For corporate governance to be truly effective it must be more than just a box-ticking exercise, according to winners of the Hong Kong Institute of CPAs’ 19th Best Corporate Governance Awards (BCGA).
The Wharf (Holdings) Ltd., whose operations include property, logistics and hotel ownership and management, prides itself on putting corporate governance at the very heart of its business. “We believe we have to go beyond just compliance with legal and regulatory requirements because good corporate governance is a must for business development,” Kevin Hui, Director and Group Financial Controller at Wharf, explains. “It has been widely recognized that a strong corporate governance framework is critical to minimizing risk, maximizing performance and sustaining growth.”
As a major public utility company, The Hong Kong and China Gas Company believes that corporate governance disclosures should be enhanced for the benefit of its many stakeholders, who range from consumers and businesses to shareholders and investors. John Ho, Chief Financial Officer and Company Secretary, says: “We believe that good corporate governance principles and practices should emphasize accountability and increase transparency so as to earn our stakeholders’ trust and faith in us to take care of their needs and fulfil our social responsibility.
“Championing laws, and honest and fair competition are crucial to sustaining our competitive advantage in the market.”
Effective implementation
The Hong Kong and China Gas Company and Wharf were first-time winners at this year’s BCGA, and both as winners of the Sustainability and Social Responsibility Reporting (SSR) Awards. The SSR awards were introduced in 2011 and focuses on environmental, social and governance (ESG) reporting. The awards reflect the increasing importance placed by the community on how companies address the longer-term issues of the sustainability of their business models. To help listed companies meet greater demands and expectations from investors and other stakeholders, the Hong Kong Stock Exchange in 2016 upgraded the ESG Reporting Guide to “comply or explain.”
Hui thinks the win is a reflection of how Wharf is constantly striving to improve its corporate governance. “We see it as a never-ending commitment to constantly review and assess our policies to respond to the fast-changing environment, regulations and needs of our diversified businesses,” he says.
In order to achieve these aims, Wharf has put in place a Corporate Social Responsibility Steering Committee and a Risk Management and Internal Control Committee to help drive development internally, both vertically and horizontally, to ensure all business units within the group are working in line with its strategies and policies.
The Hong Kong and China Gas Company has also been working to improve corporate governance. “In recent years, we have put more effort into risk management. At the board level, our Audit and Risk Committee assists the board in fulfilling its audit and control-related duties through the review of the company’s financial reporting, risk management and internal control systems.” Ho says.
He adds that the company has also put in place company-wide Risk Management Committees, which involve senior executives and the heads of business units, to regularly assess different company risks and map out mitigation plans in Hong Kong and Mainland China. “In view of increasing cyber threats to operation system breakdowns and sensitive information leakage, we have also set up a Cyber Security Committee to monitor the situation and implement preventive measures whenever necessary,” he says.
Ho explains that while business ethics and integrity has long been an integral part of his company’s core values, this year it has adopted an “anti-fault policy.” The policy aims to promote an ethical culture and enhance the group’s ability to detect and prevent fraud, misconduct and malpractice, as well as to promote consistent behaviour across the organization.
The policy applies to all employees, including directors, at the company, its subsidiaries and joint ventures. The Hong Kong and China Gas Company is also encouraging contractors and suppliers to follow the principles of the policy.
The group has also implemented a whistle-blowing policy that provides effective guidance and a reporting channel for employees to raise concerns about possible improprieties in financial reporting, internal control or other matters in relation to business ethics. This channel is also available to other parties who deal with the company, including contractors, suppliers, creditors and debtors.
Ho explains that the company has a dedicated panel to deal with any issues raised through whistle-blowing, with summaries of cases also submitted to the Audit and Risk Committee.
But there is more to good corporate governance than simply having policies in place, and Hui stresses that for Wharf, having an internal control and reporting system to monitor relevant policies and targets is essential. “Just documentation is not enough because we have to make sure what we have said or drawn up is implemented,” Hui says.
The judges of this year’s awards also emphasized the need to ensure policies were actually being implemented. Eric Tong, Immediate Past President of the Institute and Chairman of the judging panel, says: “It is important to stress that effective corporate governance requires more than just making good disclosures. The judges take note of a company’s overall performance, including evidence of how corporate governance is being implemented in practice.”
He adds that boards should also be more transparent about the way in which they operated and their accountability for business strategy and risk management. In terms of areas of weakness, the judges’ report notes: “Public sector organizations should consider providing more details of the work done by the board and committees, including significant matters considered and the corresponding actions taken to address the key issues.”
Impact on employees
Another crucial aspect of effective corporate governance is continuous training to ensure all staff know the policies, notes Hui. If this is done adequately, he believes it brings considerable benefits for companies, including fewer human errors, while risks can also be more easily identified and mitigated. “Employees will over time gain have stronger awareness of the related rules, regulations, codes and standards because they have to go through all of these during the process of documentation or implementation,” he says. “With a more transparent corporate governance framework to follow, employees may also be more disciplined, more prudent and more risk-averse because the whole process of assessment, review and documentation is something that sticks to their mind already.”
One of the biggest challenges Wharf faces in implementing its corporate governance policies is the fact that the group is large and diversified. “We have different businesses and subsidiaries, large and small, and they may have different cultures due to historical acquisitions and mergers and they may be at different paces in corporate governance,” he says.
He thinks the group’s corporate governance frameworks are strong enough to mitigate these differences, but he adds that it is important to pay special attention to varied corporate cultures issues, while close communication is crucial.
Ho agrees that having employee participation is central to effective corporate governance. “To do good corporate governance without employee participation, policies and measures means nothing,” he says. “In 2017, we provided 188 hours of anti-corruption training for our employees. In the coming years, we are going to launch a company-wide promotion campaign with a focus on integrity in our Hong Kong and Mainland China operations to underpin the corporate culture of integrity.”
Despite the importance of employees, Hui thinks technology will have an increasing role to play in corporate governance performance going forward. “Adoption of new technology for increasing automation is indispensable in an extremely complex and competitive environment,” he says. “We have adopted and will continue to explore and develop new applications for our different businesses and work procedures, which will directly or indirectly enhance corporate governance in terms of assurance and effectiveness.”
Technology, he adds, is impacting everything from low-level data processing and document management systems to high-level big data analysis to help identify potential risks and business opportunities.
Room to improve
Although many companies have made progress, no diamond awards – the highest honour – were given this year.
The BCGA judges highlighted a number of areas where companies could provide more information, including the criteria for appointing executive and non-executive directors, greater clarity around the reasons for directors’ resignations and more details about board evaluations. They also said companies should provide more details on the different components of the remuneration packages for directors and senior management.
Hui agrees that there is always room for improvement. “Business risks are evolving quite quickly, with fast-changing market ecology and regulations, both locally and globally,” he says. He adds that Wharf benchmarks itself against the Organization for Economic Co-operation and Development’s requirements and recommendations, as well as the United Nations’ Sustainable Development Goals to help it keep abreast with best practice. But he also thinks a company’s corporate governance framework must be designed to suit its own structure and needs, and be forward-looking.
Both Hui and Ho note it is essential that there is strong support for corporate governance at board level. “The board has demonstrated strong commitment and is ultimately accountable for the company’s activities, strategies and financial performance,” Ho says.
Hui thinks senior CPAs have a critical role to play in helping companies build up their governance frameworks. “As trainers, they provide management teams of the whole organization with updated market trends, rules and regulations,” he says. “They work with these teams to formulate relevant strategies and policies in an effective manner.”
He adds that CPAs also report to the relevant committees and boards on the work being done and the development status of governance matters, while they can help to fine-tune the framework.
Hui is delighted that Wharf has won an award, but also sees the process as valuable feedback on the company’s policies. “This recognition from external parties means a lot to our team. It is encouraging and strengthens our belief on our sustainability journey,” he says. “The comments made by the judges are valuable in helping the group make further improvements in this area.”
He adds that the awards’ criteria help Wharf frame its own corporate governance standards. “They provide objective external information and views, which serve as a good reference for our framework,” he says. “It also allows us to have a deeper understanding of the performance of our peers and market expectations. We can learn from other awardees’ best practice as well.”
Indeed, the BCGA seek to focus everyone’s attention on the values of good corporate governance, notes Tong. “We hope that all these awards set good, attainable benchmarks for others to follow and that they will encourage more listed companies and public sector organizations in Hong Kong to raise the standard of their governance.”
This year, there were 23 awardees of the Institute’s 19th Best Corporate Governance Awards overall, three more than in 2017. A total of around 700 annual reports and 450 sustainability reports were put through an initial screening process, followed by an in-depth review of the disclosures and practices of the best candidates, to draw up shortlists for the different categories of awards.
