MTR Corporation functions under a strong governance framework supported by control mechanisms that clearly delineate the responsibilities and accountability of the Board of Directors, the Executive Directorate and company managers.

Governance is executed through the Board and the Executive Directorate. The overall management of MTR Corporation's businesses is vested in the Board, which has delegated the day-to-day management of the Company's business to the Executive Directorate and focuses its attention on matters affecting the Company's overall strategic policies, finances and shareholders. The Board is responsible for the system of internal controls, setting appropriate policies and reviewing the effectiveness of such controls. The Board also oversees the management of other executive committees through the Executive Directorate.

The Board comprises a 13-member panel, two of whom were appointed in December 2007. The majority (12) are non-executive directors, eight of whom are independent non-executive directors. The Executive Directorate comprises the Chief Executive Officer (CEO), also a member of the Board, and the heads of the seven divisions (Operations, Projects, Property, China and International Business, Legal and Procurement, Finance, and Human Resources and Administration). Members of the Executive Directorate are appointed by the Board and are responsible for the implementation of strategy and policies as decided by the Board. They oversee the ongoing management of the Company and, together with senior managers, regularly report to the Board on the performance of the principal activities of the Company.

The 2007 Annual Report includes a governance report, which provides further information on the governance of our corporate performance and management for the year.

Governance and Sustainability

Of importance to our readers in reporting on governance during the 2007 year, we elect to focus on governance in terms of sustainability and the merger. That is, how best practice under a specified governance framework was identified during the merger process and how sustainability/CSR governance will be integrated at the Board level under the expanded MTR Corporation organisation. These two issues are essential to understanding how practices and decisions taken in the run-up to the merger foreshadow the new internal governance framework and management systems that will help drive forward the long-term sustainable development of MTR Corporation.

Merger

In anticipation of the complexity of integration, the Merger Integration Office (MIO) was established in 2006 to manage the merger integration process. This office planned and assisted in the implementation of the organisational structure for the new rail entity, and also worked to enhance the relationships among the stakeholders involved to ensure that the stated goals of the merger could be achieved.

Working on the basis of "best of both", a bottom-up assessment of existing systems and related management practices was conducted which established best practices and how such practices would influence the organisational structure. Essential in this process was the input from staff across both companies and an independent third party acting as best practice arbitrator. One of the objectives was to embed accountability into the new organisational structure and to put in place the systems and mechanisms to identify, monitor and measure performance.

An outcome of the recommended organisational structure was the identification of economic efficiencies that would serve both the Corporation's and shareholders' interests. These efficiencies form part of the anticipated three-year programme of realised cost and revenue synergies (HK$450 million/year) tabled to shareholders. For discussions of the Board-level actions undertaken during the merger, refer to our online discussions. For additional details on the merger in terms of future sustainable best practice, refer to the Merger Case Study.

CSR Committee

Of particular interest for future sustainable development is the Board-level CSR Committee that is to be established in 2008. This decision reflects the substantial commitment to establish the corporate-wide CSR policy and related practices. Implementation will become active upon announcement of the Committee's management structure.

In 2008, the CSR Policy will be introduced and the Committee structure and membership formalised. Under direct governance of the Board, the Committee is charged with policy formulation and related duties to supervise implementation and review of policy directives. The Committee is responsible for the appointment and overseeing of a management committee which will draw upon existing in-house sustainability and CSR expertise, and through the S&CSR Steering Committee, will supervise and implement appropriate activities across the organisation. Within this framework, the Committee has the power to recommend improvements, allocate resources and, if deemed appropriate, introduce new organisational initiatives. This structure will reinforce and clearly identify CSR as a key objective of sustainable development and will promote the necessary senior-level ownership to ensure CSR integration into our business strategy.