Hong Kong companies improve governance, research suggests

Sep 07, 2017
Amended governance code puts emphasis on roles and responsibilities of board and management

Corporate governance reports published by companies in Hong Kong suggest that most have complied with the special administrative region’s amended corporate governance code, according to PwC Hong Kong.

The firm studied disclosures by companies featuring in the Hang Seng Index (HSI) and the Hang Seng Chinese Enterprise Index (HSCEI), as well as the top companies by market cap in the financial services, real estate, retail and technology sectors, Corporate Secretary sister publication IR Magazine reports.

Ninety-two percent of companies studied performed the annual review of both their internal control and risk management systems, according to PwC - an increase of 23 percentage points from a year earlier. Across the two indexes studied, companies on the HSCEI made the biggest improvements, with a 25 percentage-point increase in the number of companies making the appropriate disclosures.

The HSCEI has also made an impressive effort to improve disclosure around identifying, evaluating and managing risks, PwC states. Eighty percent of companies on the index now disclose this information – a rise of 57 percentage points on the previous year, which ‘significantly narrows the gap with HSI constituents,’ the report’s authors write. Overall in the study, 78 percent of companies make such risk disclosures, an improvement of 33 percentage points from the previous year.

Another area that has seen big improvements, according to PwC, is disclosure around procedures and controls for the handling and dissemination of inside information. Eighty-seven percent of the companies studied include this information in their most recent corporate governance report – an increase of 44 percentage points year on year.

‘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,’ Eric Yeung, PwC Hong Kong risk assurance partner, says in a statement. ‘We are particularly happy to see a significant improvement in the HSCEI constituents. The results [show] that companies recognize the positive effect of enhancing corporate governance.’

But that doesn’t mean there aren’t improvements to be made. For example, while 97 percent of firms claim to have an internal audit function, only 36 percent disclose sufficient resources, qualifications and experienced internal audit staff.

Similarly, ‘only one third of companies in the study disclose that their board has received management confirmation on both risk management and internal control systems,’ PwC says, adding that ‘these results clearly indicate plenty of room for improvement.’

Commending companies on being proactive ‘in accordance with tightened risk management and internal control requirements,’ Cimi Leung, PwC’s Hong Kong and China South internal audit service leader, urges firms to continue to improve their levels of disclosure.

‘Management of listed companies and the board should strengthen the channel of communications, particularly on the reporting of substantial risk information,’ she says. ‘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.’

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