Internal control review, social duty lacking at HK companies Hong Kong companies, especially H-share firms, are lagging behind their British counterparts in corporate governance practices such as internal control reviews and corporate social responsibility, according to a study conducted by international accounting firm Grant Thornton. The study on 187 constituent stocks of the Hang Seng Composite Index, made in September, shows that only 24 per cent of these companies have internal control checks every year, much lower than in Britain, where 98 per cent of FTSE350 companies make annual reviews which include internal audits on financial statements and on fraud prevention and risk management measures. The blue-chip Hang Seng Index is better off with 61 per cent of the companies having internal control reviews while only 11 per cent of H-share companies conduct internal control checks. Britain made it mandatory for companies to have internal control reviews two years ago while Hong Kong only introduced a similar rule this year, said Patrick Rozario, principal and head of business risk services at Grant Thornton. 'It shows us that Hong Kong listed companies have to cover a lot of ground to catch up with international standards, particularly where over 40 per cent have not yet set up an internal audit function,' Mr Rozario said. The study also shows most Hong Kong-listed companies do not have a proper structure to carry out their social responsibility and to protect the environment. None of the H-share firms, only 2 per cent of the composite index companies and 11 per cent of Hang Seng Index stocks have such a structure in place. By comparison, 90 per cent of FTSE350 companies have a corporate social responsibility structure. 'This shows Hong Kong and mainland companies are very much behind their international counterparts in the areas of environmental and social responsibility. We have companies donating to charity or planting some trees, but that's not good enough,' Mr Rozario said. Hong Kong companies should follow their British counterparts in establishing a structural approach to protecting the environment, he said. For example, they could quantify the volume of paper they use and then plant a certain number of trees as compensation, and where there are carbon emissions in some production areas, they have to reduce the output in other areas. 'Companies should be aware of their responsibility to preserve the environment and resources for our next generation,' Mr Rozario said. Mike Wong Ming-wai, chief executive of the Chamber of Hong Kong Listed Companies, admits the study shows more should be done to enhance corporate governance. 'The chamber next year will promote social responsibility among companies,' Mr Wong said. 'Many investors, such as green funds and pension funds, have declared they would take into consideration the environmental policies of Chinese companies before they invest in them. 'We learned that some of these funds conduct due diligence to check on pollution by the manufacturers before investing in them. Listed companies should be aware that besides their profitability, they would now also need to have good environmental protection policies to attract foreign investors.' The Grant Thornton study also shows 32 per cent of the Hang Seng Composite Index companies have family members on board, and 12 per cent of them have a chairman who is related to the chief executive. Mr Rozario said family-owned businesses may benefit from the loyalty of the family members but these members should disclose any family dispute that may affect the company's performance.