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Review of Corporate Governance Practice Disclosure

Written by: Mr. Vincent Cheng - Risk Consultant

In September 2016, the Stock Exchange of Hong Kong Limited (“The Exchange”) published a review (“June Review”) on the issuers’ compliance with the corporate governance practice disclosure in their 2015 annual reports with a financial year-end date of 30 June 2015. The review analyzed 81 issuers’ compliance with the Corporate Governance Code (“CG Code”) of the Listing Rules. In May 2016, the Exchange also published its review (“March Review”) of 318 issuers’ compliance with the CG Code in their 2015 annual reports with a financial year-end date of 31 March 2015.


Highlight of the reviews
Comparing the results of the two reviews, generally speaking, 23% of the issuers with the financial year-end date of June (“June FYE issuers”) reported that they had full compliance with all Code Provisions (“CPs”), lower than 25% , which was reported by the issuers with March as their financial year end (“March FYE issuers”).

The Exchange also examined the distribution of the June FYE issuers that achieved full compliance with all 75 CPs by reference to their market capitalization. The issuers were classified into three groups, namely large-cap, mid-cap and small-cap. Compared with the large-cap and small cap issuers, a greater portion of the mid-cap issuers (28.6%) achieved full compliance. In particular, only 20.6% of small-cap issuers achieved full compliance, which is evidently less than the average in that period. Similar distribution pattern could be observed in the March Review.

In addition, 96% of the issuers reported they had complied with CP A.5.6, which requires them to have a policy concerning diversity of board members, and to disclose the policy or a summary of the policy in the corporate governance report. The Exchange performed spot-checks on the issuers and noted that 25% of these issuers neither disclosed the policies (or a summary of the policies) nor gave considered reasons for non-disclosure.

 

The five CPs with the lowest compliance rates
For the June Review, the CPs with the lowest compliance rate in ascending order were A.2.1, A.4.1, A.6.7, E.1.2 and A.5.1, in which four of them were the same as in the March Review except for A.5.1 which was at the fifth place in the June Review, and the sixth in the March Review.

 

The results showed that the compliance rates of the above CPs were similar in the two reviews which significant improvement was not noted. Issuers should pay more attention to these areas and undertake follow-up actions and mitigation actions. They should also be aware of the reasons or explanations provided in the reports since certain explanations were ambiguous and had been used repeatedly over the years.

With good corporate governance, the company can operate more efficiently, mitigate risks and safeguard against mismanagement. It would also be more accountable and transparent to the stakeholders. After conducting the reviews, the Exchange concluded that there is room for improvement in areas such as reporting and compliance in corporate governance. It also reminded the issuers that any non-compliance of CPs or omissions in reports without reasonable explanation would be regarded as a breach of the Listing Rules. Issuers should carefully examine their corporate governance reports and rectify any possible omissions in their next report.


Source:
Analysis of Corporate Governance Practice Disclosure in June Year-End 2015 Annual Report, The Exchance, Sept 2016

Corporate Governmance Code and Corporate Governance Report, Appendix 14, The Exchange, July 26

The Risk Management and Internal Control section of the Corporate Governance Code and Corporate Governance Report Note to subscribers for the amendments to the rules governing the listing of securities (the "Listing Rules") Update No. 115. THE EXCHANGE, Jan 2016

 

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