very high/ high risk Moderate Very low/ low risk Hong Kong Singapore Note: Respondents with no opinion are excluded. Page 25

28 As seen from the figure below, a relatively higher proportion of respondents from the industrial goods, financials and information technology sectors considered that the present potential risk of claims against directors and officers was high or very high. Regarding views on future potential claims, a relatively high proportion of respondents from the financials, industrial goods and consumer goods sectors considered that the future potential risk of claims against directors and officers was high or very high. Figure 22: Percentage of respondents who considered that the present and the future potential risk of claims was high or very high by economic sector Properties & construction 4% 24% Consumer goods 7% 34% Services 8% 26% Information technology 17% 33% Financials 19% 52% Industrial goods 25% 47% 0% 10% 20% 30% 40% 50% 60% Future Today More specifically, the potential areas from which claims may be made against directors and officers of public companies in Hong Kong, as cited by over half of the respondents included; accounting or other types of fraud (pointed out by 67% of respondents), inadequate and inaccurate disclosure of information (66%), liability arising from interested party transactions with the company such as the sale or purchase of properties etc., (63%), liability arising from conflict of interest (e.g. competition with company, misappropriation and exploitation of corporate opportunities or properties etc.) (57%), and liability arising from personal trading in the shares of the company (50%). Page 26

29 In the similar study conducted in Singapore, the potential areas of claims against directors and officers cited by over 60% of the respondents included inadequate and inaccurate disclosure of information (73%), accounting or other types of fraud (69%), conflict of interests (67%) and mismanagement leading to poor financial performance (60%). Figure 23: Potential areas of claims against directors and officers Mismanagement leading to poor financial performance 44% 60% Personal trading in shares of company 54% 50% Conflict of interest 57% 67% Interested party transactions 57% 63% Inadequate/ inaccurate disclosure 66% 73% Accounting & other fraud 69% 67% 0% 20% 40% 60% 80% $ of respondents Hong Kong Singapore Page 27

30 Regarding the sources of potential claims, about 46% (47% in 2003) of respondents rated high or very high concern over potential claims from regulators or Government. The corresponding percentages were 34% (39% in 2003) for potential claims from institutional investors or banks; 34% (31% in 2003) for small and minority shareholders; 30% for company; 29% (27% in 2003) for customers; 21% (15% in 2003) for employees; and 20% (15% in 2003) for competitors. Figure 24: Level of concern on the potential sources of claims against directors and officers Competitors 20% 15% 66% Employees 21% 14% 65% Customers 29% 12% 58% Company 30% 14% 56% Minority Shareholders 34% 12% 54% Institutional Investors 34% 14% 52% Regulators/ Government 46% 11% 43% 0% 20% 40% 60% 80% 100% High concern No opinion Low concern Note: Respondents who do not know are excluded. Page 28

31 26% of the respondents of the Singapore study also listed regulators or governments as the most likely source of potential claims. The second and third most likely sources were institutional investors or banks (18% / 25%) and small and minority shareholders (12%). It is interesting to note that a much smaller percentage of respondents in Singapore considered small and minority shareholders a very high or high threat for potential claims (12% in Singapore Vs. 31% in Hong Kong). Table 3: Sources with High / Very High threat of potential claims Hong Kong Singapore Regulators / Government 43% 26% Institutional investors or banks 32% 18% / 25% Small and minority shareholders 31% 12% Company (e.g. when director is found to have breached his fiduciary duty or duty of loyalty to the company) 28% - Customers 25% 21% Employees 18% 8% Competitors 16% 10% Page 29

32 Directors and Officers Liability Insurance About 60.5% (58.5% in 2003) of the respondents had D & O insurance. The percentage was lower for those with smaller market capitalizations, as shown in the chart below. Figure 25: Percentage of respondents who purchased D&O insurance 100% 80% 60% 40% 53% 58% 39% 63% 75% 85% 82% 20% 0% Below $ $0.1 billion billion $ billion $ billion $ billion $ billion $10 billion or above Company market capitalization Page 30

33 When analyzed by economic sector, a higher proportion of respondents from the conglomerates, information technology, utilities, financials, services and properties & construction sectors had bought D & O insurance. Figure 26: Purchase of D&O insurance by economic sector Consumer goods Oil & resources Industrial goods Properties & construction 47% 50% 50% 57% Services Financials Utilities Information technology 68% 70% 75% 75% Conglomerates 84% 0% 20% 40% 60% 80% 100% % of respondents Among those who had D & O insurance, 30% had insurance coverage below HK$ 50 million, a further 38% were in the range of HK$50 million to HK$199 million. Page 31

34 Figure 27: Purchase of D&O insurance by level of insurance coverage 40% % of respondents 30% 20% 10% 30% 24% 14% 4% 5% 23% 0% Below HK$ 50 million HK$50-99 milion HK$ million HK$ million HK$400 million or above No comment Among those who had D & O insurance around 41% paid an annual insurance premium below HK$200,000 and another 17% paid premium in the range of HK$200,000 to HK$499,999. Figure 28: D&O insurance purchases by annual premium 60% % of respondents 40% 20% 41% 17% 6% 5% 3% 28% 0% Below HK$200,000 HK$200,000- $499,999 HK$500,000- $999,999 HK$1-2.9 million HK$3 million or above No comment About 32% of those who had D & O insurance had their insurance provided by AIG/AIU, 19% by the ACE Group and 16% by Chubb. About 37% considered that insurance brokers added enough value to their insurance programs (e.g. providing more choices to enable comparison of premiums and coverage details between different insurers, and updates on coverage options). Page 32

35 Figure 29: Purchase of D&O insurance by insurance provider, 2003 and 2004 Lloyds of London Others Allianz QBE Group Chubb Ace Group AIG/AIU No comment 2% 2% 3% 4% 3% 5% 4% 8% 16% 17% 19% 15% 32% 29% 32% 28% 0% 10% 20% 30% 40% % of respondents Note: The percentages shown in the chart add up to more than 100% because some respondents have more than one insurer. About 39.5 (41.5% in 2003) of respondents did not have any D & O insurance. The main reasons given included the fact that very few claims had been filed against directors and officers (accounting for 26% of those who did not have D & O insurance), the view that coverage provided did not justify paying for the insurance premium (27%) and the assumption that since shareholders of their companies were mostly friends and family members, they would not make any claim against the company (3%). Page 33

36 Figure 30: Reasons for not purchasing D&O insurance No insurer willing to offer coverage 1% 2% Shareholders mainly friends and family members 3% 12% Other reasons 10% 14% Very few claims 26% 44% Coverage not worth the cost of premium 27% 26% No comment 31% 46% 0% 10% 20% 30% 40% 50% % of respondents Note: The percentages shown in the chart add up to more than 100% because the respondents could choose more than one answer. Views on D & O Insurance In the survey, the respondents expressed the following views: The majority of the respondents (62%) agreed with the Higgs Report of the UK that companies should inform non-executive directors of their insurance coverage before they were appointed; About 67% (70% in 2003) agreed that D & O insurance was an essential part of a listed company s insurance program; More than half, 62% (59% in 2003) agreed that having D & O insurance would help retain experienced directors; Less than half (43%) considered that D & O insurance premium was good value for money; Page 34

37 Only a small proportion (16%) were of the view that purchasing D & O insurance would increase the likelihood of claims; About 43% considered that D&O insurance to be an essential component of corporate governance; About 41% considered that D&O insurance policy wordings too restrictive; About 26% indicated that they would consider paying higher D&O insurance premium for wider coverage. A comparison of the views of those with and without D & O insurance shows that relatively a lower proportion of those without D & O insurance held a supportive view on D & O insurance. In particular, about 8% of those who had D & O insurance considered that D & O insurance was an essential part of a company s insurance program. Figure 31: Views on D&O insurance Increases likelihood of claims Paying higher premium for wider coverage Policy wordings are too restrictive An essential component of corporate governance Insurance premium good value for money Helps retain experienced directors Inform directors of insurance coverage An essential part of company's insurance programme 16% 20% 14% 26% 18% 31% 41% 32% 48% 43% 31% 50% 43% 27% 55% 62% 50% 70% 62% 48% 72% 67% 40% 85% 0% 20% 40% 60% 80% 100% % of respondents With D & O insurance Without D & O insurance All respondents Page 35

38 Policy 21 Ltd., The University of Hong Kong 29 September 2004 Page 36

39 Appendix List of Figures Figure 1: Percentage of respondents by position...7 Figure 2: Percentage of respondents by company market capitalization...8 Figure 3: Percentage of respondents by economic sector...8 Figure 4: The standard of corporate governance in Hong Kong is comparable to that in the USA and the UK...9 Figure 5: The standard of corporate governance in Hong Kong is high when compared with other Asian countries...10 Figure 6: There is substantial diversity in corporate governance standards among companies in Hong Kong...12 Figure 7: Percentage of respondents who agreed with statements on corporate governance...13 Figure 8: Respondents who agree that the majority of companies in Hong Kong are taking measures to strengthen corporate governance...14 Figure 9: Respondents who considered that the majority of companies in Hong Kong had improved corporate governance standards over the past months...15 Figure 10: Hong Kong should follow the USA in adopting more stringent regulations such as the Sarbanes Oxley Act...15 Figure 11: Corporate governance standards such as the Sarbanes Oxley Act are impacting my business in Hong Kong...16 Figure 12: Measures taken to strengthen corporate governance*...17 Figure 13: Most companies could be doing more to strengthen corporate governance...17 Figure 14: Measures taken to strengthen corporate governance in Hong Kong compared to Singapore in Figure 15: Measures related to the board and independent directors...20 Figure 16: The proposed enhancements to the regulation of listing were a positive development...21 Figure 17: Views on shared responsibility of HKEx and SFC on regulatory control of listed companies...22 Figure 18: Risk of potential claims against directors and officers in Hong Kong today, 2004 compared to Figure 19: Risks of potential claims against directors and officers today, Hong Kong compared to Singapore...24 Page 37

40 Figure 20: Risk of potential claims against directors and officers in Hong Kong in the future, 2004 compared to Figure 21: Risk of potential claims against directors and officers in the future, Hong Kong compared to Singapore Figure 22: Percentage of respondents who considered that the present and the future potential risk of claims was high or very high by economic sector Figure 23: Potential areas of claims against directors and officers Figure 24: Level of concern on the potential sources of claims against directors and officers Figure 25: Percentage of respondents who purchased D&O insurance Figure 26: Purchase of D&O insurance by economic sector Figure 27: Purchase of D&O insurance by level of insurance coverage Figure 28: D&O insurance purchases by annual premium Figure 29: Purchase of D&O insurance by insurance provider, 2003 and Figure 30: Reasons for not purchasing D&O insurance Figure 31: Views on D&O insurance List of Tables Table 1 : Comparison of corporate governance standards in Hong Kong with other Asian countries Table 2: Comparison of corporate governance standards in Singapore with other Asian countries Table 3: Sources with High / Very High threat of potential claims Page 38

41 About Jardine Lloyd Thompson Jardine Lloyd Thompson Ltd. (JLT) Hong Kong is a leading provider of insurance and risk management expertise. Today, employing over 100 industry professionals, JLT is ideally positioned to provide new, innovative solutions that enable our clients to compete more effectively, and to have a positive impact on their financial performance. JLT is a wholly owned subsidiary of Jardine Lloyd Thompson Group plc. (JLT Group), a leading risk management adviser and insurance and reinsurance broker. JLT is also a major provider of employee benefits administration services and related consultancy advice. JLT Group is quoted on the London Stock Exchange and is one of the largest firms of its type in the world. Employing 5000 personnel, JLT Group operates out of more than 100 offices in over 30 countries worldwide. Contacts: Ali Chaudhry or Mabel Chiu Tel: About Policy 21 Policy 21 Ltd. is an independent, non-profit-making research institute funded entirely by revenue generated from research projects and wholly owned by the University of Hong Kong. The mission of Policy 21 is to provide research services to the community, by conducting practically oriented research through a multi-disciplinary approach, in collaboration with researchers from universities and research institutes in Hong Kong and overseas. Since its establishment in July 2000, Policy 21 has undertaken over 100 projects for government bureaus and departments, NGOs and private corporations, spanning the fields of social and municipal services, education, manpower and human resources development, community studies, health and marketing. Contact: Mr. Richie Chu Tel: Page 39

42 Page 40

43

44 Jardine Lloyd Thompson The University of Hong Kong Policy 21 Limited 28/F DCH Commercial Centre 129 Eliot Hall, HKU 25 Westlands Road Pokfulam Road Quarry Bay, Hong Kong Hong Kong

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