As we are approaching the year end, CSj takes a look at the road ahead for governance professionals in the coming year and beyond.
In 2021, the Hong Kong Chartered Governance Institute (the Institute) has been focusing its ECPD services and publications on a number of frontier issues in governance – such as environmental, social and governance (ESG) reporting and performance, climate change mitigation and adaptation, diversity and inclusion, organisational culture and purposeful governance – that will become increasingly important for organisations’ survival and growth in the years ahead. In this article, CSj highlights some key takeaways of two such publications designed to help governance professionals in their key role future-proofing their organisations at a time of rapid and radical change.
The new board agenda
A new thought leadership paper, published jointly by the Institute and Bain & Company on 15 September 2021, seeks to give practical suggestions to governance professionals, both on the challenges ahead, and on how they can help organisations in Hong Kong and the Mainland build resilience at this critical juncture.
The New Board Agenda (the Report), which was based on a survey of over 1,400 members of senior management of companies in Hong Kong and the Mainland, highlights the fact that the turbulence and disruptions of the current operating environment – including interstate and civil conflicts, public health and environmental threats, financial crises and trade conflicts and technological disruption – are not likely to ease any time soon. Over 90% of the senior management of companies surveyed by the Report expect more turbulence in the business environment in the coming 3 to 5 years.
In this context, the Report focuses on the roles that stakeholders, boards and governance professionals can play in future-proofing organisations in the years ahead.
A new approach to stakeholder engagement
While stakeholder engagement has become an increasing part of ESG best practice, particularly in determining the materiality of various ESG issues to organisations, it is still often regarded as a compliance requirement rather than a competitive advantage. This is borne out by the findings of the Report survey. Only half of the boards of companies surveyed reported that they discuss stakeholder engagement. The survey also found that fewer than one-quarter of boards regularly discuss stakeholder issues, as opposed to three-quarters that regularly discuss strategy development.
The Report highlights the advantages of taking a new approach to stakeholder engagement – an approach that recognises and seeks to enhance the value the exercise brings to the organisation as an early warning system for changes in the operating environment. The Report urges company secretaries to closely interact with relevant stakeholder groups and monitor signs of emerging change that could affect the industry or the organisation they work for. ‘By understanding the diverse priorities of each stakeholder, board leaders and management can more effectively create successful action plans,’ the Report states.
Expanding the board’s agenda
In addition to a new approach to stakeholder engagement, the Report also emphasises the need for boards to adopt a new approach to its own function. Some changes, such as to the format and frequency of board meetings, have already become common in the market as a response to the Covid pandemic, but boards can also consider more significant changes. For example, boards can consider creating new board committees to look at frontier issues that will have major implications for their operations going forward. These might include adoption of new technologies such as artificial intelligence systems, and the management of ESG reporting and performance.
The Report also emphasises the need for boards to expand their discussion agendas to ensure that they are not blindsided by emerging issues. It suggests, in particular, seven main topics that should be on board agendas (see ‘Board oversight?’).
How can governance professionals help?
Governance professionals can play a major role in assisting organisations to become more responsive to emerging issues. One of the most obvious ways in which governance professionals can do this is by ensuring that such issues are on the board’s agenda. The Report’s survey, however, found that many boards do not involve their company secretaries in proposing meeting agendas. The survey found that only 17% of company secretaries are very involved in proposing topics and shaping board agendas.
A more positive finding, however, was that those boards that do involve company secretaries in proposing board agendas are more likely to discuss topics that address turbulence and stakeholder management. Such boards are more involved in identifying relevant stakeholders, setting goals to address their needs, ensuring clear actions and accountability for achieving those goals, reviewing progress toward the goals and achieving the right balance between stakeholder and shareholder interests.
The Report urges company secretaries to recognise their unique position to help Hong Kong and Mainland corporate boards of directors anticipate the challenges with a future-proof agenda. ‘Ideally, they’ll proactively shape the board’s agenda by proposing future-proof topics for discussion and presenting critical issues for review. And they can recognise the long-term value of those agenda items and commit to those that best serve the organisation, even when inconvenient in the short term,’ the Report states.
Corporate and board culture
The New Board Agenda, reviewed above, prioritises a new approach to organisational purpose and culture. ‘A well-defined, multigenerational purpose is a beacon by which the company can navigate turbulent times,’ the Report states. This has been a major theme of the Institute’s ECPD services and publications throughout 2021. The Institute has been promoting the board’s role in determining the purpose of an organisation and ensuring that its culture is aligned to its purpose, values and strategy.
A guidance note, published in September 2021 by the Institute’s Securities Law and Regulation (SLR) Interest Group (the Guidance Note), gives advice to governance professionals on how to prepare for higher regulatory expectations relating to corporate and board culture. In April this year, Hong Kong Exchanges and Clearing Ltd (HKEX) proposed to introduce a new Code Provision to Hong Kong’s Corporate Governance Code (the Code) to require listed company boards to align their company’s culture with its purpose, value and strategy. The Guidance Note (Board Culture – The Trend Towards Ever Greater Board Accountability) offers a useful summary of practical ways for company secretaries to support the board in anticipation of these changes to the Code (See ‘Organisational culture and purpose: recommendations for company secretaries’).
There has been a growing focus on corporate culture in regulatory regimes around the world. Jurisdictions such as the UK, Australia, Singapore and Japan have introduced requirements for boards to establish an appropriate culture. The Guidance Note highlights some of the useful lessons governance professionals in Hong Kong can learn from these overseas developments. In particular, a report published in July 2016 by the UK’s Financial Reporting Council (FRC) – Corporate Culture and the Role of Boards: Report of Observations (the Report of Observations) – found that a healthy corporate culture is a source of competitive advantage and is important for creating long-term value.
Perhaps its most useful insights, however, from the perspective of governance professionals, relate to the ways that boards can establish and uphold a robust corporate culture. The Report of Observations emphasises, for example, that companies need to have the right tone from the top. ‘Leaders, in particular the chief executive, must embody the desired culture, embedding this at all levels and in every aspect of the business. Boards have a responsibility to act where leaders do not deliver,’ it states.
It also makes the point that boards need to devote sufficient resources to evaluating culture and considering how to report on it. They should also take responsibility for understanding behaviour throughout the company and challenging any misalignment with values. Another message, and one that will be particularly welcome to readers of this journal, is that companies should empower and resource the company officers responsible for embedding the values and culture of the company. The report says that these functions should be given greater recognition at the board level.
In addition to the above, however, companies should have an incentive system that encourages desired behaviour and is aligned with the company’s purpose, values, strategy and business model.
The regulatory trend in Hong Kong
Hong Kong is looking to implement changes relating to culture in line with the international developments sketched above. As mentioned, HKEX has proposed amendments to the Code aimed at highlighting the importance of corporate culture. The Guidance Note points out that the HKEX approach is similar to that of the UK’s FRC, focusing on the need for the board to take ownership of this issue, establish the right tone from the top and for incentive systems to be aligned with the desired culture.
The Guidance Note usefully summarises the likely reporting requirements in this area. It also points out that a properly functioning anticorruption and whistleblowing framework is essential to establishing and maintaining a successful corporate culture. In this context, the HKEX consultation proposes to elevate the existing recommended best practice on whistleblowing to a new code provision. This would require companies to establish a whistleblowing policy and a system for employees and those dealing with the company to be able to raise concerns about possible improprieties.
The publications reviewed in this article are available on the Institute’s website: www.hkcgi.org.hk. The HKEX proposals on corporate culture were covered in a two-part article in the June and July 2021 editions of this journal. Corporate Culture and the Role of Boards: Report of Observations, published by the UK’s Financial Reporting Council, is available at: www.frc.org.uk.
SIDEBAR: Board oversight?
The New Board Agenda, reviewed in this article, recommends a number of ways boards can minimise the chances of being blindsided by critical emerging issues. It recommends, for example, seven main topics that should be on board agendas.
- Purpose. Clearly define the company’s long-term purpose – its reason for existence and how it benefits both stakeholders and society. A well-defined, multigenerational purpose is a beacon by which the company can navigate turbulent times and encompasses the remaining topics.
- A future-proof strategy. By focusing on the uncertainties that matter most to stakeholders, boards can begin to develop a vision for potential futures that address those concerns. They can then build a portfolio of no-regret moves and options.
- Response to disruption. Boards can identify opportunities to win by considering how to respond to potential disruptions, including future customers, ecosystem evolutions, data analytics, new capabilities and emerging competition.
- Environmental, social, and governance (ESG) strategy. By ensuring regular discussion of ESG, boards can sustainably accelerate the company’s core strategy, setting specific goals with clear action plans, and addressing evolving issues and opportunities.
- Talent strategy. The best talent strategy ensures that the right talent is in the right roles at the right time by assessing talent gaps and identifying key talent requirements. Successful strategies also include guidelines for mobilising talent and setting clear succession plans.
- Business performance management. Boards can build financial strength to fuel growth and innovation by achieving commercial and operational excellence through cost transformation, agile corporate support, procurement optimisation and supply-chain resilience.
- Risk and compliance management. A clean-sheet approach to compliance and risk identification re-examines the root causes of compliance failure and organisational complexity, and identifies which activities are truly needed, who should perform them and how they should be performed. It also eliminates nonessential tasks, thus reducing complexity and risk.
SIDEBAR: Organisational culture and purpose: recommendations for company secretaries
The latest guidance note published by the Institute’s Securities Law and Regulation (SLR) Interest Group, reviewed in this article, suggests practical ways in which company secretaries can support the board in building a culture that is aligned with the organisation’s purpose, value and strategy.
- Ensure directors are regularly reminded of their duties to ensure they fully understand the nature of their responsibilities. This could be achieved through:
- periodically circulating guidance notes on director duties – for example the SLR Interest Group’s fourth guidance note relating to independent non-executive directors, or
- providing briefings on director duties and other topics at board meetings (including, for instance, arranging external consultants to present on specialist topics such as internal controls and company culture).
- Ensure the company culture is reflected in all board papers. Board packs, containing sufficient details on the matters to be discussed by the board, should be prepared by relevant senior management and circulated to the board reasonably in advance of the meeting, so that directors have sufficient time to review the documentation and request further information, if required.
- Ensure board meetings are scheduled with sufficient time for adequate discussions of issues and at a convenient time for all directors to be able to fully participate and for issues to be raised.
- Diarise the testing and review of risk management and internal control systems and ensure that these are carried out on a timely basis with the results reported to the board. Follow- up actions should also be monitored.
- Keep the board updated with the latest guidance from Hong Kong Exchanges and Clearing Ltd (HKEX), in particular noting where updates may impact existing practices. For instance, if the proposed regulatory changes on corporate governance and culture are implemented, provide to the board any guidance issued by HKEX.
- Assist with arranging training and professional development for directors and keeping attendance records. In this connection, you can consider including the Institute’s targeted practical trainings for your directors and senior management.
- Keep full and proper minutes of shareholder and board meetings and ensure other record-keeping is maintained to a good standard.