The latest Hong Kong Institute of Chartered Secretaries Company Secretary/Board Secretary Roundtable meeting, held on 17 January in Hong Kong, focused on recent amendments to Hong Kong’s governance regime designed to raise standards in a range of areas from directors’ accountability to board diversity.
The Hong Kong Institute of Chartered Secretaries (the Institute) holds five Company Secretary/Board Secretary Roundtable meetings every year in Hong Kong and cities in the Mainland. These forums are designed to assist Institute members and Affiliated Persons from both the Mainland and Hong Kong to keep up to date with the fast-changing regulatory environment in which they work.
Speakers at the latest meeting in this series, held on 17 January in Hong Kong, emphasised the increasingly important role that corporate governance is playing in determining corporate success. Apart from anything else, upholding the best corporate governance practices is of utmost importance to maintaining investor confidence, especially the confidence of international institutional investors who not only look at the company’s short-term earnings, but also what measures the company has in place to minimise risks and prevent corporate fraud.
Over 40 company and board secretaries, representing Hong Kong- and dual-listed Mainland companies, discussed the latest developments in corporate governance of relevance to dual-listed companies.
The challenge for governance professionals
In his welcoming address, the Institute Past President Dr Maurice Ngai FCIS FCS(PE), noted that there have been numerous changes made to the listing rules and Corporate Governance Code recently, as regulators seek to improve oversight of board governance, directors and senior management. The amendments include more stringent requirements for independent non-executive directors (INEDs) and for board governance practices, especially relating to INEDs’ independence, board diversity and disclosure practices.
The lingering US-China trade war, mutual trading of shares and bonds listed and issued in Hong Kong and the Mainland, as well as the new dual-class ownership structure now permitted in Hong Kong, present unprecedented challenges to governance professionals. However, Dr Ngai is optimistic that Hong Kong’s role as an international financial centre will continue to strengthen and will attract more companies from across the region to list in the city.
‘On this occasion celebrating the 25th anniversary of the Institute, we will continue, as dedicated as we have been in the past, to foster the development of corporate governance best practices, and ensure company secretaries are suitably trained and professionally qualified for their responsibilities,’ he said. He added that the new Chartered Governance Professional designation, recently introduced in Hong Kong and internationally by The Institute of Chartered Secretaries and Administrators, will elevate members’ status both at home and abroad.
Hong Kong’s new governance regime
The first speaker, Ellie Pang, Vice-President, Policy and Secretariat Services, Listing, Hong Kong Exchanges and Clearing Ltd (HKEX), gave attendees an update on the latest changes made to the listing rules and Corporate Governance Code (the Code) in Hong Kong.
Ms Pang began with a recap of the importance of good corporate governance, including the impact on market quality, company reputation, business continuity and investor confidence. A high concentration of poorly managed companies, she pointed out, can jeopardise market stability. Moreover, a company with good governance practices tends to enjoy a better valuation by the market. She emphasised that the long-term success of listed companies relies on good board governance. Better risk management ensures long-term, sustainable development. A high level of transparency provides better investor protection and therefore helps build a company’s reputation.
In Hong Kong, the listing rules and the Code form the core regulatory and compliance framework. The Code is divided into governance principles (Principles), code provisions (CPs) and recommended best practices (RBPs).
- Listing rules are mandatory for all issuers and any breach may result in sanctions.
- Code Principles describe what good corporate governance is, but do not provide specifics as to how it is achieved.
- CPs provide specifics on how to comply with the Principles, but are not mandatory and are applied according to the ‘comply or explain’ principle.
- RBPs are desirable standards with which issuers are encouraged, but not required, to comply.
The listing rules and the Code have been subject to important amendments in recent years, in November 2017, July 2018 and the latest round of amendments, effective January 2019. These latest amendments are designed to:
- strengthen the transparency and accountability of the board and/or nomination committee and election of directors, including INEDs
- improve transparency of INEDs’ relationships with issuers
- enhance criteria for assessing the independence of potential INED candidates
- promote board diversity, including gender diversity, and
- require greater dividend policy transparency.
For every issuer, there should be an established policy on how to identify potential directors, Ms Pang said. The selection process should be transparent and fair. Issuers are encouraged to select from a broad range of candidates who are outside the board’s circle of contacts and in accordance with the issuer’s diversity policy. Formal procedures should be in place for the selection, appointment and reappointment of directors according to the selection criteria. This should include, for example, bringing value to the board in terms of qualifications, skills, experience, independence and gender diversity.
INEDs will be held accountable both for their actions and inactions – they are subject to the same legal duties and liabilities as other directors under the law and the listing rules. For this reason, once an individual has accepted an INED appointment, he or she immediately bears legal responsibility. Where directors fail in their duties, they can’t shift their responsibility onto others, warned Ms Pang.
In order to strengthen the independence and avoid potential conflicts of interest, former partners of the issuer’s current auditing firm and/or consulting firm(s) cannot assume the role of INED until after a two-year cooling period. By the same token, former partners of the auditing firm of the issuer cannot be offered a place in the audit committee until after two years. For the same reason, former partners/executives of the company’s existing vendors have to wait a year before they are eligible for such a role. When determining independence, the same factors should also apply to the director’s immediate family members, Ms Pang elaborated.
‘Though in recent years we have seen a growing focus on board diversity, over 30% of issuers we surveyed have a board purely comprised of men. I think we are way behind other major markets in terms of board diversity. A greater diversity of directors is conducive to good governance practices as it promotes efficiency and enables better decision making,’ Ms Pang said.
In addition to seeking to maintain a diversity of skills and experience on the board, listed companies are encouraged to formulate a diversity policy that articulates the benefits of all forms of diversity, including gender diversity.
According to the latest annual survey by HKEX assessing issuers’ compliance with the Code, only about 64% of the respondents reported that the chairman and CEO roles are separate, making this the least complied with RBP in the Code. The survey results were published as part of the Analysis of Corporate Governance Practice Disclosure in June and December Year-End 2017 and March Year-End 2018 Annual Reports released in November last year.
A clear separation of the chairman and CEO roles is intended to reduce possible conflicts of interest, especially when it comes to determining the CEO’s compensation, ensuring checks and balances, and maintaining a balance on the audit committee. ‘While some companies believe and may argue that the combination of the chairman and CEO roles could enable a faster decision-making process, it is more likely that the chairman/CEO is surrounded by “yes men” on the board,’ Ms Pang said.
Wrapping up her presentation, she encouraged attendees and their companies’ directors to watch HKEX’s latest e-training webcast, which includes advice on the new amendments to Hong Kong’s corporate governance regime. Directors should participate in training to develop and refresh their knowledge and skills so as to ensure that their contribution to the board remains informed and relevant, she pointed out. HKEX will continue to look for innovative ways to provide training for directors, she added.
A governance case scenario
The second speaker, Yao Jun FCIS FCS, Company Secretary, Ping An Insurance (Group) Company of China Ltd, gave attendees insights into the governance practices of this dual-listed company.
Ping An’s compliance policy addresses international market rules and regulations, China’s unique business environment and industry standards. The company does not only comply with the regulatory requirements and compliance standards imposed by both the Hong Kong and Shanghai stock exchanges, but also relevant legislation and industry standards such as the requirements of China Banking Regulatory Commission and China Insurance Regulatory Commission.
‘For Ping An, as a dual-listed company, our governance objective is to achieve the highest possible standards so that we can meet all rules and regulations imposed by multiple market regulators, domestic and abroad,’ Mr Yao said.
After Morgan Stanley and Goldman Sachs became shareholders of Ping An in 1994, the company took that opportunity to modernise its board governance structures and processes to meet international standards. When HSBC became another shareholder in 2002, Ping An learnt a lot from HSBC’s highly recognised governance practices, making substantial improvements to the company’s governance structure, risk management, internal control, firewall construction and disclosure, Mr Yao pointed out.
Ping An was listed in Hong Kong in 2004 as an H-share stock and then listed on the Shanghai bourse as an A-share stock in 2006. After the initial public offering, the company made more improvements to its governance structure, focusing on improving transparency and investor protection. ‘Thanks to all these endeavours we have made over the years, Ping An is now trusted by the exchanges, industry regulators and industry bodies in both Hong Kong and the Mainland,’ he said.
‘Our board is well diversified in terms of skill sets, cultural background and nationality. Our directors not only come from the most relevant insurance, actuarial, banking, accounting, legal, medical and engineering backgrounds, in the future we will also introduce experts in artificial intelligence to the board. 46% of our directors are from outside the Mainland, including the US, the UK, Singapore and the Hong Kong SAR,’ he added.
External directors, especially independent directors, make up the largest percentage of the four committees under the board, including committees that are entirely comprised of external directors for the sake of achieving the highest level of independence. On board diversity, Ping An factors in gender, age, cultural and educational backgrounds, experience, skill sets and knowledge when selecting independent directors.
Ping An also commissions consultants to review their compliance policies, training and strategic planning to ensure that its compliance programme aligns with the listing rules and requirements of the Code, especially when it forays into new territories, for example fintech or when launching new products. While formulating new, innovative strategies to future-proof their business, the company would also think about ways to minimise the associated risks.
In order to ensure directors are kept abreast of the company’s latest situation and to help them make informed decisions, Ping An has established multiple communication channels, including site visits, monthly director newsletters, briefings on the company’s new business lines or products and discussions either face to face or over the phone/internet whenever they have questions.
‘Ping An places a high importance on board effectiveness, and we aim to make every meeting effective and fruitful. In doing so, sufficient preparation is key. Every November, we schedule board meetings in advance for the upcoming year. Based on the meeting schedule, different business units will suggest issues they would like to be discussed at board meetings. We don’t like to arrange board meetings in a rush unless absolutely necessary.’
Sixty days before the next board meeting, the board secretary will have the agenda ready after reviews by the concerned business units and executives. Meanwhile, all directors will be given an opportunity to include matters in the agenda for the upcoming board meeting. The finalised agenda will be dispatched at least 14 days ahead of the meeting.
‘In fact, we have developed our proprietary electronic board meeting platform to distribute agendas, and send notifications and meeting reminders to directors. Directors can retrieve archived agendas, minutes and director training materials on this secure platform.’
Questions and answers
During the discussion session at the end of the meeting, a number of questions were raised about Ping An’s practices and the HKEX stance on certain hotly debated issues. Mr Yao was asked to share Ping An’s experience in ESG reporting. The speakers and audience further discussed the importance of third-party accreditation of these reports.
While all agreed on the importance of external assurance of sustainability reports, Ms Pang noted that there is a wide range of assurance providers, standards and approaches in different regions, which poses a significant challenge to the overall usefulness and reliability of assurance. This highlights the need for a generally accepted approach to assurance of ESG reports to be developed. ‘In the context of Hong Kong, we intend to leave third-party assurance to the discretion of the reporting issuers at this stage,’ she said.
Subsequent discussions focused on the roles and functions of executive and supervisory boards, whether there is an overlap between these boards, and whether this results in too much oversight function.
Ms Pang concluded with some general thoughts on governance trends. Rather than short-term profits, institutional investors such as mutual funds and pension funds are focused on building long-term shareholder value, she pointed out. Since they tend to hold onto the company’s shares for the long term, they expect the company to apply sound governance principles and practices.