The Hong Kong Institute of CPAs’ Best Corporate Governance Awards (BCGA) saw a record 30 award winners announced this year, including seven new awardees, as the standard of corporate governance in Hong Kong continued to improve.
Loren Tang, Chair of the Organizing Committee of the BCGA 2020, says the judges were impressed by the sound and clearly explained corporate governance frameworks many organizations now have in place. She points out that companies are also providing more extensive information on their risk management framework, the key risks companies face, whistleblowing policies and the introduction of board evaluation processes.
In addition, organizations have increased their focus on board diversity. “Effective boards are key to good corporate governance, as a good board culture is an essential element in board performance,” she says.
From top left, clockwise: Johnson Kong, President of the Institute and Chair of the Judging Panel of the BCGA 2020; Loren Tang, Chair of the Organizing Committee of the BCGA 2020; David Simmonds, Group General Counsel, Chief Administrative Officer and Company Secretary at CLP Holdings; Eric Ma, Chief Executive Officer at NWS Holdings Limited; Jonathan Li, Senior Manager – Sustainability at Hang Lung Group Limited; and John Haffner, General Manager – Sustainability at Hang Lung Group Limited.
But despite these improvements, the judges did not give out any Diamond Awards for the third year in a row. Tang explains that Diamond Awards are based on whether organizations have met an absolute standard of corporate governance performance or whether there is still clear scope for improvement. “The judges this year noted that companies have been enhancing their corporate governance and environmental, social and governance (ESG) practices and some have begun to deal with specific issues raised by investors, such as succession planning, board refreshment and diversity. However, the general consensus among the judges was that more could still be done,” she says.
In particular, the judges would like to see companies giving independent non-executive directors (INEDs) a stronger role to increase board accountability. Tang explains that INEDs in Hong Kong are often appointed by the controlling shareholders and seem to be more accountable to them than to shareholders generally.
The judges would also like to see faster progress in the area of board refreshment, with some boards having a substantial proportion of long-tenured non-executive directors (NEDs) and INEDs with a high average age, particularly in family businesses. Tang points out that the independence of INEDs who have been on a board for too long is open to question, adding that the Hong Kong Stock Exchange’s Corporate Governance Code was recently changed to require companies to explain why an INED being proposed for reappointment was still considered to be independent after serving for more than nine years.
At the same time, the number of female directors in Hong Kong is still low and unchanging. “We urge companies to give more weight to the merits of board refreshment and greater diversity, not only in terms of gender, but also age and other factors.”
Overall, however, the judges believe the standard of corporate governance in Hong Kong is improving. “Good corporate governance plays an even more important role in times of uncertainty to provide assurance and give confidence to international investors,” Tang says.
Loren Tang, Chair of the Organizing Committee of the BCGA 2020, and Johnson Kong, Institute President and Chair of the BCGA’s Judging Panel
Advocating high standards
Since the BCGA were first launched 20 years ago, the regulatory framework, levels of awareness and standards of corporate governance in Hong Kong have evolved significantly.
Johnson Kong, President of the Institute and Chair of the Judging Panel of the BCGA 2020, points out that there is now a much greater recognition of the importance and value to companies of good corporate governance practices. “The Institute has been an advocate for better corporate governance in Hong Kong for 25 years and, since their inception, the awards have helped to stimulate and support changes in this area,” Kong says.
A highlight of this year’s awards, according to Kong, is the increasing quality of sustainability reporting, with companies becoming better at articulating their sustainability vision and improving disclosures regarding sustainability governance. But there is scope for further progress to be made, and going forward, the awards will put an increased emphasis on this area. “Sustainability considerations should be integrated into corporate strategies and risk management, and not treated as if they are in a separate silo. Sustainability vision, strategies and action plans should also be clearly connected,” Kong says.
He adds that only a few companies share their ongoing performance targets to help investors track progress towards their ESG goals.
Another area in which Kong would like to see improvements is board disclosures, particularly in terms of companies’ evaluations of the performance of their board, disclosures regarding the appointment and resignation of directors and information about individual remuneration packages.
The Institute would also like to see listed companies develop a code for NEDs to help investors evaluate the role they expect NEDs and INEDs to play, and how effective they are in upholding good corporate governance standards and ensuring the board remains accountable.
Kong points out that the COVID-19 pandemic is testing companies’ corporate governance and ESG and has highlighted the need for good communication and disclosure.
“We believe that companies and public sector organizations with good corporate governance deeply ingrained are more resilient and are also more likely to be able to weather the storm and recover more quickly once it has passed,” Kong says. But he adds that it is also important that companies provide timely and specific information on how COVID-19 is affecting their businesses, including an analysis of the impact on their operations, liquidity and overall financial position, as well as explaining how they are addressing the risks and uncertainties created by the pandemic and what their strategy is for dealing with these over both the short and longer-term.
Kong thinks the pandemic will increase the focus on ESG, adding to the momentum already gathering as a result of global trends, such as the need to meet the Paris Agreement targets on climate change issues.
Energy company CLP won the Outstanding Achievement Award this year in recognition of the fact it is the only organization to have won a corporate governance award every year since the BCGAs were first launched, and a Sustainability and Social Responsibility Reporting Awards each year since these were introduced in 2011.
David Simmonds, Group General Counsel, Chief Administrative Officer and Company Secretary at CLP Holdings
David Simmonds, Group General Counsel, Chief Administrative Officer and Company Secretary, says: “We invest throughout the organization a huge amount of time and effort in our corporate governance and reporting, and it is really pleasing recognition of our hard work and commitment.”
Simmonds explains that CLP has always been managed for the long-term with corporate governance and sustainability fully integrated. “When you have sustainability as a bolt-on to your business, it doesn’t work. We have a process from the board right the way through to the management team that has regard to these issues,” he says.
“When you have sustainability as a bolt-on to your business, it doesn’t work.”
To help manage sustainability issues across different time scales, short-term, immediate risks are managed by the Audit and Risk Committee, and longer-term risks and opportunities are under the purview of the board’s Sustainability Committee. This approach is supported by a similar structure across management, who also help to identify what the material sustainability issues are for the company.
Simmonds explains that CLP’s corporate governance is constantly evolving to ensure it keeps pace with the changing expectations of both investors and the communities in which it operates. As such, its corporate governance strategy rests on two key pillars, namely transparency and a need to continuously review and adapt its principles and practices. “Every year our board and our Audit and Risk Committee do a review of the changes in corporate governance and how our own practices and policies are going. We regularly recommend tweaks and modifications along the way, so that it becomes an evolutionary change, rather than a revolutionary overhaul of our approach at some point along the line,” he says.
Simmonds advice for companies that are starting out on their corporate governance journey is to be patient and understand that the process takes time. He also suggests finding champions among the board and senior management that see the value of corporate governance
Going forward, Simmonds expects corporate governance in Asia to continue to evolve from a rules-based approach, to one that is more principles orientated and has a much broader application. He adds that during the past five years, the focus on climate change risks has increased, while the pandemic has caused companies to put more focus on the “social” component of ESG.
For its own part, Simmonds says CLP will continue to focus on long-term value creation, as it prepares to cope with the changes created by decarbonization and digitization. “We were an early mover on climate change reporting and setting decarbonization targets for the business and we will continue to focus on that as a priority issue.”
Property developer Hang Lung Group Limited’s first Sustainability and Social Responsibility Reporting Awards win comes as it launches an enhanced sustainability framework. The framework identifies four priority areas, namely climate resilience, resource management, wellbeing and sustainable transactions, on which the company will focus its efforts.
John Haffner, General Manager – Sustainability at Hang Lung Group Limited
The company has set a series of goals and targets in these priority areas which it aims to achieve by 2030, such as building a nearly net zero carbon building and diverting 90 percent of waste away from landfill. To help the company achieve these goals, it has set around three dozen sustainability key performance indicators (KPIs) for the coming year, defining how departments and properties across the company must work together. John Haffner, General Manager – Sustainability at Hang Lung, says: “We see this journey as taking us on a path where we hope to be among the most sustainable real estate companies in the world a decade from now.”
To enable it to meet this ambitious target, Hang Lung’s boards have become more engaged with corporate governance and sustainability oversight. “The integration of top-level management and board-level oversight with our long-term target setting and our annual KPI process is very important for being able to move forward,” Haffner explains.
Hang Lung’s focus on sustainability also extends to finance, and the group launched a green finance framework in 2019, under which it has issued green bonds worth HK$2 billion and arranged green loans of HK$1.8 billion. It also recently announced HK$1.5 billion of sustainability-linked loans, the proceeds of which will be used for initiatives that further improve its long-term sustainability performance. “We consider this to be an important milestone. What is exciting about sustainability-linked loans is there is an incentive for us to achieve against sustainability-linked performance targets,” Haffner says.
He adds that the loans mean the group’s finance department is also engaged in supporting the targets, further reinforcing its sustainability agenda.
Jonathan Li, Senior Manager – Sustainability at Hang Lung Group Limited
Jonathan Li, Senior Manager – Sustainability at Hang Lung, says when the company first started to build a company culture that embraced sustainability and good corporate governance, it looked for early successes, such as achieving green building certification, to help motivate staff. This approach also enabled them to see that corporate governance and sustainability were valued by investors and stakeholders, which led to them increasing their efforts to ensure the company continued to improve.
“It takes time to get beyond this stage, and it is important to have strong support from the top.”
Even so, Li says Hang Lung did encounter some resistance when it started to introduce more ambitious goals that required employees to put in more effort. “It takes time to get beyond this stage, and it is important to have strong support from the top so that everyone understands that good corporate governance and sustainability is now something that is being built into the DNA of the company,” he says.
Haffner describes winning the award as a great honour for Hang Lung. “It is external validation that we are on the right track,” he says, adding that the judges’ feedback is also helpful. Li agrees: “It really motives our colleagues, and makes us want to achieve more.”
First-time winner NWS Holdings Limited, a diversified business with core interests in construction, roads and aviation, which won a Gold Award in the Non-HSI (Medium Market Capitalization) Category, has set itself the target of cutting its emissions by 50 percent by 2030. Chief Executive Officer Eric Ma says: “It is a very ambitious target, but everyone is buying into it.”
Eric Ma, Chief Executive Officer at NWS Holdings Limited
In order to meet its goal, NWS is focusing on building a strong corporate governance culture across the organization, taking both a top-down and a bottom-up approach.
Ma explains that the first step in building this culture has been getting the support of the board and the Audit Committee, after which it created its corporate governance framework. “This was important so that all departments within the company knew what was expected of them,” he says.
The group has also produced a code of conduct, and guidelines for internal controls and risk management, all of which have been made easily available for staff to consult. But Ma stresses that it is also important to have an open culture, so that employees feel able to speak out about any non-compliance or operational risks they identify. “It is very important to have two-way communication,” he says.
One of the biggest challenges NWS faced in implementing a strong corporate governance culture is that, as a conglomerate, its operations are diversified. “It is very challenging to align all of these business units with our goals. This is why we need to have good communication, so that employees know why good corporate governance is important not just to the company, but also to our shareholders, investors and business partners.”
Ma explains that for NWS, ESG is seen as being equally important as corporate governance, while both corporate governance and sustainability have also been integrated into its enterprise risk management. “We conduct regular meetings with our staff on corporate governance and ESG, so they are part of our culture of risk management. People are really putting it into practice, and we are seeing a strong culture being built,” he says.
NWS is paying particular attention to climate change and has piloted a study to assess the impact this issue will have on the Hong Kong Convention and Exhibition Centre in Wanchai. The study identified areas for improvements, such as enhancing existing facility management practices to better prepare for more extreme wind and flooding events. In its last financial year, it also committed to HK$1 billion of environmental performance-linked loans to further integrate sustainability into its operations.
On the corporate governance side, NWS is rolling out a board evaluation process, which started in 2017 with internally administered questionnaires, followed by a questionnaire led by an external consultant in 2019. The process led to a number of recommendations being put forward, such as enhancing the communication between the board and the management of NWS’s different business units.
Ma says the company feels honoured to receive a BCGA, which not only serves as recognition for employees of their efforts in this area, but also provides a benchmark of its performance against other local conglomerates.
As the COVID-19 pandemic highlights the importance of good corporate governance and sustainability, and with these issues remaining high on investors’ agenda, organizations are likely to have to redouble their efforts in these areas going forward.
The Institute’s Best Corporate Governance Awards this year considered about 500 annual reports and around 500 sustainability reports in the initial stage. A diverse range of candidates reached the final stages, and seven new awardees emerged, including those winning awards for the first time in the Sustainability and Social Responsibility Reporting or environmental, social and governance section. All the articles of the BCGA at 20 series can be found on the A Plus website.