Asking difficult questions: CGC 2014 review
True to form, the latest HKICS corporate governance conference set itself some hard questions to answer. Peter Greenwood FCIS FCS, Conference Chair, and Kieran Colvert, Editor, CSj, take a look at the highlights as well as some of the lighter moments of the day’s discussions.
The Institute’s Corporate Governance Conference 2014 lived up to the reputation of its predecessors by delivering a lively, thought-provoking and substantive discussion of current governance issues to an audience of over 330 governance professionals.
In her opening remarks, the Institute’s President Edith Shih, explained that the direction of this year’s conference was to identify, debate and shed light on a number of specific governance areas characterised by incoming change for which practitioners needed to be fully prepared. ‘In the current business environment, the bar is rising for everyone involved in corporate governance – directors, regulators and professional practitioners included,’ she said.
The keynote address was delivered by Carlson Tong SBS, JP Chairman of the Securities and Futures Commission (SFC). Carlson generously noted the important role played by the Institute and its members in promoting enhanced governance standards in Hong Kong. Whilst those standards were both good and improving, Carlson warned against complacency. The SFC will continue to play an active role in setting, monitoring and enforcing the standards and best practices of Hong Kong companies to ensure they match the best in the world.
This does not necessarily mean more rules, however. ‘A thicker rule-book is not what we need going forward. It is just as important that all company directors and managers have selfdiscipline and perform their duties properly and professionally,’ he said. The SFC will be focusing even more strongly on influencing corporate behaviour, including through a reinforced regime for statutory disclosure of inside information.
Has regulation gone too far?
The first of the conference sessions, ‘The long arm of the law’, tackled the implications of the widening reach of law and regulation into corporate governance, including the growing trend for national legislation with extra-territorial application. A poll of the audience showed that 91% of conference participants felt that their jobs had become more complicated as a result of new regulations (see ‘Poll results – session one’ overleaf).
Gilles Hilary, Mubadala Chaired Professor in Corporate Governance and Strategy, INSEAD, explained that, however wellintentioned and well-received, there is an identifiable trend for new legislation to destroy value, increase the complexity of doing business and bring confusion. ‘There is confusion even among regulators about what the regulations are saying’, he said.
He suggested that social norms, expressing peer pressure and conveyed through social media might provide a valuable and positive influence on corporate behaviour and this is why getting the right ‘tone at the top’ is so important for companies. ‘We all contribute to social norms but the people at the top have greater influence,’ he said. ‘They have the gravitas to change people’s behaviour.’ However, it seems that for the moment, legal rules continue to substitute themselves for social norms, meaning that corporate behaviour is driven by legal compliance rather than companies’ own judgements, influenced by those norms, on how they should properly conduct themselves.
In a fast-paced and stimulating address, Anthony Neoh JP, Senior Counsel and former adviser to the China Securities Regulatory Commission, focused on the ongoing and large-scale increase in money supply. He graphically explained the rising complexity of financial products, which are both of limited inherent purpose and close to impossible to understand. This was backed up by a poll which showed that a majority of conference participants believed that boards do not understand all the financial transactions their companies enter into (see ‘Poll results – session one’ overleaf).
‘Complexity is not coming solely from regulations – financial markets themselves have become more complex. We have seen securitisation upon securitisation upon securitisation,’ Mr Neoh said. He added that these trends will increase the urgency for effective dispute resolution procedures to address the disputes to which such instruments will inevitably give rise.
Panellist Anthony Rogers, former Vice-President of the Court of Appeal, continued this theme by observing that financial markets are addicted to debt. ‘The root cause of these problems is too much debt, we have become debt junkies,’ he said. The solution, however, will not be found in increased regulation since people will always be able to find ways around the rules. He favoured a return to companies being led by management, not appointed ‘outsiders’, with clear accountability for signing-off the accounts. This suggestion received overwhelming support from conference participants when put to the vote (see ‘Poll results – session one’ opposite).
Panellist Stephen Brown, Director, Corporate Affairs, Noble Group, and Deputy Chairman of the Hong Kong Exchanges and Clearing (HKEx) Listing Committee, commented that extraterritorial application of regulations could have quite perverse effects, for example for a prospective CFO to have a US passport would now weigh significantly against his appointment. It is essential to avoid companies being drowned by regulation, especially when that regulation detracts from the easier understanding of businesses – as might well be considered to be the case with mark-to-market accounting.
‘I fully agree that more regulation is not the way to go. On the Listing Committee we realise that any listing rule changes have to be thoroughly considered and we would rather go the “comply or explain” route than have an extra 15 pages of regulations,’ he said.
Mr Brown also endorsed Mr Neoh’s earlier remarks about the need for efficient and transparent markets. Unfortunately, the recent ‘regulatory push’ is increasingly driving business under the counter. Good ethics, rather than complex regulation, remains the foundation of good governance.
Is Hong Kong ready for its new competition law?
Anna Wu, Chairperson, Competition Commission, opened the second session, ‘Competing to win’, by giving a clear, authoritative and purposeful explanation of the objectives, implementation and timetable for the full application of Hong Kong’s new Competition Ordinance.
She confirmed that the Competition Commission hopes to be able to implement the Ordinance by the third quarter of 2015.
She emphasised strongly that companies doing business in Hong Kong must already have started their work of preparation and readiness for the Competition Ordinance. They should not underestimate of the scope, importance, imminence and effective enforcement of Hong Kong’s new legislation in this area. She added that the Commission will regard cartel activity as one of the most serious and harmful types of anti-competitive behaviour. One fifth of conference participants answered ‘yes’ to the question – ‘Has your company been involved in cartel activities now or in the past?’ (see ‘Poll results – session two’).
Overseas experience shows that offering immunity or leniency to first reporters of cartel activity is one of the most effective ways of combating this form of anti-competitive practice and Ms Wu confirmed that this will be part of the Competition Commission’s armoury. ‘Cartels are bad news for any economy.
Any companies involved in cartel activity need to get out now before the commencement of the law. Bear in mind that your business partners may seek immunity and you may face the problem of the unenforceability of contracts.’
A poll led by the Chair of session two, Mark Williams, Professor of Law at the University of Melbourne Law School and founder of the Asian Competition Forum, suggested that around two thirds of the conference attendees believed that the Competition Ordinance will affect their own business (see ‘Poll results – session two’). ‘A third of you are probably wrong,’ he quipped. Clara Ingen-Housz, a Partner at Linklaters Hong Kong, provided an insight into the significance of anti-trust enforcement on a global and regional basis. She warned of increasing enforcement of competition legislation, including in Asia itself, even if this has not yet reached the scale of the US and EU. One aspect of such enforcement in Asia was that it could be driven by domestic policy considerations, rather than purely legal or regulatory factors. ‘Competition law is a hot topic at the moment and certainly one that companies need to think about proactively, but competition law is not always clear cut – we specialists sometimes struggle to understand the rules,’ she said.
Kala Anandarajah, of Rajah and Tann, provided further insights into Asian practice, including by reference to experience in Singapore. She warned that pre-legislation anti-competitive practices with ‘no effective end date’ may be punished once the Competition Ordinance comes into operation – reinforcing the need to correct any such practices now, rather than await the law coming into effect.
Stephen Crosswell, Partner, Baker and McKenzie, noted that it could take a significant time for a company to undertake a proper audit of its anti-competitive risks and correct any problems. ‘If you are a company secretary you need to get this issue before the board and don’t underestimate the time it takes to undertake the audit process and to unwind the risks,’ he said.
Is the new regulatory environment a wake-up call for directors?
The third conference session, ‘Board shoulders, broad shoulders’ looked at developments in the role and responsibilities of directors. Ashley Alder JP, CEO of the SFC, discussed the SFC’s tougher approach to enforcement of market rules. One of the SFC’s aims is that well-governed companies should hold the view, with confidence, that misconduct by others would be identified and dealt with. He outlined Hong Kong’s ‘new regulatory architecture’ which intends to promote this, using four components:
1. gate keeping (with particular reference to IPOs)
2. statutory backing to disclosure obligations
3. better SFC real-time regulatory oversight, and
4. a clear and communicated enforcement policy.
Mr Alder noted that corporate governance misconduct cases have tended to be around issues of false financial information, self-enrichment and the disclosure of false information or concealment. ‘The ante has been upped,’ he said, adding that the SFC will use all the tools available to it to ensure that market rules are enforced. He mentioned in particular that Section 213 of the Securities and Futures Ordinance is a key enforcement tool for the SFC. ‘Hong Kong is an open market with porous borders so it is essential for us to be in a position to provide remedies for the victims of misconduct. This is one of the top goals of what we do,’ he said.
Ada Chung JP, Registrar of Companies, briefed the conference on the meaning, implications and significance of Section 465 of the new Companies Ordinance, whose effect she suggested practitioners should take to heart. ‘If you can’t remember anything else, remember Section 465,’ she said.
The introduction of an objective test of directors’ duties, acting cumulatively with a subjective test, brings necessary clarity and rigour into the legal yardstick by which the performance of such duties should be measured. Equally, this redefinition brings those duties more into line with modern realities, practices and expectations. Responding to a question from the floor, Ms Chung explained that this revised definition of directors’ duties applies only to companies incorporated in Hong Kong, although practitioners should be aware that corresponding legislation in other jurisdictions might impose similar standards.
During a lively panel discussion, Teresa Ma, Partner, Linklaters, developed the theme of directors’ broad shoulders by emphasising that they must not ‘slouch’ when faced with their responsibilities. Through training, ethical standards and confidence they must be aware of their duties and be prepared to stand firmly by them. Kelvin Wong, Chairman of the Hong Kong Institute of Directors, and Wendy Yung FCIS FCS, Executive Director and Company Secretary of Hysan Development, shared their experiences as directors of listed companies. ‘Against the backdrop of the increasingly complex regulatory environment there is clearly a wakeup call for mediocre directors in Hong Kong, but I am optimistic about the future – there are many organisations such as the HKICS promoting higher standards,’ said Mr Wong.
Ms Yung was also optimistic about the capacity of Hong Kong directors to understand and fulfill their responsibilities. She noted the underlying differences between executive and non-executive directors and how her own experience with statutory bodies has given her a better understanding of the challenges faced by non-executives and the duty of executive management to support them in the more effective discharge of their role.
Michael Duignan, Senior Director, SFC, discussed the role of the recently team, which is an expression of the SFC’s increased focus on corporate behaviour. As a relatively recent arrival in Hong Kong, with considerable regulatory experience elsewhere, his initial impressions are that corporate governance in Hong Kong and respect for the regulatory regime are at a reasonable level by international standards, but equally that there is real scope for improvement as demonstrated by well-known cases, which taken together indicated a somewhat ‘patchy’ overall standard.
Is Hong Kong ready for mandatory ESG reporting?
The conference’s final session, ‘Winds of reporting change’ focused on Hong Kong’s preparedness for mandatory environmental, social and governance (ESG) reporting. A poll of the audience led by session Chair Professor CK Low, revealed a modest level of current ESG reporting among conference participants, and nearly half regarded ESG reporting as a regulatory burden rather than as a part of a risk mitigation strategy (see ‘Poll results – session four’ on page 16).
David Graham, Chief Regulatory Officer and Head of Listing at HKEx, provided considerable doubt about the prudence of such a belief. He pointed out that the new Companies Ordinance now requires companies, for financial years beginning on or after 3 March 2014, to include in their directors’ reports a discussion of their environmental policies and performance, as well as an account of their relationships with key stakeholders. Moreover, on the basis of an ESG survey carried out earlier this year, HKEx is planning to raise its disclosure obligations to the level of ‘comply or explain’.
‘Many respondents to our ESG questionnaire said that they were waiting for the recommended best practice to become a code provision. We think it is time to upgrade the current recommended best practice on ESG to a code provision in 2015 or early 2016,’ he said. He added, however, that the market will be consulted on this proposed change – the Exchange plans to bring out a consultation paper setting out the proposed changes in early 2015.
John Barnes, Partner, PricewaterhouseCoopers, echoed Mr Graham’s remarks on the importance of ESG reporting as not just a future trend, but a present reality for listed companies and others. He explained the importance of a systematic approach to the identification, management and reporting of environmental and social risks. Shortcomings in the effective management and mitigation of ESG risks could have significant adverse impacts on a company’s business and profitability. As had been heard earlier, in the context of competition law, a particular theme of Mr Barnes comments was the need for upfront, proactive and systematic steps to adapt to new requirements in ESG disclosure and the time and effort these would require.
Dr Jeanne Ng, Director, Group Sustainability, CLP Power Hong Kong Ltd, offered some of CLP’s experience in being an ‘early mover’ in ESG disclosure. She explained that this had not been merely a question of compliance. Instead, it also reflected an awareness of growing stakeholder interest in this area, and that if a company did not measure and disclose its own ESG performance honestly and proactively, those stakeholders would assess, even report upon, that performance themselves. ‘Social media has become a transformational technology for ESG,’ she said. ‘Everything you are doing, or not doing, is magnified and that is the risk.’
Some tentative answers
In the limited time available, the conference could not expect to offer an in-depth analysis, still less solutions to the wide-ranging and complex issues discussed. Rather, the goal was to heighten practitioners’ awareness of those issues and to start them thinking about how they might affect their companies and their own roles. Nevertheless, the conference did indicate some tentative answers to the questions raised.
It appears from the speakers’ own input and audience feedback that Hong Kong’s governance professionals are reasonably attuned to the implications of competition law, whereas the response to the advent of mandatory ESG reporting indicated a noticeable degree of unreadiness. The reaction of both speakers’ and attendees to the statutory redefinition of directors’ duties was positive and informed. On the broad issue of regulation, whilst both corporate behaviour and regulatory compliance might sometimes be ‘patchy’, Hong Kong’s practitioners are managing change reasonably well. Nonetheless, the extent of shortcomings in familiarity with all relevant Securities and Future Ordinance obligations, revealed in the polling on this point, suggested potential vulnerability to enhanced enforcement by the SFC.
Over the years, the Institute’s corporate governance conferences have had a reasonable track record in foreseeing or anticipating incoming trends affecting governance and the corporate secretarial profession. Looking back at past agendas, the conferences have addressed topics such as ESG reporting; the increase in directors’ duties; the growing role of independent non-executive directors; the importance of audit committees and risk management; and the advent of corporate governance codes – all before they had fully entered mainstream governance thought and practice.
During this year’s conference there was a general consensus that no slowdown in the pace of regulatory change is in sight, and, were such a slowdown to unexpectedly occur, no one contemplated a slowdown in the effectiveness of regulatory enforcement. This presents all corporate governance professionals with a real opportunity; that of developing new skills, enhancing their role within executive management and bringing themselves closer to the heart of corporate decision-making, not just with respect to compliance, but the wider issues of values, ethics, standards and behaviour.
Peter Greenwood FCIS FCS, former Company Secretary and Corporate Counsel of CLP Holdings, and Kieran Colvert, Editor, CSj
The Institute’s ninth biennial corporate governance conference was held on19-20 September in Hong Kong.