Looking at all published corporate governance reports from companies in the Hang Seng Index (HSI) and the Hang Seng Chinese Enterprise Index (HSCEI), as well as the top companies by market cap in the financial services, real estate, retail and technology sectors, PwC Hong Kong says most have complied with Hong Kong’s amended corporate governance code.
More than nine out of 10 firms (92 percent) performed the annual review of both the internal control and risk management systems, according to PwC, an increase of 23 percentage points year on year. Across the two indexes studied, it is the HSCEI that has made the biggest improvements, with a 25 percentage-point increase in the number of companies making the appropriate disclosures.
The HSCEI has also made an impressive effort to improve disclosure around identifying, evaluating and managing risks, notes PwC: 80 percent of companies on the index now disclose this information – a rise of 57 percentage points on the previous year, which ‘significantly narrows the gap with HSI constituents’. Overall in the study, 78 percent of companies make such risk disclosures, an improvement of 33 percentage points year on year.
Another area that has seen big improvements, says PwC, is disclosure around procedures and controls for the handling and dissemination of inside information. Eighty-seven percent of the companies studied include this information in their most recent corporate governance report – an increase of 44 percentage points year on year.
‘Since the amended corporate governance code became effective, many of the large-cap listed companies have enhanced their level of disclosure on internal control and risk management,’ says Eric Yeung, PwC Hong Kong risk assurance partner, in a press statement. ‘We are particularly happy to see a significant improvement in the HSCEI constituents. The results [show] that companies recognize the positive effect of enhancing corporate governance.’
That doesn’t mean there aren’t improvements to be made, however. For example, while 97 percent of firms claim to have an internal audit function, only 36 percent disclose sufficient resources, qualifications and experienced internal audit staff.
Similarly, ‘only one third of companies in the study disclose that their board has received management confirmation on both risk management and internal control systems,’ says PwC, adding that ‘these results clearly indicate plenty of room for improvement’.
Commending companies on being proactive ‘in accordance with tightened risk management and internal control requirements’, Cimi Leung, PwC’s Hong Kong and China South internal audit service leader, urges firms to continue to improve their levels of disclosure.
‘Management of listed companies and the board should strengthen the channel of communications, particularly on the reporting of substantial risk information,’ she says. ‘We believe that enhancing corporate governance could bring value to all organizations, which improves investor relations and protects shareholders. It is a performance issue instead of a compliance issue.’
