CGj highlights some of the latest guidance notes added to the Thought Leadership section of the Institute’s website in the first quarter of 2024.

The Institute regularly publishes guidance notes keeping practitioners up to date on all the latest developments in governance, risk and compliance. In the first quarter of 2024, the Institute published guidance notes covering:

• the roles of governance professionals in building and maintaining an effective whistleblowing framework
• new British Virgin Islands compliance obligations
• the practices of directors of Chinese mainland companies listed in Hong Kong
• recent developments in competition law
• decision-making processes in family businesses
• startup governance, and
• due diligence considerations for D&O insurance.

This article highlights some of the key recommendations of the Institute’s latest guidance notes. Readers can access the full publications in the Thought Leadership section of the Institute’s website: www.hkcgi.org.hk.

Whistleblowing – the roles of governance professionals

The latest guidance note issued by the Institute’s Ethics, Bribery and Corruption Interest Group, titled Whistleblowing – the ‘Software’ and the ‘Hardware’ to thrive (Part 1), offers practical advice on the roles of governance professionals in this area of practice. Part 2 of this guidance note will discuss some developments relating to listed companies on whistleblowing.

An essential first step in creating an environment where employees can voice concerns about wrongdoings within an organisation is to ensure that the board and senior management support a speak-up culture. Fundamentally, the effectiveness of whistleblowing systems is all about trust – employees need to feel that their concerns will be taken seriously and that wrongdoings will be addressed promptly.

The guidance note suggests a number of ways that organisations can build this trust. Directors and senior managers should, for example, hold regular meetings with employees to address whistleblowing concerns. The message needs to be loud and clear that complaints will be handled fairly and that there will be no reprisals against complaints made in good faith.

Organisations should also be providing training for directors, senior management and ethical leaders to become role models. The necessary soft skills should include training in effective communication, collaboration, conflict management, decision-making and resilience under stress. Governance professionals will often be involved in facilitating this training.

They will also typically be involved in the communication of ethical expectations within organisations. The fight against corruption and fostering business ethics will only succeed if there is an entity-wide joint effort, and governance professionals can play a key part in promoting codes of conduct and ethical standards to foster the right organisational culture.

‘Good communication also ensures that all understand the expectations of ethical behaviour and that reporting channels are clear and accessible,’ the guidance note states.

Communication with stakeholders outside the organisation is also crucial. The organisation must explain and promote its whistleblowing policy and practices with suppliers, customers, subcontractors and business partners.

While the above recommendations deal with the ‘software’ needed for an effective whistleblowing system, the guidance note also addresses the ‘hardware’ issues. These mainly involve the practical side of establishing and running an effective whistleblowing framework. For example, the guidance note gives useful suggestions on what whistleblowing channels should be considered. These should enable employees to report their concerns anonymously and ensure that the organisation can collect the scope of information that will be needed for analysis. Typically, they will include email and phone lines, but with the growing digitalisation of business operations, many organisations have established web-based whistleblowing platforms.

The guidance note also discusses the benefits of appointing a conduct observer to act as the point of contact for reporting concerns and to be responsible for training and monitoring ethical conduct.

‘Instituting a conduct observer within every team encourages employees to speak with him/her when they see wrongdoings occurring. It promotes a culture in which employees can openly discuss ethical dilemmas, fostering trust and mutual respect among employees. Employees may also feel more comfortable speaking with a close counterpart,’ the guidance note says.

Finally, the guidance note also discusses the issue of whether to use external whistleblowing service providers. Clearly, organisations will need to weigh up the costs and benefits of using external support and the guidance note emphasises that there is no ‘one size fits all’ approach. Nevertheless, where a whistleblowing system is run by an external service provider, this can give employees added reassurance that they are safe from retribution and that their complaint will be followed up.

‘Engaging an external service provider not only eases case management but also ensures unbiased processing of the reports and upholds the integrity of the process,’ the guidance note explains.

Supporting the decision-making process of family businesses

Family businesses hold a unique position in the corporate landscape as they are not only the oldest form of business, they also make up the majority of businesses around today. The latest guidance note published by the HKCGI Wealth Management Interest Group – Supporting Decision Making Process of Family Businesses – explores key strategies for governance professionals supporting family business leaders in making informed and effective decisions.

One of its main themes is that governance professionals need to think beyond the technical areas of their competence when advising family business decision-makers. To excel in this area of practice, they will need to have a good understanding of the intricate personal and psychological factors at play. These might include the need to manage intergenerational family ties and to preserve the family legacy.

Decision-makers in family businesses are often faced with a difficult balancing act – they need to make decisions that are commercially sound and that will protect the firm’s assets. Sometimes such decisions will not please all family members. Governance professionals therefore need to gain a deep understanding of the family dynamics. Only by comprehending the intricate relationships and personal histories within the family can they provide guidance that takes into account the dynamics that influence decision-making.

Such knowledge will also help governance professionals build trust and rapport with family employers, and this will put them in a better position to promote best practices and good governance. Governance professionals can play a key role in helping decision-makers understand how important it is to keep some personal impulses separate from business decisions and to ensure that decisions align with the organisation’s long-term goals, the guidance note says.

Startup governance

Good governance is no less crucial for startups, but, by their very nature, firms in their infancy will usually be starting from a low base when it comes to the usual components of governance frameworks. In March this year, the Institute published a guidance note (Startup Governance – Board and Structuring Issues) that offers a practical, step-by-step introduction to the process of building a good governance framework for startups.

The main focus of the guidance is on the crucial role played by the board. It begins with a sobering look at just how badly things can go wrong in the absence of an effective board. The fate of FTX – the cryptocurrency exchange that filed for bankruptcy in November 2022 – has been back in the news recently with the conviction of its co-founder Sam Bankman-Fried for fraud. Bankman-Fried was sentenced to 25 years in prison by a judge in March this year. Power and control of FTX were concentrated in the hands of Bankman-Fried and his coterie of friends. In an environment where there were no checks and balances on the power of the decision-makers, fraud and malpractice quickly brought the organisation down.

The guidance note highlights the essential components of an effective board. First in this list is the importance of independent directors. ‘For a startup, having independent and non-executive directors with the right authority cannot be overstated,’ the guidance note says.

It suggests that independent directors forming one-third of the board will be a good initial yardstick to work towards. Moreover, it is best practice to have an independent chair of the board, rather than letting the CEO double up in this role. An independent nomination committee for nominating director candidates is also a recommended best practice. ‘If the persons proposing director candidates are not independent, the possibility of having the elements of independence would be reduced,’ the guidance note points out.

While it is often the practice for startup boards to have shareholders appointed as board members for commercial reasons, the guidance points out that from a governance standpoint such directors cannot be considered independent.

The guidance note also emphasises that, as the startup’s business develops, there should be implementation of board assessment to provide constructive feedback on the board’s effectiveness and to identify any gaps in developing the business. Corporate governance is not a one-time effort, but is an ongoing process. This is a key point to bear in mind because startups, by their very nature, will usually have a rudimentary governance framework in the early stages of their development. The contribution of governance professionals in this context can help lay the governance groundwork for a resilient and thriving organisation.

D&O insurance

The risks and liabilities of directors have increased dramatically in the current operating environment. In this context, finding the best directors’ and officers’ (D&O) insurance is an essential part of risk mitigation. Nevertheless, the due diligence processes involved in the selection of appropriate D&O insurance coverage is no simple matter. A recent HKCGI guidance note – Beyond Pricing Considerations for D&O Insurances – sheds light on the many issues that need to be considered.

As the title of the guidance note suggests, the focus is on the considerations beyond the premium price. Governance professionals involved in sourcing D&O insurance should pay close attention, for example, to coverage assessment. In particular, does the D&O policy cover emerging risks, such as cyber and ESG risks? In the current operating environment there has been a rise in the number of cybersecurity incidents resulting in regulatory investigations regarding whether directors have breached their fiduciary duties. It is therefore important to pay attention to the cyber coverage of existing or prospective D&O policies. Are cybersecurity incidents explicitly covered? Governance professionals would do well to look very closely at the drafting of the relevant clauses in the policy.

Most D&O policies these days cover legal expenses relating to formal interviews or document production costs when a director or senior manager is involved in an official investigation. Some policies, however, will only cover internal investigations carried out in response to a request from an official body. Governance professionals should look at whether the policy covers costs incurred at the pre-investigation stage, as well as costs associated with dawn raids and with self-reporting to official bodies. There might be exclusions to pay regulatory fines or other non-permitted indemnities at law.

Another important consideration is the claims reputation of the insurer. Knowing the insurer’s reputation for a smooth claim process and for paying claims is important. The governance professional might want to ask whether the insurer has its own experienced claims staff, or whether it uses outside law firms for its claims. They should also look at the number of D&O claims the insurer has handled and paid in the past five years.

The guidance notes covered in this article are available in the Thought Leadership section of the Institute’s website: www.hkcgi.org.hk.

Credits

The HKCGI guidance notes published in the first quarter of 2024 are set out below. The Institute would like to thank everyone involved in their production.

January

Whistleblowing – the ‘Software’ and the ‘Hardware’ to thrive (Part 1). This HKCGI Ethics, Bribery and Corruption Interest Group guidance note (13th Issue) was authored by William Tam ACG HKACG, Partner of Deloitte China. The Interest Group members are: Dr Brian Lo (Chairman), Cynthianna Yau, Mary Lau, Michael Chan, Ralph Sellar and William Tam ACG HKACG.

British Virgin Islands (BVI) Annual Return and Other Recent Compliance Obligations (Amended). This HKCGI guidance note was authored by Leon Mao, Head of Advisory and Managing Director, North Asia, Vistra.

Guidelines on Practices of Directors of Mainland Companies Listed in Hong Kong. This Chinese-language HKCGI guidance note was produced in collaboration with DLA Piper LLP.

February

2023 in Review (Parts 1 and 2). These two Competition Law Interest Group guidance notes (13th and 14th Issues) were authored by Natalie Yeung, Partner, Slaughter and May, with input from Alexander Lee, Counsel, Michele Ho, Associate, and Yvonne Ngai, Legal Assistant, Slaughter and May. The Interest Group members are: David Simmonds FCG HKFCG, Institute President (Chairman), Adelaide Luke, Alastair Mordaunt, Brian Kennelly QC, Mike Thomas and Natalie Yeung.

March

Supporting Decision Making Process of Family Businesses. This HKCGI Wealth Management guidance note (3rd Issue) was authored by Patricia Woo, Partner and Global Co-Head of the Family Office Practice of Squire Patton Boggs. The Interest Group members are: Edmond Chiu FCG HKFCG(PE), Institute Council member, and Jenny Choi FCG HKFCG(PE) (Co-Chairs), Willa Chan ACG HKACG, Wilson Cheng, Hazel Fok ACG HKACG(PE), Catherine Lee, Lee Chee Weng FCG HKFCG, Winnie Shek and Alice Yip.

Startup Governance – Board and Structuring Issues. This HKCGI guidance note is a collation of the thoughts of Edith Shih FCG(CS, CGP) HKFCG(CS, CGP)(PE), Honorary Adviser to Council, Past International President and Institute Past President, and Executive Director and Company Secretary, CK Hutchison Holdings Ltd. The guidance was prepared by Mohan Datwani FCG HKFCG(PE), Institute Deputy Chief Executive.

Beyond Pricing Considerations for D&O Insurances. This HKCGI guidance note was authored by Melody Qian, SVP, Greater China, Global ProFin, Lockton Companies. Michael Ling FCG HKFCG, Joint Company Secretary of CLP Holdings Ltd, and Chairman, Institute Technical Consultation Panel, also contributed.

The Institute would also like to thank April Chan FCG HKFCG, Institute Past President, and Michael Ling FCG HKFCG, Chairman of the Institute’s Technical Consultation Panel, for their oversight of the Institute’s guidance notes, and Mohan Datwani FCG HKFCG(PE), Institute Deputy Chief Executive, who is the Contributing Editor of the Institute’s guidance notes. Comments and suggestions are welcome, and should be sent to: mohan.datwani@hkcgi.org.hk.