Since retiring two years ago, Richard Ho FCIS FCS, has embarked on a second career as an independent non-executive director (INED). He shares with CSj some essential lessons in how to make a success of the INED calling.
Can you tell us about your personal background and career path?
‘I studied for the examinations of The Institute of Chartered Secretaries and Administrators (ICSA – now The Chartered Governance Institute) full time at Hong Kong Polytechnic (now The Hong Kong Polytechnic University) in the 1980s. After I graduated, I found a job in a bank and I stayed in banking until I retired.’
Was the ICSA training useful to you in your career?
‘Yes, I haven’t worked specifically as a Chartered Secretary, but the training provided me with a good foundation for my career. The training covers everything from accountancy and business law to administration. Accountancy was obviously useful, as a banker you need to be able to analyse balance sheets, but the business law aspects were just as useful since that background gave me confidence to advise customers on regulatory issues. There are courses specifically designed to give formal training to bankers, but I think the ICSA training was equally good, because it gave me an across-the-board awareness of many different aspects of business.’
Can we turn to your second career as an INED since your retirement two years ago?
‘I was 60 years old when I retired, so I was looking for something I could do. I was approached by some of my business friends to join a board as an INED. That was an interesting option for me. It’s not a full-time job, but I felt that it would be a way for me to maintain my connections with the business world.
I can’t claim to be an experienced INED. I started this work only one-and-a-half years ago, but I have had the benefit of being a committee member of The Hong Kong Institute of Directors (HKIoD) Directors of the Year Awards. I joined HKIoD to learn more about how to be a director and I was asked to join the committee running the award. The award celebrates directors who excel in corporate governance, those who serve as role models for what directorship is really about, so this has been an interesting and eye-opening experience.’
You mention that working as an INED is not a full-time job – have you been surprised by the amount of time it takes?
‘People used to think that being invited to join a board as an INED was an honorary position. They assumed it wouldn’t occupy much of their time and that they could be very passive. Over the last decade, expectations have changed a lot. The requirements of the listing rules and the Companies Ordinance are much more explicit about the need for directors to maintain an active interest in the affairs of the company.
The fact is, to be effective in the INED role, you need to understand every aspect of the company and the wider business environment. You cannot be passive, you have to be proactive and diligent in doing your duty as a director. This does not only mean spending the time needed to understand the business and attend meetings, it is also about having the courage to speak up if something doesn’t seem right.
Board and board committee meetings should not be regarded as a formality, held in the interests of conformance with the listing rule requirements. Compliance is essential of course, but directors are not there just to ensure conformance but to improve performance. That means effectively developing the company’s business strategy and effectively monitoring the performance of management. So signing up for a director’s role is not a decision to be taken lightly. You may have to be controversial because you are the watchdog on behalf of all
You mention that expectations have changed – have attitudes among independent directors also changed in line with these expectations?
‘I think awareness is improving. Part of the credit for this should go to the many bodies in Hong Kong that are promoting better professionalism among directors. The Securities and Futures Commission (SFC), Hong Kong Exchanges and Clearing Ltd (HKEX), the HKIoD and The Hong Kong Institute of Chartered Secretaries have focused on the importance of directors understanding their duties and responsibilities.’
What advice would you give to someone thinking of joining a board as an independent director?
‘The first thing I would emphasise is that the Companies Ordinance doesn’t differentiate between executive and non-executive directors – all directors share the same legal responsibilities and liabilities, and they share the same fiduciary duties towards the company and its stakeholders.
Management’s job is to run the company and your job as a director is to oversee management, so when you accept a seat on a board, you are accepting this challenge. If you take on the INED role without really understanding your responsibilities you might be in for an unpleasant surprise. There are cases of serious malpractice in companies and, when it comes to light, you often hear the directors complain that they were not properly informed, or that they were deceived by management. Alternatively, they may say that they weren’t given sufficient time to go through the board papers before meetings, or that they were too busy to go through all of the documents thoroughly. Another common complaint is that there wasn’t enough time in the meeting to ask questions.
These are not valid excuses. The Companies Ordinance makes it very clear that directors’ duties will be interpreted according to both objective and subjective tests. This means that directors will be held accountable, not only for the knowledge they are known to possess due to their professional expertise and background, but also the general knowledge, skill and experience that may be expected for a reasonably diligent person having taken on the role of the director.
There is an expectation that directors will exercise professional scepticism with regard to the information supplied by management and will request the information they need to exercise good judgement. If board meetings are too rushed, or you don’t have enough time to review the board papers, you should ask the company secretary for more time. Asking for the board papers to be circulated at least five days before the meeting, for example, is very reasonable. It does take time to review all the agenda topics before coming to a meeting so that you will be in a position to have a meaningful discussion.
Directors need to ensure that they are in a position to constructively challenge management. That’s why they are on the board. So my advice would be for new directors to always apply a reality check to what they are being told. That is not disloyal – directors are supposed to be a check and balance as the loyal opposition party to management.’
You mention the company secretary – what’s your view of the importance of the relationship between the company secretary and independent directors?
‘INEDs, not being employees of the company, rely a lot on the company secretary for the information they need. The company secretary is a bridge between INEDs and the management of the company. So the extent to which INEDs can do their job well depends on how well the company secretaries do their jobs.
I know the companies I work for as an INED quite well – they were clients of mine as a banker. Other INEDs may not be in that position and they may not know much about the business or the industry. In that case, the company secretary is a kind of mentor. They can coach inexperienced directors to ensure that they understand their roles and responsibilities, as well as the latest trends and developments in the market. With this in mind, the quality of the corporate governance in a company depends on how good its company secretary is. They are key players in keeping directors informed about new corporate governance requirements and what’s happening in the market.’
Do you think that the existing measures to boost the independence of INEDs in Hong Kong are effective?
‘There are rules saying for example that the previous auditors of a company cannot be an INED for two years after they retire. In my case, as the previous banker of the company inviting me onto their board, I was not able to join for one year after my retirement.
Nevertheless, generally in Hong Kong the chairman, CEO or CFO recruit board members who they know. I don’t have figures to hand, but it is still not common for listed companies to use an outside agency to recruit their INEDs. There will be a question mark over the independence of INEDs who are recruited because they are friends of the top management or chair – will they be in a position to be a check and balance? Will they be reluctant to ask difficult questions with a view to being asked to stay on when the next rotation comes around?
These questions are particularly relevant in companies that are still under family control. That is not to say that family run companies are not good companies – some of Hong Kong’s most successful companies fall into this category and, as a banker, I would be very comfortable lending them money. Where a family-owned business has been handed down through several generations, the owners are often very good caretakers, reluctant to take on speculative risks just to push up the share price. Family-owned businesses tend to be run by conservative owners whose main priority is to make sure that the company prospers in the long term for future generations of the family. But where the directors are all close friends of the chairman or the CEO, and where the culture is not conducive to directors challenging the chair or CEO in the boardroom, it is even more vital that INEDs understand their roles and responsibilities and the need to exercise independent judgement.’
David Webb has suggested that independent directors should be elected by minority shareholders. Do you think that would be a good way boost their independence?
‘That would be a way to boost their independence, but we have to strike a balance between the need for independence and the need to run an efficient board. In the interests of “perfect” corporate governance, you could insist that all listed companies should have an entirely independent board, but would the directors be able to fit in and work efficiently with the chairman and CEO? Such a rule would likely be a disincentive for companies to get listed.’
What’s your view of the impact on directors of the recent shift to a multi-stakeholder model of corporate governance?
‘Directors should not be focused on the interests of one particular group or individual – whether that is the shareholders, the directors themselves, the CEO or the chairman – they need to make their decisions based on what is good for the company as a whole. The interests of the shareholders and the company are not always aligned – dividend payments are a good example of this. Shareholders are generally keen on increased dividend payments but this year, in the context of the crisis we are facing, I’ve seen some companies taking the decision not to pay a dividend to shareholders, or to reduce the dividend and reduce the bonus shares issued. This makes sense at a time when companies need to retain funds to prepare for the difficult times ahead.’
Do you have advice for company secretaries regarding their board support role?
‘I would recommend company secretaries remind the chairman or the CEO to allocate more time for the discussion of strategic issues at board meetings. There is often a pressure in board and board committee meetings to reach a decision on the agenda items on time. This is a compliance issue – the company may have a tight deadline to decide on its resolutions for the AGM for example, but that sometimes means that strategic issues don’t get addressed.
I would recommend that the company secretary set aside time for the board to discuss the company’s long-term business plan in the yearly board agenda. The COVID-19 pandemic and the social unrest in Hong Kong should, for example, have prompted discussions at the board level about whether the company’s crisis management plans and strategies are effective. If not, the company needs to think about how to revamp these plans for the future. This might not be regarded as urgent, but it will be important in the long run. The company secretary should try to draw up a master schedule for these kinds of strategic issues.
Company secretaries might try to line up all the agenda items to be decided on in one meeting. They might try to organise board committee meetings one after another so that the agenda can be discussed in one day, or even half a day. That often leads to a scenario where the board discusses the urgent issues on the agenda but important aspects of strategy get crowded out because time is so limited.
Another recommendation I would have for company secretaries is for them to arrange whole board training sessions at least once a year. This ensures that all directors receive the same message and everyone is on the same page. It is particularly useful where directors need to be updated on important changes in the governance or regulatory environment. I would also recommend company secretaries record any dissenting opinions among directors in the minutes of board meetings. The board takes collective responsibility for decisions made, but individual directors may have dissenting views and that should be noted down.’
Do you have advice for INEDs at this difficult time for businesses in Hong Kong?
‘I would encourage boards to focus on maintaining high standards of corporate governance, in particular ensuring that their companies remain transparent and accountable to all stakeholders. Times of crisis and major change are a test of our levels of transparency and accountability, but they are also the time when these things become most important.
COVID-19 is affecting the operations of most companies in Hong Kong, not only companies like restaurants and hotels which are in the front line when it comes to the pandemic. The SFC and HKEX recently issued a joint statement, giving advice on how companies should maintain proper disclosure during the COVID-19 crisis. They suggest companies should be making voluntary announcements and I would strongly urge companies to use this route to ensure stakeholders are informed about how COVID-19 is impacting them. They may not be able to quantify too much because no one knows how long this situation will last, but they can discuss their crisis management plans, and what measures are in place to try to safeguard employees’ safety and to resume operations.
Some companies may opt to take a wait-and-see approach, but this is not really an option. Stakeholders know that there will be some impact, so if you don’t give them any information there will be a loss of trust. Many stakeholders are directly affected by the changes to companies’ operations. After Chinese New Year, many factories in the Mainland were shut down, so customers may be worried that companies might not be able to deliver their goods on time. Suppliers may be concerned about the disruption to distribution networks. If companies issue regular updates about the situation, stakeholders will be reassured that the company recognises and is managing the risks involved.’
Richard Ho was interviewed by CSj Editor Kieran Colvert.