Over their 16-year history, the Institute's corporate governance conferences have earned a reputation for generating unusually lively debates and this year's forum was no exception. CSj looks at the conclusions of the Corporate Governance Conference (CGC) 2012, held last month at the JW Marriott Hotel in Hong Kong, and revisits some of the highlights of the refreshingly feisty one and a half days of discussion.

T his year's corporate governance conference, the eighth in the series of conferences launched by the HKICS back in 1996, set itself the very serious and ambitious task of 'troubleshooting’ the modern board of directors. Conference chairman Peter Greenwood, Group Executive Director – Strategy, CLP Holdings Ltd, didn’t let that get in the way of the equally important task of keeping the audience awake and engaged in the proceedings. ‘Your input is what makes the day and a half of discussions a success,’ he said to the audience at the launch of the conference, 'this forum should be a dialogue rather than a monologue from the stage.’ Speaker presentations were therefore kept to a maximum of 20 minutes and each session was followed by an extended panel discussion which invariably, thanks in large part to Greenwood's take-no-prisoners style of chairmanship, produced a lively exchange of views. Audience engagement was helped along by two other factors. Firstly, this is the second time the Institute's CGC has utilised instant polling but the full potential of these polls has clearly now been recognised. While they are obviously a useful way to gauge participants’ views on the tough questions under discussion – should there be quotas on board diversity? Should director training be mandatory? – they are also surprisingly effective when the discussion needs a kick start. Hence the regular 'curve balls’ thrown at the audience such as – is the company secretary a barnacle on the backside of business? Which speaker or panellist least resembles his or her photo in the conference brochure? Secondly, the liveliness of the proceedings had a lot to do with the topic of this year's forum. Why do boards fail? What can be done to improve board effectiveness? Is the board of directors, an institution inherited from the 17th century, fit for purpose in the 21st century? These are inevitably highly contentious questions.

Conference conclusions

Another characteristic of the Institute's CGCs is their practitioner, and practical, focus. The debate is designed not just to explore contemporary issues in corporate governance, but to make practical recommendations to help company secretaries and other governance practitioners address the many challenges they face in the course of their work. The conference conclusions, Greenwood pointed out in his summing up address, are what the participants take away with them after the forum. 'We have tried to tackle a vast subject in a short period of time,’ he said. 'The conference has been an invitation to think deeply about boards, but perhaps its real value will emerge in the conclusions we come to as we take some of those thoughts and implement them in our work. One-tier good, two-tier better? The issue of how to structure the board and how to achieve the optimum balance of executives and non-executives is clearly crucial for board effectiveness. The conference was in favour of retaining the unitary board structure in Hong Kong over the two-tier board structure adopted in mainland China and most of Europe. Some 47% voted to retain the unitary board, although interestingly 41% voted in favour of 'hybrid’ board models. Interpretation of this last option should be put into the context of the presentation by Dr YRK Reddy, Founder Trustee & Head, Academy of Corporate Governance. He showed that one-tier and two-tier board structures can, and do, coexist as different adaptations to different market conditions. Mainland China, for example, has a hybrid system – companies have supervisory boards and independent non-executives (INEDs) on the management board. Dr Reddy said that mainland China demonstrates that there is no need to force fit an existing model – different environments need different board models. He added that mainland China has been able to successfully borrow good ideas from overseas while maintaining its governance preferences. 'No country in corporate history has done so much in so little time on such a huge scale,’ he said. Nevertheless the PRC is rethinking its approach to the supervisory board, noted Professor Li Weian, President, Dongbei University of Finance and Economics, PRC. Professor Li, who has carried out research in this area, said it had been hoped that 'one plus one could be more than two’ (referring to the practice of having both a supervisory board and INEDs on the management board), but added that sometimes it appears that the sum has resulted in less than two. The conference also addressed the system of INEDs within unitary boards. Professor Merritt B Fox, Michael E Patterson Professor of Law, NASDAQ Professor for the Law and Economics of Capital Markets, Columbia Law School, US, showed how the institution of the board has increasingly become, in the US at least, a monitoring board with an ever greater number of independent directors. Independence is beneficial for the effective monitoring of management and ensuring accountability but, panellist Gordon Jones FCIS FCS, author and Hong Kong's former Registrar of Companies, warned that the falling number of executive directors on unitary boards might be detrimental to board effectiveness (see his article on the following pages 16–22 for more on this).

Has directors’ liability gone too far?

The conference addressed the issue of whether the current trend of increasing directors’ liabilities will reduce the talent pool from which companies can draw when recruiting directors to the board. Robert Cleaver, Partner, Linklaters, highlighted a number of different ways in which the accountability of directors is on the increase. Hong Kong's new PSI disclosure regime, for example, means that officers of the company can be personally liable if there is a breach and they failed to implement measures to prevent such a breach. Mr Cleaver added, however, that there are ways to manage this increased liability. While many companies have sought to indemnify their directors through clauses in the company's Articles and through more comprehensive D&O insurance policies, a much more effective strategy, he suggested, is to ensure an effective compliance programme. Most of the legislation imposing new liabilities on directors recognises that putting measures in place to prevent breaches does mitigate the offence. This is certainly true, for example, of Hong Kong's new PSI disclosure regime. The issue of directors’ liability is nowhere more acute than in the case of INEDs. CK Low, Associate Professor in Corporate Law, Chinese University Hong Kong Business School, presented his latest research in this area in session four of the conference. Professor Low studied recent sanctions imposed for disciplinary actions by the Stock Exchange's Listing Committee and found that in four cases the committee imposed tougher sanctions on INEDs than on other directors. He questioned whether this meant that the fundamental principle of collective responsibility of the board has been abandoned in Hong Kong. Interestingly, 56% of conference delegates did not believe that executive directors, nonexecutive directors and INEDs should share the same liabilities. Professor Low warned, however, that the increasing mismatch between liabilities and rewards for INEDs may make it increasingly difficult for boards to find suitable candidates for this position. 'The iNed position is unlikely to become as desirable as the iPad or the iPhone anytime soon,’ he quipped.

Should we legislate for board diversity?

The CGC 2012 hosted two speakers who highlighted the value and importance of boards ensuring that they have a diversity of perspectives. Professor Judy Tsui, Chair Professor of Accounting, Vice-President (International and Executive Education), the Hong Kong Polytechnic University, argued that Hong Kong has fallen well behind in terms of its regulatory approach to board diversity. Most European jurisdictions, together with the US, UK, Australia, Malaysia and Singapore, have issued rules or code provisions on board diversity. She expressed disappointment that both board diversity and sustainability were notably absent from the latest changes to Hong Kong's Corporate Governance Code. The case for board diversity usually focuses on its practical value, but Dr Kelvin Wong, Executive Director and Deputy Managing Director, COSCO Pacific Ltd, pointed out that there is also an ethical case to be made for diversity. 'A commitment to diversity is also a commitment to justice,’ he said. 'Justice provides an impetus to overcome discriminatory behaviour towards outsiders or people who are different from us.’ He urged companies in Hong Kong to widen the criteria for prospective directors and go beyond 'outdated notions of race, ethnicity and gender’. Panellist Shalini Mahtani, Founder and Board Director, Community Business, appealed to the audience to make a submission to the Stock Exchange on its current board diversity consultation which proposes adding a provision to Hong Kong's Code on Corporate Governance Practices for listed companies to adopt a diversity policy. As a code provision, this would not be a mandatory requirement for listed companies, but would be subject to the comply or explain principle. Despite this, 51% of conference attendees voted against this measure. Indeed, there seemed to be little appetite among participants for any legislative or regulatory measures aimed at ensuring better diversity, only 11% voted in favour of imposing quotas on board diversity. This was not a vote against diversity however, 57% of participants voted in favour of having more female directors on Hong Kong boards and 61% assented to the notion that board diversity is about more than just gender.

Can I use the 'T’ word?

Director training has been a controversial issue in Hong Kong since the Stock Exchange proposed a requirement for eight hours of director training per year. This was shot down in the consultation process but, surprisingly, given the selfregulatory instincts of the conference on other issues, a hefty majority of conference participants voted in favour of mandatory director training (68%). Grant Kirkpatrick, economist, corporate governance consultant, and former Head, Corporate Affairs Division, OECD, pointed out that there can be little doubt of the necessity for director training these days. 'Induction is a continuing process,’ he said. However he acknowledged that company secretaries should be careful about proposing more 'training’ for directors – a proposal for more director 'briefing’ or director 'development’ will perhaps be better received. He cited an interesting case he came across of a company secretary finding a diplomatic approach to director training. The board of a bank in the Middle East consisted of 11 directors, seven of whom had been appointed by the bank's controlling shareholder and some happened to be members of the royal family. The company secretary knew that he couldn’t propose 'training’ for these directors, so he appointed a mentor for the chair. Pretty soon they all wanted one and training was accomplished via the board members’ mentors.   Can I use the 'E’ word? If proposing director training is a tough call for company secretaries, proposing board evaluation was seen by some participants as tantamount to suicide. A poll revealed that only 16% thought that such a recommendation would be welcomed by the board, while 40% believed the suggestion would be rejected and 33% believed it would be accepted reluctantly. Rather alarmingly 11% thought the mere recommendation of board evaluation would provide an excuse for the company secretary's dismissal. It seems likely, however, that the Hong Kong market will acclimatise to the need for regular evaluations of board performance. Simon Osborne FCIS, Chief Executive, Institute of Chartered Secretaries and Administrators outlined the way board evaluations were resisted but eventually embraced in the UK. The UK Corporate Governance Code now requires all boards to undertake annual evaluations of its own performance and that of its committees and individual directors. The Code also requires the boards of FTSE 350 companies to be externally facilitated at least every three years. In the wake of these changes to the Code, introduced in 2010, companies in the UK have become a lot more comfortable with the board evaluation process.

The role of regulation

Regulators were well represented among the speakers of the CGC 2012 and one area of discussion was the appropriate role of regulation in board matters. In the wake of the global financial crisis there has been a trend globally for tougher rulesbased regulation, but the CGC found that regulators in Hong Kong and mainland China are going in the opposite direction. ‘Corporate governance is enlightened selfinterest,’ pointed out keynote speaker CK Chow, Chairman, Hong Kong Exchanges and Clearing Ltd (HKEx), 'because better corporate governance makes it easier for companies to raise funds.’ He added that the HKEx would maintain its mainly principles-based approach to regulation. Interestingly, the second keynote speaker, Dr An Qingsong, Secretary-General, China Association for Public Companies, revealed that, despite the generally rulesbased approach to regulation adopted in the mainland, there has been a shift in recent years from this top down approach to encouraging more self-regulation within companies. ‘Governance needs to be self-initiated,’ Dr An said. 'We recognise that if the regulatory regime forces too many rules on companies it will be detrimental. The CSRC understands that there has to be a balance of external and internal forces driving better corporate governance.’.     The Hong Kong Institute of Chartered Secretaries’ Corporate Governance Conference 2012 was held 5–6 October at the JW Marriott Hotel, Hong Kong. The Institute would like to thank the sponsors and participants for their support of this event. As in previous years there were far more questions from the floor than could be answered in the time available. Two major issues raised by the questions, answered and unanswered, concerned INEDs’ independence and recruitment and board diversity. The journal aims to address these issues with reference to the questions raised at the CGC in forthcoming editions   SIDEBAR: The rise of the company secretary ‘With great power’, Spiderman comes to realise, 'comes great responsibility.' The CGC 2012 discussed the way the company secretary role has evolved and expanded in recent years, particularly with regard to board support. Perhaps the most consistent theme to emerge from the discussions was that company secretaries need to be ready to take up that challenge. Often the only thing holding company secretaries back is an outdated concept of what the role entails. Ben Mathews, Company Secretary, Rio Tinto PLC, presented two slides with two very different pictures of the company secretary – the gatekeeper and the minute-keeper. Minute keeping is an essential part of the company secretarial role, but Mr Mathews argued that 'a company secretary's skills have to run much deeper than this today – he is a gatekeeper and a lot more.’ This is also true of the board secretary role on the mainland. Liu Tingan FCIS FCS, Deputy Chairman and President, China Life Insurance (Overseas) Company Ltd, pointed out that board secretaries have a very powerful position in mainland companies. 'Often the first person shareholders go after is the board secretary, they believe that the board secretary is the one who gets things done,’ he said. How then should company secretaries rise to this challenge? Mr Mathews believes that company secretaries need to think strategically for the board. 'A good company secretary thinks ahead and plans ahead to root out problems before they arrive,’ he said. This point was also made by Keith Stephenson, Partner, Risk and Controls Solutions, PwC. Company secretaries need to move on from the traditional mindset where they ask the chair for the agenda ahead of board meetings, he suggested, they themselves should be proposing the agenda. ‘Every company secretary needs to be thinking about what needs to go into that agenda. The directors are often too occupied with fighting fires to be thinking effectively about strategy. Directors are a bit like Pavlov dogs, they read what is provided to them but they don’t determine what they need to read,’ he said. Charles Grieve, Senior Director, Corporate Finance, Securities and Futures Commission, pointed out however, that the opportunities discussed above are dependent on the attitudes of the directors toward the company secretary. 'You can’t make a real contribution unless your board wants you to,’ he said. 'If a company employs a company secretary to shuffle papers that's what you’ll do.’ For this reason, Keith Stephenson suggested that company secretaries need a good sponsor on the board. 'If you have a sponsor on the board who understands the value you bring, then you are not a lone voice,’ he said.