It is crucial for public sector companies to have high corporate governance standards because of their links to the government as well as their public role, according to Ruth Kung, Chief Executive of the Hong Kong Securities and Investment Institute, a member of the Hong Kong Institute of CPAs, and a long-time member of the judging panel for the Institute’s Best Corporate Governance Awards. “Because of where their funding comes from, people expect greater transparency and accountability compared with other companies,” she says. “Listed companies have listing rules that govern them, but public sector organizations are beyond the regulatory requirements, so good corporate governance is important to gain people’s trust.”
The more transparent public entities are, the better the public can understand what is happening within them, Kung adds. As a result, if they run into difficulties, the public would see that the problem may not have been caused by an issue in governance, but rather by circumstances that were beyond their control.
She also thinks larger and well-resourced public sector organizations have a role to play in increasing corporate governance standards in Hong Kong. “They tend to have high profiles. They are in the news a lot and get more public attention. They should lead by example,” she says.
(Clockwise) Ruth Kung, Tim Lui, Ricky Leung, Alice Law.
One thing that has struck Kung in the years that she has been a judge is the increase in the number of companies and organizations getting through to the later stages of the awards. She has also seen a greater variety, with entrants no longer limited to big names, but increasingly including smaller and less well-known organizations.
Another change has been the decision for judges to not only look at entrants’ annual reports and sustainability reports, but also to consider news articles, enforcement cases, websites and even social media. “We try to look at what is actually happening, not just what is on paper, to see how good their corporate governance is,” she says.
For Kung, a key aspect of good corporate governance is transparency, and she is pleased to see a trend in organizations increasing the voluntary disclosures they make. She adds that many are also making their disclosures more accessible by changing the way they present the information, with some even producing a shorter and easier to read version of their annual report. “Most annual reports have a lot of numbers, but now some organizations have changed their focus to be less financial and include more non-financial information. An annual report should be something people can understand and something they are interested in reading. Some annual reports are now much more user-friendly and easier to read, telling the story behind what they have done,” she says.
Another area in which she thinks companies have improved in recent years is in their attitude to environmental, social and governance (ESG) issues. “I see more focus on ESG reporting, which may be due to the Stock Exchange of Hong Kong’s requirements or peer pressure.”
“I see more focus on ESG reporting, which may be due to the Stock Exchange of Hong Kong’s requirements or peer pressure.”
Even so, Kung believes board diversity is one area that could be improved. “Good board diversity means different profiles in terms of, for example, age, gender, experience or nationality. It is important in both the private and public sectors as it can help to bring in new ideas and new perspectives, and to strengthen corporate governance.”
Another area where improvements could be made is the disclosure of non-financial key performance indicators (KPIs) and targets. Companies and organizations should disclose whether they are achieving their KPIs, and their progress towards targets, including explanations, as well as any remedial measures, where they have fallen short.
Kung thinks the COVID-19 pandemic has been a good test for companies’ corporate governance, pointing out that companies with high standards in this area tend to be agile and better able to adapt. “COVID-19 has been a very good learning exercise for everyone. It is like a report card on how good organizations’ risk management is and how adaptable they are to challenges without compromising standards,” she says.
Ruth Kung is Chief Executive of the Hong Kong Securities and Investment Institute.
Tim Lui, Chairman of the Securities and Futures Commission (SFC), and a Past President of the Institute, also thinks exceptional times, such as the current COVID-19 situation, highlight why good corporate governance is so important for all organizations. “Companies that have good corporate governance frameworks and practices in place are in a better position to manage the operational risks arising from unforeseeable disruptions, such as the COVID-19 pandemic,” he says.
The SFC was given a Special Mention in the Public Sector/Not-for-profit (Large) Category last year, and one of its main objectives as a regulator is to ensure that Hong Kong’s international financial market functions efficiently during times of extreme stress. “Making sure that companies practice effective corporate governance is a big part of what we do to maintain the integrity of the market,” Lui says.
In its work to promote good governance, the SFC puts a lot of emphasis on corporate culture and management accountability. “We let senior management know that we expect them to set the right tone from the top,” Lui says.
The importance of a strong and effective board of directors is also something it emphasizes in its regulation of listed companies. Lui says the SFC is pursuing more investigations into corporate misgovernance through its enforcement work compared to only a few years ago, while it has also stepped up its collaborations with its regulatory and law enforcement counterparts in other jurisdictions to reflect the interconnectedness of global financial markets.
“Making sure that companies practice effective corporate governance is a big part of what we do to maintain the integrity of the market.”
He thinks good corporate governance is just as important for the public sector as it is for the corporate sector, although he adds that public sector organizations likely have to use different metrics to measure their performance due to their very different operations. “Statutory bodies, such as the SFC, have public service mandates, and we are accountable to the public. This means we have to abide by the highest standards of transparency and accountability, and I do believe that our main focus should be on meeting the expectations people have of us.” He adds that the SFC’s traditions of independence, impartiality and public accountability are the values that form the foundation of its work.
Lui stresses that it is important for companies to make genuine efforts when it comes to disclosures and compliance, and they should not just adopt a box-ticking approach.
He adds that while 20 years ago, companies were, for the most part, compliant, their disclosures were largely designed to meet the minimum statutory or regulatory requirements.
But in the intervening years, the importance of corporate governance has been increasingly recognized, and this change has coincided with Hong Kong’s development into a leading international financial centre. The SFC has also introduced the Principles of Responsible Ownership, a guidance for investors on how they should fulfil their ownership responsibilities. “We hope this will promote more and better engagement with investee companies, and in turn, help to strengthen the corporate governance culture in Hong Kong.”
Going forward, Lui expects investors to be increasingly looking at ESG factors when making decisions, and he warns that companies that do not pay attention to disclosures in this area risk being left behind.
He thinks the Institute deserves high praise for its efforts to help raise corporate governance standards in Hong Kong, adding that the awards have had a significant impact on driving developments in the city’s governance regime. “The awards have not stood still and have changed with the times. New categories are created to keep up with market trends. This helps inspire companies and public sector organizations to aim higher and do more year after year.”
Moving beyond compliance
Alice Law, Deputy Chairman and Managing Director of the Mandatory Provident Fund Schemes Authority (MPFA), thinks having the right values in place is key to helping organizations move beyond compliance to implementing good governance. “Compliance is doing the minimum – it is ticking a box – but good governance is setting and truly embracing the values within an organization. We should make good decisions, not just for the sake of responding to internal audit exercises, but because it is in the public interest to do so,” she says.
She stresses that it is also important to have visibility on how decisions that affect public interest were made. “It has to be clearly explained on paper, so that anyone can understand the basis for the decisions and see that they are well-thought out, well-reasoned and objective.”
She adds that, unlike the private sector, public organizations are entrusted with a public mandate, so the organization must be supported by a good governance framework to ensure they can execute this mandate. “Public bodies are also entrusted with public money, so we have to be fully accountable and have transparency,” she says.
Law says the MPFA, which was given a Special Mention in the Public Sector/Not-for-profit (Large) Category of last year’s awards, has a clearly stated mandate and its structure is designed to uphold its mission and values. But she concedes that for many people, this is quite abstract, and they also need to be given the tools to fulfil the mandate, while the right culture must also be put in place. “You have to change the culture and the mindset of how people see things as a public officer. You can make many rules for your staff to comply with but if they are not truly embracing the values, it is only a paper exercise for them,” she says. “Clearly, in a setting like this, we are not driven by maximizing profits, so sometimes people lose a sense of why they are here, and it can be harder to measure performance.”
“You can make many rules for your staff to comply with but if they are not truly embracing the values, it is only a paper exercise for them.”
Since it was first set up just over 20 years ago, the MPFA has been working continually to improve its governance standards. Its internal audit process was set up in 2002, with the audit committee put in place three years later, followed by internal training and the creation of codes of conduct for directors and staff. “It has been an evolving process and a learning process as well. It is not straightforward. We need to provide frequent communication and a lot of briefings to remind staff why they are here and what their mission is. We want them to see themselves as providing regulatory services in the provident fund space,” Law says.
Alongside ensuring that the MPFA itself has good governance, the organization also promotes high governance standards across the MPF industry. It has done this in different phases since it was first launched, initially raising awareness and producing a set of governance principles as a benchmark, then encouraging MPF providers to carry out their own internal self-assessments, and finally provided training for directors to help them improve standards within their organizations.
In 2018, it organized the trustees of MPF schemes to pledge a Governance Charter committing to putting scheme members’ interests first. It also holds regular roundtable events and seminars, as well as an annual symposium to promote high governance standards. Law says: “It is important that people share their experiences and are not shy about discussing their problems, so that we can all learn from each other. Enforcement can be a blunt tool, and it is also important to offer coaching and mentoring, share experiences and to collaborate as a partner.”
She thinks the Institute’s awards are important for public organizations because they provide them with recognition that they are doing a good job. “For us, winning a governance award was recognition, not just of what our organization is doing itself, but also our work lifting governance standards and awareness across the industry. This is our biggest source of satisfaction.”
Leading the way
Public sector organizations should lead by example when it comes to sustainability, according to Ricky Leung, Executive Director, Engineering and Technology, at the Airport Authority Hong Kong (AA). He adds that as a statutory body, the public often has higher expectations of the AA in terms of corporate governance, sustainability reporting and disclosures.
Sustainability has become increasingly important to the AA over the years, with the organization rolling out an array of programmes, ranging from carbon management and waste management, to green procurement and a sustainable dining policy, to setting up an environmental fund. “We believe sustainability has become a focus across Hong Kong against the backdrop of growing awareness of its potential impact on businesses, as well as increasingly proactive government policymaking and the growing body of international agreements related to the environment. The public, especially consumers, have become more conscious of companies’ sustainability efforts and performances,” Leung says.
The AA, which won a Gold Award in the Public Sector/Not-for-profit (Large) Category, together with a Special Mention for its sustainability reporting, in last year’s awards, adopts an airport-wide approach to sustainability, moving beyond areas that are under its direct control, to engage with its business partners in order to have a greater impact. “We try to frame these programmes to be easy, useful, and, wherever possible, free to our airport business partners,” Leung says.
An example of one of these initiatives is its food waste recycling programme, under which it collects food waste from Hong Kong International Airport (HKIA) and its partners, and transports it to an organic resources recovery centre for conversion into biogas. Meanwhile, the HKIA food rescue programme, which is run in partnership with Food Angel, a local food rescue organization, collects surplus food and uses it to put together hot meal boxes for distribution to people in underprivileged communities.
Leung thinks organizations will need to be increasingly focused on sustainability as the world copes with COVID-19, and companies not only need to enhance their resilience to face future challenges, but also to contribute to a community-wide recovery effort. He adds that accountants have an important role to play in helping organizations improve their performance in terms of sustainability. “Incorporating accounting into sustainability would help companies visualize and measure the efforts and impact of their sustainability work. It would also enable them to determine how they could further enhance their work and allocate resources to maximize the positive impact,” he says.
Leung thinks the inclusion of sustainability and social responsibility in the Institute’s awards has helped to elevate the importance of these issues among both C-suite executives and accounting professionals. He adds that winning one of the Institute’s awards is an honour for the AA. “It recognizes our effort in upholding corporate governance and improving our sustainability performance and will further motivate us to continuously improve.”
Many public sector organizations recognize the role they have to play in raising governance standards in Hong Kong, seeing their public service mandates, and the increased need for transparency and accountability as strong reasons to focus on excelling in this area.
Read the first part of the BCGA at 20 series in the March 2020 issue of A Plus.
The Best Corporate Governance Awards, organized by the Hong Kong Institute of CPAs, are proudly celebrating their 20th anniversary this year. The awards are open for entry in early July across seven categories of listed companies and public sector/not-for-profit organizations.