CSj highlights some of the anticipated, as well as some of the more surprising, findings of the latest research report published by The Hong Kong Institute of Chartered Secretaries.

There is no ‘one-size-fits-all’ in corporate governance. Different jurisdictions have different board structures, legislative and regulatory infrastructures and of course different cultural factors, all of which influence the definition of good governance. Moreover, the macro environment – business, social and political – in which organisations operate is always changing. It is in this context that the Institute’s latest research report, ‘Taking the temperature: The state of corporate governance practices in Hong Kong and the Mainland’ (the Report), has been published.

The Report is based on a survey (the Survey) launched in February 2019. The Hong Kong Institute of Chartered Secretaries (the Institute) asked its members 10 questions regarding the policies, practices, attitude and standards of corporate governance of companies listed on the Hong Kong, Shenzhen and/or Shanghai stock exchanges. By the close of the survey in April 2019, the Institute had received 419 responses.

The subsequent Report was authored by Peter Greenwood MA FCIS FCS, a member of the Institute’s Technical Consultation Panel and an Institute representative on the International Council of The Institute of Chartered Secretaries and Administrators (ICSA), now renamed The Chartered Governance Institute (CGI), and Chairman of its Thought Leadership Committee. The Report gives first-hand data on how businesses in Hong Kong and the Mainland approach the key governance issues they face on a day-to-day basis. Moreover, it includes a number of findings that will help to correct any misperceptions we may have about the specific characteristics of governance in Hong Kong and the Mainland.

Key findings

Tone at the top

The first question in the Survey was intended to discover the degree to which the various actors in a company’s corporate governance regime influenced the company’s day-to-day corporate governance practices. The responses confirmed that an effective corporate governance regime is set by the ‘tone at the top’ (see Figure1: Who are the key influencers?). The top three influencers were deemed to be the chairman, the CEO and the board.

Some interesting differences emerged, however, between the Hong Kong and the Mainland responses to this question.

Within the Mainland, a much higher proportion of responses identified the chairman and the board secretary as having the most influence on corporate governance practices. 67% of Mainland members deemed the chairman to be the most influential factor in governance (as against 22% of Hong Kong members), while 25% of Mainland members deemed the board secretary to be the most influential factor in governance (as against 7% of Hong Kong members).

The Report cautions, however, that the number of Mainland respondents to the Survey was much smaller than the number of Hong Kong respondents (48 of the total 419 respondents were Mainland-based). Readers should bear this sample size discrepancy in mind where Mainland/Hong Kong comparisons are made.

The benefits of good governance

The second question of the Survey asked respondents to rank the benefits of good corporate governance and better risk management was a clear winner (see Figure 2: What are the benefits of good corporate governance?). Overall, 75% of respondents identified effective risk management as being the foremost benefit. Generally, the respondents ranked highly the practical benefits of good governance (second and third place were taken by ‘operational efficiencies’ and ‘quality of financial controls’), and, somewhat surprisingly, share price enhancement came well down the list.

‘It is commonly suggested that investors are prepared to pay a premium for shares in well-governed companies. This was certainly not the perception among our respondents. Overall, only 4% of these ranked share price performance as even being in the first three perceived benefits of good corporate governance practices,’ the Report states.

Again, there were some interesting differences in the respective importance attached to benefits by Hong Kong and Mainland respondents. Mainland respondents (35%) attached much greater weight to promoting access to capital markets as a benefit of good governance than did their Hong Kong counterparts (7%). Hong Kong respondents attached greater importance to reputational enhancement as a benefit of good corporate governance (34%), compared to only 15% amongst Mainland respondents.

‘Hong Kong companies tend to see good governance as preserving their reputation amongst existing capital providers, whereas Mainland companies tend to consider this a valuable tool in the search for new capital sources,’ the Report states.

The role of the company secretary

The Survey was a good opportunity to get an update on the similarities and differences between the roles of company secretaries in Hong Kong and board secretaries in the Mainland. The overall findings demonstrate that the roles of both company and board secretaries are dominated by the responsibility for advising upon and ensuring statutory compliance.

There were some differences between the weighting attached by the Hong Kong and Mainland respondents to aspects of their role beyond broad statutory compliance, however, and these variations give us a valuable window on where the two roles differ. ‘Disclosable transactions’ and ‘connected party transactions’, for example, gained almost twice the weighting among Mainland respondents as they did among their Hong Kong peers. The Report points out that this is probably due to the fairly common situation where a Mainland company is the listed vehicle within a much larger state-owned enterprise, or group of state-owned enterprises. ‘Given the linkages that exist in such circumstances, including in terms of business, ownership and board representation, it is not surprising that the proper implementation of the governance implications of disclosable transactions and connected party transactions is a core element of a company secretary’s daily duties,’ the Report states.

Governance scorecard

Questions 4–8 of the Survey asked respondents to express their opinion on the quality of their companies’ corporate governance standards. Their responses to these questions necessarily come with some caveats, the Report points out.

Firstly, while the survey was anonymous, ‘not every respondent will have felt disposed to highlight reservations as to the quality of corporate governance in his or her company,’ the Report points out. Secondly, any self-assessment of performance standards are subject to the so-called ‘Lake Wobegon Effect’. Named after a fictional school in a radio series where all children were ranked above average, this is the well-known tendency for individuals to overestimate their positive qualities and capabilities, and to underestimate their negative qualities, relative to others.

With these caveats in mind, there was a high level of confidence in the quality of corporate governance standards, codes of conduct, the implementation of financial controls, anti-bribery and corruption measures and the respect of high ethical standards among the survey respondents. The levels of confidence in the quality of policies and procedures on matters relating to social and relationship management and interaction, however, were lower. ‘This indicates that more work needs to be done in bringing issues of diversity, inclusion, anti–sexual harassment and whistleblowing effectively within corporate governance systems,’ the Report concludes.

Commitment to corporate governance

Question 9 of the Survey asked respondents to assess their company’s commitment to corporate governance (see Figure 3: Commitment to corporate governance). While the responses to this question were subject to the same caveat described in the section above, they were quite revealing in terms of indicating the main drivers for better corporate governance in Hong Kong and the Mainland.

Two-thirds of respondents assessed their company’s commitment to corporate governance as motivated by ‘general compliance’. Approximately one quarter of respondents assessed their company’s commitment to corporate governance as being a ‘wholehearted commitment’.

The fact that a larger proportion of respondents see the drive towards better governance as being motivated by compliance is a significant finding. Regulators, together with the Institute, have been eager to promote governance as a strategic priority rather than as a question of compliance with the regulatory minimum. ‘It will be interesting to monitor the evaluation of views in this sense over the coming years, since enduring excellence in corporate governance requires standards that regard compliance only as a floor and not a ceiling,’ the Report states.

The direction of corporate governance

The final question of the Survey asked respondents to look ahead and give their thoughts on whether corporate governance requirements would increase or decrease over the next five years. The answers from both Hong Kong and the Mainland painted a clear picture – corporate governance requirements are expected to increase substantially over the next five years.

Of the almost 200 replies received overall to this question, only four respondents foresaw any decrease in corporate governance requirements. 98% of Institute members expect an increase in these requirements and 56% believe this increase will be substantial or very substantial. ‘It is most definitely the view of our members that… corporate governance is a journey, not a destination,’ the Report states.

Changing perceptions?

The Institute’s latest research report is a valuable addition to our knowledge of the current governance landscape in Hong Kong and the Mainland. It will be useful to company secretaries and governance professionals, as well as to other stakeholders in governance, as an update on current governance standards in Hong Kong and the Mainland and as a timely reminder of which governance aspects need more attention.

The Report gives a very strong indication, for example, of the perceived strengths and weaknesses of organisations’ governance regimes. While respondents to the report are confident of their organisations’ approach to the core areas of governance, such as compliance, disclosure, financial controls, the adoption of codes of conduct and the maintenance of high ethical standards, they are significantly less confident when it comes to frontier aspects of governance such as diversity and inclusion, anti–sexual harassment and whistleblowing.

The Report also gives valuable insights into the fundamental drivers for better governance in Hong Kong and the Mainland. The momentum towards higher governance standards in these two markets is still largely dependent on regulators raising the legislative and regulatory bar. The Report points out that where better governance standards are largely driven by compliance concerns, they are unlikely to progress much further than the basic minimum set by regulatory and legislative requirements. Moreover, shareholders and other stakeholders will find it hard to differentiate between different companies’ standards of governance because these will be concentrated around the one single, identical reference level of compliance with regulation.

The Report therefore argues in favour of an approach to governance which sees regulatory and legislative requirements as a floor not a ceiling. It also underlines the responsibility of company secretaries in Hong Kong and board secretaries in the Mainland, as well as fellow governance professionals, to play their part in contributing to high standards of governance in Hong Kong and the Mainland.

The report – ‘Taking the temperature: The state of corporate governance practices in Hong Kong and the Mainland’ – is available from the Publications section of the Institute’s website: www.hkics.org.hk.

SIDEBAR: The role of the Institute

The Report reviewed in this article also highlights the role of The Hong Kong Institute of Chartered Secretaries (the Institute) in encouraging and enabling excellence in governance in Hong Kong and the Mainland. The Institute, the Report recommends, must be representative, influential, forward-looking and enabling.

Representative – the Institute’s membership (it currently has over 6,000 members) has increased substantially over the past years, in line with the growing recognition of the importance of the profession.

Influential – the Institute has a close and constructive relationship with the HKSAR Government, legislators and regulators and with all the key stakeholders in the profession. Over the last five years, it has participated in 50 general consultations on legal and regulatory change, in addition to engaging in less formal processes of soft consultation and experience-sharing. The Institute is represented on many consultation bodies, steering groups and the like, as a voice of the profession and promoter of excellence in governance.

Forward-looking – since regulation, legislation and practical governance constantly evolve, the Institute should look ahead to emerging trends and ideas that will impact its members. Since 1998, its biennial Corporate Governance Conference has become a leading regional forum for debate and discussion on new developments in governance. Through reports such as this and this journal, CSj, the Institute provides frequent insights into current and pending issues affecting the profession.

Enabling – the Institute’s members need and expect high standards of education and professional training to equip them to meet their responsibilities. The Institute presently has over 3,500 students undergoing professional education. The Institute’s qualifying education and examination programmes are presently being updated and reshaped to include an added emphasis on areas such as boardroom dynamics and risk management. The Institute recognises that professional development training is now a career-long process. Last year it held over 90 seminars and workshops with a total attendance of over 17,000 attendees. Its 20th Annual Corporate and Regulatory Update conference (ACRU), held on 5 June 2019, which has grown steadily in importance, was attended by 2,000 delegates.

Finally, the Report points out that the Institute must always remain relevant to its members, to the businesses and organisations which employ them and to the wider community it serves. ‘As governance has grown in scope, responsibility and importance, it has extended beyond the domain of company secretaries alone. There is no doubt that our Institute now embraces a much wider range of governance professionals, such as lawyers, accountants, directors, managers and many others. We welcome anyone who has an interest in supporting the standards of corporate governance practices, policies and attitudes described in this Report, and in taking those standards to new levels in Hong Kong and the Mainland,’ the Report states.