Hong Kong companies pay too little attention to corporate governance practices that protect the rights of small shareholders, BDO says.
As a result, foreign investors may be discouraged from putting money into these companies, the international accounting firm says.
A BDO study released last month showed the proportion of Hong Kong firms complying with the city's corporate governance code last year had dropped to its lowest level since the code was introduced in 2006.
"The major reason for the slump is some new requirements introduced in 2012 which many companies failed to comply with. This shows many companies are not willing to make quick changes to their internal systems to comply with the corporate governance code," said Patrick Rozario, a director and head of risk advisory services at BDO, who oversaw the annual compliance review.
Rozario told the South China Morning Post that Hong Kong remained attractive to international investors because the mainland had not yet opened up its stock markets, so those wanting to invest in mainland firms were forced to trade in their H shares listed in the city.
"However, once China has its free-trade zones and other reforms to open up its markets, international investors will directly invest in mainland China," he said. "If that happens, what Hong Kong can compete on to retain the international investors is the quality of the market.
"The recent corporate governance review, however, was disappointing. If companies do not make improvements to keep high corporate governance standards, Hong Kong will lose out to the mainland market."
Rozario said a major area of non-compliance was the requirement that a firm must have a whistle-blowing policy in place for people to report any malpractices. None of the H-share firms has such a policy.
Of the Hang Seng Composite Index firms, 77 per cent failed to comply with the requirement. Sixty-six per cent of the Hang Seng Index firms did not have such a policy.
Also often disregarded was the requirement for a firm to have a policy for communicating with minority shareholders. Eighty-seven per cent of H-share firms did not have one. Nor did 82 per cent of Hang Seng Composite Index firms and 78 per cent per cent of Hang Seng Index companies.
Another major area of non-compliance was an old requirement for the roles of chairman and chief executive to be held by different persons. Thirteen per cent of H-share companies failed to comply with the requirement, compared with 23 per cent of Hang Seng Composite Index companies and 20 per cent of Hang Seng Index companies.
Rozario said most of the companies in Hong Kong were family-owned, and many did not voluntarily want to comply with the code to offer more protection or disclosure to minority investors.
"The code is on a voluntary basis, meaning the companies would only need to explain non-compliance to shareholders, and they would not face any penalty," he said. "Fortunately, when companies explain any non-compliance, they often indicate they are planning to make changes to comply with the code.
"Let's hope we can see some improvement next year."
He said in the United States and Britain, companies were more willing to make disclosures and voluntarily comply with corporate governance standards.