The governance of not-for-profit entities, public bodies and indeed the government itself is just as important as the governance of corporations, but receives far less attention. In a two-part article starting this month, Gordon Jones FCIS FCS, author and Hong Kong's former Registrar of Companies, tests the governance of these organisations against the same principles and standards applied to the commercial sector – the results are somewhat sobering.

Public and private sector governance are closely interrelated. Corporate governance does not and cannot exist in a vacuum as companies, by definition, operate in society and both influence and are influenced by their host societies. Accountability and transparency are essential preconditions of good corporate governance in any country. However, these will be heavily influenced by the cultural, economic, environmental, legal, political, social and bureaucratic structures in place which, inevitably, tend to provide the template for the manner in which the private sector organises its affairs. In this context, the role played by a country's government is of particular importance as governments are expected to provide leadership and set an example. If a country's political system and public sector organisations lack accountability and transparency, it will be correspondingly more difficult, if not impossible, to expect commercial entities to be accountable and transparent. Equally, governments must ensure good governance standards in the public sector if they are to advocate better corporate governance standards in the private sector without being accused of having double standards. Governments must have in place adequate legal and regulatory systems to ensure corporate governance takes place within certain established parameters so that, if and when there are abuses and defaults, it is possible for remedial action to be taken. This, in turn, presupposes the existence of a strong, independent judiciary; properly drafted and administered laws; a supporting legal infrastructure of lawyers; a clean, effective and efficient civil service and regulators; and the absence of corruption. The existence of a free and independent press and electronic media are also very important elements as these will ensure that corporate abuses, if and when they occur, run the high risk of being reported rather than being swept under the carpet by corporate vested interests. While it is theoretically possible for a company to have good corporate governance without the existence of these macro-factors, it would be far more difficult as the political and societal norms would tend to militate against it.

Public governance in Hong Kong

In its broadest definition, public governance covers all areas of government activity, including the operation of the civil service. However, for the purposes of this article, the discussion of public sector governance will focus on those parts of the public sector outside the civil service with particular reference to: appointments to and the operation of the Executive Council (ExCo), appointments of political officials in the government and appointments to advisory committees and public bodies. The second and final part of this article, to be published in next month's CSj, will look at the governance of not-for-profit entities and public bodies.

Appointments to the Executive Council

Under Article 54 of the Basic Law, 'the Executive Council of the Hong Kong Special Administrative Region shall be an organ for assisting the Chief Executive (CE) in policy making.’ Article 55 stipulates that the members of ExCo shall be appointed by the CE 'from among the principal officials of the executive authorities, members of the Legislative Council and public figures’. The appointment and removal of members is the CE's prerogative and their term shall not extend beyond the expiry of the term of the CE who has appointed them. These requirements are what would be expected of the government's principal policy-making body where it is necessary for the CE to have a very high degree of discretion as to who he wishes to appoint to his cabinet to advise him on the governance of Hong Kong. From the governance angle, it is critically important for all members of ExCo to behave with complete integrity regarding conflicts of interest given their critically important role in policy making. In this respect, there is no definition of what constitutes a 'conflict of interest’ although the ExCo Guidelines state that, where a conflict of interest exists, the CE can tell a member to excuse himself or herself from the meeting. In addition, all ExCo members have to complete a 'Declaration of Registrable Interests’. The issue of 'registrable interests’ received a considerable amount of publicity in 2010 and 2011 due to the failure by Lau Wong-fat not to declare all his interests in New Territories land and property which, after continual drip-feeding of information, eventually totalled 724 plots of land. Although there were widespread calls for Lau's resignation (as he would have been required to in virtually any other jurisdiction), a subsequent LegCo enquiry ruled against taking any action to punish Lau apart from referring complaints against him to ExCo for its own consideration. Among the factors in reaching this decision were the alleged ambiguities in the current system regarding the declaration of interests by ExCo members and the absence of any evidence showing that Lau had deliberately concealed the information. Subsequent to the Lau case, the Declaration of Registrable Interests was revised on 12 July 2012. Prior to these revisions, all members had to declare changes to any items of interest declared, within 14 days of their occurrence. This requirement has now been revised to put it beyond doubt that new interests acquired, not just changes to interests already declared, will have to be notified. For land and property outside Hong Kong, such changes should be notified within 28 days of their occurrence so as to provide a more reasonable time for ExCo members to make the notifications. In addition, all declarations of interests are downloaded to the ExCo website for public inspection. The issue raised by Lau's failure to declare his property interests is not just one of whether or not he complied with the details of the rules and the possible use or misuse of privileged information (which would, in any case, be subject to investigation by the appropriate authorities). As pointed out by an editorial in the South China Morning Post (‘Public deserves a little more credit from Lau’, SCMP, 13 October 2010), the Code for Officials under the Political Appointment System states that the CE may be required to take measures against both actual and perceived conflicts of interest. The first article under the chapter 'Prevention of Conflict of Interest’ states that: 'politically appointed officials shall avoid putting themselves in a position where they might arouse any suspicion of dishonesty, unfairness or conflict of interest’. Although Lau was not reappointed to ExCo on 1 July 2012, it is essential that, in the future, any lapses of behaviour by members are handled appropriately and not glossed over.

Appointment of political officials

The Principal Officials Accountability System (POAS), or 'ministerial system’, was introduced by the then CE, Tung Chee-hwa, on 1 July 2002 to try to make the civil service more accountable in the aftermath of various high-profile cases involving the conduct of senior civil servants. Under the previous bureaucratic structure inherited from the British colonial government all the top positions in the government were held by career civil servants, almost invariably drawn from the elite Administrative Service. These officials were politically neutral and governed Hong Kong in a dispassionate, objective manner to the best of their abilities. However, quite irrespective of their administrative and political abilities and individual popularity, they were not elected and had no popular mandate. They exercised power but were not 'accountable' for any failings in their exercise of power. Although the Legislative Council (LegCo) could summon them to enquiry sessions and, if deemed necessary, pass motions of no-confidence, this did not, and could not, lead to dismissal or disciplinary action. Furthermore, with the exception of the three principal officials (the Chief Secretary for Administration, the Financial Secretary and the Secretary for Justice), they were not members of ExCo. Under the accountability system, principal officials would serve no longer than the Chief Executive who appointed them. Under the system, the CE would appoint the three principal officials and the directors of the 11 (subsequently expanded to 12) government bureaus, also known as 'Secretaries’. After the introduction of the POAS, the CE also appoints all principal officials to ExCo which has become a de facto cabinet, bearing collective responsibility for all policy decisions. A number of full-time non-official members have been retained as 'ministers-without- portfolio’, with the aim of achieving policy coherence and co-ordination within the government. However, with the influx of officials and non-officials to represent 'pro-government’ political parties on LegCo, the current ExCo, since 1 July 2012, now comprises 31 members. This makes it a very large and possibly unwieldy body which is not necessarily conducive to in-depth discussion and coherent policy making. In theory, the POAS is aimed at raising the accountability of the civil service, so the political appointees are responsible for all their job aspects and will step down if they fall short of expectations. However, the reality is very different. Since the implementation of the accountability system, only three principal officials have resigned from their positions, and this was as a result of public pressure, not because they were required to resign by the CE. The functioning of the accountability system was put to the test in the aftermath of the 'Harbour Fest’ programme to re-launch Hong Kong after SARS in June 2003 which resulted in cost over-runs. However, rather than accountability for this being accepted by one of the principal officials involved, Mike Rowse, the then Director-General of Invest Hong Kong, the government agency which organised HarbourFest, was held responsible. Rowse had to endure civil service disciplinary hearings and ended up taking the Hong Kong government to court in a judicial review case which he won. A further 'development’ of the POAS took place in 2008 under Tung Chee- hwa's successor, Donald Tsang. Two new posts, Deputy Directors of Bureaus and Assistants to Directors (these are also known as 'Under Secretaries’ and 'Political Assistants’), were added to the political appointment system thereby creating a three-layer political system. In most bureaus, each Director of Bureau is assisted by the two new appointees who constitute the political team while the civil servants in the bureau carry out the administrative and executive tasks of the government. As in the case of the heads of bureaus, the occupants of these two new posts can also be drawn from within or outside the civil service, and appointees may be with or without a political background. To date, the track record of the POAS has been less than satisfactory as may be seen from the following:

• The ministerial system is aimed to strengthen accountability and nurture political leaders by opening up the top positions in the government to outsiders. However, the hard reality is that civil servants have tended to remain the core of the team.
• As some of the appointees from outside the civil service lack any obvious administrative, professional and political ability to discharge their public duties effectively and efficiently, they face significant problems of winning public credibility and respect. The mediocre performance of some appointees to date has further undermined their image.
• The system for making appointments to these political posts lacks transparency (by comparison, in the US, the Senate holds confirmation hearings to determine whether or not to approve an individual appointed by the executive branch).
• No political appointees have been required to resign since the inception of the accountability system in July 2002 (over 10 years ago), although there have been a number of high profile government scandals and mistakes which, in most other jurisdictions, would have seen the immediate departure of the politicians responsible.
• There have been a quite unprecedented number of very high-profile cases in 2012 under which an ex-CE and two ex-Chief Secretaries are currently subject to investigations by the ICAC and/ or the Buildings Authority which may or may not lead to criminal prosecutions. For example, on 13 July 2012, an ex-CS, Rafael Hui, was charged by the ICAC with misconduct in public office.

The cumulative effect of these factors undermines the public's confidence in not only the accountability system but also the government as a whole which is very detrimental to the governance of Hong Kong. Furthermore, there is also a consequential very adverse impact on civil service morale which further undermines the quality of public sector governance.

Appointments to advisory committees and statutory bodies

Small pool of appointees and lack of transparency

Significant governance issues are also raised by the government's system of appointments to the various statutory and advisory bodies which play such an important role in the governance of Hong Kong. In some ways, this is not dissimilar to the appointments of independent non-executive directors to the boards of public companies. At the heart of the problem is the fact that the government seems to consistently appoint candidates from a very small pool of talent, with little transparency in the selection process, to these statutory bodies and advisory boards. To an outsider, it seems that, in many cases, the government only wants to appoint people who are its 'political supporters’ with the same mindset and attitudes, while dissenting and alternative views tend not to be heard. As a consequence, it is not surprising that the government is considered to be out- of-touch with community attitudes and feelings, and many of its policies have, increasingly, led to public criticism and demonstrations. In turn, this undermines the credibility of public governance. This trend is of particular concern given the democratic deficit in the government of Hong Kong where the government lacks a popular mandate or direct accountability to the people but can still appoint candidates to nearly 6,000 non- official posts on these bodies in addition to more than 100 district councillors. In his policy address in 2004, the then CE, Tung Chee-hwa, seemed to recognise these issues by ordering a review of the various advisory and statutory bodies  in order to bring in more talent from different backgrounds to ensure broader representation. Furthermore, during the first contested CE election his successor, Donald Tsang, also pledged that his government would 'represent all social strata and (be) one that strives to balance the interests of all’. Despite such public commitments, investigative reporting by the South China Morning Post has indicated that, superficially at least, having regard to recent appointments to statutory boards, these pledges have a long way to go. For example, an SCMP report in August 2010 revealed that of the 641 members of the election committee who nominated Tsang for the post of CE, 343 occupied seats on various statutory bodies, particularly those which have considerable power such as the Airport Authority, the Tourism Board and the West Kowloon Cultural District Authority (see 'Appointments that call for greater accountability’, SCMP, 6 August 2010). Furthermore, more than a fifth of the medals awarded since 2007, such as Bauhinia Stars, had gone to those 641 committee members. By comparison, only 49 of the 132 election committee members who nominated Alan Leong Kah-kit – Donald Tsang's opponent in the 2008 CE election – subsequently gained seats on various statutory bodies and were awarded only five medals. As the Post's editorial noted somewhat tersely: 'These figures will only invite criticism that the government prefers to keep its distance from its critics and to reward its supporters in a manner that weakens the quality of governance.’

The issue of independence

Issues regarding the government's appointment system to public bodies also surfaced in the context of the Hong Kong Institute of Certified Public Accountants (HKICPA) Best Corporate Governance Disclosure Awards for 2009. According to Paul Winkelmann, the then President of the HKICPA, some public sector and non-profit organisations could do more on the corporate governance sections of their annual reports. As a result of the overall poor standards in this sector, there was only one award in the Public Sector category of the awards, namely to the Airport Authority. He also commented that there was insufficient indication as to how many directors in public bodies appointed by the CE were actually selected. According to the judges report: 'It remains unclear how independence is judged in relation to board members in the public sector. Clearer criteria are needed to distinguish between non- executive and independent non-executive board members’ (see 'Only two win top award for corporate governance', SCMP, 24 November 2009).

The six-year rule

Furthermore, in order to secure the infusion of new blood into the governing boards of statutory bodies to ensure that the governance of these bodies does not stagnate, it is essential to have a periodic turn-over of the membership of these boards. In view of this, the government has introduced the very sensible 'six year’ rule – non- officials should not be recommended to serve on more than six advisory and statutory bodies at any one time nor to sit on the same body for more than six years. However, despite this, as of last year, according to an SCMP report, 167 members of statutory boards had held such positions for over six years, which represents a clear and blatant breach by the government of its own guidelines. The SCMP noted: 'the (current) lack of transparency in the appointment process makes it difficult to convince the public that there are no other qualified candidates for these posts’.

Influence of property developers

A further very disquieting development has been the increasing influence of Hong Kong's powerful property developers on statutory bodies and advisory committees in Hong Kong. This is of particular concern as the issue of continually increasing and unaffordable property prices is one of the biggest social issues currently facing Hong Kong, with the division between the propertied and non-propertied classes becoming more and more glaring. According to an SCMP report (see 'Property giants’ influence grows’, SCMP, 12 April 2010) the directors of six major property companies had been given 54 seats on various advisory and statutory bodies as at the end of March 2010, compared with just 16 in 1998 and 38 in 2007. While the number of seats occupied by the directors of property companies only accounts for about 1% of the total, the majority of these seats are on the boards of major and influential statutory bodies with substantial statutory power and resources, such as the Airport Authority, the Hospital Authority, the Mandatory Provident Fund Schemes Authority and the West Kowloon Cultural District Authority. Furthermore, six property company directors including the vice- chairman of Sun Hung Kai Properties (Thomas Kwok Ping-kwong) and the deputy chairman of Cheung Kong Holdings (Victor Li Tzar-kuoi) serve on the Commission of Strategic Development which advises the CE on Hong Kong's long-term development. Such a predominance of the interests of one particular sector on the boards of major statutory bodies does not bode well for either the governance of these bodies or the overall governance of Hong Kong. Gordon Jones FCIS FCS Author and former Registrar of Companies, Hong Kong Gordon Jones’ new book, 'Corporate Governance and Compliance in Hong Kong’ (LexisNexis 2012) is currently available in bookshops. Look out for the second and final part of this article in next month's CSj.