Cultivating independence of mind – ACRU 2017 review: part one
The importance of cultivating an independent mindset for both independent non-executive directors and the company secretary emerged as a central theme of this year’s Annual Corporate and Regulatory Update seminar, held last month at the Hong Kong Convention and Exhibition Centre.
Every year, the Institute’s Annual Corporate and Regulatory Update (ACRU) seminar provides an ideal opportunity for practitioners, senior managers and directors to enter into a direct dialogue with Hong Kong’s major regulatory bodies about the issues at the top of both regulators’ and regulatees’ agendas.
The 18th ACRU, held on 2 June at the Hong Kong Convention and Exhibition Centre, did not disappoint. Our review of the event will first focus on the main themes to emerge from the presentations and Q&A discussions, and then turn (see the following cover story on pages 18–22) to look in more detail at the specific governance and compliance issues that regulators highlighted at the event.
The role of the board
‘Issuers are run by people,’ Kenneth Chan, Senior Vice-President, Compliance and Monitoring, Listing, Hong Kong Exchanges and Clearing Ltd (the Exchange), pointed out in his ACRU presentation, ‘and we expect them to have a good character, integrity and competence, and we expect them to fulfil their duties of skill, care and diligence. In short, we have high expectations of directors.’
Kenneth Chan’s presentation focused on ‘directors’ suitability’ – the need for the individuals in these roles to have the requisite integrity and skills. He cited a recent case where the Exchange opposed the appointment of a director to a company listed on the Exchange since he had, only one year previously, been found to be actively involved in market manipulation activities and sanctioned with a heavy fine by an overseas securities regulator.
Stephen Jamieson, Senior Vice-President, Head of Enforcement, Listing, the Exchange, focused his ACRU presentation on the need for directors to understand and fulfil their duties. ‘It is quite surprising the number of cases where directors do not understand their obligations to comply with the listing rules,’ Mr Jamieson said. In fact, directors’ duties has been the single most common theme of the Exchange’s enforcement activities over the last year (see ‘Top enforcement themes for the Exchange’ on page 17).
As an example he cited the case of Mei Ping, former Executive Director of China Nonferrous Metals Company Ltd. Mr Mei executed a number of guarantees as a
legal representative of the issuer’s subsidiaries for loans borrowed by another company of which he, together with his brother, were directors and substantial shareholders. The guarantees therefore constituted a major and connected transaction, but Mr Mei did not inform the board of the transaction, nor did he obtain board approval. His actions contravened almost every GEM listing rule relating to directors’ duties, failing to:
- act honestly in good faith in the interests of the issuer as a whole
and for proper purpose
- properly apply the issuer’s assets
- avoid conflict of interest and duty
- fully disclose his interest, and
- apply the skill, care and diligence expected of him given his knowledge, experience and his role as compliance officer of the issuer.
Speakers from both the Exchange and the Securities and Futures Commission (SFC) emphasised that directors will be held personally liable for any failure to fulfil their duties. ‘We will hold directors personally liable for any loss they cause their companies by breaching their duties,’ Eugène Goyne, Senior Director, Enforcement, SFC, stated.
Mr Goyne discussed the SFC’s new enforcement priorities, pointing out that listed company corporate fraud and director misconduct are priority areas of focus. The SFC now has two specialised teams focused on these areas. The teams will be focusing on high-impact cases and grouping cases together to assess multiple breaches within the same corporate group as a whole. This new approach by the SFC to enforcement is mirrored at the Exchange. Stephen Jamieson explained that the Exchange will be focusing resources on pursuing the most blatant and serious misconduct in order to get the maximum regulatory effect from their existing resources.
The role of INEDs
Corporate governance systems around the world, including in Hong Kong, have been vesting increasing importance in the role of independent non-executive directors (INEDs) on boards as a way to bring objectivity and a wider perspective to board discussions. Trevor Keen, Head, Financial Market Infrastructure Oversight & Licensing, and Sarah Kwok, Head, Banking Conduct, at the Hong Kong Monetary Authority (HKMA), addressed the theme of ‘INED empowerment and bank culture’ in their ACRU presentations.
The HKMA has been promoting best practice for INEDs for some time, working closely with banks in Hong Kong to ensure that individuals taking up INED roles have the right combination of skills and qualities. Ms Kwok stressed that, in addition to the appropriate experience and expertise, INEDS need to have integrity and the right personal qualities for the role. These qualities are essentially an independence of mind and a willingness to challenge management. ‘INEDs need to constructively challenge management,’ she said. ‘They also need to have the ability to exercise objective, independent judgement after fair consideration of all relevant information and views, without undue influence from executives or from external parties.’
She added that this ‘independence of mind’ is crucial since INEDs need to protect the interests of all shareholders, depositors and customers and ensure that the company conducts its business in the wider public interest.
Mr Keen discussed the time commitment required for an INED position. The INED role is demanding, Mr Keen pointed out, and prospective INEDs may underestimate the time they will have to commit. ‘Board and committee meetings, reading and preparation, understanding the business of the bank, keeping up with regulatory and industry developments all take time, especially for non-bankers,’ he said.
Stephanie Lau, Senior Vice-President, Compliance and Monitoring, Listing, the Exchange, focused on the critical role played by INEDs in ensuring that connected transactions are conducted in compliance with the listing rules. ‘The Exchange is concerned that INEDs all too often simply rely on information supplied by management when performing their connected transaction reviews,’ she said, ‘and that some issuers fail to provide reliable information on the fairness and reasonableness of connected transactions to their INEDs.’
The Exchange recommends INEDs to exercise independent and objective judgement and recommends issuers to provide their INEDs with better quality information in order for them to monitor and perform their review of connected transactions.
The role of the company secretary
This year’s ACRU saw an increased focus on the role of the company secretary, in particular the company secretary’s role in providing governance advice and board support. ‘How company secretaries can support directors’ was the theme of the presentation by Katherine Ng, Senior Vice-President and Head of Policy, Listing, the Exchange, in the first session of the day (see pages 6–11 of this month’s journal for her insights on this topic).
Her colleague at the Exchange, Stephen Jamieson, made the point that company secretaries should not neglect their critical role in advising directors on their obligations under the listing rules and their obligation to cooperate with the Exchange’s investigations.
Eugene Goyne of the SFC pointed out that the new focus of regulators in Hong Kong on enforcing individual accountability of both directors and senior management will be particularly relevant to company secretaries, not only due to their own higher liability, but as a highly persuasive tool they can use to get the governance message across to board directors.
The presentations by Trevor Keen and Sarah Kwok of the HKMA also provided useful insights into the board support role of company secretaries. They made the point that one of the key factors in improving the effectiveness of directors generally, and INEDs in particular, is the level of support they receive from the company secretary.
Since INEDs will rarely have the same level of knowledge as executive directors of the company’s business, Ms Kwok stressed that the induction and ongoing training facilitated by the company secretary is a crucial part of making INEDs effective members of the board. She recommended that company secretaries provide regular briefings on operations and risk management, as well as briefings on wider developments in the industry and regulatory requirements.
Mr Keen stressed the importance of good practices in the management of board meetings, such as:
- planning meeting schedules well ahead and avoiding making changes unless really necessary
- providing clear board papers that avoid overly technical language
- providing briefings ahead of meetings where required
- facilitating tele- or video-conferencing where physical attendance is impossible
- facilitating access to professional advice, and
- ensuring that board and individual evaluations are carried out at least once a year.
He also emphasised the importance of preparing proper minutes. This issue surfaced in the Q&A at the end of the HKMA session. The chair of the session, Paul Stafford FCIS FCS(PE), Institute Vice-President and Chairman of the Professional Development Committee, asked what would be the appropriate level of detail in the minutes. Mr Keen said that, while they should not be verbatim, they should cover what was said. Most importantly, the minutes should name who said what. ‘If I held a dissenting view, I would want that noted,’ he said.
The Q&A at the end of the SFC session raised another important issue for company secretaries – what should they do if their advice against a proposal that would, in their view, compromise governance or ethical standards was not heeded by the board. Eugene Goyne said that company secretaries should be prepared to resign and state why they are resigning if their attempts to alert the board to fraud or breaches of the rules go unheeded.
The chair of the SFC session, Gillian Meller FCIS FCS, Institute Council member, asked whether the resignation should only be the last resort – that is, company secretaries should try to work with INEDs to remedy the situation first before considering resigning. ‘We recognise that you are in a difficult position,’ said Mr Goyne, ‘and we don’t expect company secretaries to be saints, but we do expect you to fulfil your obligations and that includes the duty to speak up if breaches of the rules have been discovered. I urge you not to be intimidated by excessively overbearing or dominant directors trying to push something through’.
He added that company secretaries should also be prepared to report criminal behaviour to the SFC. ‘If you detect fraud, please come forward – without the cooperation of the people in this room our job is more difficult. Your identity will be kept confidential. Often coming to us may be the best thing you can do.’
SIDEBAR: Keeping the dialogue open
Many speakers at ACRU 2017 commented on the usefulness of the ACRU seminar as a means for regulators to get the governance message out to the market. Both Hong Kong Exchanges and Clearing Ltd (the Exchange) and the Securities and Futures Commission (SFC) speakers emphasised the need for regulators to improve communication with market participants to ensure the governance message is heard and understood and thereby head off potential future governance and compliance problems.
‘We tend to come in when the dead bodies are already on the floor,’ said Eugène Goyne, Senior Director, Enforcement, SFC, ‘but we recognise that we cannot rely on enforcement alone.’ He added that companies can expect to see more preventative interventions in the future to achieve better governance and compliance outcomes. ‘You can expect to see a much more active SFC getting involved at an earlier stage,’ he said.
This approach, which has been dubbed ‘front-loaded’ regulation by SFC Chairman Carlson Tong SBS JP, will also mean a more extensive use of existing communication channels (for example via the SFC’s Enforcement Reporter), and early warnings of enforcement priorities. The new approach will also involve a closer collaboration between different SFC divisions – aiming to achieve a better integration of the supervisory and enforcement sides of the SFC’s work.
SIDEBAR: ACRU in quotation
‘if you detect fraud, please come forward – without the cooperation of the people in this room our job is more difficult’ Eugène Goyne, Senior Director, Enforcement, SFC
‘the Exchange is concerned that INEDs all too often simply rely on information supplied by management when performing their connected transaction reviews’ Stephanie Lau, Senior Vice-President, Compliance and Monitoring, Listing, the Exchange
‘issuers are run by people, we expect them to have a good character, integrity and competence, and we expect them to fulfil their duties of skill, care and diligence’ Kenneth Chan, Senior Vice-President, Compliance and Monitoring, Listing, the Exchange
‘it is quite surprising the number of cases where directors do not understand
their obligations to comply with the listing rules’ Stephen Jamieson, Senior Vice-President, Head of Enforcement, Listing, the Exchange