Hong Kong was already a regional leader in the area of corporate governance when the Hong Kong Institute of CPAs first set up the Best Corporate Governance Awards in 2000, albeit regional standards at that time were not highly developed. The awards, like the Institute itself, have been through name changes since. But the Hong Kong Society of Accountants, as it was known, had been active in the area of corporate governance since 1995, producing five publications on areas such as recommendations to improve corporate governance, setting up audit committees and directors’ remuneration. “We were pretty much in the vanguard in Hong Kong in promoting good corporate governance,” Peter Tisman, the Institute’s Director of Advocacy and Practice Development, says.
Even so, he describes the corporate governance framework at the time as being “pretty rudimentary,” with the Code of Best Practice, an early corporate governance code, running to only one or two pages. “There was a preponderance of family-controlled businesses, and disclosures were not particularly good in some areas. There was not much information on things like the number of board meetings held, attendances at meetings and remuneration packages,” he says. Tisman adds that although the judges at the first awards described corporate governance in Hong Kong as being respectable by international standards and high by regional standards, it was felt that more needed to be done to ensure the city remained competitive as an international financial centre.
From top left, clockwise: Chris WH Chan, Professor and Associate Dean (Asia) at Ivey Business School; Nick Allen, Independent Non-Executive Director at CLP Holdings; Richard Lancaster, Chief Executive Officer at CLP Holdings and Peter Tisman, the Institute’s Director of Advocacy and Practice Development.
While he thinks awards on their own can never really be drivers of change, he does think the Institute’s awards have helped to identify trends, support change and nudge companies and public sector organizations in the right direction. He gives the example of the Sustainability and Social Responsibility Reporting Awards, which were introduced in 2011. “There wasn’t too much happening at that time, but they picked up very quickly,” he says.
Changes to the awards also reflect Hong Kong’s developments in the area of corporate governance, with an increased focus, and sometimes new awards, introduced over the years specifically on areas such as risk management and internal control, and the governance of Mainland enterprises. In 2016, the awards underwent a refresh, with the word “disclosure” dropped from their title. “Good disclosure has always only been one aspect of good corporate governance. In 2000, the disclosures were generally insufficient and that was the right thing to focus on,” Tisman explains. “But over the years, we have emphasized that what we are looking for is a sound corporate governance culture, something that is entrenched in the DNA of the company.”
To ensure the awards remain current, the organizing committee carries out a debriefing every year looking at how they can improve the awards the following year. “We are always exploring the boundaries of investor and public expectations,” Tisman says.
The growing focus of companies on corporate governance is reflected in the way the awards have expanded. In the first year, the judges looked at just 50 annual reports and there were seven winners. Last year, the judges went through more than 500 annual reports and sustainability reports, with 26 awardees. “Over the years it has become a much bigger enterprise. We are very appreciative of the time and effort contributed every year by the reviewers, judges, committee members and Institute staff who make it all work,” Tisman says.
As corporate governance itself has evolved in Hong Kong, so has the role of accountants. “Accountants have been involved in advising businesses on corporate governance, risk management, and internal controls, and that has developed over the years as these areas have become more important,” Tisman says.
He adds that there is now also an expectation on the profession to play an important part in the development of environmental, social and governance (ESG) reporting, particularly in terms of the quantification and analysis of ESG reporting. “There are the beginnings of a push for more standardized assurance on ESG reports, and the profession will definitely have to play a role in that,” he says.
Tisman would like to see the awards become more automated, using technology to take into account a broader range of corporate communications to gain a deeper understanding of companies’ underlying corporate governance and sustainability culture. He would also like to see more developments around stewardship codes and the role of institutional investors, with greater integration of corporate governance and sustainability.
But ultimately, he says he would like the awards to cease to be needed, with many listed companies and public sector organizations self-initiating all of the things that communities, investors and stakeholders want to see.
Recognizing the benefits
Chris WH Chan, Professor and Associate Dean (Asia) at Ivey Business School, and a long-standing judge of the awards, has seen companies’ attitude towards corporate governance transform over the years from doing the bare minimum, to recognizing the benefits of having good practices.
He says the baseline for corporate governance in Hong Kong has improved significantly since the awards first launched. “Negative events like the Global Financial Crisis [of 2007-08] shake people up and make them do more, but I think it still comes down to how owners and senior managers see the importance of corporate governance in their whole value model,” he says.
As corporate governance evolves, Chan thinks standards in Hong Kong need to reflect the higher concentration of state-owned enterprises (SOE) and family-owned companies in the city. “There are the minimum things you need to do in corporate governance, no matter whether you are an SOE, or family-owned or listed company. But at the same time, because of the different types of corporate ownership, the application of corporate governance needs to be different,” he says.
“I think it still comes down to how owners and senior managers see the importance of corporate governance in their whole value model.”
For SOEs, Chan focuses on cross-enterprise loans, and the transfer and sale of state-owned assets, as well as whether the government plays an active management role on the board, when judging the awards. In the case of family-owned companies, he looks at board formation, pointing out that 15 years ago, the boards of family-owned companies only needed to have three independent non-executive directors (INEDs). That has now changed with INEDs needing to make up a third of the board, although Chan would like to see their representation increased further to 50 percent.
He adds that 10 to 15 years ago, INEDs typically came from the same small pool of people, and there was a lot of crossover between INEDs on the boards of different companies. “Now, I see an improvement. You see more people who are much more independent, much more vocal and active,” he says.
Another area in which Chan has seen change is transparency over the appointment of non-executive directors and INEDs, as well as greater disclosure about board meetings. “Companies report not just attendance, but also some of the topics discussed now,” he says. Even so, he adds that companies still underreport on the criteria for the appointment of directors and the activity of their directors.
Chan thinks the Institute’s awards have definitely helped to raise awareness of the importance of corporate governance among companies. “For them to recognize that having strong and admirable corporate governance practices actually adds value to shareholders was not an easy task, but I think we have done a lot to promote and ingrain that in a lot of companies’ mindset,” he says.
He thinks the awards have also created peer expectations among companies, as well as helping to influence Hong Kong’s regulatory framework. He has been particularly impressed to see more medium-sized companies and even start-ups entering the awards in the past five years.
Overall, he thinks whether companies consider corporate governance to be just a compliance exercise or whether they see it as something that adds value to shareholders has a huge impact on the way they go about it. “Even today, I would say a lot of medium-sized companies in Hong Kong are still doing the minimum required by the regulator, but at the same time, over the years, the top 30 percent to 40 percent of companies are moving forward and realizing that corporate governance is something that can be good for the company.”
Continuous evolution
Energy group CLP Holdings has won a Best Corporate Governance Award every year since the awards’ inception. The company credits its success to its culture of continuous improvement. Richard Lancaster, Chief Executive Officer of CLP, explains that the company is constantly looking to improve its performance in every aspect of its business. “We believe that a strong, successful and sustainable company does every aspect of its business well. Whether you look at our operational performance, or our safety performance, or our financial performance, all of those contribute to the strength of the business, and corporate governance is part of that,” he says.
He adds that CLP’s business is underpinned by a strong set of values that influence everything it does. “In the energy industry, we are providing a social service to the community. We are very conscious that we need to be doing the right thing all the time and have a high degree of transparency,” he says. “We have a very simple but very clear set of values: we care about people, the community, and the environment, as well as caring about business performance and making sure we are fully compliant with laws and standards.” Lancaster says these values go from the company’s Chairman, Sir Michael Kadoorie, through the board of directors and the senior management, right through the whole organization to the people who work in the front line.
He adds that CLP has put in place a strong framework for its corporate governance to ensure it is firmly embedded into the group’s culture, with both the group’s board and Audit and Risk Committee engaged in monitoring how well the group is complying with these systems.
Lancaster points out that corporate governance itself has evolved in the 20 years since the Institute’s awards were first launched in response to both changes in the business environment and in stakeholders’ perceptions of businesses. Like many businesses, CLP is also facing big strategic challenges, such as climate change. He says this has created changing societal expectations on businesses and has led to increased interest in the ESG aspects of companies. “I think we have been able to position ourselves as being in front of the wave because we have a strong corporate governance framework, a strong culture, and because we take it seriously.
“Our whole approach to corporate governance, the transparency, and the seriousness with which we take it, has all helped to maintain trust.”
“The biggest benefit CLP has seen from its focus on corporate governance is the level of trust it has enabled to build up and maintain with the company’s stakeholders,” Lancaster says. “Our whole approach to corporate governance, the transparency, and the seriousness with which we take it, has all helped to maintain trust.”
Lancaster also stresses the importance of communicating changes to CLP’s corporate governance policies to its stakeholders, who include investors, its customers, suppliers and partners, as well as its own staff. “When you are evolving, improving and refining your corporate governance systems, sometimes people just see it as a box-ticking exercise without necessarily understanding the real inherent value. The communication and maintaining that alignment with stakeholders has been the biggest challenge.”
Going forward, he says, CLP will continue to focus on its ESG reporting, which it has been strengthening in recent years. The group is also entering a period in which some of its long-serving directors will step down. “We have just changed our board diversity policy in the last year and we are using an external search process to bring in new directors, so that we can continue to have a very strong and diverse board in the years ahead,” he says.
He adds that the benefit the company gains from consistently winning the Institute’s Best Corporate Governance Awards is twofold. “Firstly, it’s a great motivator for our employees and helps reinforce the culture we have to ‘always do the right thing.’ Secondly, it brings external validation to our high corporate governance standards which helps maintain the trust of our stakeholders.”
The company’s conscience
Nick Allen, a long standing Independent Non-Executive Director at CLP Holdings, thinks INEDs have an important role to play in strengthening corporate governance and board oversight. “At one level, one can look at the INEDs as a sort of conscience of the company. I think bringing in independent views means that management of the company has to take a broader view of issues than they might do if managing a private company,” he says.
Allen also thinks strong corporate governance only really develops when companies put a major focus on it, something he says the electric company has always done. During the 10 years that he has been on the board, he has seen an evolution in this focus, with an increased emphasis put on climate change.
The Sustainability Committee, on which Allen sits, has also taken on a more prominent role, looking at both longer-term sustainability issues, as well as taking a shorter-term tactical view on investments. Other changes include the company putting more resources into communicating with its stakeholders, not only in terms of annual reporting and its annual general meeting, but also arranging more than 50 shareholder visits to one of its facilities every year, hosted by a member of the management team or an INED.
The role of INEDs has also evolved, with CLP’s Human Resources and Remuneration Committee, and Nomination Committee now chaired by Allen. “I joined the board primarily because of my financial background, and I was seen to have an important role to play on the audit committee. “But now I chair both the nomination and the human resources committees, while I sit on the sustainability and the finance and investment committees, so I have a much broader role within the organization,” Allen says.
He points out that the culture around independent directors has grown significantly in the past 20 years, with INEDs now receiving a lot more training. There have also been a number of regulatory developments, such as the Securities and Futures Ordinance on corporate disclosure, which Allen says means INEDs must be cognisant of what their responsibilities are. “We have the continuing updating of the ESG listing rules. Another example is that most boards will be thinking about what public announcements they should be making to the market about the impact of the coronavirus, so I think the external pressures have increased.”
Allen believes it is important for companies to have a blend of INEDs from different backgrounds on their boards. “A lot INEDs, and I am one of them, tend to come from professional backgrounds, whether they are lawyers or accountants. It is important on boards to have both industry expertise, and entrepreneurial talents with experience of actually running businesses, because you will get different reactions from that INEDs group in different circumstances,” he says.
He adds that one of the biggest challenges of his role as an INED is balancing the need to act as an important oversight of the statute of governance and the operations of the business, while not acting as a drag on its speed and efficiency.
What constitutes good corporate governance is constantly changing, and companies that want to be leaders in this area must remain agile and respond to the evolving demands of their stakeholders. While Hong Kong has come a long way in the past 20 years, there is still more to be done, as businesses face an increasingly complex and challenging environment.
Look out for the second part of the BCGA at 20 series in the June 2020 issue of A Plus.
The Institute’s Best Corporate Governance Awards launched in 2000, when there were only three categories, in which diamond, platinum and gold awards, could be given out, with overall one grand award. In 2019, the awards had grown to include six main categories, Sustainability and Social Responsibility Reporting Awards, Self-Nomination Awards, and website corporate governance information commendations, amounting to over 40 possible awards.
