Company secretaries in Hong Kong assess the new demands on, and demand for, compliance professionals in the emerging regulatory environment.
Compliance work is at the core of what company secretaries do. The Institute's latest research report on the roles and responsibilities of company secretaries in Hong Kong's listed companies found that regulatory compliance takes up the highest proportion (33%) of practitioners’ time (The Significance of the Company Secretary in Hong Kong Listed Companies, at www.hkics.org.hk, Publications/ Research Papers).
Keeping up to date with the latest regulatory changes, therefore, occupiesa central place in company secretaries’ working lives. This is borne out by surveys of practitioners. In February this year,for example, the US journal Corporate Secretary published a surveyof governance professionals in the US and Canada which found that keeping pace with regulatory change had been the number one challenge over thepast 12 months for respondents (Governance Practices Survey: Top Governance Challenges at www.corporatesecretary.com, Articles/ Regulation and Legal/ 11 February 2011).
Since the global financial crisis of 2008, of course, many new regulations have been implemented in the West, but here in Hong Kong regulatory reform has been just as busy and as a result regulatory risk has climbed the corporate agenda. Respondents to this article feel that these developments have made this a very interesting time to be a company secretary – while the unrelenting pace of regulatory change has meant that practitioners’ workloads have increased, the value they bring to an organisation is also much better recognised.
‘Ten years ago if you introduced yourself as a company secretary,’ says Bill Wang, Company Secretary for Standard Chartered Bank (HK) Ltd, 'people would probably associate that role with record filing and minute-taking work. While there are still very important technical aspects of the job, over the years the role has developed into a more trusted advisory role to the board, the board chairman and the executives. Sometimes the company secretary and the chairman may be fronting issues before the board has even started to discuss them. So it is very exciting to be in that space, but it is also very scary as the bar is rising constantly.’
Mr Wang, who is also Head of Group Listings, Asia, and Head of Subsidiary Governance, Greater China, for Standard Chartered Group, adds that regulators need to get the balance right between too much and too little regulation. 'I work for a bank which is in a very heavily regulated industry. I can’t speak for other sectors but certainly in the financial sector, there have been increasingly heavy regulatory requirements since the 2008 financial crisis,’ he says.
He believes the challenge going forward is to decide what things can be left to the market and what things need to be subject to regulation. 'We have seen over and over again that having too little regulation does not work, but on the other hand if you overreact and go to the other extreme that won’t work either. This is not the first time we have faced a financial crisis and you can see the cycle – the easiest reaction is to say we need more regulation, but to put more rules out there might not solve the problem. It's like having a sick patient, if you deliver heavier and heavier medication, this may help with some of the symptoms but the side effects may lead to unintended consequences,’ he says.
A demanding role
The changing regulatory environment has meant that compliance professionals, and company secretaries in particular, need to stay unusually vigilant. 'You need to be watching for what's coming round the corner,’ says April Chan, FCIS FCS(PE), Company Secretary of CLP Holdings. 'You can do that, not just by reading, but by talking to people and that is one of the main benefits of being a member of the HKICS,’ she adds, 'you can get a sense of what's coming up.’
Chan cites two global trends – the need for higher levels of corporate disclosure and for genuine independence of independent non-executive directors (INEDs) and auditors – that company secretaries need to be preparing for. 'These trends are already evident in the West and they are blowing East,’ she says. 'We should be proactive and address these areas rather than waiting for regulators to bring in tougher rules. As company secretaries we will need to facilitate the nomination and audit committees in their assessment of the independence of INEDs and auditors.’
Edith Shih FCIS FCS, Head Group General Counsel and Company Secretary of Hutchison Whampoa Ltd and HKICS President, adds that the company secretary also has a key role in communicating the implications of new regulations throughout the organisation. She regularly makes presentations about new regulatory requirements to the board, to her colleagues in the legal, company secretarial and finance departments, and to her colleagues in business units in Hong Kong and around the world. 'You need to devise appropriate policies and procedures that will be accepted by your colleagues and you need to ensure that you have buy in from them as to what you would like them to do.’
Ms Shih also recommends a continuing monitoring and improvement cycle. 'The rules and laws will change so you have to look at the entire process again from time to time,’ she says.
Exercising judgement
In addition to the increasing pace of regulatory change, compliance professionals have also had to contend with the changing nature of the regulatory environment. A number of different trends have meant that companies need to be a lot more self-reliant when it comes to compliance. The Stock Exchange has moved to the post-vetting of corporate announcements, for example. Moreover, regulators have placed greater reliance on a principles-based approach. This is not only evident in the Corporate Governance Code, but also in legislation such as revised Securities and Futures Ordinance (SFO), which involves directors, and the company secretaries advising them, in complex judgement calls.
‘Initially, I was sceptical about the move to post-vetting,’ says Edith Shih, 'but this is being adopted by most of the stock exchanges all over the world so why not Hong Kong?’ She adds that the switch to post-vetting has not been accompanied by a rise in the number of problematic corporate announcements and there have been benefits for company secretaries. 'It has helped company secretarial work tremendously,’ she says, 'since we no longer have to fit in with the stock exchange schedule when preparing disclosures.’
Ms Shih still has some reservations about principles-based regulation in Hong Kong, however. 'I would love to say that companies can self-regulate and there are companies who will be diligent, but there will always be those who don’t know what they should be doing. We need to strike the right balance here. I don’t have a problem with the principles-based approach, but in addition you need to have clear laws and regulations that draw attention to what is required. When it comes to corporate regulation, the majority of companies in Hong Kong need clear guidance. Once something has become compulsory it becomes internalised and companies will do it on their own.’
Bill Wang believes that this process of internalising the rules is the key to effective compliance. 'You need to internalise the regulations as part of your daily conduct,’ he says. 'Unless you fully embrace the rationale behind the regulations their purpose will be lost.’
He points out that the weakness with the rules-based approach is that companies can always find a way to circumvent the rules. 'There are a lot of smart minds out there and if their purpose is to get around the regulations, they can. The point is that good regulations need to be followed both in the spirit and the letter.’
April Chan points out that stakeholder expectations have become just as powerful a force as regulation in terms of shaping governance requirements and this is changing the compliance philosophy of both regulators and companies. 'Regulators encourage companies to think about the benefits of going beyond the compliance requirements and practitioners have a role to promote this,’ she says.
Bill Wang believes that companies will be increasingly focused on 'brand and value' issues in the future. At the group level, Standard Chartered has a 'brand value committee' whose job is to monitor and oversee these issues. 'Brand and value issues have a long-term impact on your reputation in the investment community and the general public and are just as important as your quarterly results,’ Mr Wang says. 'Standard Chartered has been around for 150 years and we hope we'll be around for another 150 years and beyond. So the question is, in a very competitive environment, how do we balance the pressure for financial performance versus our long-term goals? That certainly needs to be considered by the board and our board does take that very seriously.’
Shaping the future
As we have seen, the emerging regulatory environment has increased the demand for, as well as the demands on, compliance professionals. Company secretaries in particular have found that they are increasingly relied on as a trusted adviser to the board and to executives on all corporate governance matters.
This development has launched a debate in the corporate secretarial profession globally about whether practitioners should eventually specialise solely in corporate governance advice. 'The ICSA Australia Division recently changed its name to “The Governance Institute of Australia” and there has been quite a bit of discussion about this in the profession,’ says Edith Shih. 'I personally don’t think we will want to give up our basic company secretarial functions and call ourselves governance experts only; the job has to cover both types of responsibility.’
Bill Wang points out that there are advantages to having the two types of responsibility joined in one role. 'It means that you don’t lose touch,’ he says. He adds that it would be a mistake to see the administrative tasks as trivial. 'If you get it wrong directors will get in trouble for a very stupid mistake – they could even face jail time or a fine,’ he says.
April Chan points out that it is not only directors who are seeking the advice of company secretaries about the emerging regulatory environment – regulators increasingly rely on input from the profession about the likely effect of proposed regulatory reforms. 'We have a role in making sure that regulatory changes can be practically implemented and will achieve their intended goals,’ she says.
‘Company secretaries have a good sense of which regulations really do achieve their goals and those regulations which end up just generating a tick the box scenario,’ says Bill Wang. He welcomes the willingness of regulators to consult the market. 'I have participated in many consultations – such as those on board diversity, price-sensitive information disclosure and connected transactions – and I think Hong Kong regulators are pretty good at listening to the market,’ he says.
Kieran Colvert, Editor, CSj
