The Stock Exchange of Hong Kong (SEHK) has its own rules (that were inspired by international rules, such as the ones on the CFA Institute).
The first formal corporate governance initiative was launched in 1992, in order to “enhance and promote a higher standard of corporate standards”. In 2005, listed companies had the obligation to follow the “comply or explain” approach, which meant that firms either had to comply with the guidelines of the Code of Government Practices or explain why they chose to do differently. In either case, it had to be published in their annual reports.
There are “Listing Rules” that are mandatory for any listed firm, and in the case where a firm does not comply there are sanctions applied. Another particularity of the SEHK is the regulation of transactions due to the fact that there is a lot of issuers and that they are generally controlled by a dominant shareholder (individual, family or state-owned).The founder and chairman of Manfold Toy’s, Joseph Wan, owns 68% of the shares, which is the majority, and thus gives him the majority of voting rights. This is an issue because the opinion of the other shareholders cannot be expressed adequately.
In 2010 there was a review (applied in 2011) that included measures to improve transparency, “enhance the quality of directors”, “require greater involvement in the issuer’s board committees” by independent non-executive directors (INEDs) and emphasize the “leadership role of the chairman of the board in corporate governance matters”. Manfold Toy’s is a listed company on the SEHK and should have a rigorous corporate governance framework, inspired by the one of the SEHK, in place. Changes to the Listing Rules recommended that INEDs should comprise one-third of the board.
Manfold Toy’s board was composed of three INED’s, which, according to the rules of best practice, should be completely independent of the company.However, this was not the case of Fred Wong, who was INED and chairman of the audit committee, who was also Director of Yee Exports who happened to have exclusive rights to distribute Manfold Toy’s products in Australia and New Zealand. In addition, this explains, due to the close relationship between Wong and Wan, the fact that fraudulent activity was taking place in order to improve financial statements. Wong should have ensured, acting according to his responsibility to act according to shareholder interest, that the information present in company accounts was accurate and reliable.
In fact, according to the SEHK guidelines, to ensure that the code and rules are respected, the SEHK conducts periodic reviews of the companies listed, including corporate governance reports, financial statements and annual reports. This is Page1of6Manfold Toy Company: Corporate Governance and Ethics for Directors and Professionals 2271_Corporate Governance TAdone to ensure transparency and high standards in the published and publicly available reports. In Hong- Kong, there is also the Financial Reporting Council (FRC), which is an independent statutory body and oversees the auditing profession and the issuers’ financial reporting. The role of the FRC is to conduct independent investigations into auditing and reporting irregularities and non-compliance with accounting requirements. The main role of the FRC is to control risks within financial reporting activities. The board of Directors illustrates lack of honesty, which cannot be the case when one has the responsibility of financial accounts which are made publicly available. Furthermore, Wong disclosed confidential information, which is also a violation.
Additionally, Wong was not elected fairly, and cannot serve in the audit committee since he is not independent. It is important that all Directors are not compromised in their judgement due to financial or other related reasons. In the case of Maggie Mok, she served as chairman of Big Capital at the same time, the company who was also responsible for providing analysis of the Manfold Toy’s company to the potential buyer, Mitchell ; Meyer. Moreover, Sherona Leung, which is an INED, chairman of the remuneration committee and member of the audit committee, was also the president of the charity association called We care. Wan happened to be the largest donor of We Care, which would, in turn, incentivize Leung to act in a way to further Wan’s financial contributions to the charity.