CSj highlights the latest additions to the guidance note series of The Hong Kong Institute of Chartered Secretaries (the Institute), providing guidance on digital transformation, competition compliance and the disclosure of inside information.

The Institute’s seven Interest Groups, set up under the Technical Consultation Panel in June 2016, have built up a substantial body of practical guidance on the Institute’s website (www.hkics.org.hk) for the benefit of the Institute’s members, and the wider profession and community. This article highlights the latest additions to this series.

Digital transformation

The fourth in the series of guidance notes published by the Institute’s Technology Interest Group looks at the role of governance professionals in assisting organisations in the digital transformation process. Governance professionals can play a key part in ensuring that the board oversees the digitalisation process, but to be effective in this role, practitioners need to understand the technology, its potential benefits and risks, and how to facilitate effective board oversight.

Understanding the technology

Governance professionals are not expected to be experts on IT matters, but to assist in the digitalisation process they do need to understand the technologies involved. These technologies include cloud computing, big data and analytics, middleware software, software as a service, mobile platforms, internet of things and data integration. The guidance note provides simple introductions to each of these.

Understanding the benefits and risks of digitalisation

A governance professional will generally not be the person within an organisation who is primarily responsible for identifying or managing the opportunities and risks of digitalisation. Nevertheless governance professionals need to understand these opportunities and risks to be effective in their board support and advisory roles.

The benefits of digitalisation are generally better known than the risks. Many businesses have successfully leveraged internet technologies over the years to transition sales from offline to online. The benefits of selling online are well understood and brands who are successful in doing so also experience improved customer loyalty. Digitalisation has also enabled many organisations to track and analyse detailed metrics from across their businesses, which they can use to make better decisions, better understand their customers’ preferences and rethink their business strategies.

Nevertheless, digitalisation can also create significant operational risks for organisations. The guidance note points out that digitalisation creates large amounts of confidential data which an organisation may not have previously collected and therefore may not know how to properly store. Such data is susceptible to cyber threats, including cyber attacks and data loss or theft. The digitalisation process may also leverage third-party solutions and an organisation may face risks (operational and legal) from those third parties failing to perform.

Supporting the board

Navigating the digital transformation process certainly requires effective board oversight and assisting the board in this endeavour will be the core contribution of governance professionals. They bring to this process an excellent knowledge of the business and the board, and can facilitate information flow between all relevant parties. They are therefore well placed to facilitate discussions with management and ensure the board understands the risks and opportunities and has access to the information it needs, including relevant training.

The guidance note suggests that the digitalisation process should begin with a detailed and well-thought-out strategic plan, setting out the benefits and risks of the digitalisation process, which should be reviewed by the board. Practitioners will find the lists of questions provided by the guidance note very useful to help them ensure that the board addresses the key issues relevant to these benefits and risks.

Competition compliance

The Competition Ordinance (Cap 619) (the Ordinance), the first economy-wide competition law in Hong Kong, came into force on 14 December 2015. Since its introduction, the main agency charged with investigating conduct that may infringe the Ordinance – the Competition Commission (the Commission) – has shown itself to be highly active in the fulfillment of its duties. The fifth in the series of guidance notes published by the Institute’s Competition Law Interest Group urges organisations – in the context of the increased risk of enforcement actions resulting in pecuniary penalties, director disqualification, reputational damage and the risk of follow-on claims for damages – to review their competition compliance policies and procedures.

‘Looking ahead, we anticipate that the trend for increasing enforcement action will continue. Therefore, it is important that companies prioritise and step up their competition compliance efforts now – for example, by reviewing any existing competition compliance policy and procedures, and assessing whether they remain fit for purpose, or introducing a new policy if none exists today,’ the guidance note states.

Enforcement trends in Hong Kong

Governance professionals in Hong Kong need to be aware of the potential for large pecuniary penalties for anti-competitive conduct. ‘Breaching competition rules can result in significant sanctions for both your company and your employees,’ the guidance note states. Defendants in the Commission v W. Hing Construction Company Limited and Others case, for example, were ordered to pay fines of between HK$132,000 and HK$740,000 to the government, and were also required to share the Commission’s cost in taking the enforcement action.

Fines can also extend to individuals and organisations also need to consider the adverse reputational impact of enforcement action. In addition, directors found liable for involvement in anti-competitive conduct could face disqualification as directors. ‘There are cases currently going through the Tribunal where the Commission is seeking such sanctions, a trend we expect to see going forward,’ the guidance note states.

In the light of the above, it is all the more important that organisations have effective competition compliance policies and the guidance note sets out three tips which companies can consider when developing or reviewing such policies and procedures.

Compliance tips

1. Create a compliance culture within your company. The guidance note emphasises the need to ensure that compliance is embedded as part of an organisation’s culture. In this respect, senior management should lead by example by advocating the importance of compliance, giving full support to any practical competition training organised, and adhering to policies and procedures. The guidance note also emphasises the need to conduct regular reviews of the compliance policies and procedures, making any necessary changes to ensure they remain relevant and effective.
2. Make your competition compliance policies and procedures easy to understand. The guidance note recommends using clear and simple language when drafting compliance policies and procedures so that employees can understand and apply them regardless of their position or experience. Jargon or technical words or detailed references to the relevant laws and rules should be avoided. It also recommends including case studies or common risk situations to highlight particular rules.
3. Conduct regular competition compliance training. The guidance note recommends conducting regular competition compliance training to ensure that employees remain aware of the risks and follow the desired procedures. In this regard, it is important that organisations identify the key employees for training. This may include senior management, the sales and marketing team, and other teams with market-facing roles who have regular exposure to other market participants, including competitors.

Inside information disclosure

The third in the series of guidance notes issued by the Institute’s Securities Law and Regulation Interest Group provides an overview of Hong Kong’s disclosure regime, a review of recent enforcement actions by the Securities and Futures Commission (SFC) and practical tips for compliance.

Hong Kong’s inside information disclosure regime

Hong Kong’s statutory inside information disclosure regime is contained in Part XIVA of the Securities and Futures Ordinance (SFO), which came into force on 1 January 2013. ‘A listed corporation must,’ Section 307B(1) of the SFO states, ‘as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public unless a safe harbour applies’.

The guidance note offers advice on the interpretation of this obligation and highlights its implications for governance professionals, in particular company secretaries. As officers of listed corporations, company secretaries are under a duty to take all reasonable measures to ensure that proper safeguards exist to prevent a breach of the listed corporation’s disclosure requirements. If a listed corporation is in breach, an officer who has not taken such reasonable measures, or whose intentional, reckless or negligent conduct has resulted in the breach, is also in breach of the disclosure requirement.

Penalties for breach

The Market Misconduct Tribunal (MMT) can impose a range of sanctions for breaches of these disclosure obligations from disqualification orders to regulatory fines of up to HK$8 million. It can also require the payment of reasonable costs and expenses incurred by the SFC and/or the government in relation to the MMT proceedings and any investigation conducted. The MMT is also able to make recommendations to any body that is able to take disciplinary action against persons in breach of the SFO’s disclosure requirements to ensure that a breach does not occur again.

The SFC has the power to seek civil remedies from the Hong Kong court, including injunctions and/or other remedial orders. Civil compensation can also be sought by affected parties in an appropriate case, for example by investors in a listed corporation that has breached the disclosure regime.

Enforcement actions

The guidance note reviews the enforcement actions taken by the SFC for breaches of the inside information disclosure regime and highlights the lessons that governance professionals can learn from these cases. Compliance failures and human error have been the leading causes of compliance failures. The key factors were a lack of internal systems/policies to ensure directors and officers are kept apprised of financial performance and corporate developments, and human error in the sense of failing to recognise or identify an event as amounting to price-sensitive information, or failure to escalate such matters to the board.

Practical tips for compliance

The guidance note emphasises the need for directors and officers of listed companies to be aware of their obligations under the SFO regime. Listed companies should have reasonable measures in place for this purpose, for example:

• putting in place an internal system/policy on disclosure of inside information
• implementing a ‘sensitivity list’ setting out categories of price-sensitive information, and
• offering and providing regular training to all directors and officers in order to enhance awareness and compliance.

In order to comply with their obligations, directors and officers (and other relevant parties) should closely monitor the financial performance and corporate development of the company on a regular basis. This includes reviewing all financial and management information made available to them, and scheduling calls and meetings for this purpose. Communications and discussions between these parties should be clearly documented and kept, including any reasons for delaying disclosure of price-sensitive information. Legal and compliance personnel within the company, including external counsel if necessary, should be consulted as appropriate when considering whether price-sensitive information should be disclosed.

The guidance notes reviewed in this article are available on the Institute’s website: www.hkics.org.hk.

SIDEBAR: CREDITS

The Institute would like to thank everyone involved in the guidance notes reviewed in this article, in particular the members of the Institute’s Interest Groups set out below.

Technology Interest Group

Dylan Williams FCG FCS (Chairman), Gabriela Kennedy, Philip Miller FCG FCS, Ricky Cheng and Sheena Loi.

Competition Law Interest Group

David Simmonds FCG FCS (Chairman), Adelaide Luke, Alastair Mordaunt, Brian Kennelly QC, Mike Thomas and Neil Carabine.

Securities Law and Regulation Interest Group

Daniel Wan (Chairman), Agnes Wong, Bill Wang FCG FCS, Professor CK Low FCG FCS, CK Poon FCG FCS, Dr David Ng FCG FCS and Tommy Tong FCG FCS.

Mohan Datwani FCG(CS, CGP) FCS(CS, CGP)(PE), Institute Deputy Chief Executive, serves as Secretary to the Institute’s Interest Groups. If you have any comments and/or suggestions relating to the Institute’s Interest Groups, he can be contacted at: mohan.datwani@hkics.org.hk.