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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Вторник, 07 мая 2019 апдейт:

3. Discussion and analysis of jurisdictions studied. 3.1.3 The role of culture

It is not possible in the post 2008 era to discuss CG processes without also giving some consideration to the topic of CG culture. While CG culture has always been recognized as a fundamental issue in corporate processes, it has only been given scant attention by regulators and has largely been overlooked by the processes of regulatory oversight until more recently. This is possibly due to the twin difficulties of defining culture while at the same time avoiding the risk that “culture” is used as a residual explanation when other modes of explanation are insufficient.

The FRC defines culture in a corporate context as “a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders”. In other words, it is how a company behaves in its daily operation and how it deals with its stakeholders as influenced by the values it in practice subscribes to. Specific discussions of “CG culture” can be undertaken either (1) at the specific level of the corporation and the values and practices of the owners and managers of the company, or (2) at the wider social or market context in which a company operates and the generally accepted values and practices of all persons considered to be legitimate stakeholders in the market, possibly encompassing not only owners and managers but also employees, creditors, business partners, and so on. As explained in Section 2 Methodology, the scope of the present study is confined to the former more narrow definition of CG culture.

Any assessment of CG processes must also be astute to the fundamental difference between the bare fact of complying with a regulatory requirement, and complying with the objective that a regulatory requirement is intended to achieve. The former is consistent with a “box-tick” approach to compliance that in some cases can only be discernable from the latter according to whether or not the relevant behaviour is underwritten by an appropriate CG cultural attitude toward the objective of the relevant regulatory requirement. Regrettably, box-ticking is often synonymous with the validation of an act and a corresponding perceived diminution of culpability.

There is no shortage of reading material on the question of what businesses should be doing to succeed. However, the things that go wrong with companies frequently represent implosions where the board wasn't doing enough and the shareholders weren't challenging them. These are things that are going wrong inside the business, not external factors. Examples include Volkswagen, the SONY hacking, FIFA and Wells Fargo.

The recent issues arising out of the Wells Fargo incident - which have given rise to its Chief Executive Officer (CEO) facing a Congressional hearing - has redoubled attention to the importance of “tone at the top”. Commenting on the board's response to the incident, a former chairwoman of the Federal Deposit Insurance Corporation stated:

“Unfortunately, it appears that the bank's response was to view the problem as employee misconduct and to fire people as opposed to looking at the supervisory chain and culture...Culture and tone at the top is exactly what the board should be looking at.”

Corporate values and culture do appear to be subject to more discussions in the boardrooms of FTSE 350 Index (FTSE350) companies. The FRC are taking an active interest in understanding corporate culture and the components relevant for boards to consider. However, based on the quality and profile of strategic reporting in 2015, only one fifth of FTSE350 chairmen gave culture prominence and provided insight into the topic with only half of these using their primary statement to emphasize the importance of culture. In 2016, although 86% of FSTE350 companies' annual reports mention corporate culture, only 20% provide a meaningful discussion, and 48% do not clearly communicate their organizational values. Fragmented commentaries may give the impression that culture and values are neither embedded in nor drive CG behaviour within a significant number of issuers, and it has been suggested that companies failing to adequately explain their CG related objectives may indicate a possible box-tick mentality.

It is of interest to note that the connection between legal liability and culture has been recognized in the United States Federal Sentencing Guidelines for Organizations (FSG) issued by the United States Department of Justice. The FSG expressly deal with, inter alia, the compliance obligations of directors and establish criteria as to what is expected of a director in relation to organizational culture and the promotion of ethical conduct and a commitment to compliance with the law. This is important in view of the steady expansion of director liability that require directors to exercise greater - and effective - oversight of the company's affairs. While the FSG substantively acts as sentencing guidelines, because the laws are actively enforced, they also serve proactive purposes. Key criteria of the FSG deal with matters such as the exercise of senior management oversight, undertaking effective communication to employees, installing appropriate compliance systems in relation to wrongdoing within the corporation, the consistent application of enforcing compliance standards through appropriate disciplinary mechanisms, and taking appropriate steps to prevent recurrence of compliance breaches. Put together, this recognizes the reality of effective governance, namely, that successful governance reflects a firm-wide approach - it is not something that merely happens in the boardroom.

The conversation on culture in fact has already moved beyond “tone from the top”. “Tone from the middle” and even “tone from everywhere” reflects the reality that achieving cultural objectives of a company requires recognition that this is not someone else's responsibility.

The importance of culture is also gathering increasing attention in Hong Kong. There have been significant developments in senior management accountability at law, notably following the introduction of the SFO in 2003 and including, as a result of amendments to the SFO in 2013, responsibility for systems that enable compliance with statutory disclosure obligations. The SFC also appears to increasingly recognize that merely approaching CG via standard setting that is enforced when the standards are breached is not sufficient and that it is “essential that a culture of robust corporate governance is developed to safeguard the interests of the investing public.”

The importance of culture in the CG context is that in the absence of an appropriate CG culture a company's compliance with CG regulations may be reduced to a box-tick approach. Where a culture of non-compliance is caused by existing shortcomings in the value system that has been adopted, the question is how to get companies to change the CG culture. Simply imposing another rule is not enough.

There needs to be other supporting mechanisms that work to promote change. This might encompass externally-imposed mechanisms (such as more effectual enforcement mechanisms), ones that are generated from within the company (such as whistle¬blowing) as well as from the market itself (such as an active and vocal institutional investor base). It is trite to point out that changing a CG culture that leans in the wrong direction requires considerable effort and involvement of many parties over a period of time.

Perceived shortcomings in establishing an appropriate CG culture has in many jurisdictions brought increased attention to mechanisms that affect the ability, willingness and accountability of directors to prevent or deal with malpractice. This includes boardroom practices including the roles expected of independent directors and board sub-committees, shareholder engagement and the role of stewardship, and the means of bringing greater accountability to executive remuneration, whether through shareholder accountability or the imposition of clawback arrangements. These mechanisms are discussed in subsequent Sections.

The topic of CG culture requires special consideration in relation to the abundance of Mainland China businesses in both new and existing listings on the Hong Kong market. Given the very different political, economic and social history of Mainland China - which affects both management and controlling shareholders - from that experienced in Hong Kong (or the other jurisdictions studied) it would be unremarkable to state that their management and investor makeup is quite different, and their experiences different. For example, a mainland unlisted business would not be accustomed to the same type of pre-listing reporting as would be a UK unlisted company. To some extent this needs to be qualified by observing that state-owned enterprises (SOEs) are subject to the oversight of, and corresponding reporting to, various Government ministries. Nevertheless, the reporting requirements of a UK unlisted company (to private equity investors) and a UK listed company (to the public market) is significantly similar, as compared to an SOE reporting to government ministries as compared to a public market.

The foregoing distinction is in some ways underlined in bold by comments of President Xi Jinping that positions SOEs as primarily serving the interests of the Communist Party in the economic realm and that they are, or should be, “party organs in leadership and political affairs.” Those comments represent a significant schism from traditional Western approaches to the role of the company and the position of CG in that regard. Rather, the incorporation of “Western” CG board processes over the past three decades may instead be perceived as undermining the leadership of the Communist Party. The extent to which such comments interact with the realities of SOEs listed in Hong Kong (or elsewhere) is hard to estimate. However, it has been suggested that as many as 19 SOEs listed in Hong Kong have established Communist Party committees, with powers enshrined in new amendments to the articles of the companies, whose function includes advising and/or instructing the board on, inter alia, operational and strategic matters as well as board appointments and remuneration. SOEs do of course remain subject to CG requirements in the markets they are listed on. However, it is notable that the United States-China Economic and Security Review Commission in its annual report to the United States Congress in 2016 expressed concerns as to the nature and purposes of state-backed enterprises.



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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