COVID-19 Opens New Opportunities for Corporate Governance and Sustainability

Imagine a day later in 2020, a workday like any other. You go into your corporate law firm office like any other day. Perhaps dreading another Monday with only the support of a strong coffee.

You receive a call from an old friend, let’s call her Cindy. Cindy tells you she is setting up a new fintech business and tells you “We’ve got this great new technology idea which will give access to loans for millions of people in China. However, in my old company, during COVID-19 we had a lot of disagreements with how to deal with the situation and staff. In the end we couldn’t save the company. I really want to make sure we don’t get into those problems again and also build a strong sustainable business and culture. Can you help set the company up for us so that we can make sure that it is profitable and managed sustainably? We don’t want to have any arguments on this in the future, especially when we expand and bring in new investors, directors and managers.”

How are you going to react? What decision making structures would you put in place to address Cindy’s concerns?

This article explores the opportunities and benefits of clarifying decision-making principles between shareholders and managers in the light of recent local and international developments and the impact of COVID-19.


The principal duty for directors exercising their decision-making power is to act in good faith for the benefit of the company as a whole. It is easy to understand that directors must not use their discretion for a collateral purpose, such as personal benefit. However, when it comes to making business decisions in complex situations, applying this duty can be difficult and lead to misunderstanding and disagreement between directors and shareholders.

COVID-19 has exemplified the challenges directors face in complex situations. With great urgency, directors must make difficult decisions regarding employees, customers, suppliers and other stakeholders. Directors are considering whether to retrench staff, reduce salaries or require no pay leave, whether to renegotiate contracts with customers and suppliers and overall, what impact the decision has on the company’s survival, profitability and long-term success.

The complexity of making these decisions is heightened by measures such as the Hong Kong Government’s’ Employment Support Scheme which requires employers to undertake not to make redundancies. Is taking government support and making this undertaking better or worse for the company. For some large companies, who have declined to apply for the support, is that decision taken for the direct benefit of shareholders, or for the long-term interests of the company, or for the benefit of the society in which they operate?

Outside of the COVID-19 situation, there is growing pressure from shareholders, governments and other stakeholders for companies to take proactive measures on environmental and social matters. Companies listed on the Stock Exchange of Hong Kong are already required to report on environmental, social and governance matters in their annual report. Larry Fink, the Founder, Chairman and CEO of the world’s largest investment firm BlackRock, issued a statement in 2018, in a significant departure from previous statements, stating that “companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate”.

This pressure is only likely to grow as more attention is focused on the role of companies in causing and addressing environmental and social challenges. In these complex situations, what framework do directors have to assess whether a decision is in the best interests of the company? This can open up a minefield where shareholders and directors have different expectations as to how these decisions should be made.


Over the recent decades, two main theories of board decision making have dominated discussion – the ‘shareholder primary’ model and the ‘stakeholder’ model.

Shareholder dominance

Acting in the company’s best interests has often been associated only with its shareholders. The famous economist Milton Freidman described the ‘shareholder dominance’ theory in the terms that “there is one and only one social responsibility of business - to use its resources and engage in activities to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.

Even within this simple concept there is tension. Short term and long-term profit maximisation are often not aligned. For example, saving money by large scale retrenchment can have a significant short-term benefit for shareholders by increasing profitability. As reported in the Harvard Business Review, a 2002 study by Magnus Sverke and Johnny Hellgren of Stockholm University and Katharina Näswall of University of Canterbury found that after a layoff, survivors experienced a 41% decline in job satisfaction, a 36% decline in organizational commitment, and a 20% decline in job performance. This raises the question whether directors pursing retrenchment favour short-term results (potentially aligned with their own remuneration) over long-term success.

Stakeholder model

Alternatively, the ‘stakeholder’ model stresses the company’s relationships with its customers, suppliers, employees, shareholders, communities and others who have a stake in the organization. The theory argues that a company should create value for all its stakeholders and that it doing so, shareholders will obtain long term value.

The UK adopted a form of stakeholder model for directors’ duties in the Companies Act 2006. Section 172 provides that “a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a)     the likely consequences of any decision in the long term,

(b)     the interests of the company's employees,

(c)     the need to foster the company's business relationships with suppliers, customers and others,

(d)     the impact of the company's operations on the community and the environment,

(e)     the desirability of the company maintaining a reputation for high standards of business conduct, and

(f)      the need to act fairly as between members of the company.”

Notwithstanding significant debate on this codification, it is becoming an integral part of the fabric of UK companies. Under the UK Companies (Miscellaneous Reporting) Regulations 2018, listed and large private UK companies must prepare a strategic report which includes a statement which describes how the directors have had regard to the matters set out in (a) to (f) when performing their duty under section 172.

Guidance is also provided on how to comply with this new requirement. In 2018 the GC100 (a group of general counsel and company secretaries of FTSE100 companies) issued Guidance on Directors’ Duties – Section 172 and Stakeholder Considerations, which supplements its 2007 guidance, and provides further practical guidance on section 172. The guidance encourages directors to take a holistic approach and ensure the factors are embedded into everything they do as a director.

The UK Financial Reporting Council, which is responsible for setting the UK’s corporate governance and stewardship codes, issued in 2018 a new UK Corporate Governance Code and Guidance on the Strategic Report.  The guidance includes examples such as “[a] company could disclose a stakeholder map, that identifies its key stakeholder relationships showing the dependencies of each part of the business on different groups of stakeholders and the impacts that the business has on each of those groups. This could include the environmental and community resources that the company is dependent on...”.

Nevertheless, concerns still remain with the stakeholder model. Concerns remain as to how directors can make decisions taking all these factors into account and their legal interpretation, although further guidance is slowly overcoming this challenge. Doubts also remain as to what the ultimate purpose of an organisation is in this structure.

Other models

New forms and theories of decision-making and organisations structures continue to evolve. Among these are different decision-making models based on stakeholders, ethical concepts, self-organising teams and empowered employees. New organisational theories provide opportunities for organisations to develop innovative decision-making, corporate governance and organisational structures to address their complex business and social challenges beyond the shareholder and stakeholder models.


Each organisation’s shareholders and directors will have different attitudes and preferences when it comes to decision-making principles, whether they fall within the shareholder model, stakeholder model or some other model. Clarity between shareholders, directors and managers will reduce the potential for conflict and open opportunities for directors and managers to act more strategically and long-term for the benefit of the organisation.

For-profit companies

The duties and obligations of directors of Hong Kong companies exist in many different forms. Firstly, case and statute law set out fiduciary duties and specific duties for example regarding preparing accounts. Secondly, the directors are bound by the company’s articles of association and governance rules adopted by the company. Thirdly, duties may arise from the director’s personal contract with the company.

The duty to act in good faith for the benefit of the company as a whole is a common law principle. During the 2008 consultation process for the Companies Ordinance (Cap 622), it was considered whether directors’ general duties, including this duty, should be codified. Responses were highly divided. Some supported codification and adopting a similar approach to the UK described above.  Concerns were raised that doing so would reduce flexibility and may not fit with the beliefs of some companies. The Standing Committee on Company Law Reform concluded that it was premature at that time to codify this duty.

The Companies Ordinance (Cap 622) did, however, codify the ratification by a company of conduct by a director amounting to negligence, default, breach of duty or breach of trust. As a result, disinterested members can approve actions taken by directors in breach of common law rules.

This leaves both uncertainties, as shareholders and directors may have different views on how to exercise this duty, and flexibility, for shareholders and directors to define decision making principles within the overall broad framework. 

Not-for-profit (tax-exempt) companies

In addition to the duty to act for the benefit of the company, charities in Hong Kong must also comply with section 88 of the Inland Revenue Ordinance (Cap 112) to be exempt from tax. To be tax-exempt, the institution must be established for and carried on for purposes which are exclusively charitable in the strict legal sense.

In April 2020 the Hong Kong Inland Revenue Department issued a new Tax Guide for Charitable Institutions and Trusts of a Public Character. The Tax Guide encourages persons founding a charity to take cognisance of the purposes of the charity and the manner in which they wish the charity to be administered. The instrument establishing the institution must precisely and clearly state the purposes or objects for which the institution is established. Consequently, charities must focus on their purpose and corporate governance to ensure they obtain approval and remain tax-exempt.


In the meantime, by the start of 2020 organisations are starting to go deep into stakeholder concepts and how to drive long-term profitability and sustainability. This is on the back of a number of recent statements by leading local and international players which illustrate the shift towards more complex and community orientated decision-making.

At the heart of many of these statements is the concept of corporate purpose and its link to stakeholders and company success. While the concept of purpose has been around for a long time, it is frequently now being considered as a fundamental element in driving success, stronger cultures and addressing sustainability challenges. Of course, these pronouncements are not without debate, but indicate that there are, at least, multiple different ways for shareholders and directors to define how their organisation should operate.

HKEx Listing Rules

With effect from 1 July 2020, the Environmental, Social and Governance (“ESG”) reporting requirements of companies listed on the Stock Exchange of Hong Kong will be expanded. Companies are now required to make mandatory disclosures and state whether they have complied with the “comply or explain” provisions. Disclosures include the Board’s ESG management approach and strategy and how the Board reviews progress made against ESG-related goals. The consultation process expressed the importance of disclosure to both investors and other stakeholders.

US Business Roundtable

When 181 CEOs from leading US companies (including the likes of Amazon, BP, Bank of America, Ford, Goldman Sachs, 3M and the big 4 accounting firms) make a joint statement committing to a free market economy and stakeholders, it’s worth listening. In the statement issued by the Business Roundtable in August 2019, the CEOs set out a statement on the purpose of a corporation and committed to:

  • “Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.”

PwC, in their statement in September 2019 issued with the Business Roundtable statement, explained their rationale: “Serving society well and creating value for shareholders needn’t be mutually exclusive. Businesses should view the Business Roundtable's position as an evolution, not a revolution because in today’s world social good and profitability are increasingly intertwined… Managements, boards, and their investors should engage in the debate as to what is important for each company and define how success will be measured and reported.”. 

The Council of Institutional Investors (“CII”) expressed concern that the Business Roundtable statement undercuts notions of managerial accountability to shareholders. The CII stated that it “believes boards and managers need to sustain a focus on long-term shareholder value. To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners.”. These comments further highlight the value of establishing consensus between shareholders and managers.

So how are these companies living up to these commitments during COVID-19? As an example, Goldman Sachs has committed USD300 million to support communities and small business. Ford, together with 3M, within 40 days designed, developed and commenced shipping air-purifiers, the profits of which will be donated to COVID-19 non-profit organisations.

World Economic Forum

At the end of 2019, the World Economic Forum issued the Davos Manifesto 2020: the Universal Purpose of a Company in the Fourth Industrial Revolution. The three main principles are:

“A. The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company…

B. A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility.

C. A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but acts itself as a stakeholder – together with governments and civil society – of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world.”

UK guidance

The 2018 UK Corporate Governance Code and Guidance on the Strategic Report, place significant emphasis on purpose and sustainability. Companies must communicate on their purpose, values and strategy. The principles include:

  • “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
  • The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.
  • The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success…
  • Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy.”

Further guidance is provided that the board should assess and monitor culture. Where it is not satisfied that policy, practices or behaviour throughout the business are aligned with the company’s purpose, values and strategy, the board should seek assurance that management has taken corrective action. The annual report should explain the board’s activities and any action taken.

To match these new requirements, UK lawyers and consultants are providing new advice to their clients on how to exercise their decision-making obligations, how to meet the requirements of these guides and how companies communicate their approach to shareholders and stakeholders.

Other key opinion leaders

Larry Fink further updated and revised his statement to CEOs in January 2020, focusing not only on stakeholders but on establishing a new model for corporate governance that incorporates both stakeholders and purpose. His statement entitled A Fundamental Reshaping of Finance concludes that “Companies must be deliberate and committed to embracing purpose and serving all stakeholders – your shareholders, customers, employees, and the communities where you operate. In doing so, your company will enjoy greater long-term prosperity, as will investors, workers, and society as a whole.”.

The British Academy, the UK’s national academy for the humanities and the social sciences (involving more than 1,000 leading scholars), released a paper in 2019 entitled Principles for Purposeful Business: How to deliver the framework for the Future of the Corporation. The paper places purpose at the centre of business and states that purposeful businesses will be essential contributors to solving the global challenges of the 21st century, best expressed in an integrated way by the UN Sustainable Development Goals. It further sets out principles, that enable the delivery of purpose while remaining flexible to the diversity of business models, cultures and jurisdictions. Law is a central part of these principles as follows:

“1. Corporate law should place purpose at the heart of the corporation and require directors to state their purposes and demonstrate commitment to them…

3. Ownership should recognise obligations of shareholders and engage them in supporting corporate purposes as well as in their rights to derive financial benefit.

4. Corporate governance should align managerial interests with companies’ purposes and establish accountability to a range of stakeholders through appropriate board structures. They should determine a set of values necessary to deliver purpose, embedded in their company culture.”

New forms of corporations

Coupled with movements towards companies adopting purpose and stakeholder models, there are also new forms of corporations being created which expand the concept of for-profit companies.

Benefit corporations are types of for-profit entities which include positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals. Already 35 US states have adopted legislation allowing for the incorporation of benefit corporations and there are over 5,000 benefit corporations in the US. Benefit corporations clarify corporate governance and the scope of stakeholder interests that directors should consider when making decisions. Benefit corporation legislation has been passed in Italy, Canada and Puerto Rico and is being considered in Australia, Argentina, Chile, Colombia and Taiwan. Some US states have also enacted legislation to create other forms of for-profit organisations such as social purpose corporations, which enable but do not require social or environmental issues in decision making and flexible purpose organisations, which do not have a profit motive but pursue a social benefit.

B Corp Certification is an international third-party certification administered by the non-profit B Lab, based in part on a company's verified performance on the B Impact Assessment. Whereas the benefit corporation and other similar corporations are a legal structure, B Corps choose governance policies that align with purpose and stakeholders and build a community around these initiatives. There are over 3,000 B Corps worldwide, 8 of which are Hong Kong companies.


With this growing focus on stakeholders and sustainability, external and in-house lawyers can be at the forefront of enabling organisations to achieve these efforts by advising on how those goals and principles intertwine with legal and governance documents and obligations. For example, lawyers could be advising on:

  • the possibility, advantages and challenges of enshrining purpose and decision-making principles (such as shareholder or stakeholder interests) in their articles of association, shareholders’ agreements or other documents to build clarity between shareholders and directors and support culture development;
  • for joint venture partners, who will likely have different culture and values, on agreeing a purpose, decision-making principles and culture for the joint venture company;
  • communications with shareholders and stakeholders, for example in preparing annual reports, the ESG Report and for AGMs;
  • board terms of reference and corporate governance terms;
  • for charities, defining and meeting their purpose to maintain their tax-exempt status; and
  • internal policies and procedures.

As an example, below are some of the potential advantages and challenges to consider in defining decision-making principles:




Increasing clarity between shareholders and managers

Ensuring consensus at the outset


Fostering long-term effective decision making which can drive long-term success and reduce short-term shareholder pressure

Discussing and communicating approach with existing shareholders and stakeholders

Cultivating strong and effective organisational culture


Difficulty identifying meaningful metrics to assess whether the organisation is achieving its purpose and goals


Addressing cultural differences


Setting overly complex requirements which may slow down decision making

Ensuring compliance with applicable laws and regulations

Aligning staff performance targets and incentives with the purpose and goals

Building reputation for ESG actions and community mindset which can improve customer loyalty

Attracting growing pool of sustainability focused investors

Now thinking back to Cindy’s call, what will you be thinking about? What type of decision-making principles support the business she would like to establish and where should these be enshrined? How do stakeholders fit into the picture? Do the directors need to regularly report to shareholders and stakeholders?

6. BEYOND 2020

The impact of COVID-19 has resulted in many organisations refocusing on how they operate internally and how they operate within their communities. This comes at a time when there is already a growing focus on stakeholders and sustainability. In this environment, defining decision-making principles can add significant clarity and promote the success of the organisation. While these possibilities won’t be appropriate for some organisations, many are seeking new choices and looking for support to implement them.

Advising in this area comes with the challenge of understanding the latest local and international organisational structuring, governance and sustainability trends. Nevertheless, it provides an opportunity for lawyers in Hong Kong to be a key element in how this area develops in Hong Kong and across Asia-Pacific.

Imagine now that Cindy calls you up and just asks you to help her set up a new business with her partners. Are you going to ask her whether they want to build in purpose and adopt principles to guide decision making?

Director of Corporate Finance & Legal, NISI (HK) Limited