Corporate Governance Scorecard Project Organized by

Corporate Governance Scorecard Project Organized by: - Sponsored by: HKIo. D Corporate Governance Development Foundation Mr. Herbert H M Hui Mr. Peter S H Wong Executed by: Prof Stephen Y L Cheung City University of Hong Kong 1

Research Committee • Coordinator – Prof. Stephen Y L Cheung (City University of Hong Kong) • Members – – Dr. Aristotelis Stouraitis (City University of Hong Kong) Dr. J. Thomas Connelly (Chulalongkorn University) Dr. Piman Limpaphayom (Chulalongkorn University) Ms. Lynda Zhou (City University of Hong Kong) • Research Assistants – – – Ms. Cindy Chen (City University of Hong Kong) Mr. Justin Liang (City University of Hong Kong) Mr. Sam Lam (City University of Hong Kong) Mr. Sam Yang (City University of Hong Kong) Mr. Simon Lam (City University of Hong Kong) Ms. Sarah Wan (City University of Hong Kong) 2

Research Methodologies I • Survey results based on publicly available information • HSI, HSHKCI, HSCCI, and HSCEI constituent stocks • Based on information disclosed in 2002 • 168 major companies are covered 3

Surveyed Companies I (as at 9/2003) Allied Group (373) Brilliance Chi (1114) China Pharma (1093) CNAC (1110) Allied Ppt (HK) (56) BYD Company (1211) China Res Land (1109) CNOOC (883) Angang Newsteel (347) Cafe De Coral H (341) China Res Logic (1193) CNPC (Hong Kong) (135) Anhui Conch (914) Cathay Pac Air (293) China Resources (291) COFCO Intl (506) Anhui Expressway (995) Chalco (2600) China Ship Dev (1138) COSCO Intl Hold (517) Artel Group (931) Cheung Kong (1) China South Air (1055) COSCO Pacific (1199) Asia Satellite (1135) China Aerospace (31) China Telecom (728) Culturecom Hold (343) ASM Pacific (522) China East Air (670) China Travel HK (308) Dah Sing (440) Bank of E Asia (23) China EB Ltd (165) China Unicom (762) Datang Power (991) Beijing Airport (694) China Insurance (966) Chinese Est H (127) Denway Motors (203) Beijing Ent (392) China Mer Hold (144) CIFH (183) Digital China (861) Beijing N Star (588) China Mobile (941) Citic Pacific (267) Dream Int'l (1126) Beijing Yanhua (325) China Oilfield (2883) CKI Holdings (1038) E&E Int'l (33) BOC Hong Kong (2388) China Overseas (688) CLP Holdings (2) Eganagoldpfeil (48) 4

Surveyed Companies II (as at 9/2003) Esprit Holdings (330) GZI Transport (1052) HSBC Holdings (5) Jiangxi Copper (358) First Pacific (142) HAECO (44) Huadian Power (1071) Johnson Elec H (179) Fong's Ind (641) Hang Lung Group (10) Huaneng Power (902) K M Bus Hold (62) Forefront Int'l (885) Hang Lung Ppt (101) Hung Hing Print (450) K. Wah Int'l (173) Founder Hold (418) Hang Seng Bank (11) Hutch Harb Ring (715) Kerry Ppt (683) Fountain Set (420) Henderson Inv (97) Hutchison (13) Kingmaker (1170) Giordano Int'l (709) Henderson Land (12) Hysan Dev (14) LCH Bank (1111) Glorious Sun (393) HK & China Gas (3) i-Cable Comm (1097) Lenovo Group (992) Great Eagle H (41) HK Chinese Ltd (655) ICBC (Asia) (349) Lerado Group (1225) Guangdong Inv (270) HK Electric (6) IDT Int'l (167) Li & Fung (494) Guangnan (Hold) (1203) HK&S Hotels (45) Interchina Hold (202) Linmark Group (915) Guangshen Rail (525) HKEx (388) Intl Bk of Asia (636) Lippo China Res (156) Guangzhou Inv (123) HKR Int'l (480) JCG Holdings (626) Maanshan Iron (323) Guoco Group (53) Hopewell Hold (54) Jiangsu Express (177) Moulin Int'l (389) 5

Surveyed Companies III (as at 9/2003) MTR Corporation (66) Shanghai Ind H (363) Sinopec Kantons (934) TVB (511) New Asia Realty (49) Shanghai Pechem (338) Smartone Tele (315) Varitronix Intl (710) New World Dev (17) Shangri-la Asia (69) SW Kingsway (188) Vitasoy Int'l (345) Next Media (282) Shenzhen Express (548) Swire Pacific A (19) Vtech Holdings (303) Ngai Lik Ind (332) Shenzhen Int'l (152) Swire Pacifice B (87) Wharf Holdings (4) Oriental Press (18) Shenzhen Invest (604) TCC Int'l Hold (1136) Wheelock (20) Pac Centry Ins (65) SHK Ppt (16) TCL Int'l Hold (1070) Wing Hang Bank (302) PCCW (8) Shui On Cons (983) Techtronic Ind (669) Wing Lung Bank (96) Petro. China (857) Shun Tak Hold (242) Texwinca Hold (321) Wong's Int'l (99) Qingling Motors (1122) Silver Grant (171) Tianjin Dev (882) Yanzhou Coal (1171) QPL Int'l (243) Singamas Cont (716) TPV Techonology (903) Yizheng Chem (1033) Road. Show (888) Sino Land (83) Travelsky Tech (696) Yuen Ind (551) Sa. Sa Int'l (178) Sino-I Tech (250) Truly Int'l (732) Zhejiang Express (576) SCMP Group (583) Sinopec Corp (386) Tsingtao Brew (168) Zhenhai Refin (1128) 6

Research Methodologies II • Avoids subjectivity bias • Not dependent on companies’ willingness • However, not as rich as an internal assessment. . . • . . . and captures only what the companies released in public and their documentation • Written request was sent to individual companies. Only a few companies supplied us with information 7

Objectives of Corporate Scorecard for Hong Kong Listed Companies Encourage adoption of best practice of corporate governance in Hong Kong through a systematic evaluation of current practices Define a methodology/ framework to assess corporate governance practices in Hong Kong Develop specific criteria and a measurement tool to evaluate individual companies Hopefully Set up processes to evaluate corporate governance of Hong Kong companies on an annual basis 8

Consistency • Each company was rated by two different members • The overall results were cross-checked by academics 9

Scorecard Followed The Five OECD Corporate Governance Principle OECD principle Number of questions & sub-questions A. Rights of shareholders 16 B. Equity of shareholders 10 C. Role of stakeholders 4 D. Disclosure and transparency 30 E. Board responsibilities 26 86 • OECD is internationally recognized • HKEx guidelines comprehensively covered • 168 public companies surveyed 10

MTBV Positive Correlation between Good Corporate Governance and Company Valuation 11

Market Valuation (Tobin’s Q) by Corporate Governance Entry Quartile 12

Corporate Governance Performance by Indices Strong Weak HSI (恒生指數) HSHKCI (恒生香港綜合指數) HSCEI (恒生中國企業指數) HSCCI (恒生香港中資企業指數) 13

Corporate Governance Performance by Industries Strong Weak 14

Corporate Governance Performance by Categories Strong Weak A: Rights of Shareholders (股東的權利) B: Equitable Treatment of Shareholders (對股東的公平待遇) C: Role of Stakeholders in Corporate Governance (利益關係團體在公司治理中扮演的角色) D: Disclosure and Transparency (公開與透明化) E: Board Responsibilities (董事會的責任) 15

A. Rights of Shareholders (股東的權利) 84. 49 27. 79 Improvements: • Improve the quality of Notice to Call Shareholders Meeting • Attendance of all Board members • AGM minute – any Q&A sessions? – any resolutions being solved? 16

A. Rights of Shareholders (388) (股東的權利) 17

B. Equitable Treatment of Shareholders (對股東的公平待遇 ) 93. 33 63. 33 Improvements: • Provide rationale/ explanation for related-party transactions • Allow minority shareholders to influence the Board • To facilitate voting by proxy 18

B. Equitable Treatment of Shareholders (762) (對股東的公平待遇 ) 19

C. Role of Stakeholders in Corporate Governance (利益關係團體在公司治理中扮演的角色) 100 Improvements: • Disclose more details on the safety and welfare of its employees • Long-term employee incentive plan 41. 67 20

C. Role of Stakeholders in Corporate Governance (2388) (利益關係團體在公司治理中扮演的角色) 21

D. Disclosure and Transparency (公開與透明化 ) 90. 33 Improvements: • Transparency in ownership structure • Quality of Annual Report 64. 01 – Basis of Board members’ remuneration – Operating risks • Communication with shareholders – Website’s contents 22

D. Disclosure and Transparency (45) (公開與透明化 ) 23

E. Board Responsibilities (董事會的責任 ) 81. 67 41. 67 Improvements: • A set of written corporate governance rules • Corporate vision/mission • The quality of the Audit Committee Report in the Annual Report – Attendance – Internal control – Management control, etc. 24

E. Board Responsibilities (2) (董事會的責任 ) 25

Results • NOT finger-pointing exercise • Important input for policy-makers, companies, and the public • Score for individual companies will not make public • Feedback report can be obtained for individual companies 26

Results • Market-to-book ratio (MTBV) was used as proxy for company’s market value • Positive and significant relationship between MTBV and CG Index was found • Number of executive directors has negative impact • The top 5 shareholders’ holding has negative impact • The inclusion in the MSCI has positive impact • Transparency index does matter 27

The Top 10 Best Performing Companies (by alphabetical order) • • • Asia Satellite (1135) Bank of East Asia (23) China Mobile (941) CLP Holdings (2) HK & S Hotels (45) HKEx (388) HSBC Holdings (5) Linmark Group (915) MTR Corporation (66) Vtech Holdings (303) 28

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