Keeping companies honest – The essential ingredients of a good governance regime
The winner of the HKICS Prize 2016, Gordon Jones FCIS FCS BBS, Hong Kong’s former Registrar of Companies, was closely involved in putting in place Hong Kong’s current statutory and regulatory infrastructure. In this interview with CSj, he points out that writing the rule book is only the beginning of the long journey to good governance.
Congratulations on receiving the HKICS Prize. You have been closely involved in building Hong Kong’s corporate governance infrastructure, particularly in your work on the rewrite of the Companies Ordinance – are you happy with the results of the rewrite exercise?
‘I was pleased that the ordinance was passed by LegCo in July 2012 and implemented in March 2014 – in the present political climate it would be very difficult to get approval for such a major legislative reform.
I think the new Companies Ordinance is a huge improvement on the previous Cap 32. We now have a modernised Companies Ordinance which focuses on core company law. All the myriad provisions regarding corporate administration and management, which were previously crammed into Part IV of the ordinance, have now been separated so we now have separate parts on directors, company administration and procedure, accounts and auditing, shareholder remedies etc. The law has also in many ways been brought up to speed in terms of company law and corporate governance developments in other comparable jurisdictions, so I think it is a huge improvement in terms of structure and content.
One of my principal concerns, however, is that, although there was a commitment to prepare the legislation using the plain English principle, in many places the wording of the new ordinance is anything but plain English. In some places, in particular the accounting and auditing provisions, it is possibly even more complex than the previous Cap 32, and you need to read the relevant provisions several times before you really understand precisely what they are trying to say.
Another area of concern is that the new Companies Ordinance doesn’t cover a number of issues which were strongly supported by the various advisory groups involved in the rewrite exercise. These were incorporated into the draft legislation but, for whatever reason, were deleted before the new Companies Ordinance became law. One of these is the statutory disclosure of directors’ remuneration which was strongly supported by the joint Working Group the government set up with the Hong Kong Institute of Certified Public Accountants. It appeared in the first drafts of the new Companies Bill, but at a later stage the Financial Services and the Treasury Bureau recommended, in the context of a public consultation exercise, that it should be deleted. I think the reasons for this were completely erroneous, particularly as it would not have imposed an unreasonable burden on listed companies. This is something which I think we should revisit quickly because directors’ remuneration is a hot topic and there is no reason for not making this as transparent as possible.
Other deleted recommendations were the disclosure of directors’ substantial property transactions and allowing the inspection of directors’ service contracts by shareholders which were in the White Bill that was vetted by ExCo before the final Blue Bill went before LegCo. Although these provisions have been part of UK law ever since the 1985 Companies Act, they were deleted from the version which was debated by LegCo and I have no idea why this was the case.’
Do you think Hong Kong’s regulatory infrastructure is basically sound?
‘I think we have basically got the right mix. First and foremost, we’ve got the Companies Ordinance providing the statutory provisions applicable to all companies as the base of the structure followed by, at a second level, the non-statutory listing rules with additional provisions for listed companies and, at a third level, the Corporate Governance Code, which, following the UK model, sets out principles-based corporate governance provisions applicable to listed companies subject to the comply or explain principle.’
Do you think the principles-based approach is right for Hong Kong and, if so, do you think Hong Kong should move further in this direction?
‘Yes, I think so. In fact, if you look at the Corporate Governance Code, as a result of reforms over the past few years, most of the recommendations are code provisions as opposed to recommended best practices, and therefore, subject to comply or explain. Companies have to comply or have to state their reasons for non-compliance. There are very few recommendations that are still only recommended best practices and I think that is a move in the right direction.
At the end of the day, corporate governance depends more on the quality of the people running companies than the various structures and processes you have in place, although these are important. It is possible, for example, to have less than optimal governance structures and processes but good people on the board and still have good corporate governance, but I don’t think you will have good governance where you have good structures and processes but bad people. In the case of Enron, they ticked all the boxes in terms of good governance practices – for example, the company had audit committees and independent directors – but many of the directors were crooks. So I think principles-based corporate governance is the way to proceed since it requires that you have good people with sound ethical core principles running companies.’
Do you think the principles-based approach is working in Hong Kong – some have argued that Hong Kong doesn’t have a sufficiently active and independent shareholder lobby to ensure that the comply or explain mechanism works?
‘I think that is a valid point because, traditionally, corporate governance reform is driven by shareholder pressure, but in Hong Kong it tends to be driven by regulatory pressure. This is partly a cultural issue because, unlike the US, which has a well-established and sometimes aggressive investor and minority shareholder culture, Hong Kong has no culture of minority shareholder activism. That is a major obstacle to having significant corporate governance reform in this particular jurisdiction. Whether or not this vacuum can be filled by institutional shareholder activism remains to be seen.’
Looking beyond the rulebook, how important do you think it is to have an effective civil society infrastructure in place – in particular an independent judiciary and an active and free media – to keep companies honest?
‘There is no point in having a good law if it cannot be enforced fairly and without fear or favour, so you need to have an independent and robust judiciary. Corporate governance doesn’t exist in a vacuum as the governance of companies is influenced by the governance of the host society. In fact, there are a myriad number of factors that influence it – cultural, economic, environmental, legal, political and social. There are certain basic things that have to be in place for good corporate governance to take root. For example, as you have mentioned, you need to have an effective regulatory and legal infrastructure; you need to have a good independent and robust judiciary which can administer and enforce the law without fear or favour; and, when things go wrong, you need to have a free and independent media to report on these abuses.’
There has been concern that Hong Kong’s independent judiciary and free media are under threat – do you think they can still provide the checks and balances you mention to ensure good corporate and political governance?
‘At the moment, my answer is yes, but this is something we need to monitor carefully. The two key principles of good corporate governance are accountability and transparency, and these can’t exist in a totalitarian society. There are clear challenges and threats to the continued existence of an independent judiciary and media in Hong Kong. In the case of media, one obvious concern is the risk of self-censorship as journalists don’t want to offend Mainland Chinese interests or, closer to home, strong vested Hong Kong interests.’
How important is the element of personal ethics in terms of underpinning good corporate governance?
‘Ethics are of critical importance to good corporate governance. The law lays down the basic minimum standards, but companies should be doing more than the law requires. Following best practices in corporate governance is very much a question of your corporate culture, mindset and education. It depends on the key ethical values of decency, fairness, honesty and integrity. Now, you cannot legislate for these values – the law can provide an appropriate punishment for wrongdoers but cannot create “goodness” and “good-doers”. This goes back to my earlier point of why it is so important to have good people in key corporate governance roles in a company because they are so fundamentally important to the adoption of good corporate governance by the company. This will always be a work in progress because you are always going to have bad apples somewhere.’
Can we look at where these issues will be heading in the future? What do you think will be the major governance issues both in Hong Kong and globally in the future?
‘I think one of the big areas for development will be corporate social responsibility. This brings into focus the increasing role played by stakeholders in the corporate governance process. Traditionally, companies were accountable to their shareholders, but increasingly companies have to pay far more attention to key constituents such as suppliers, employees, customers and the community within which they operate. Another area will be the issue of weighted voting rights (WVR) which challenges the long-established principle of one-share-one-vote and linking economic power with voting rights. We have already had a long-running debate in Hong Kong about whether or not companies with WVR structures should be listed, and this is not going to go away.’
Do you think that this stakeholder focus is rewriting the social contract under which companies operate?
‘If you have a situation where a company is accountable to different sets of constituents, then basically it will not be accountable to anyone since many of these constituents will have conflicting interests. So I would re-formulate it as a situation where the company is still legally accountable to its shareholders, that is fundamentally important, but has to take account of these other very important constituents like suppliers, customers, employees and the community. I don’t think you can legislate that a company has to be accountable to all of its stakeholders, but it certainly has to take account of their interests. At the end of the day, it is a question of balancing a whole lot of competing and possibly conflicting interests.’
Could we turn to the role of the company secretary? Do you think Hong Kong made the right decision when it opted to retain the mandatory requirement for all companies to have a company secretary? After all, there are not many jurisdictions globally which have this requirement.
‘Hong Kong is rather unusual in terms of making it a mandatory requirement for companies to have a company secretary, but the point is that, even if you don’t have a formal company secretary position, you still have to have somebody in the company who is doing the work of a company secretary, whatever title you give to this role. So, given this, I see no problem with our approach, and I think there is a lot of clarity in having a specific statutory post called the company secretary which has to be filled by a professionally qualified person. This is a good rule as far as corporate governance is concerned.’
Do you have any advice for young recruits to the Chartered Secretarial profession?
‘The way that the Chartered Secretarial profession and corporate governance have developed over the last couple of decades indicates that this is going to be a very interesting and challenging career for any young graduate interested in helping companies improve their corporate governance culture. It is important that people going into the Chartered Secretarial profession realise that they are the company’s conscience and must, at all times, maintain a high degree of independence and an unbiased approach so that they are equally trusted by both the board and management. They have to have the courage and ability to speak candidly to the board if they feel that the board is doing something that goes against good corporate governance practice. They need to have the courage to speak up if they find that there are regulatory or legal deficiencies that need to be remedied. That’s not easy if you are faced with experienced executive directors who are used to doing things in a certain way.’
Gordon Jones was interviewed by Kieran Colvert, Editor, CSj