Corporate governance - an investment well worth making

practicesLead-in-water crisis raises a host of issues and over who to blame, but it is basically a matterof policymaking and having proper controls

PUBLISHED : Saturday, 03 October, 2015, 12:24am
UPDATED : Wednesday, 20 June, 2018, 5:56pm

The lead-in-water crisis dominated the media headlines for quite some time. In mid-July, excessive lead was found in the tap water of numerous public and private housing estates, throwing hundreds of residents' lives into chaos. Furious and innocent residents yelled for justice.

A special task force was set up by the government to investigate and so far no conclusion has been made. Until today, the terror-triggered tap water tests are still being carried out in various types of properties, and the number of confirmed cases keeps increasing.

According to Chief Executive Leung Chun-ying, lead-containing substances binding joints in water pipes and banned soldering material were most likely to blame for the water scare. But who should take the blame?

While the relevant government department and contractors all had reasons for not being mainly responsible for the incident, some intuitive and important questions cannot be ignored.

For example, is the stated standard for materials to be used for water pipes adhered to? How was it monitored in the operation? Are the responsibilities of the involved parties clearly identified in the contract? Is there any proper mechanism to ensure compliance and quality? Is there any regular review to evaluate the efficiency and effectiveness of the prevailing system for contracting and sub-contracting? Where are the loopholes, in paper and in operation, if any?

While ill-management or ineffective supervision is commonly used to describe the tainted-water incident, the above questions are basically issues of governance, which is about the establishment of policies and continuous monitoring of their proper implementation by the members of the governing body of an organisation.

Governance focuses on authority, decision-making and accountability. Good governance contributes to the realisation of organisational and societal goals.

Governance applies widely to all types and all sizes of establishments including governments, private or public companies, non-government organisations or even individual project teams within an organisation.

Good governance helps boost reputation, create value, prompt long-term sustainability and ultimately enhance the well-being of the community as a whole. Bad governance, on the other hand, will lead to malpractices, damaging the interest of all stakeholders financially, physically and/or even mentally.

Hong Kong, as an internationally renowned hub for financial services, needs extremely sound governance procedures to maintain its competitiveness in this ever-changing world. Good governance, especially that for corporations, has a key practical outcome of creating "confident investors, quality market and lower capital of cost", Securities and Futures Commission chief executive Ashley Alder said last year. Nevertheless, good governance involves not only continuous improvement in the regulatory framework, but also assurance that enforcement and compliance will be effective.

In their corporate governance watch report for last year, CLSA and the Asia Corporate Governance Association ranked Hong Kong No1 in the Asia-Pacific. However, the report also revealed an overall deterioration of the performance ratings. "Singapore and Hong Kong have slipped due to internal conflicts of interest, weak leadership and opposition to reform from various quarters," it said.

Although the report only focused on the governance of 944 corporations across 12 Asia-Pacific markets, it identified problems in the governance procedure and sent warnings on the sustainability of the relevant jurisdictions.

The Hong Kong economy features heavy participation of small and medium-sized enterprises, which account for more than 98 per cent of business units and 47 per cent of private sector employment. Corporate governance is usually seen as irrelevant by these companies since most of them are owned by the managers, meaning there is no agent-principal conflict, and corporate governance implementation is a costly exercise.

The major corporate governance issues for small and medium-sized companies are centred on establishing a clear governance structure, effective internal controls, succession planning, compliance and risk management. In addition, many of them have operations on the mainland that involve managing legal, regulatory and cultural differences. Therefore, the top priority for these companies is to set up governance rules and guidelines to facilitate all parties to understand the company goal, improve management efficiency and limit internal conflicts.

Sound governance practices minimise the likelihood of fraud, theft and other financial losses, and improve prospects in securing financial resources, thus paving the way for expansion.


Dr Sunny Sun is an assistant professor and Tam Ching-yee a teaching fellow at Hong Kong Polytechnic University's school of accounting and finance