Report on Improving Corporate Governance in Hong Kong

Оригинал на английском языке.
Гонконгский институт лицензированных публичных бухгалтеров
Hong Kong Institute of Certified Public Accountants
Авторы: Syren Johnstone и Say H Goo
Обзор текущего состояния (дата издания отчета 15.12.2017) корпоративного права Гонконга, основанного на Ординансе "О компаниях" 2014 года (Hong Kong Companies Ordinance) и Ординансе "О ценных бумагах и фьючерсах" 2003 года (Hong Kong Securities and Futures Ordinance). Исследование недостатков действующего режима и предложения о направлениях развития.

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Суббота, 25 мая 2019 апдейт:

3. Discussion and analysis of jurisdictions studied. 3.7.11 INED qualifications

The UK Walker Review (2009), recognizing a problem identified in the Turner Review (2009), suggested that non-executive directors («NEDs») be required to undergo an induction process, receive regular training, and be provided with dedicated support to put them in a position they can contribute as effective challengers on the board. Although the review was focused on banks and financial institutions, its findings and recommendations are nevertheless of wider interest to the CG topic. However, the UK CG Code does not distinguish between the training needs of different directors, although it does provide that non-executive directors should have access to independent professional advice where relevant to the execution of their responsibilities.

In the United States, the Independent Directors Council («IDC») was founded to focus primarily on the education of directors, particularly on independent directors. However, this body and the training provided by it do not carry with it any specific status for legal or regulatory purposes.

Directors in Mainland China are required to attend training (see Appendix IV.7.2). The CG Code requires directors to «earnestly attend relevant training to learn about the rights, obligations and duties of a director, to familiarize themselves with relevant laws and regulations and to master relevant knowledge necessary for acting as directors». Directors must sign a declaration as to whether he has participated in any securities business training programme organized or acknowledged by the CSRC and the Exchanges and undertake to participate in professional training programme organized by the CSRC or the relevant Exchange. The Exchanges have guidelines on the requirement of training, for example the SSE's guidelines require that INEDs must participate in not less than 30 hours of classes to obtain qualification to be an INED and obtain the certificate for such qualification (guideline 18, section 3), and must attend not less than 30 hours of continuing training once every 2 years (guideline 19). Training typically last for a few days with an examination at the end. According to the guidelines, the training program should be recognized by the CSRC; the guidelines also contain a detailed list of training topics and requirements issued by the SSE.

Mainland China is the only market that has a regulatory requirement for certifying director candidates. This may be a consequence of its relatively recent transformation to a market driven economy following on from the reforms introduced by Deng Xiaoping, something that the other jurisdictions have not had to grapple with. While director training may in spirit be a worthy undertaking, it is highly debatable whether such training is effective in changing a director's understanding of their role and their behaviour in the boardroom so as to improve the quality of directors and corporate governance (see Appendix IV.7.2). Doubtless there will be a population of individuals who will learn and change in consequence of the experience as much as there will be a population that regard the training as a necessary box-tick exercise. Establishing the relative size of these populations would be a relevant measure of the success of the training, however, no such research appears to have been undertaken to date.

In Singapore, the CG Code requires the provision of director training and a professional development programme albeit on a comply or explain basis (see Appendix V.7.2). The Singapore Institute of Directors, like the Hong Kong Institute of Directors (HKIoD), provides regular training (see Appendix V.7.2). Director training is the responsibility of the nomination committee. With the nomination committee being responsible for board and director evaluation, companies characterized by a corporate board and director/s which are not objective or impartial (e.g. SingPost - see discussion in Appendices V.1.3 and V.7.3) will likely be indicative of ineffective director training. The vague recommendations in the CG Code are of little assistance. In SingPost's case, the disclosure of induction and training in the 2014/2015 Annual Report was a boilerplate response that essentially mirrored the CG Code's recommendations. The annual report stated that training focused on commercial risks, business operations, industry developments, and changes in regulations and guidelines. Furthermore, SingPost's 2014/2015 annual report provided no indication of how often director training takes place, who supervised the training, what the training covered, nor who participated in the training. Boilerplate explanations are essentially a non-response to the comply requirement of director training pursuant to the CG Code and provide no assistance in evaluating the effectiveness of director training. When comparing disclosures of director training in annual reports (2014), there is no discernible difference between companies' characterized as having effective and ineffective CG. Thus the disclosures made under the CG Code provide no basis to evaluate the effectiveness of director training. The 2014 Association of Southeast Asian Nations (ASEAN) Corporate Governance Scorecard stated that companies should provide more details on continuing education programs and training of directors in their annual reports.

The flexibility of the comply or explain regime potentially increases the range of effective and ineffective examples of director training while at the same time obscuring which companies have effective or ineffective CG. This amounts to the creation of a false validator. Such a regime facilitates, in addition to genuine compliance, an option not to comply or engage in poor compliance. The effectiveness of director training is not easily gauged under a comply or explain regime.

One approach to quantitatively evaluate the effectiveness of director training might be to analyze the disclosures in the Corporate Governance Report contained in the Annual Report, and company disclosures and any directives on the SGX website. The first aspect involves searches for any voluntary disclosures and if so, how detailed are the explanations given? Were any directors at fault, and if so why? Secondly, has the company been given any directives by the SGX, why were they given, did they involve a director/s, and how did the company manage these directives? Analyzing the behaviour of the company and its directors will provide some insights to the CG culture of the company and mind-set of directors when addressing breaches of the CG Code. This may be a more accurate gauge of the effectiveness of director training and how well it addresses CG issues, although it is essentially subject to the culture of the board overall.

Hong Kong

In Hong Kong there is no regulatory agency of directors per se, other than the normal laws and regulations under which they are accountable. In an IPO context they are subject to vetting by the sponsor and the SEHK as to their suitability. It has long been regarded as an anomaly that such pre-IPO vetting falls away once an issuer is listed, meaning that a person that might not satisfy the pre-IPO vetting may nevertheless be appointed in the post-IPO context.

Following a consultation over 2010 to 2011, the HKEX upgraded a recommended best practice that directors should participate in continuous professional development to a code provision together with a requirement to report in the Corporate Governance Report on how each director met the requirement. The proposal did not distinguish INEDs as possibly requiring different types of training from other directors. The SEHK decided not to impose a mandatory requirement of 8 hours training per year because many respondents did not agree to the proposal even though members of HKIoD are already required to undertake 10 hours of training to remain a member. Currently, only where a director breaches the listing rules might the SEHK require the director to undergo mandatory training, by the HKIoD, the Hong Institute of Chartered Secretaries or another body approved by HKEX.

In March 2017 the HKEX launched a series of directors training videos with the ostensible purpose of providing practical advice and tips with a view to helping improve board performance - all directors are encouraged to «complete the training» but watching the videos is not mandatory. The first series, which dealt with matters such as conflicts of interest, complex transactions and the role and functions of board committees, was subsequently further extended to cover risk management and internal control, and environmental and social governance reporting.

While the content of the videos are right-minded and uncontentious as regards delivering useful guidance on important governance matters, it is an entirely separate question whether they constitute a learning environment that works to change the behaviour of directors in the marketplace. It is noted that there is no means of independently tracking which directors have watched the videos and whether it has brought any influence upon them. Moreover, it is rather predictable that the body of directors that the market is most concerned about - those who have little regard for CG standards - are unlikely to study and learn from the videos such that they change their behaviour. To the extent the webcasts may not represent effective means of training they operate as a false validator that the HKEX is doing something about the standards of directors. Nevertheless, they do serve as a signal to the market that the need to improve director knowledge of CG is on the regulatory agenda.


The essential question that underlies the debate on director training is whether undertaking the role of a director in a listed company should be determined solely by commercial considerations subject to legal and regulatory enforcement mechanisms and the vested interests of directors to comply with them, or whether the ability to be appointed to undertake a director post should be subject to a formal training, qualification or certification requirement imposed by a regulatory or similar body. The market is replete with examples of persons subject to the latter approach, such as financial intermediaries, lawyers and accountants, all of whom are subject to continuous professional training (CPT) requirements imposed by a regulator of the relevant activity.

Most interviewees supported the idea of mandatory training for INEDs, especially pre¬IPO training - although it is noted that pre-IPO director preparation is often undertaken by the sponsor and its and/or the issuer's solicitors. INEDs do face a different set of tasks from executive directors. Some interviewees have found the training to be very useful in preparing them for the job as independent directors and expose them to various items of knowledge. Site visits are also found to be very useful for independent directors to speak to people below management level and to understand the company's business and operation. Directors should also read widely outside board papers prepared by management, conduct one-on-one conversation with management people who are not on the board, and attend industry and related conferences especially for directors who are not industry experts. In Hong Kong the HKIoD already offers training courses on a regular basis leading to certificates and diplomas.487 There is however no formal requirement that a director must receive training or be a member of HKIoD.

Some interviewees had suggested that Mainland issuers listed in Hong Kong are accustomed to rule-based culture, and so experience difficulties knowing how to comply with the principle-based approach in Hong Kong. If so, it would be desirable to educate mainland company directors and compliance officers on the meaning and importance of principle-based regulation as part of their required training (see Appendix IV.7.2). Another possibility would be to review the HK CG Code to provide more guidance notes that elaborate the principles in the HK CG Code and listing rules. However, other interviewees felt this distinction was exaggerated, citing the increasingly rule-based nature of CG requirements in Hong Kong and the reality that senior management in Mainland issuers have considerable experience in interpreting policy guidance from the Mainland Chinese Government or its regulatory agencies covering a range of matters.

The issue of director training cannot be wholly segregated from the issue of director qualification. A «strong» model might propose that directors are only eligible to serve as such if they pass required qualification tests. This appears to be the basis of the approach in Mainland China. However, concerns over this approach include the body empowered to provide training and set tests, the effectiveness of such a regime in improving standards, and whether the commercial forces of the market are unduly interfered with. In the absence of the first two features, and given Hong Kong's open commercial culture, a strong model is not supported. A «weak» model might propose voluntary training that is not subject to testing, and this is effectively the HKEX's current approach and, as discussed above, the effectiveness of a weak model is highly questionable where enforcement is also weak. There would be several variants of an «intermediate» model, such as proposing mandatory director training but not requiring any testing beyond attendance certification - this follows the model with other professional CPT programmes under which training can be provided through a number of recognized avenues. The intermediate model might also incorporate an appropriate level of disclosure to shareholders.

Finally, given the concerns surrounding INEDs (for example as expressed in the Walker Review and Turner Review discussed above), it might also be asked whether INEDs should be subject to a distinct form of training requirement. While they are subject to the same directors duties and liabilities as all other directors, their role in relation to the topic of CG is of particular significance.

The foregoing leads to Recommendation A4.2.3 «INED training».


Содержание отчета

Executive summary
Executive Summary I Key Findings
Executive Summary II Summary of Recommendations
Executive Summary III Approach to the Study
Executive Summary IV Abridged Text of the Analysis

1 Introduction to the study and its purposes
1.1 Purpose of this Report
1.2 The development of CG in Hong Kong
1.2.1 Domestic drivers
1.2.2 Global drivers
1.3 Structure of this Report
1.3 Structure of this Report
1.3.1 Methodology
1.3.2 Analysis
1.3.3 Recommendations
1.4 Scope and limitations of this Report
1.5 Next steps

2 Methodology
2.1 Scope
2.1.1 CG concepts
2.1.2 CG Geographic reach
2.1.3 CG mechanisms
2.2 Work process
2.2.1 Data collection
2.2.2 Initial data organization
2.2.3 Oral evidence
2.2.4 Parity check
2.2.5 Analysis
2.2.6 recommendations

3 Discussion and analysis of jurisdictions studied
3.1 Overarching considerations
3.1.1 Thematic topics
3.1.2 Trends in regulating CG standards
3.1.3 The role of culture
3.1.4 The methodology of assessment
3.1.5 Cost-benefit considerations
3.1.6 Maintaining competitiveness
3.1.7 Effectiveness
3.2 Non-locally incorporated companies
3.2.1 Application of local laws and regulations
3.2.2 Cross border enforcement and cooperation
3.3 Information
3.3.1 Legal status of CG disclosures
3.3.2 Disclosure of listing rule compliance
3.3.3 Board evaluation
3.3.4 Audit committee
3.4 Involvement
3.4.1 Shareholder stewardship
3.4.2 Shareholder votes
3.4.3 Remuneration
3.4.4 Changes of control
3.5 Equality
3.5.1 Voting rights generally
3.5.2 Weighted voting rights
3.6 Accountability
3.6.1 Information disclosures generally
3.6.2 Listing rules
3.6.3 Board refreshment
3.6.4 Appointment of independent directors
3.7 Effectiveness
Part A - CG system design
3.7.1 Impact of regulatory design
3.7.2 Policy development agencies
3.7.3 Enforcement agencies
3.7.4 Audits of public companies
3.7.5 Duties of directors
3.7.6 Role of fiduciary law
Part B - Specific actions
3.7.7 Differentiation of CG requirements
3.7.8 Listing regime standards upon entry
Part C - Independent directors
3.7.9 Determination of independence
3.7.10 Requirements relating to INED performance
3.7.12 Empowerment of INEDs - controlling shareholders
Part D - Other items
3.7.13 Whistle-blowing
3.8 Coda

4 Recommendations
Introduction and approach to the recommendations
Part A - The board
4.1 Processes
4.2 Independent directors
4.3 CG standards
Part B - Enforcement
4.4 Shareholders
4.5 CG disclosures
4.6 Regulators
4.7 Ex ante mechanisms
Part C - Architecture and policy
4.8 Architecture
4.9 Policy
4.10 Summary tables

5 Concluding remarks
5.1 The Recommendations
5.2 The Hong Kong market

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