External investors and stakeholder groups have become much more active players in the corporate governance arena in Hong Kong over last decade, but they are sometimes treated with suspicion by governance players within companies. The HKICS Corporate Governance Conference 2016 looked at what all the key players – inside and outside the company – bring to the governance table and how their roles interact.
The HKICS has been organising its corporate governance conferences (CGCs) on a biennial basis since 1998. This year’s CGC, as the 10th in the series, showed just how far the event has progressed in terms of refining the format and management of the event to ensure it delivers on its promises. One of those promises is the remit not only to discuss tough corporate governance challenges, but also to offer possible solutions to them. This review will focus on the key questions raised, and the conclusions reached, during the two days of discussions.
Governance – a collaborative endeavour
The theme of this year’s conference was ‘Corporate governance inside and out – forces shaping the corporate governance landscape’. The forum looked at the roles of key governance players internal and external to the corporate entity – namely directors, managers, shareholders and stakeholders.
Though these roles were addressed in separate sessions, the forum quickly revealed that they cannot be considered in isolation. Governance is a collaborative effort which requires everyone in an organisation from the chairman to shop floor employees to sign up to. Moreover, complex intersecting relationships exist between the roles and single individuals often find themselves in dual or multiple roles.
The need for a recognition of the complex interactions between the various governance players is nowhere more evident than in the role of the company secretary. Company secretaries play an intermediary role between board and management and between the company and its shareholders and stakeholders. They also hold a role which straddles the ‘inside and out’ categorisation as members of senior management as well as gatekeepers for compliance and ethics. The role of the company secretary, while it was not the specific focus of any of the conference sessions, was frequently at the centre of the discussions.
This first part of our conference review will focus on the key conference conclusions relating to directors and managers.
The business environment within which companies operate has become a lot more complex. In this context, the necessity of having a good board to navigate the challenges and opportunities facing the enterprise is all the more important. In his keynote address on day two of the conference, Anthony Neoh FCIS FCS, Senior Counsel and Former Chief Adviser to the China Securities Regulatory Commission, sketched out some of the key risks and opportunities that directors should be addressing (see his keynote address on pages 12–16 of this month’s CSj).
How then should boards respond? The first session of the conference focused on the need for directors to take a professional approach to their responsibilities. For speaker Nicholas Charles Allen, Chairman, Link Asset Management Ltd, the key issue is the need for directors to be in a position to constructively challenge management. To do this properly, directors need to ensure that they are adequately informed to ask the right questions.
Do your homework
Directors usually have a seat on the board because of a particular area of expertise they can bring to board discussions. This does not mean, however, that they are not expected to contribute to discussions outside their field of expertise. Indeed, panellist Ada Chung FCIS FCS, Registrar of Companies, Companies Registry, highlighted the fact that, since the implementation of the new Companies Ordinance, directors are no longer only subject to a ‘subjective’ test of their duties of care, skill and diligence. The new Companies Ordinance added an ‘objective’ test which looks at the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the director. ‘This means that they cannot claim ignorance,’ she pointed out. ‘They are expected to go out of their way to know about the subjects under discussion by the board. It is more and more onerous to act as a director today.’
So what is the best way for directors to ensure that they are adequately informed? A primary source of information, of course, will be the board papers prepared by management. Mr Allen warned, however, that ‘while board papers are a very important source of information, they nevertheless come with a health warning. The CFO and CEO will vet all documents going to the board and they spend considerable amounts of time managing their boards,’ he said.
To avoid the danger of management ‘capture’, directors need to broaden their sources of information. They should be having face-to-face meetings with managers not on the executive committee or board, particularly leaders of business divisions. They should be going on site visits to assets of the business, and they should be attending industry-specific events and learning opportunities. These ‘learning opportunities’, such as CPD events and conferences, are a good way for directors to gain a better understanding of the areas they are not an expert in. ‘You won’t become an instant expert, but you will be able to participate in the debate and ensure the right questions are asked,’ Mr Allen said.
This issue has particular relevance, of course, for company secretaries – directors’ access to information is a key part of the company secretary’s board support role. Mr Allen made a direct appeal to the company secretaries in the audience – ‘My message to the Chartered Secretaries here is to be brave enough to help develop the skill sets of the directors on your boards by facilitating these meetings, site visits and industry and related conferences,’ he said.
Don’t get lost in the detail
Another key part of directors’ due diligence is the need to ensure that the board addresses the strategic challenges and opportunities facing the organisation. Panellist Dr Kelvin Wong, Executive Director and Deputy Managing Director, COSCO SHIPPING Ports Ltd, pointed out that board agendas are often much the same as they were 100 years ago and often boards don’t get much further than a review of minutes of the last meeting followed by a discussion of ‘matters arising’. ‘These matters are essential but not sufficient, they tend to be confirmatory rather than exploratory and to discuss strategy is rare among listed companies in Hong Kong,’ he said.
Dr Wong believes that it is more common for management to discuss strategy in Hong Kong companies. He therefore urges INEDS to demand that strategy should be added to the board agenda at least once a year. He also urges professional investors to attend AGMs and ask the questions they want answered. He pointed out that this helps directors ensure that such issues are taken seriously by the board.
The need for boards to discuss strategy was also raised by panellist Andrew Weir, Regional Senior Partner, Hong Kong, Head of Capital Markets, KPMG China, and Global Chairman of Real Estate and Construction, KPMG. He highlighted the fact that both risk and strategy are often neglected by boards in Hong Kong and linked this to the danger of management ‘capture’ discussed above. Where management controls the board agenda, risk and strategy are often neglected. The issue for the board is therefore to make sure that the board, rather than management, owns the board discussion, he said.
Speaker Antony Leung Kam-chung, Group Chairman and Chief Executive Officer, Nan Fung Group, also emphasised the importance of directors discussing strategy – ‘often boards don’t have time to see around the corner and lead the organisation going forward,’ he said. He recommended having specific board sessions dedicated to strategy and pointed out that the agreed strategy needs to be matched with the organisation’s key performance indicators (KPIs). He cited the example of an organisation which had focused its business model on being the best in customer service while none of it’s KPIs were related to customer service.
Get the right people
Mr Leung also emphasised the importance of getting the right people – whether for board or management positions.
‘First who then how. If you have the wrong people, the best system in the world will not prevent things going wrong,’ he said. Where directors are concerned, he added that the recruitment exercise should not only look at a potential director’s credentials.
‘Some candidates have great credentials but lack creative and lateral thinking, as well as critical independence,’ he pointed out.
Session two of the conference examined the governance role of managers, posing the question whether management is ‘hands on or handcuffed’? Speaker Lincoln Leong, CEO, MTR Corporation Ltd, pointed out that managers are subject to a lot more public scrutiny today. Ten years ago they were expected to uphold the interests of shareholders – now, in addition to shareholder interests, they need to consider an ever-widening group of stakeholders who tend to have very high expectations of ethics and corporate governance.
Has this enhanced public scrutiny been good for companies? Mr Leong believes it has, since it has pushed them to be more transparent. Panellist William Lo Chi-Chung, Executive Director, Finance, Airport Authority Hong Kong, pointed out that, for the Airport Authority, everyone is a stakeholder and that, while the increased scrutiny has been ‘more good than bad’, it has not come without a cost. For example, there have been eight judicial reviews related to the airport’s third runway. ‘We have spent a lot of money and management time on this, but the stakeholder pressure has helped us set our priorities. I believe it is good for management and the board – it keeps us humble and helps to take care of blind spots.’
Speaker Edith Shih FCIS FCS(PE), Head Group General Counsel and Company Secretary, CK Hutchison Holdings Ltd, pointed out that company secretaries can ‘uncuff the chains’ for management in the sense that they help to assure directors that legal, regulatory and ethical compliance issues are under control. ‘When compliance is attained there are no chains to be uncuffed,’ she said.
She also made the point that improving governance solely in the interests of ‘compliance’ was not necessarily a bad thing. An electronic poll found that a majority of the audience felt that corporate governance was observed more out of compliance rather than as a strategic advantage. Ms Shih pointed out that this is often the way good governance practices first take hold. ‘If you are required to do something, that is a good place to start. Initially you may adopt good governance only for compliance reasons, but hopefully when you start to practice it you come to embrace it,’ she said.
The Hong Kong Institute of Chartered Secretaries Corporate Governance Conference was held at the JW Marriott Hotel, Hong Kong on the 23–24 September 2016. More information and photos of the event can be found on the Institute’s website: www.hkics.org.hk, and the conference website: www.hkics.org.hk/CGC2016.
SIDEBAR: IN THEIR OWN WORDS
“Directors cannot claim ignorance, they are expected to go out of their way to know about the subjects under discussion by the board.”
Ada Chung FCIS FCS, Registrar of Companies, Companies Registry
“If you are required to do something, that is a good place to start. Initially you may adopt good governance only for compliance reasons, but hopefully when you start to practice it you come to embrace it.”
Edith Shih FCIS FCS(PE), Head Group General Counsel and Company Secretary, CK Hutchison Holdings Ltd
“These matters [discussed by boards] are essential but not sufficient, they tend to be confirmatory rather than exploratory and to discuss strategy is rare among listed companies in Hong Kong.”
Dr Kelvin Wong, Executive Director and Deputy Managing Director, COSCO SHIPPING Ports Ltd
“Stakeholder pressure has helped us set our priorities. I believe it is good for management and the board – it keeps us humble and helps to take care of blind spots”
William Lo Chi-Chung, Executive Director, Finance, Airport Authority Hong Kong
“While board papers are a very important source of information, they nevetheless come with a health warning. The CFO and CEO will vet all documents going to the board and they spend considerable amounts of time managing their boards.”
Nicholas Charles Allen, Chairman, Link Asset Management Ltd
“First who then how. If you have the wrong people, the best system in the world will not prevent things going wrong.”
Antony Leung Kam-chung, Group Chairman and Chief Executive Officer, Nan Fung Group