The Essential Company Secretary is, just as the title suggests, a one-stop guide to the essential responsibilities and duties of company secretaries in Hong Kong. Last month the HKICS published a revised edition of the guide which, in addition to giving readers useful advice on company secretarial practice, acts as a reminder of the higher standards of professionalism and integrity expected in the current business environment.
The Essential Company Secretary has come a long way since it was first published in 1994. Under its original title, Duties of the Company Secretary in Hong Kong, the guide was one of the first publications designed as a reference tool for HKICS members. Published in English and Chinese, it served as a useful guide to the many statutory requirements (and penalties) which affect members as advisers to directors and personally as officers of companies.
The guide was subsequently revised in 2004 following the Higgs report in the UK (The Review of the Role and Effectiveness of Non-Executive Directors, publishedin January 2003) which highlighted the role played by company secretaries in maintaining good corporate governance standards. It was reprinted, but not updated, in 2006 and was therefore due for a further round of revisions to keep it up to date with the fast-changing world of the corporate secretary in Hong Kong. Last year, the HKICS assembled a team (see ‘The people behind the guide’ on page 10) to do just that, and the revised guide was launched last month.
The 2013 edition of the guide is both a practical reference work for company secretaries in Hong Kong, but also a call to arms – reminding practitioners that expectations, both regarding the corporate governance standards of companies and the integrity and professionalism of those advising them, have been on the rise globally since the financial crisis. Mohan Datwani, HKICS Director of Technical and Research, believes it is a must read for practitioners. ‘Many company secretaries in Hong Kong are very busy with their daily work, but I think all professional company secretaries need to step back and take some time to read this guide since it encapsulates the aspirations of what being a good company secretary is all about.’
Raising the bar
The most consistent theme of the revised guide is the need for HKICS members to actively promote good corporate governance practices and discharge their duties with a high degree of integrity. It points out that the reputation, both of the profession and the HKICS, ‘stands and falls on the individual and collective efforts of its members in performing their duties with integrity, skill and dedication’.
‘People are more reliant on the company secretary to draw any irregularities to the attention of the board,’ says April Chan FCIS FCS (PE), HKICS Past President and Chairman of the Technical Consultation Panel. ‘All stakeholders, including regulators and shareholders, have higher expectations of the standards of professionalism and ethics of company secretaries.’
This view is seconded by Jack Chow FCIS FCS, HKICS Treasurer and Chairman of the Institute’s Professional Development Committee. He points out that company secretaries now play a crucial role in keeping directors informed about corporate governance expectations. ‘Directors may not be acquainted with the relevant rules and regulations, but, with the assistance of company secretaries, they are able to obtain appropriate advice to carry their duties pursuant to the rules and regulations.’
He adds that company secretaries need to keep up to date with relevant developments via regular attendance at CPD events and seminars and should bear in mind their higher exposure to legal liabilities. Both of these points are backed up in the guide.
1. Stay relevant
The revised guide states that ‘all members are required to update their knowledge and training by complying with the Institute’s prevailing mandatory continuing professional development requirements’.
In August 2011, the HKICS brought in a mandatory requirement for its members to attend 15 hours of CPD per year. Since January 2012, this has been backed by a similar requirement in the listing rules. Appendix I of the revised guide sets out for ease of reference the arrangements for the phased introduction of these requirements.
2. Watch your back
Jack Chow reminds company secretaries that they should bear in mind the higher legal liabilities they are exposed to in the current business environment. ‘Like it or not, legal liabilities are imposed on company secretaries. Where an individual is named as the company secretary, the liabilities carry. In other words, the office of company secretary has a defined scope of responsibilities, failure to discharge the duties renders the company secretary exposed to litigation.’
The revised guide also mentions the raised legal liabilities practitioners face – indeed, it reminds company secretaries that they have the overall responsibility for ensuring regulatory compliance, irrespective of which individual is tasked with compliance in specific areas of the company’s operation. ‘In view of potential liabilities, company secretaries cannot afford to ignore any cases of non-compliance with legislation or regulation that come to their attention, even if the directors have purported to make someone else responsible for those matters. As an officer of the company, the company secretary has a duty to monitor these matters, regardless of the terms of his or her employment and should draw such cases to the attention of the directors and advise them of their own and the company’s duties and obligations,’ the guide states.
April Chan cites, as an example, the system adopted by the company she works for – CLP. ‘As company secretary, despite the fact that emissions compliance is the responsibility of individual business managers, I am still the key person to ensure that good governance is adhered to. In this case, that means ensuring that proper systems are in place to ensure that any potential incidences of non- compliance with emissions standards are reported to the board and board committees – in this case the audit committee – and that action is taken to remedy the situation.’
The governance agenda
The company secretarial role, both in Hong Kong and internationally, has continued to evolve towards a greater responsibility for corporate governance. Since the global financial crisis, regulators have increasingly sought to exploit the opportunities of the company secretary role to enhance governance and board effectiveness. This was evident in Hong Kong with the 2012 revisions to the Hong Kong Corporate Governance Code and the listing rules to clarify the role of the company secretaries in corporate governance and board support.
These code provisions and listing rules are included in the revised guide for ease of reference. Rule 3.28, for example, which contains the new standards relating to the qualifications, requisite knowledge and experience of company secretaries of listed companies, is set out in Appendix I. Appendix II sets out the new Section F of the Corporate Governance Code which is devoted to the role of the company secretary.
‘The role has changed,’ says Louisa Lau FCIS FCS(PE), HKICS General Manager and Company Secretary. ‘In the past, the role was often seen as primarily an administrative one, but now the emphasis is on the value company secretaries bring as corporate governance advisers.’
It has been nearly a decade since the last revision of The Essential Company Secretary and, as you might expect, the business environment within which companies operate has changed. The 2013 edition of the guide addresses a number of issues at the cutting edge of company secretarial practice.
Perhaps the biggest challenge for company secretaries over the last year has been establishing internal controls to ensure compliance with Hong Kong’s inside information disclosure regime. Appendix III of the revised guide reminds company secretaries of the need to:
• have procedures in place to identify, monitor and disclose inside information
• keep directors and senior management reminded of their continuous disclosure obligations, and
• properly document decisions on the disclosure of inside information and non-disclosure thereof based on safe harbours.
In principle, April Chan is supportive of the regulators’ strategy to cultivate a ‘continuous disclosure’ culture among Hong Kong listed companies. ‘The capital market is international and investors expect timely disclosure of price-sensitive information, so this is the way forward in terms of encouraging a culture of transparency. However, in practice I think that the Securities and Futures Commission (SFC) and the Stock Exchange should provide more guidance for listed companies on what constitutes inside information and the meaning of the safe harbours.’
She adds that the company secretary has a crucial role to play in helping the board to discharge its obligations under the inside information disclosure requirements in the revised Securities and Futures Ordinance (SFO). ‘Companies need to have procedures in place to determine whether a particular piece of information is inside information. They also need to set up training programmes to ensure that all managers are aware of their obligations. Very naturally, these fall under the responsibility of the company secretary,’ she says.
Environmental, social and governance (ESG) reporting
There has been increasing pressure on listed companies in Hong Kong to engage in ESG reporting. While stakeholders are clearly interested in the economic performance of the company, there has been an increased demand, both internationally and in Hong Kong, for more information about the environmental, social and governance performance of the company.
While there are currently no mandatory requirements for ESG reporting, this is set to change. The new Companies Ordinance, set for implementation in the first quarter of 2014, will require public companies, together with ‘larger’ private companies and guarantee companies, to include an analytical and forward-looking ‘Business Review’ in a ‘Directors’ Report’ section in their annual reports. The Review must include information relating to environmental and employee matters that have a significant effect on the company. In addition, the current recommended best practice on ESG reporting in the Corporate Governance Code is likely to be upgraded to a code provision by 2015.
The revised guide flags up the importance of sustainability issues and ESG reporting developments, pointing out that company secretaries are responsible for ‘advising the board in relation to its sustainability and ESG policies and practices and reporting thereon’.
April Chan emphasises that company secretaries cannot confine themselves to purely governance matters alone. Not only do they need to advise the board on ESG issues, but also their responsibility both for shareholder communication and for corporate reporting mean that ESG reporting will be an increasingly major issue they will need to engage with. While many companies have a separate investor relations department, these departments usually handle communication with analysts, fund managers, and institutional investors and liaison with retail shareholders remains with the company secretary.
‘In CLP, with our long history, we have many long-term retail shareholders and we find that they are very interested in the environmental performance of the company. Company secretaries should keep up to date with ESG disclosure, sustainability issues and reporting developments to give meaningful advice to the board on these issues,’ she says.
You might not expect company secretaries to be avid followers of philosophical debates, but one such debate has had a direct impact on their work. In the decade since the last revision of The Essential Company Secretary, ‘shareholder capitalism’ has taken a beating from the rival school of ‘stakeholder capitalism’. While there are still many who believe that companies exist solely to make money for their shareholders, now the majority view is that companies exist for the benefit of all of their stakeholders – including the communities they operate in.
It seems certain that company secretaries will be hearing a lot more about stakeholder engagement in the coming years and the revised guide flags up this issue for readers. It advises that company secretaries need to ensure ‘that the concept of stakeholders (particularly employees) is in the board’s mind when important business decisions are being taken’.
What’s in it for me?
The 2013 edition of The Essential Company Secretary sets its sights not only on raising the awareness among HKICS members of the need for high professional standards and good ethics – it also aims to give readers useful advice on company secretarial practice.
April Chan believes the guide successfully combines aspirational encouragement with practical advice. ‘If you produce something for members, they will certainly look for tips on best practice and I believe The Essential Company Secretary is a very useful tool for company secretaries.’ In particular she refers readers to Appendix III of the guide which sets out the specific responsibilities relating to directors and senior management for company secretaries to review. This has been set out as a series of questions, such as:
- Do you have direct access to the chairman on governance issues and all matters relating to board and shareholder proceedings?
- Do you ensure that there is unlimited and equal provision of information to all board members?
- Do you co-ordinate the timely flow of information to the board?
‘This is a list of questions company secretaries can ask themselves to identify and review whether their current duties conform to the general expectation and then they can make appropriate changes if necessary,’ Chan says.‘The Essential Company Secretary’ is available on the HKICS website (www.hkics.org.hk) under ‘publications’.
‘The Essential Company Secretary’ is available on the HKICS website (www.hkics.org.hk) under ‘publications’.