Rebooting governance for the new era

The morning sessions of the Institute’s 14th Biennial CGC focused on how business leaders and investors are adapting to the profound technological and societal changes transforming our world. The afternoon sessions looked at the implications of the current operating environment for Hong Kong’s competitiveness and for everyone involved in promoting good governance. Following the forum’s remit to explore solutions to the challenges identified, a number of recommendations emerged from the discussions for the consideration of all stakeholders of the debate.

Don't underestimate the challenge

Hong Kong’s future as an international financial centre was a central focus of the afternoon discussions. Speaking in the final session, The Honourable Bernard Charnwut Chan GBM GBS JP, Chairman and President, Asia Financial Holdings Ltd, and Chairman, Asia Insurance Company Ltd, warned that Hong Kong needs to recognise that the challenges it is currently facing are structural.

‘Hong Kong people have shown themselves to be very resilient to crises in the past – we always believe that we will figure things out and get back to normal – but this is a more fundamental crisis and what is needed is a complete mindset shift,’ he said.

In view of the above, does Hong Kong need a change of business model?

Speaking as a panellist in the third session, Laurence Li SC JP, Chairman, Financial Services Development Council, pointed out that for the last 30 years, Hong Kong has been a safe bet for investment due to the rapid growth of the PRC economy, which averaged around 10% annually. In contrast, the US and OECD economies experienced average annual growth rates of 2% to 3%.

‘When the gap in economic growth was 7%, investments came just for the exposure to the Chinese mainland’s high-growth economy and Hong Kong was a major beneficiary of that,’ Mr Li explained.

That gap has now narrowed considerably, however. While the growth rates of the US and OECD economies have remained relatively stable, China’s official growth rate has halved. Moreover, this shift has occurred at a time when Hong Kong’s competitive advantages in regulation and governance are becoming less pronounced, as other regional markets have raised their game. In this context, Hong Kong’s traditionally higher cost margins are starting to appear less attractive.

An audience poll taken in the third session showed that 33% of participants were positive about Hong Kong’s future as an international financial centre. Conversely, nearly an equal number (29%) expressed concerns. Mr Li indicated that this balance of optimism and caution accurately reflects the current market assessment of Hong Kong’s prospects.

Don't cut corners in governance

Keynote Speaker, Julia Leung SBS JP, Chief Executive Officer, Securities and Futures Commission, pointed out that Hong Kong should not be complacent about its governance track record. She noted that upholding good corporate governance is especially important to our large and deep capital markets, while other markets outside Hong Kong have been raising their governance standards.

‘Locally, we have heard voices that this is not the best time for corporate governance reform as companies are struggling to survive. However, one should always have time for good corporate governance, particularly in challenging times,’ she emphasised.

She cited the example of how Japan’s corporate governance reforms over the previous decade, which may have been a painful process, have now strengthened the Japanese markets.

‘In these challenging times, we understand that it is only natural for companies to find ways to cut back and streamline, but they must be careful not to cut corners on their core corporate governance standards,’ she added.

In this context, she welcomed the proposals put forward by The Stock Exchange of Hong Kong Limited in its recent consultation on Hong Kong’s Corporate Governance Code. She acknowledged that some of these proposals, in particular the nine-year hard cap for the tenure of independent non-executive directors (INEDs), have been the subject of lively debate in the city.

‘While there is no hard-and-fast rule to determine the ideal tenure, we believe that implementing a hard cap of nine years aligns better with international standards,’ Ms Leung stated. She added that Singapore, Malaysia and the Chinese mainland have set tenure limits for independent directors of listed companies.

This debate was picked up by Katherine Ng, Head of Listing, Hong Kong Exchanges and Clearing Limited (HKEX), in the final session of the conference. ‘What you cannot ignore is that other markets are catching up very quickly and, in some areas, they are more advanced than we are. We must ensure Hong Kong’s standards meet those expected of an international financial centre,’ she said.

She added that governance reform was not something that could be put on hold. ‘The rules around ESG and corporate governance are evolving all the time and what looked like “good practice” five years – or even three years – ago might not be good enough today. We need to move with the times,’ she stressed.

Stay ahead of the tech transformation

Perhaps the most obvious strategic imperative for any jurisdiction seeking to thrive in the current and future operating environment is to get technology right. The fourth session of the conference looked at this issue in detail. The first speaker, Cally Chan MH, General Manager, Microsoft Hong Kong and Macau, focused her presentation on the urgent need for organisations to adopt artificial intelligence (AI).

The adoption of AI tools generally leads to a significant increase in productivity, she explained. Moreover, the accessibility of Generative AI tools (due in large part to the fact that they can be used via natural-language prompts) has played an important part in making these tools highly prevalent in the marketplace.

While many business leaders acknowledge that AI is now a business imperative, there remains a knowledge gap regarding its responsible use. Ms Chan highlighted the urgent need for organisations to educate employees about responsible AI practices and to leverage trustworthy AI platforms with robust security and compliance measures to mitigate the risks of harmful or biased content, and improve data privacy protection.

A panellist in the fourth session of the conference, Professor Christine Loh SBS JP OBE, Chevalier de l’Ordre National du Mérite, and Chief Development Strategist, The Hong Kong University of Science and Technology (HKUST), shared her insights on AI’s importance with respect to climate change, as AI has powerful capabilities.

She pointed out that the foundation of good climate risk assessment and projection requires good data that can then be used for modelling. She mentioned the work that the climate science teams at HKUST are doing to assess local risks on a fine scale that is useful for government, asset owners, investors and communities. She suggested that a set of Hong Kong climate risks could be created and updated for the city with government backing for use by used by all stakeholders.

‘The more I talk to bankers, investors and insurers, they are asking for a set of data that can be regularly updated, and ideally endorsed by the government, to help them in their risk assessments,’ she said.

Stay relevant and fit for purpose

The need to ‘reboot’ governance for the new era was a recurring theme of the afternoon sessions. The idea first came from Dr Kelvin Wong SBS JP, Chairman, Accounting and Financial Reporting Council (AFRC), speaking in the third session. He pointed out that the need for a governance reboot was implicit in the conference theme: ‘Reviewing, Rethinking and Resetting Corporate Governance for a New Era’.

He added that the reboot would need to start with an honest assessment of what works and what does not work in our current governance frameworks. When regulators uncover governance failures, a natural follow-up question is of course about where the governance gatekeepers were. Where were the many different parties responsible for preventing governance failures?

One of the core aims of the AFRC is to ensure that auditors, as key gatekeepers of good governance, discharge their responsibilities effectively and Dr Wong dedicated much of his presentation to strategies for enhancing audit quality and transparency within firms. He noted that the trend of decreasing audit fees in Hong Kong has hindered efforts to improve audit quality.

‘This may be an issue worldwide, but in Hong Kong it is becoming quite critical,’ he said. He called for a better alignment of audit fees to accurately reflect the necessary work required and the associated risks. He pointed out that no one would opt for substandard medical services when getting a health check, regardless of any discounts, as doing so would undermine the purpose of the exercise.

He also urged audit firms to publish transparency reports. This has become a requirement in the EU and standard practice for many international firms. Dr Wong advocated for broader adoption of this practice in the market to ensure that stakeholders have access to essential information about the firms’ operations, finances and strategy.

As you would expect, the role of another governance gatekeeper – governance professionals – also featured highly in the discussions. Speaking in the fourth session, Andrew Weir MBE JP, Regional Senior Partner, KPMG in Hong Kong; Vice Chairman, KPMG China; and Global Chair, Asset Management and Real Estate, KPMG International, emphasised the roles that company secretaries can play in helping to ensure that boards are not blindsided by emerging risks.

Two aspects of the company secretarial role particularly relevant here are the preparation of the board agenda and the preparation of board meeting materials. The latter task, Mr Weir pointed out, can make a huge difference by ensuring that directors get access to quality information about emerging risks, but this task has been made all the more difficult given the prevalence of misinformation and disinformation.

The former task (preparation of the board agenda) also faces difficulties, mainly down to the limitations on board discussion time and the large – and ever-expanding – number of potentially relevant issues that boards need to discuss. This point was raised by Nicholas Charles Allen, Independent Non-executive Director, HKEX; Non-executive Director, The London Metal Exchange; and Non-executive Director, LME Clear Ltd, in the fifth session.

‘Boards have limited time to discuss the many issues relevant to an organisation’s future direction,’ he said, ‘so my challenge to people helping to set the agenda is to ask yourself what you think the board and the Chairman want to get out of this?’ Generally, he pointed out, boards and board chairs would like to drive discussions towards a decision, so this should influence how the agenda, and the time spent on each item, is managed.

He also directly addressed young practitioners building their careers in the governance profession. ‘Focus on output rather than input,’ he suggested. ‘Empathise with those you are dealing with and have an opinion yourself. Have a view about aspects of governance and network within your communities.’

A career in governance

Good governance is not only about having the right structures and processes in place – it is also about people. In the final session of the conference, Edith Shih FCG(CS, CGP) HKFCG(CS, CGP)(PE), Honorary Adviser to Council, Past International President and Institute Past President, and Executive Director and Company Secretary, CK Hutchison Holdings Ltd, gave a very personal and moving reflection on what qualities and skills are required to make a successful governance professional.

‘I have travelled the corporate governance journey for more than a quarter of a century, and have witnessed its development and expansion,’ she said. Over that time, Ms Shih has seen how technology has made the administrative aspects of the company secretary function vastly more efficient. At the beginning of her career, meeting minutes were still written up from notes jotted down by the company secretary. These days, of course, AI can deliver minutes in any given style right after the meeting is concluded.

Tech tools have transformed many other aspects of the company secretarial function and, accordingly, tech skills have become a basic requisite for governance professionals today. Nevertheless, Ms Shih also emphasised the enduring value of the traditional skills and qualities that practitioners are expected to have. With this in mind, she recommended the following to governance professionals, both existing and prospective.

Continuing education and training. With new legal and regulatory requirements being implemented at such exponential speeds, lifetime learning is crucial.

Ethics and integrity. This is a vital attribute as governance professionals need to navigate ethical dilemmas and make decisions in the best interests of their organisations.

Knowledge transfer. A single individual cannot hope to develop all the know-how required by the job and must therefore be able to transfer knowledge acquired and to apply it, as well as to adapt to new tasks, changing environments and emerging governance trends.

Analytical skills. These skills are essential for assessing governance risks, identifying opportunities for improvement and making data-driven decisions, especially in the era of ever-upgraded legal and regulatory requirements.

Good communication skills. Strong written and verbal communication skills for effectively conveying issues to a variety of stakeholders – including board members, executives, regulators and shareholders – is a must for governance professionals.

In conclusion, Ms Shih pointed out that all professionals have to keep an open mind to embrace new knowledge, skill sets and challenges. Moreover, no matter how the new era has evolved, they should never stray from the fundamentals of good governance, which is the DNA of every well-governed organisation.