Should ethical considerations take precedence over legal requirements? How should professionals address conflicts of interest situations encountered in their work? Dr Brian Lo FCIS FCS, Vice-President and Company Secretary APT Satellite Holdings Ltd, takes a look at the ethical risks and obligations of professionals in Hong Kong.
Philosophers have, over thousands of years, debated the relationship between law and morality. Some have argued that law and morality are distinct from each other, although both may influence each other reciprocally.
Two opposing views of the relationship between law and morality have emerged. One school of thought argues that, as long as a law is formally legislated in accordance with the relevant constitutional requirements, and is recognised by the legal system, such a law must be obeyed by the people in that jurisdiction, regardless of its moral qualities. If the law is immoral, the duty to obey it is not vitiated by its immorality.
In contrast, the ‘natural law’ legal theory, takes the view that laws can and should be judged by their moral merit. Aquinas, for example, argued that ‘an unjust law is no law at all’. In more recent times, natural law legal theory has been further developed by two philosophers– Lon Fuller and John Finnis. In The Morality of Law (1964), Fuller looks at the ‘inner morality of law’, while in Natural Law and Natural Rights (1980) Finnis argued that morality and law are strongly interconnected and cannot be separated from each other. Nowadays, it is generally accepted that both morality and law supplement and support one another.
The issues of legal and ethical obligations have a particular relevance for professionals. Most professionals, such as doctors, lawyers, accountants, engineers and Chartered Secretaries, are subject to strict codes of conduct, or professional ethics, which enshrine rigorous ethical and moral obligations. Generally, professional standards of practice and ethics for a particular field are agreed upon and maintained by the relevant professional bodies or associations because this is critically important to the survival and continuity of the whole profession.
Professional ethics encompass the personal and organisational standards of conduct expected of particular professionals, as well as the public. These tend to be principles-based, such as the requirements for:
• confidentiality, and
Professionals are expected to utilise, as well as rely on, their specialist knowledge and skill. The utilisation of such knowledge and skill when providing services to the public may, from time to time, involve significant scope for discretion or judgement. As such, the conduct of professionals involves numerous moral issues, and the necessity of regulation, by either externally imposed law or internally imposed professional ethics, is self-evident. Since professional ethics are generally internally driven by professionals themselves and is self-administered by their relevant professional institution, it is considered to be more efficient, as well as incurring less social cost, as compared to regulation by law.
Why ethics matters
Unfortunately, it is virtually impossible to totally prevent unethical practices by a limited few ‘black sheep’ in any given professional field. The abuses may manifest in various forms, such as taking advantage of clients and failing to act in their best interests.
In serious cases, professionals are reported to have stolen their client’s assets in breach of trust. Some doctors have been said to negotiate for a higher service charge with patients as they lie on the table in an operations theatre. Other failures of professional conduct include: failing to conform to professional standards or the code of conduct of the profession; failing to comply with relevant rules, regulations or laws; profiting from a conflict of interest; and breaching fiduciary duties or the duties of care, skill and diligence.
There are three specific forms of professional abuses:
1. nonfeasance – where professionals have ignored, neglected or taken no action despite having a duty to act
2. misfeasance – where professionals have fallen below expected professional standards by taking inappropriate or incorrect actions, or have given inappropriate or incorrect advice, and
3. malfeasance – where professionals have seriously deviated from expected professional standards.
Professionals are often working under pressure, especially when they are subject to financial difficulties or family problems. Such difficulties can drive professionals to cross the line. Moreover, they will be likely to frequently encounter opportunities for personal benefit and ‘insider dealing’. Some common scenarios testing the ethical standards of professionals include:
• A professional becomes aware that a client is under investigation by the SFC – should he or she tip-off the client?
• The company secretary is asked to issue a press announcement which grossly misstates the fact of the case – should he or she refuse?
• A professional is tipped-off by an executive director about price-sensitive information – should he or she deal on the basis of the insider information?
Family members, peer groups and the culture of the organisations the professionals work for will be critically important in determining how they behave in such circumstances. For example, fraudulent activities may well be rationalised by peers in an organisation with deficient ethical standards.
The implications for company secretaries
The roles and responsibilities of company secretaries are set out in Section F of Hong Kong’s Corporate Governance Code (Appendix 14 of the listing rules). Section F makes it clear that, among other things:
• the company secretary plays an important role in supporting the board by ensuring good information flow within the board and that board policy and procedure are followed, and
• the company secretary is responsible for advising the board through the chairman and/or the chief executive on governance matters.
An example of the importance of this latter point can be found in a recent Market Misconduct Tribunal (MMT) case. In March 2015, the MMT hearing examined dealings in the shares of Asia Telemedia Ltd (now known as Reorient Group Ltd) in 2007. No market misconduct was identified; however, in the course of the proceedings, the Tribunal commented on the expected roles and duties of Asia Telemedia’s company secretary, who is a member of HKICS.
The Tribunal ruled that, although she had no formal role/power in the decision-making process, she was also a member of senior management. As such, she had a duty to advise the chairman and the board on all matters of good governance, including compliance with statutory and regulatory rules for listed companies.
Company secretaries, like all professionals, also need to consider their fiduciary duties. As set out in Millett L J, Bristol and West Building Society v Mothew : A fiduciary is someone who has undertaken to act for, or on behalf of, another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty to their beneficiary.
The core liability has several facets:
• fiduciaries must act in good faith
• they must not make a profit out of their trust
• they must not place themselves in a position where their duty and interest may conflict, and
• they may not act for their own benefit or the benefit of a third person without the informed consent of their principal.
In Boardman v Phipps , fiduciary duty is strict and preventative in approach and operation. Fiduciaries may be held to be in breach of their fiduciary duties, even where:
• they have acted in complete good faith and in an attempt to advance their beneficiary’s interests
• There was no actual conflict between their own interests and those of the beneficiary
• The fiduciaries’ actions not only caused no loss to the beneficiary but actually benefited them, and
• The gains made by the fiduciaries could not otherwise have been made by or for the beneficiary.
Company secretaries who are Chartered Secretaries are also subject to the code of conduct enforced by the Hong Kong Institute of Chartered Secretaries (HKICS) this code expects members to:
• observe the highest standards of professional conduct and ethical behaviour in all their activities and to uphold the objectives of the Institute
• uphold the Charter and the reputation of the Institute
• maintain good corporate governance and management
• exercise probity, honesty and independence in carrying out their duties and responsibilities
• conduct all business dealings strictly according to all statutory rules and regulations • respect the confidentiality of information
• avoid conflicts of interest with the company or employer
• exercise due care and diligence in performing their duties, and
• ensure the currency of their knowledge, skills and technical competencies for professional practices.
There are limits to how far legal requirements can achieve ethical behaviour and morality often plays an important part in supplementing legal requirements. If the only reason for obeying the law is to avoid punishment, the overall social cost of monitoring, investigating, prosecuting and punishing non-compliance is high. Where citizens obey the law as a result of internal self-motivation to be a good citizen and uphold ethical conduct, the overall cost of enforcement for society is relatively low.
Professionals in Hong Kong are expected to adhere to ethical principles, not just as citizens, but as professionals subject to a code of professional conduct. They should:
• uphold the expected standards of their profession
• avoid legal risks, and
• safeguard the public interests of society.
Dr Brian Lo FCIS FCS
Vice-President and Company Secretary APT Satellite Holdings Ltd