Cultivating board culture towards greater accountability

Proposals for Hong Kong 

Hong Kong is also looking to implement changes in line with international developments. In its April 2021 consultation paper, the Stock Exchange set out proposed amendments to the Corporate Governance Code aimed at highlighting the importance of corporate culture. 

Currently, the Corporate Governance Code⁴ sets out the principles of good corporate governance for listed companies with two levels of recommendations: code provisions (where companies must explain the reasons for any non-compliance) and recommended best practices (where companies are encouraged to confirm their compliance or the reasons for any deviations). It sets out recommended practices for an effective board, which include recommendations on board composition, directors' responsibilities, accountability, delegation, board arrangements and risk management and internal controls. However, until these latest proposals, the Corporate Governance Code has not specifically drawn out board culture as a standalone focus area. 

New code provision focused on board culture

The Stock Exchange is proposing to add a new code provision which focuses on board culture, requiring the following:

• The board should establish the company's purpose, value and strategy. These should be aligned with the company's culture. 
• Directors are expected to promote the desired culture. In doing so, they should act with integrity and lead by example. 
• The culture should instil and continually reinforce across the organisation acting lawfully, ethically and responsibly.

The Stock Exchange has indicated that it will provide guidance to explain the board's role in culture and set out the key elements commonly identified in a sound culture. The consultation paper identifies tone from the top, accountability, effective communication and challenge and incentives. These are the same themes highlighted in the Financial Reporting Council report discussed above. 

Disclosures on culture

The Stock Exchange has also indicated that it will provide guidance on recommended key issues for disclosure to help stakeholders understand the company's culture. These may include the following:

• description of the company's vision, value and strategy, together with its culture, and how these affect the company's business model; 
• description of the company's success measurements and a discussion on how the desired culture affects or contributes to performance. Success measurements include, for example, key performance indicators for areas such as revenue growth, profit margins, return on equity and market share;
• discussion on the measures used for assessing and monitoring culture. By way of example, this could include specific indicators such as turnover rate and whistleblowing data, and data on regulatory breaches;
• description of measures to ensure that the culture and expected behaviours are communicated to employees, for example through a code of conduct;
• information on the forums available for sharing ideas and concerns on any misconduct or misalignment identified and how they are dealt with; and
• discussion on the company's financial and non-financial incentives to support the desired culture.

Anti-corruption and whistleblowing

Anti-corruption and whistleblowing are essential to achieving a properly functioning corporate culture. The Stock Exchange is, therefore, proposing to elevate the existing recommended best practice on whistleblowing to a new code provision. This would require the company to establish a whistleblowing policy and a system for employees and those dealing with the company to be able to raise concerns about possible improprieties. The policy should ensure whistleblowing is anonymous and in confidence. The audit committee, or other designated committee comprising only independent non-executive directors, should be responsible for handling whistleblowing complaints. In addition, a new code provision is proposed requiring the company to establish anti-corruption policies. 

The Stock Exchange will provide guidance to help companies to prepare their anti-corruption and whistleblowing policies. Such policies should include the policy scope, committees or personnel responsible and the reporting channels. 

FOCUS ON CULTURE IN STOCK EXCHANGE'S POLICY STATEMENT 

In early July 2021, the Hong Kong Stock Exchange updated its policy statement on Listing Rule enforcement. This contains important messages for listed company boards and senior management on the regulatory expectations for those responsible for Listing Rule compliance. 

The Stock Exchange sets out the below three key concepts underling its enforcement decisions. Importantly, a company's culture and attitude to compliance and corporate governance are now included: 

• Responsibility - Whilst primary responsibility sits with the directors, enforcement actions could also be brought against others, for instance senior management, where they cause by act or omission, or knowingly participate in a breach of the Listing Rules;
• Controls and culture - Listed companies are expected to implement appropriate and effective internal controls to ensure regulatory compliance. Compliance and corporate governance should be embedded in the company's culture and evidenced at the director and senior management levels; and 
• Cooperation - Listed companies and their directors are expected to cooperate with the Stock Exchange. This includes a requirement to provide information reasonably requested as part of an investigation into any suspected breach of the Listing Rules.

The Stock Exchange has also updated its enforcement sanctions statement⁵ to reflect the recent rule changes to enhance its disciplinary powers and sanctions which came into effect on 3 July 2021.  Whether there is evidence of a good culture conducive to rule compliance and the promotion of good corporate governance is included among the factors that the Stock Exchange will apply in determining the appropriate sanctions for Listing Rule breaches.

To avoid the risk of enforcement action, it is more important than ever that listed company boards have in place, and keep under review, the necessary policies, systems and procedures to ensure effective compliance with the Listing Rules and match the regulatory expectations and standards.  Given that compliance is now included as an important concept underlying enforcement decisions, boards must also embed a culture of compliance and uphold high corporate governance standards.  

KEY TAKEAWAYS AND TIPS FOR COMPANY SECRETARIES

Whilst the threat of more serious enforcement action may currently be a driving factor for adopting a compliance culture, stakeholders are increasingly seeing the intrinsic value in well managed companies with an embedded culture of good corporate governance. The current regulatory focus on corporate culture within a corporate governance regime now shifts the emphasis from its use as a compliance tool to the fundamental sustainability benefits and value to investors and other stakeholders of an embedded, transparent culture with promotes governance compliance at all levels of the business.

Company secretaries have a key role to play in ensuring that companies are able to maintain high corporate governance standards and helping the board to formulate and push forward a robust compliance culture to meet both regulatory and investor expectations.

¹  Consultation Paper on the Review of Corporate Governance Code and Related Listing Rules dated April 2021. 
²  Enforcement of the Listing Rules – Policy Statement dated 8 July 2021.
³  Corporate Culture and the Role of Boards – Report of Observations (July 2016).  
⁴  Appendix 14 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (Listing Rules).
⁵  Enforcement Sanctions Statement dated 8 July 2021. 
⁶  For example the HKICS Securities Law and Regulation Guidance Note (Fourth Issue) - Relating to Independent Non-Executive Directors - Selective Roles, Responsibilities and Liabilities.