Most of the listed companies reviewed have complied with the amended Hong Kong Corporate Governance Code issued by the Hong Kong Stock Exchange, according to the latest study by PwC.
The amended Code aims to enhance the level of disclosure of internal control and risk management systems, as well as the handling and disseminating of inside information. However, companies need to put greater effort into improving reporting to the board of directors and the effectiveness of their internal audit functions.
The study, conducted by PwC Hong Kong’s Risk Assurance division, covers all published Corporate Governance reports of 223 listed companies in the Hang Seng Index (HSI) and Hang Seng Chinese Enterprise Index (HSCEI), as well as the top companies by market capitalization in the financial services, real estate, retail and technology sectors.
The amended Corporate Governance Code became effective for accounting periods from 1 January 2016. The amendments were designed to give greater emphasis to risk management and to further define the roles and responsibilities of the board and management. They also emphasize the board of directors’ ongoing responsibility to oversee risk management and internal control systems.
The study reveals that 92% of companies performed the annual review of both the internal control and risk management systems, representing an increase of 23% year-on-year. 93% of HSI constituents and 85% of HSCEI constituents have also made appropriate disclosures, which represents a 7% and 25% increase over the prior year respectively.
In terms of Industry, the Retail sector (97%) outperformed Real estate (93%), Technology (93%) and Financial Services (90%).
At the same time, 78% of the companies in the study disclosed their process to identify, evaluate and manage risks, which represents a 33% increase year-on-year. 80% of HSCEI constituents have made such disclosures, a 57% increase which significantly narrows the gap with HSI constituents.
On an industry basis, Financial Services (90%) outperformed the other sectors.
Moreover, 87% of the companies disclosed their procedures and internal controls for the handling and dissemination of inside information, which is an improvement of 44% year-or-year. 91% of HSI constituents made the disclosures, slightly outperforming the HSCEI constituents (88%).
On an industry basis, only 77% of Technology companies have made such disclosure, lagging behind all other sectors (around 90%).
Enhanced level of disclosure
“Since the amended Corporate Governance Code became effective, many of the large-cap listed companies have enhanced their level of disclosure on internal control and risk management. We are particularly happy to see a significant improvement in the HSCEI constituents. The results reflect that companies recognize the positive effect of enhancing Corporate Governance,” says PwC Hong Kong Risk Assurance Partner Eric Yeung.
The study also found that 97% of companies claimed to have an internal audit function. However, only 36% of them disclosed that they had sufficient resources, qualifications and experienced internal audit staff, which represents a 16% increase on the previous year.
Only 10% of HSCEI constituents and 44% of HSI constituents had covered the internal audit function in their annual review to ensure the adequacy of resources, qualifications and experience, training programmes and budget for their IA function.
On an industry basis, Real estate companies (58%) outperformed the other sectors.
Similarly, only one-third of companies in the study disclosed that their Board of Directors had received management confirmation on both risk management and internal control systems. These results clearly indicate plenty of room for improvement.
“We are grateful that listed companies are being proactive in accordance with tightened risk management and internal control requirements,” says PwC’s Hong Kong and China South Internal Audit Service Leader Cimi Leung.
“We strongly encourage companies to continuously improve their level of disclosure, and allocate adequate resources for internal audit and training programmes. Management of listed companies and the Board should strengthen the channel of communications, particularly on the reporting of substantial risk information. We believe that enhancing corporate governance could bring value to all organizations, which improves investor relations and protects shareholders. It is a performance issue instead of a compliance issue.”