A Guide on Better Corporate Governance Disclosure

A Guide on Better Corporate Governance Disclosure The Institute would like to thank the convenor, deputy convenor and members of the Corporate Governance Working Group of the Professional Accountants in Business Leadership Panel, for their work on the development and promotion of this guide, and the Panel for its direction and support on this project. COMPOSITION OF THE CORPORATE GOVERNANCE WORKING GROUP Convenor: Kim Man Wong HK Electric Investments Limited Deputy convenor: Wendy Yung Hysan Development Company Limited Members: Derek Broadley Deloitte Touche Tohmatsu Clara Chin Hospital Authority Eddie Kam Getnice Holdings Limited Stephen Law MTR Corporation Limited Guy Look Sa Sa International Holdings Limited Horace Ma Kong Tai Sundry Goods Company Limited Patrick Rozario BDO Financial Services Limited Secretaries: Peter Tisman Director, Specialist Practices, HKICPA Sharon Yeung Associate Director, Specialist Practices, HKICPA COMPOSITION OF THE INSTITUTE’S 2013 PROFESSIONAL ACCOUNTANTS IN BUSINESS LEADERSHIP PANEL Chairman: Kim Man Wong HK Electric Investments Limited Deputy chairman: Stephen Law MTR Corporation Limited Members: Derek Broadley Deloitte Touche Tohmatsu Stephen Chan Trinity-C Management Limited Jennifer Cheung The Hongkong and Shanghai Banking Corporation Limited Cavan Cheung Hong Kong Cyberport Management Company Limited Clara Chin Hospital Authority Susanna Chiu Li & Fung Development (China) Limited Ronald Fan The Treasury Eric Fok Bright Talent Consultants Limited Kantstant Fung Sun Life Finance Hong Kong Eddie Kam Getnice Holdings Limited Vivian Lau Fortune Sun (China) Holdings Limited William Lo Airport Authority Hong Kong Guy Look Sa Sa International Holdings Limited Horace Ma Kong Tai Sundry Goods Company Limited Anthony Ng Fubon Bank (Hong Kong) Limited Patrick Rozario BDO Financial Services Limited Simon Wong Legend Capital Partners Inc. Wendy Yung Hysan Development Company Limited Secretaries: Peter Tisman Director, Specialist Practices, HKICPA Sharon Yeung Associate Director, Specialist Practices, HKICPA The Institute also acknowledges those companies whose annual reports provided the examples of good corporate governance disclosure used in this guide. CONTENTS Introduction and background 1 Part 1 5 The Board: Role, what it did during the year and how Part 2 16 Accountability and Audit: Internal Controls - Sound and effective controls Part 3 31 Accountability and Audit: Audit Committee - Rigorous and effective oversight Part 4 41 Communication with Shareholders: Encouraging participation by shareholders Introduction The main aim of this guide, A Guide on Better Corporate Governance Disclosure, is to encourage meaningful corporate governance disclosures by Hong Kong- listed companies, under the revised Corporate Governance Code of the stock exchange listing rules (“revised Code”) 1, which took effect in 2012. It may also be of value to other companies and organisations that wish to enhance their corporate governance disclosures for the benefit of their stakeholders. 1 Appendix 14 to the Main Board and Appendix 15 to the Growth Enterprise Market listing rules Copyright © February 2014 Hong Kong Institute of CPAs. All rights reserved. 1 Background The Hong Kong Institute of CPAs (“Institute”) for strengthening corporate governance has been a prime mover in advocating good disclosure. This was a forward-looking corporate governance in Hong Kong for the document, containing, as its core past two decades. The Institute has always recommendation for enhancement, a believed that sound, well-organised and proposal that listed and public companies well-regulated markets and good corporate be encouraged to include a statement governance are vital ingredients in Hong on corporate governance in their annual Kong’s success as a financial centre and will reports. The inclusion of such a statement remain so in the future. is now seen as a basic requirement of good governance. Part of the preamble to the Between 1995 and 2008, the Institute 2001 guide bears repeating, remaining as published a series of corporate governance true today as it was then: guides and surveys on a range of important topics, including audit committees, directors’ A strong disclosure regime is a pivotal remuneration, internal control and risk feature of market-based monitoring of management and public sector governance. corporate conduct and is central to the In 2000, the Institute expanded its work in ability of shareholders to exercise their this area by establishing the Best Corporate voting rights effectively. Experience in Governance Disclosure Awards, to promote countries with large and active equity awareness of good corporate governance markets shows that disclosure can and to give recognition to exemplars of best also be a powerful tool for influencing practice in the Hong Kong market. the behaviour of companies and for protecting investors. A strong disclosure One of the Institute’s main corporate regime can help to attract capital and governance guides, published in 2001, maintain confidence in capital markets. Corporate Governance Disclosure in Shareholders and potential investors Annual Reports - A guide to current require access to regular, reliable and requirements and recommendations comparable information in sufficient for enhancement (“2001 guide”) reviewed detail for them to assess the stewardship disclosure in annual reports, setting out of management and make informed the requirements applicable at that time decisions about the valuation, ownership and making a number of recommendations and voting of shares. Insufficient or 2 unclear information may hamper the took effect, for new accounting periods, as ability of markets to function, may from 1 January 2005, except for the Code increase the cost of capital and result in a provisions and disclosures relating to poor allocation of resources. internal control, which became effective as from 1 July 2005. During the intervening Disclosure also helps improve public period, the Institute published guidance understanding of the structure and on internal control, at the invitation of the activities of companies, their policies Hong Kong Stock Exchange. and performance with respect to environmental and ethical standards and In 2011, the 2004 framework underwent their relationships with the communities another substantial review, consultation and in which they operate. revision, in the light of developments over the previous seven years. As a result of this At the time of the publication of the 2001 exercise, a number of RBPs were elevated guide, mandatory corporate governance into Code provisions and some provisions disclosures in Hong Kong were quite became listing rules. The Code and the CGR limited. The Code of Best Practice at were also combined into a single, expanded Appendix 14 of the listing rules was a sparse revised Code. Other than the new listing rule document by today’s standards. In 2004, it requirement that independent non-executive was replaced by a much more substantial directors must form at least one third of Code on Corporate Governance Practices the board, for which the deadline was 31 and set of disclosure requirements in the December 2012, the changes contained in Corporate Governance Report (“CGR”). the revised Code were implemented, on Listed companies were expected to apply the either 1 January or 1 April 2012. “provisions” of the 2004 Code on a “comply or explain” basis. The Code also contained Notwithstanding the development over the “principles”, setting out the underlying aims years of a much more extensive framework of of each main section, and recommended rules, requirements and recommendations, best practices (“RBPs”), compliance with the Institute’s professional accountants which was entirely voluntary. The CGR, in business leadership panel (“PAIBLP”) meanwhile, contained mandatory and perceived there to be scope to produce recommended disclosures. This framework additional guidance for listed companies, 3 to discourage a “box ticking” approach and The guide focuses on significant areas of to encourage more meaningful disclosure the revised Code, where, we believe, more in annual reports. The PAIBLP set up a meaningful disclosure would be welcomed corporate governance working group with by investors and other stakeholders. The members from diverse backgrounds to areas covered, initially, are the (i) board, (ii) develop suitable guidance. internal controls, (iii) audit committee and (iv) communication with shareholders. This Some elements of the revised Code are is not intended to be a static, one-off exercise fairly straightforward and need no further but, rather, something that can be further explanation, such as disclosure of the number expanded and refined over time. of board and committee meetings held during the year and directors’ attendance Enhancing corporate governance disclosure records. However, other important areas is a continuing and interactive process. In are not as self-explanatory, such as the preparing this guide, feedback was sought requirement for an annual review of from annual report preparers, as well as users internal controls to be conducted and how such as investors, independent directors, this should be implemented. The purpose listed company management, auditors of this guide is to help bridge that gap. As and consultants. We are grateful for their first step, we believe that helping preparers perspectives. to appreciate the underlying rationale of the Code principles and provisions would We hope that this guide

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