The Stock Exchange of Hong Kong Limited (the “Exchange”) published the findings of the tenth review of listed issuers’ corporate governance practices (the “2017/2018 Review”) on 16 November 2018.
Latest Review of Listed Issuers’ Corporate Governance Practices
The Corporate Governance Code and Corporate Governance Report (the “Code”) was introduced in 2005 to maintain high corporate governance standards, with the last report published in October 2017 with data collected in 2016 (the “2016 Review”).
The 2017/2018 Review was based on disclosures made by 400 issuers (the “Sample Issuers”). The scope includes:-
(a) compliance with the Code Provisions (“CPs”);
(b) disclosures under the Code’s Mandatory Disclosure Requirements (“MDRs”); and
(c) disclosures under the Code’s Recommended Disclosures (“RDs”).
Examining Sample Issuers’ Compliance with CPs
The 2017/2018 Review demonstrates a high level of compliance of the Code by the Sample Issuers. 36 percent reported full compliance with all CPs, representing a 2 percent rise from the 2016 Review and nearly all the Sample Issuers complied with 70 or more CPs.
The two CPs with less than 90 percent compliance were A.2.1 and A.4.1.
A.2.1: Separation of the roles of chairman and chief executive
CP A.2.1 provides that the roles of chairman and chief executive should be separate and should not be performed by the same individual.
The compliance rate of this CP is 64 percent, representing a 1 percent rise from the 2016 Review. The two common reasons for departure are that (i) the same person will provide consistent leadership, effective planning and implementation of long-term business strategies ; and (ii) the company structure is sufficient to address any potential issues in having the same person as chairman and chief executive.
The Exchange commented that CP A.2.1 promotes stability in a company as the chief executive can focus on strategy, operations and organisational issues while the chairman can oversee management, lead the board and promote good governance.
A.4.1: NEDs being appointed for a specific term, subject to re-election
CP A.4.1 provides that non-executive directors (“NEDs”) should be appointed for a specific term, subject to re-election.
The compliance rate of this CP is 85 percent, representing a 3 percent drop from the 2016 Review. The Exchange considered that issuers should treat CP A.4.1 and the practice of retirement by rotation separately notwithstanding that both prevents entrenchment through periodical re-election of directors.
Reviewing Sample Issuers’ Disclosures Under the Code’s MDRs (Sections G to Q)
As compliance to the MDRs, issuers must include a corporate governance report prepared by the board in their summary financial reports (if any) and annual reports (“Corporate Governance Report”) which must contain all the information in sections G to Q of the Code. Any failure to do so is a breach of the Listing Rules.
The 2017/2018 Review shows 90 percent of the Sample Issuers complied with sections G, H, J, K, L.(a)-(c), N, P and Q. The compliance level of sections I, M and O ranges from 67 percent to 82 percent.
In the 2017/2018 Review, the Exchange focused on the quality of the disclosures under section L.(d), ie summary of the work of the board committees and disclosure of diversity policy.
Summary of work of the board committees
Over 95 percent of the Sample Issuers were able to state the roles and functions, composition and details regarding committee meetings, but the quality of disclosure varied. The unsatisfactory disclosures resorted to boilerplate phrases when describing their policies and criteria.
The Exchange commented that such disclosure promotes transparency of the board committees and improves the accountability and board effectiveness.
Board diversity policy
Section L.(d)(ii) requires issuers to disclose their board diversity policy or a summary of the policy.
Majority confirmed the adoption of a board diversity policy. Some merely reported that without disclosing the policy itself.
The Exchange encouraged the determination of measurable objectives in accordance with particular needs of the company and disclosure of any milestones achieved.
Reviewing Sample Issuers’ Disclosures Under the Code’s RDs (sections R to T)
Issuers are recommended to disclose in their Corporate Governance Reports information set out in sections R to T of the Code.
For section R (ie share interests of senior management), 92 percent of the Sample Issuers did not make disclosures on the number of shares held by senior management. For section T (ie management functions), 92 percent of the Sample Issuers made disclosures on the division of responsibilities between the board and management.
The Exchange commented that in case information under the RDs is disclosed elsewhere rather than in the Corporate Governance Reports, cross-references are needed to ensure stakeholders can easily identify the information required or recommended in the Corporate Governance Reports.
The implications are that issuers should:
(a) refrain from using boilerplate disclosures;
(b) elaborate on narrative statements;
(c) tailor-made the disclosures to suit the unique circumstances of the company; and
(d) use cross-references to provide clarity and avoid duplications.