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At a glance Governance deficit ESG incoming Where to improve |
When it comes to corporate governance, the benchmark for Hong Kong listed companies is ‘the code’ – a guide to corporate governance practices issued by Hong Kong Exchanges and Clearing (HKEx) in 2005. In recent years, the code has made changes in areas including increasing the emphasis on risk management, clarifying the accountability of boards and management, and improving companies’ ESG.
‘According to our survey results, a small but positive trend of improvement from the larger Hang Seng Composite Index (HSCI) indicates that there has been some progress, but the mixed performance of Hang Seng Index and HSCEI companies further indicates that corporate governance provisions are not being fully embraced,’ says Ricky Cheng, director of risk advisory services at Hong Kong-based BDO Financial Services. The most common areas of non-compliance are failure to split the chairman and chief executive roles and failure to establish a nomination committee, Cheng notes. In addition, the quality of explanation provided by companies that are not fully compliant has decreased year on year, and some companies have simplified the level of their explanation for non-compliance compared with previous years.
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‘Many newly listed companies are providing only bare minimum disclosure when addressing non-compliance [such as] not providing sufficient rationale for provisions that have not been adopted, and not explaining how risks or concerns addressed by the provisions are mitigated,’ Cheng says.
Opportunity knocks
The code’s new emphasis on ESG reporting, which will affect reporting periods this year, provides new opportunities for investor relations professionals, Cheng believes.
‘ESG reporting has been a hot topic in Hong Kong recently following the mandatory disclosure requirements as set out by HKEx at the end of 2015,’ he explains. ‘One of the key elements of ESG reporting is that management should engage stakeholders during the ESG reporting process to identify their concerns and expectations. As stakeholders, investors’ investment behavior can significantly affect the share price performance of a listed company. IR professionals [will] engage more with investors to let the company become more transparent to the market and receive investor feedback.’
The ESG disclosure requirements will likely result in enhanced corporate governance by Hong Kong companies through the setting up of more formal mechanisms and procedures to deal with stakeholders’ concerns and funnel their feedback to management and the board, he adds.
One company already feeling the need to respond to the increased focus on ESG reporting is Fortune REIT, a real estate investment trust (Reit) listed on the HKEx and Singapore Exchange.
‘With the Reit market growing during the past years, Reits are having to sustain their highest degree of corporate governance disclosure in order to hold the confidence of the investment community,’ explains Justina Chiu, chief executive of Fortune REIT. ‘In recent years, there has been rising investor focus on how listed entities interact with the environment and society in a sustainable fashion.’ That pressure from investors led to the HKEx’s increased emphasis on ESG, she adds.
Fortune aims to go beyond the disclosure levels of other listed companies by, for example, practicing a 100 percent dividend payout policy, although the governing Code on Real Estate Investment Trusts of Hong Kong requires only a 90 percent threshold. Chiu says the company also adopted vote by polling in 2003 – before it became a listing requirement in 2009 – that allowed unit holders to vote on a one-unit, one-vote basis and enabled greater transparency and fairness in the voting process.
Three-part focus
When it comes to corporate governance at other Hong Kong-listed companies, Wendy Yung of Practising Governance says there are many companies that ‘want to do better, but they may not have the right resources to keep up with fast-changing international standards.’ Hong Kong-listed companies should focus on addressing three main topics:
Make corporate governance a matter of substance. The spirit of being responsible to the shareholders should be taken to every level of the company. For example, Yung says risk management cannot be restricted to just the risk manager or the risk committee; operations must also have this mind-set and take a structured approach to identifying risk and implementing mitigating measures.
Properly disclose insider information immediately. This is a complex topic that is especially relevant in the current economic climate, when profit warnings are more likely. ‘Some compliance issues are multi- disciplinary,’ notes Yung, who is also a qualified accountant. For example, she says, determining what inside information needs to be disclosed requires not just a legal understanding, but also knowledge of accounting law and practice as well as complex business judgment to understand what investors feel could affect stock prices. ‘The regulators have been very active in enforcement and have brought proceedings against a number of companies this year,’ Yung adds.
Building shareholder engagement. ‘Shareholders are more active globally nowadays, including in Hong Kong, and it’s a trend that will continue,’ Yung says. In recent years, institutional investors have been more likely to vote against directors who over-board and whose attendance record is poor. Companies are gradually changing their practices in response, with some directors resigning following low approval rates. Last year also saw some companies’ attempts to amend theirs voted down, Yung adds.
An issue of trust
IROs who know their business, their shareholders and the law are central to enabling companies to meet these challenges. Yung practices what she preaches: she set up her company after 16 years working for property firm Hysan Development Company, most recently as executive director and company director.
‘The IR function is definitely becoming an essential function,’ she says. ‘The most important quality of the IRO is trust: you have to be able to cultivate trust in the IR function, from both investors and the company. For investors, if you can bring clarity, if you’re being responsive and if you understand the business, those are the important elements that contribute to building trust. At the same time, however, IR has to win the trust of the company.’
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Governance outlook in Singapore As in Hong Kong, regulators in Singapore have been taking steps to improve their corporate governance systems with the aim of raising corporate governance standards and protecting minority interests, says Justina Chiu, CEO of Fortune REIT, which is dual-listed in Hong Kong and Singapore. In the real estate investment trust (Reit) sector, Singapore’s regulations are more established than Hong Kong’s, reflecting the city-state’s longer history of Reit listings, and the trusts there must comply with the Code on Collective Investment Schemes issued by the Monetary Authority of Singapore. ‘One example is that the Singapore Code of Corporate Governance 2012 recommends the appointment of an independent director as lead independent director where the chairman [does not fulfill that role],’ says Chiu. ‘As such, Fortune REIT has appointed a lead independent director [who serves] as an independent channel of communication for the unit holders in the event the standard channels via management are not appropriate. He also helps facilitate periodic meetings of independent non- executive directors without the presence of management, and provides feedback to the chairman after such meetings.’ The Hong Kong code Hong Kong’s governance code is regularly updated to keep up with the changing corporate landscape and to maintain high standards. Issuers are obliged to include a corporate governance report prepared by the board of directors in their summary financial reports and annual reports. The code operates on a comply-or-explain basis, with companies that have not met certain provisions encouraged – though not compelled – to explain their reasons for not doing so. Shareholders should not consider this a breach, cautions the HKEx. As the code puts it: ‘Deviations from code provisions are acceptable if the issuer considers there are more suitable ways for it to comply with the principles.’ Investors optimistic over Japanese governance changes North American and European investors hold largely positive views of the impact of Japan’s Stewardship Code, introduced two years ago, and the country’s Corporate Governance Code, introduced in June 2015, according to research from BNY Mellon, writes Garnet Roach. For the 20 investors at 19 large and small investment firms surveyed, which have aggregated equity assets under management of $679 bn – of which $49 bn is invested in Japanese equities – the most important components of the codes are the independence of board directors at 65 percent and return-focused capital policy at 60 percent. Almost all respondents (19 out of 20) point to some improvement in issuer behavior since the introduction of the codes (adherence to which is voluntary), though many (45 percent) indicate that their approach to investing in Japan has not changed. ‘Concerns were voiced that many issuers will approach implementation of the codes with a ‘box-ticking’ mentality, and fulfill only the minimum requirements at the surface level or provide vague explanations for non-compliance in the absence of truly embracing the spirit of the codes,’ write the authors of the research. |
This article appeared in the fall 2016 issue of IR Magazine
