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Corporate Governance for Listed Companies in Greater China
China Business Knowledge @ CUHK Forum addresses the latest developments in corporate governance, transparency and disclosure in greater China
By Fang Ying, Senior Writer, China Business Knowledge @ CUHK
In December 2015, Hong Kong Exchanges and Clearing Limited (HKEX) published its new requirements based on the consultation conclusions on the review of the Environmental, Social and Governance (ESG) Reporting Guide. According to the new requirements, from January 2016, all companies listed on HKEX are required to comply with the ESG Reporting Guide by publishing an ESG report on an annual basis stating whether they have complied with the provisions of the Guide.
Key Changes Brought by ESG Reporting
“No doubt, the new requirements on ESG reporting by HKEX have brought multiple changes to the stock market,” said Ivy Wong, Special Counsel of Baker McKenzie, a leading global law firm. Wong was one of the panelists in the joint forum hosted by China Business Knowledge @CUHK and the American Chamber of Commerce in Hong Kong on January 11, 2017. The event titled “Corporate Governance for Listed Companies- a new era in Greater China?” was attended by more than 60 participants including AmCham members, academics and industry experts.
“One of the key changes is that we are moving from voluntary to mandatory disclosure days,” Wong continued. “Companies now have to disclose their corporate governance information and explain their efforts in environmental protection to the public.”
Wong observed that since the implementation of the ESG Reporting Guide, a growing number of investors have begun to take note of companies’ environmental, social, and governance indicators. The changes also brought about some anxiety from senior managements. “The anxieties from the directors’ level and competitions from peers do push companies to comply with the Guide,” she said.
More importantly, she noted that companies’ stakeholders believe that enhancing environmental awareness can reduce operational risks.
“They believe that [the ESG Reporting] can contribute to the long-term success of the company and that it plays a big role in building a company’s reputation,” she remarked.
“So I believe these changes would have big impacts on companies’ corporate behaviors, since they have to face the public and deliver ESG results at the end of each year,” she added.
Corporate Governance Development in China
“Good corporate governance is important to a company’s sustainability; it can be a mechanism that helps companies to sustain in the long run.” Prof. Daphne Yiu
How are corporate governance and overall corporate responsibility evolving in this new context, as companies listed in Hong Kong as well as in mainland China strive to incorporate these aspects into their business? Are Chinese corporate governance converging to the global standard or diverging due to the institutional embedded nature of corporate governance system? These questions were answered by another panelist, Prof. Daphne Yiu at the Department of Management, CUHK Business School.
Prof. Daphne Yiu has been conducting research on China’s corporate governance development for more than a decade. In her presentation, she reviewed the development of corporate governance in China in the past decades and the impacts of ESG reporting on Chinese listed firms.
According to Prof. Yiu, 30 years ago, Chinese companies used to either copy what Hong Kong companies were doing in regard of corporate governance or invite Hong Kong firms to help them set up the corporate governance system in their companies.
However, the situation has changed since the Chinese government and stock exchanges started to take a leading role in promoting the development of corporate disclosure in China and regulating companies’ conducts.
“In 2006, Shenzhen Stock Exchange took the initiative to introduce ESG reporting to its listed firms. Two years later, Shanghai Stock Exchange followed and introduced a similar guide. That’s much earlier than Hong Kong. Since then, China’s corporate governance environment has changed a lot,” said Prof. Yiu.
Prof. Yiu pointed out that as the Chinese stock markets grew in the past decades, China has even got its own technical evaluation system on companies’ CSR practices.
“Such evaluation assesses the transparency, regularity and availability of CSR information in a company, and quantify the company’s CSR behavior,” she said.
Prof. Yiu emphasized that the Chinese government and agencies, China’s stock exchanges, even non-governmental organizations (NGOs) are all pushing the idea of CSR to become more acknowledged by Chinese enterprises.
When it comes to the relationship between CSR and company performance, some people might think CSR adds extra cost to companies, however, according to Prof. Yiu, it is actually a strategic investment.
She cited a research to prove the notion. The study result showed that when the listed companies in Shanghai Stock Exchange conducted CSR practices, their share price would increase by 2.4 RMB per share, and in Shenzhen Stock Exchange, the share price would increase by1.97 RMB increase per share. “That’s the actual value CSR can bring to the companies,” Prof. Yiu said.
According to her, from a corporate perspective, corporate governance is highly linked with managerial incentives and risk-taking behaviors, which in turn affects managerial decisions for the short-term and long-term development of a firm.
As such, a value-creation perspective should be adopted to understand more about how new governance regulations and ESG reporting can be adopted in a way to help a firm to align interests among different stakeholders, as well as to enhance a firm’s sustainability and competitiveness in the long run.
“Good corporate governance is important to a company’s sustainability; it can be a mechanism that helps companies to sustain in the long run,” she remarked.
Another panelist Jamie Allen who is the Founding Secretary General of Asian Corporate Governance Association (ACGA) focused on the overall ecosystem and the challenges facing Hong Kong.
Allen introduced several key findings in a corporate governance report released by ACGA in 2016. ACGA is an independent, non-profit membership organization working with investors, companies and regulators in the implementation of effective corporate governance practices throughout Asia.
According to the report, Hong Kong ranked second in the terms of quality of corporate governance in the region. “We predicted that Hong Kong to on the top of the list, but it is not the case,” he said, adding that Hong Kong has fallen in two aspects behind Singapore which has the highest score in the category.
“First, the Hong Kong government doesn’t have a clear strategy on Hong Kong’s corporate governance development. Second, there are still no independent audit regulators in the city to assess companies’ corporate governance behavior.”
So how can Hong Kong improve the corporate governance system? The key is developing an ecosystem.
“A healthy corporate governance system needs the balanced participation of a range of stakeholders: financial regulators, listed companies, auditors, investors and civil society groups,” he remarked. “These different interests act collectively to drive top-down and bottom-up improvements, leading to better policymaking and faster adoption of new ideas,” he concluded.