Katherine Ng, Senior Vice-President and Head of Policy, Listing, Hong Kong Exchanges and Clearing Ltd (the Exchange), and a speaker at the Institute’s latest Annual Corporate and Regulatory Update seminar held last month at the Hong Kong Convention and Exhibition Centre, offers some tips on how to enhance the effectiveness of the company secretary’s role in supporting the board.
The work of company secretaries has increased in volume and complexity over the years. This can be attributed to heightened expectations for better corporate governance and greater transparency in corporate affairs. The regulatory landscape has also become more elaborate, as physical borders disappear through the increasing use of the internet. In this context, the role of the company secretary has become more critical than ever.
Duties and responsibilities of company secretaries
A company secretary performs two main functions – the secretarial function and the corporate governance function. The secretarial function covers mostly administrative duties such as regulatory filings, organising meetings and keeping corporate records required under laws and regulations. This was historically the dominant function of a company secretary, but times have changed and the company secretary is now increasingly relied upon as a trusted adviser to the board – particularly on regulatory and governance matters.
This governance function of the company secretary is enshrined in Hong Kong’s Corporate Governance Code (CG Code), which sets out the company secretary’s responsibility to advise the board on corporate governance matters and ensure that board policy and procedures are followed. Under the CG Code the company secretary is also responsible for facilitating good information flow and the professional development of directors.
Company secretaries now have a much more dominant role as the corporate governance ‘captains’ of their companies and of the market generally.
Advising on governance and ensuring regulatory compliance
While the ultimate responsibility for corporate governance and ensuring an issuer’s compliance with laws and regulations, including the listing rules, rests with the board, the board can and will look to company secretaries for advice and comfort.
Section F.1.4 of the CG Code states that all directors should have access to the advice and services of the company secretary to ensure that board procedures, and all applicable laws, rules and regulations are followed. This access should be straightforward, unobstructed and sufficiently regular and timely.
To achieve this, close involvement of the company secretary in the board’s decision-making is required. The board should be able to seek the company secretary’s advice during the deliberation process and the company secretary can keep a close eye on any corporate governance or compliance issues.
Acting as the conscience of the company
Company secretaries are expected to act as the conscience of the issuer. That means guiding the issuer in making the right decisions and being ready to ask questions and advise and challenge the board – especially when faced with proposals which do not sit well with good governance practices.
As the company’s ‘conscience’, a company secretary’s role goes beyond ticking the compliance boxes. It is not just about doing the task or transaction lawfully and in accordance with the listing rules, but also whether it is the conscionable choice for the issuer.
Maintaining information flows
The company secretary acts as a key conduit between the board and the management and external parties by ensuring a good information flow between them.
Internal communication – taking a board meeting as an example, the company secretary can help the chairman set the agenda and gather information for the board. Furthermore, the company secretary should ensure that the background information provided by management to the board is presented in a succinct manner that is easily understood by the directors. Should the directors have questions or require further information prior to the board meeting, the company secretary should be their first point of call. This is particularly important for non-executive directors, who, unlike executive directors, may not be as familiar with the structure and personnel of the issuer and are not physically in the office every day.
External communication – for listed companies, external communication is equally important. Company secretaries can play a very important role in maintaining an ongoing dialogue with shareholders and external stakeholders. They are often the best persons to manage relations with institutional investors especially on corporate governance matters. One of the ways to do this is through the implementation of a holistic shareholder communications policy. Shareholders should be provided with up-to-date and relevant information relating to the issuer through general meetings and other corporate communications. Communication is a two-way process – as well as ensuring good information flow to stakeholders, there must be a channel provided to stakeholders to give their feedback or raise enquiries. These enquires and feedback must be documented, followed up in a timely manner, and brought to the attention of the board where appropriate.
Facilitating the professional development of directors
A good company secretary keeps under close review all regulatory and corporate governance developments and informs the board of any major changes that may affect the issuer’s operations.
Company secretaries should also arrange formal training for directors. For new directors, induction training is essential for directors to understand the issuer’s operations, as well as their duties and responsibilities under applicable laws and regulations. For incumbent directors, refreshers can keep directors informed of the latest developments.
The Exchange’s new series of directors’ training webcasts (see Directors’
training webcasts’ below) can assist company secretaries in their directors’ training function.
Key areas where company secretaries provide support
The board of directors of an issuer is collectively responsible for its management and operations. The Exchange expects directors to, both collectively and individually, fulfil their fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law.
Conflict of interests and connected transactions
There are many family-controlled companies in Hong Kong. Conflict of interests and connected transactions are common issues faced by these companies every day. Under the Companies Ordinance, directors have an obligation to declare the nature and extent of their interests in any transaction, arrangement or contract to the board. Rule 3.08 of the listing rules requires directors to:
- act honestly and in good faith in the interests of the company as a whole
- act for proper purpose
- be answerable to the issuer for the application or misapplication of its assets
- avoid actual and potential conflicts of interest and duty
- disclose fully and fairly their interests in contracts with the issuer, and
- apply such degree of skill, care and diligence as may reasonably be expected of a person of their knowledge and experience and holding their office within the issuer.
- Chapter 14A of the listing rules also prescribes stringent disclosure and shareholder approval requirements for connected transactions.
The first step is identifying and disclosing the conflict. Some conflicts may be apparent, but others may not be as straightforward. Whilst directors are ultimately responsible for disclosing any potential conflicts, they should reach out to the company secretary for advice and a second opinion if they are in doubt. The next step is ensuring that documents are not distributed to an interested director and that he or she refrains from taking part in the board discussion and voting on the conflicted issue.
Under Code Provision A.1.7 of the CG Code, if a substantial shareholder or a director has a conflict of interest in a matter to be considered by the board which the board has determined to be material, the matter should be dealt with by a physical board meeting rather than a written resolution. Independent non-executive directors who, and whose close associates, have no material interest in the transaction should be present at the board meeting.
All declarations of conflicts should also be recorded in the minutes of the meeting. The company secretary will need to ensure that proper board procedures and shareholder approval procedures are followed.
Dealing in the issuer’s securities
It is important that directors wishing to deal in any securities in an issuer must first have regard to the insider dealing and market misconduct provisions of the Securities and Futures Ordinance (SFO), as well as the Model Code for Securities Transactions under the listing rules.
The company secretary can help to establish necessary policies and procedures regarding dealings in the issuer’s shares. This may involve reminding directors of blackout periods and prohibitions on dealings, keeping records of dealings by directors and assisting with the subsequent disclosure of interests as required under the SFO.
Risk management and internal control
Risk management and internal control is an important part of good corporate governance. The board is responsible for defining the risk appetite by reference to the issuer’s strategy, ensuring appropriate internal controls are implemented to manage the risks and reviewing the effectiveness of internal control systems on a regular basis.
Company secretaries can assist directors in their oversight of the issuer’s internal control systems and risk management efforts by:
- reminding the chairman to include risk management considerations on the board’s agenda
- acting as a conduit between the management and the board to ensure that the board is kept informed of any changes to major risks faced by the issuer
- assisting the board in preparing corporate governance reports and environmental, social and governance reports by gathering the relevant information from operation teams and meeting with stakeholders etc.
Sitting at the centre of the board’s operations, the company secretary is often one of the first persons to learn of new transactions or material changes affecting the company. Such transactions or changes could constitute inside information within the meaning of the SFO.
The company secretary should help to establish procedures for monitoring and escalating potential inside information to the board, and provide timely advice to the board as to whether there is inside information. Once inside information has been identified, the company secretary should take reasonable precautions to preserve its confidentiality. This includes reminding directors and employees who have access to such information of their confidentiality obligations. During the material time, the company secretary should also pay close attention to the media and consider whether confidentiality has been breached.
Where a disclosure obligation has arisen, the company secretary may need to arrange a public announcement to be made in connection with the inside information. Such announcement should be clear, comprehensible and provide sufficient background information so that investors can make well-informed decisions.
External service providers
It is not uncommon for companies to engage external professional firms as company secretaries, but there may be some inherent difficulties which need to be overcome by external company secretaries in order to perform their duties. For example, if they are not physically in the offices of the company every day, they need to ensure that clear internal processes are implemented so that they are kept informed of the issuers’ activities at all times.
Good corporate governance cannot be achieved by a box ticking exercise. It is important to recognise that the ‘comply or explain’ regime under the CG Code is designed to cater for greater flexibility for a reason. Issuers should consider whether an alternative framework is more suitable to its needs and give a full explanation of the reasons behind it. The best corporate governance practice would be one that is tailor-made for an issuer after considering the issuer’s businesses and circumstances from all angles.
Katherine Ng, Senior Vice-President and Head of Policy, Listing Hong Kong Exchanges and Clearing Ltd
SIDEBAR: Are you effective in your role?
Hong Kong’s Corporate Governance Code states that all directors should have access to the advice and services of the company secretary, but in practice the level of reliance placed on the company secretary’s shoulders varies significantly from company to company. The following questions are designed to help company secretaries assess how effective they are in their roles.
- Are your directors relying on you for advice especially on listing rule compliance?
- Are you closely following the board’s discussions and decision-making process?
- Are you prepared to challenge the board where good corporate governance standards are at risk?
- Are you actively maintaining a dialogue between board and management and between your company and external stakeholders?
- Are you actively engaged in facilitating directors’ training – both in terms of induction and ongoing training?
- Do you assist directors in their oversight of the company’s internal control and risk management systems?
- Are you actively engaged in ensuring that proper procedures are followed when managing conflict of interests and connected transactions?
- Are you involved in preparing corporate governance reports and environmental, social and governance reports?
SIDEBAR: Directors’ training webcasts
The Exchange recently launched a new series of directors’ training webcasts. The first webcast (in March 2017) focused on directors’ duties and board committees. A webcast in June this year discussed risk management, internal control and environmental, social and governance reporting. Two more webcasts are scheduled for the second half of 2017 on company secretaries and other support available to directors, and the Exchange’s expectations of directors for IPOs.
Company secretaries are encouraged to watch the webcasts available on the Exchange’s website: www.hkex.com.hk.