Observations of the Best Corporate Governance Awards 2019 judges and reviewers

Key observations from this year’s Best Corporate Governance Awards’ judges and reviewers 

The Best Corporate Governance Awards judges and reviewers share an overview of the findings of the judging process from the 2019 Best Corporate Governance Awards

The annual Best Corporate Governance Awards organized by the Hong Kong Institute of CPAs are now in their 20th year. They are recognized as an important benchmark of Hong Kong’s current corporate governance (CG) standards and best practices, while winners of awards regard them as a significant achievement and accolade.

The winners of the awards will be announced at a ceremony in early December. Ahead of their announcement, this article covers the judges’ and reviewers’ findings from the judging process.

Disclosures and practices of the best performers

The best performers in most categories were still able to achieve high scores on the strength of their voluntary additional disclosures and practices. These companies were also likely to be early adopters of any changes in requirements, as they see the benefits of a good CG regime to the long-term success and sustainability of the company.

More relevant risk disclosures

One area where clear improvements can be seen over the years is in risk management, as companies are providing more relevant details about it. Increasingly, companies categorize and analyse the principal types of risks that they face and the underlying control and mitigation measures to address those risks. However, there is still scope for companies to say more about the likelihood of particular risks materializing. In addition, the disclosures relating to internal control reviews could be elaborated to include, for example, an overview of how the function operates and how it could be enhanced, as well as information on any significant findings, and measures that have been or will be taken to address them.

Areas for further improvement

A process for regular evaluation of board performance, which is a recommended best practice under Hong Kong’s CG code, does not seem to be implemented widely among companies. Where companies indicated that an evaluation was conducted, often, matters such as how the evaluation was carried out and the underlying methodology were not explained in any detail.

The rationale for specific appointments of directors, particularly information on the skills that newly-appointed family members can bring to the board, and explanations for directors’ resignations; and illustrating the process and criteria for the selection and appointment of directors, including both executive directors (EDs) and independent non-executive directors (INEDs).

Although in public sector organizations board members may be appointed by the government, this does not mean that there is no need for further disclosures. The public would naturally want to know about the selection process and whether new members have suitable qualifications, skills and experience to take up the office effectively. There should also be a distinction drawn between non-executive directors (NEDs) and INEDs and a clear definition of what independence means in the public sector.

Disclosing more detailed information about the individual remuneration packages, including the breakdown of total remuneration of senior management. We would reiterate that this useful and relevant information for shareholders, particularly for boards where there are many NEDs and few EDs. It would help to increase transparency and accountability.

With regards to board diversity, while many companies indicate the composition of their boards quite clearly, few set specific targets or disclose progress towards those targets.

Information on succession planning is not widely disclosed. However, it is an important issue for investors, particularly in family businesses, and it is reasonable to expect some discussion of this at appropriate times. Planning for a smooth and progressive transition of the leadership helps to instil confidence, ensure stability, and allay possible concerns about disruption.

The tenure of directors, particularly INEDs, should not be indefinitely long. It was observed that at present, not many companies provide information to explain why directors holding office for over nine years are still considered to be independent.

There has been a significant improvement, overall, in sustainability reporting alongside the upgrading of the Environmental, Social and Governance Reporting Guide under the Listing Rules. More companies are setting key performance indicators and benchmarking their performance against recognized international standards, which is a welcome development. However, they also need to set targets (e.g. on carbon emissions) and report on their progress towards achieving those targets.

Good CG and sustainability are important for all organizations. The findings introduced above can help organizations to improve their own policies and practices, and better serve their shareholders, investors and other stakeholders.

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