Quality of Corporate Governance Reporting Rising in Hong Kong

The general quality of corporate governance and corporate social responsibility (CSR) reporting among Hong Kong companies was high this year, as evidenced by the high number of short-listed organisations in the Best Corporate Governance Disclosure Awards 2012 organised by the Hong Kong Institute of Certified Public Accountants.


Second-time winner, Prudential plc. and, consistent winnter, CLP Holdings Ltd. were the only two diamond winners in this year's competition. The 2012 Awards identified new awardees including, COSCO International Holdings Limited, Pacific Basin Shipping Limited, Ping An Insurance (Group) Company of China, Ltd. and The Link Real Estate Investment Trust.


The judges decided no diamond award, the highest honour, be given out in three categories: H-share companies and other mainland enterprises, non-HSI mid-to-small market capitalization, and the public sector.


They noted that many Hong Kong listed companies and not-for-profit organizations still have more to do to benchmark their corporate governance practices and disclosures to the highest standards.


"This year, we refined the marketing scheme taking into account the latest developments," says Stephen Law, chairman of the awards organising committee. "The judges have looked for evidence that more listed companies and public sector organisations have ingrained good governance practices into their organisational culture. This includes preparing for the changing demands and expectations reflected in the new Corporate Governance Code under the listing rules, which is being implemented in phases starting this January, and to have increased awareness of the impact their activities have on the community and the environment."


In terms of corporate social responsbility (CSR) reporting, this year's clear winner of the sustainability and social responsibility award was CLP Holdings Ltd., one of last years's join winners.


According to the judges, the company is a good role model for sustainability and social responsibility reporting, providing extensive and detailed, stakeholder-focused information.


The best annual reports were from companies that opted for early adoption of the key elements of the new Corporate Governance Code and those that closely tracked their corporate performance against the provisions and recommended best practices in the Code.


"The judges were pleased to see the general quality of corporate governance and CSR reporting, as reflected by the short-listed organisations, was high this year, particularly in the HSI and non-HSI large cap categories," says Keith Pogson, the Institute president and chairman of the judging panel. "The continuing competition among H-share companies is also encouraging, as it helps to push up the overall standard and bring out new contenders. It was also good to see advances in corporate reporting and a closer contest in the non-HSI mid-small cap category."


The HSI category continued to set the pace fo Hong Kong's corporate governance standards and CLP Holdings Ltd., in particular, maintained its position as the highest benchmark for Hong Kong companies. CLP won top honours, the diamond award, for the tenth successive year, with Hong Kong Exchanges and Clearing Ltd. and MTR Corporation Ltd. following behind with the platinum and gold awards, respectively.



In the non-HSI large market capitalisation category, Prudential plc., The Link Real Estate Investment Trust, and Hysan Development Company Ltd. won diamond, platinum and gold awards respectively, with new contender Pacific Basin Shipping Limited getting a special mention.


Among the highlights in this category were the very high standard of Prudential's transparency and accountability and the innovative reporting style and content of Pacific Basin Shipping. The judgest recognided the good progress made by first-time winner, The Link Real Estate Investment Trust in its corporate governance, by giving the company an additional honour in this category, a Significant Improvement Award.


Though there was no diamond award in the non-HSI (mid-to-small market) category, the judges found it difficult to separate the quality of disclosures and practices of two companies in this category. They considered both first-time winner, COSCO International Holdings Ltd., and repeat winner, SOCAM Development Limited, to be worthy of a platinum award.


This year, the H-share companies category was expanded to include other mainland enterprises that do most of their business or receive most of their income from mainland China. However, the top performers were still H-share companies and the competition was close.


While the judges decided not to give out a diamond award, they acknowledged companies in this category for their strengths in particular areas of disclosure, such as the detailed explanations of how they discharge their regulatory obligations, and for improving the standard of the management discussion and analysis sections in their annual reports.


Industrial and Commercial Bank of China Ltd., was again the highest achiever in this category, receiving a platinum award. Other winners in this category were first-time awardee, Ping An Insurance (Group) Company of China, Ltd., and the consistently good, Jiangsu Expressway Company Ltd., talking a gold award and a special mention respectively.


Without taking anything away from the award winners in the public sector and not-for-profit category, the judges were disappointed that this category, again, did not produce many surprises.


The Airport Authority of Hong Kong and the Securities and Futures Commission were worthy winners, with the former, an awardee for the twelth consecutive year, taking the platinum awards this year, and the SFC, another regular awardee, winning a gold award.


"We hoped to see improving standards of corporate governance in the public sector and, while there were one or two organisations 'knocking on the door' of the judging panel, they still fell short of the standards required for recognition," explains Susanna Chiu, Institute vice president and chair of the professional accountants in business leadership panel. "We accept that most public sector and not-for-profit organisation do not have the same level of resources as those in the listed company sector, but we cannot compromise standards when it comes to the essential requirements of good governance," she adds.



The judges found that companies are expanding the information they provide on their risk management and internal controls framework, and more are conducting evaluations of their boards' and board committees' performance. The improving standard of CSR reporting was also nother area of actual improvement acknowledged by the judges this year.


"Overall, the judges noted a clear and genuine commitment on the part of more board and management to achieve a good standard of corporate governance disclosures and practices. There is also greater willingness to respond to the desire of investors and other stakeholders for meaningful reporting that demonstrates good corporate citizenship. While there are a number of positives in this year's competition, this is certainly not the end of the story; there are other areas in need of further improvement," says Pogson.


As for examples of where more could be done, the judges recommended better explanations of the criteria for selection of board members, including in the public sector, and more about emolument policies and how remuneration and incentives are linked to long-term, sustainable performance.


They also recommended more detailed information about the practical aspects of risk identification, assessment and prioritization, and the process of internal control reviews. In addition, the judges report asks to see balanced coverage of the challenges and opportunities facing companies, how companies can retain their competitive edge, and generally, an increased focus on quality instead of quantity of information.


There are calls too for more disclosure of the approval process for related-party transactions, espcially for mid-small cap and family-controlled companies.