The increased use of public money to bail out large companies has made it more urgent for governments and regulators to tighten and upgrade corporate governance practices.
Many governments have pumped substantial funds into the financial system to shore up their economies and rescue corporations considered 'too big to fail', says April Chan, president of the Hong Kong Institute of Chartered Secretaries (HKICS).
'Regulatory bodies have introduced more regulations to ensure the money has been used adequately to protect the interests of all the stakeholders and to be accountable to the general public. The media, including traditional and social media, have exposed many cases of failed compliance with regulations. Sometimes the failure in good governance can be catastrophic,' she says.
HKICS hosted its 12th Annual Corporate and Regulatory Update conference last month to address pressing governance and compliance issues.
Hong Kong's regulators have continued to tighten corporate governance practices. For instance, Hong Kong Exchanges and Clearing, which operates the city's stock exchange, organised a consultation on the revision of the Code and Practices of Corporate Governance introduced in 2005.
In its fourth review of corporate governance disclosure in annual reports for 2009 by 132 companies, the stock exchange found 99 per cent of companies complied with 41 out of the 45 code requirements. However, there are doubts over whether the companies in substance complied with requirements and if their compliance reached the same standard.
This has led to the realisation that a single code may not apply to all companies because of their different businesses and cultures.
'To build up the substance of their compliance, company secretaries should introduce international best practices based on the nature of business and cultures of their respective corporations in addition to compliance with the regulators' rules,' Chan says.
'The stock exchange has consulted us on ways to modify the code to enhance the standard of compliance. A provision will be added to the code to clearly spell out the role and responsibilities of company secretaries. This is significant to the overall corporate governance standard of local listed companies. Company secretaries are the gatekeepers to good governance, and this formal recognition and specified code of role and responsibilities will definitely help enhance their work.'
The code contains a section on recommended best practices. Listed companies need to provide an explanation if they have failed to comply with those practices. The stock exchange is considering upgrading some recommended best practices to code provisions and upgrading some code provisions to listing rules.
Rewriting of the Companies Ordinance is under way. The purpose is to reflect international corporate laws and practices and to align the ordinance with listing rules. 'In terms of the reform of corporate governance practice, we should look at the fundamentals to develop ways to encourage the local financial community to go beyond compliance with minimum requirements and to do continuous disclosure and reporting,' Chan says.
In 2009, the government and regulators introduced the Price-sensitive Information Disclosure Guide, which basically requires timely disclosure of any leak of price-sensitive information. The provision is likely to be codified in the Companies Ordinance.
'Although the Securities and Futures Commission has issued the Guideline on Insider Information Disclosure to help practitioners with compliance, we believe more guidance can be provided on aspects such as the process of simultaneous disclosure to different stakeholders,' Chan says.
Meanwhile, if reporting beyond compliance is adopted, all stakeholders will be informed of any matters that may have an impact on the share prices of a listed company.
'A company's annual report can be more forward-looking and have more emphasis on such aspects as the budget, business plans and strategies, emerging risks and possible mitigation,' Chan says.
'The other challenge is to manage liability to ensure the accuracy, quality and relevance of the disclosure. Because the disclosure is not driven by any laws and regulations, and not disciplined by external audit, it is challenging for companies to choose the right model and the information for disclosure that is meaningful for stakeholders.'