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Steady rise in compliance, but more still needs to be done

Corporate governance and how Hong Kong companies implement it has been a topical issue for the past few years. Activists have taken up the cudgels on behalf of minority shareholders and taken the issue to corporate regulators. So what is the state of corporate governance here and how do we compare to other jurisdictions in the region?

Awareness about the importance of corporate governance and its role in public and private companies have grown continuously in recent years, according to a survey by consultancy Grant Thornton.

Patrick Rozario, principal and head of business risk services at Grant Thornton, says that it has become increasingly obvious that corporate governance can make valuable contributions to addressing risk, increasing accountability, safeguarding the interests of stakeholders and strengthening market regulation. That is especially true where publicly-listed companies are concerned.

Grant Thornton's latest annual Corporate Governance Review was published towards the end of last year. Its aim was to gauge the state of corporate governance in Hong Kong's leading businesses, and its approach was to measure the progress made by all public companies listed in the Hang Seng Composite Index (HSCI) in addressing the recommendations and best practices outlined in the Code on Corporate Governance Practices during the previous 12 months.

Rozario says that listed companies have complied with corporate governance rules and regulations, that were issued in 2005.

'Companies reach a certain level [of corporate governance] and stay there for some time,' Rozario says. The Grant Thornton consultant says that it is important to learn from how lapses in corporate governance contributed to the failures and losses of many global companies, and to realise that firms can take pre-emptive actions and reassess existing governance practices, with a view to identifying where any weaknesses exist and what improvements are necessary.

The code's objectives are similar to those of its British, Australian and United States counterparts. It provides a good framework by outlining the basic principles of corporate governance in Hong Kong.

These are critical methods for avoiding potential dangers and enhancing accountability, transparency and - ultimately - competitiveness in the marketplace, Rozario says in the report. Furthermore, the code has a principles-based, or 'comply- and-explain', format and it strongly urges companies to attain full compliance.

Thornton's review shows that, while many Hong Kong companies have demonstrated this understanding and made noticeable progress, a lot still need to step up their efforts. The review tracks how well the companies surveyed have done in adopting the code since it took effect in January 2005.

The analysis reveals a steady increase in overall compliance. This strongly indicates the market has grasped the value and benefits that can result from a good corporate structure and that companies have been taking the right steps to implement the practices which support this.

But more still needs to be done, Rozario says, pointing to the second-tier companies in the Hang Seng Index that do not follow the corporate governance rules and don't do anything about implementing them. Hong Kong's stock exchange should push these companies in an attempt to honour the rules of corporate governance, he suggests.

These companies should now make it their interim goal to eliminate the exceptions in order to either regain or attain full compliance. Then they should start taking steps to determine how they can improve further, suggests Rozario in the review. Whereas the code gives companies the option to explain why they are not adopting certain principles, it is imperative for them to regard such instances as rare exceptions.

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