Consultation Conclusions on Risk Management and Internal Control: Review of the Corporate Governance Code and Corporate Governance Report (the “Code”)
editor: Ms. Winnie Leung - Risk Consultant
The Stock Exchange of Hong Kong Limited (the “Exchange”) published a consultation paper on risk management and internal control: review of the code in June 2014. The proposal includes:
Emphasizing that internal controls are an integrated part of risk management;
Enhancing accountability of the board, board committees and management by clearly defining their roles and responsibilities in risk management and internal controls;
Improving transparency of the issuer’s risk management and internal controls by upgrading the recommendation for issuers to disclose their policies, process, and details of the annual review carried out in respect of the effectiveness of the risk management and internal control systems; and
Strengthening oversight of the risk management and internal control systems by upgrading the recommendation for issuers to have an internal audit function.
The Exchange received substantial majority support with a few exceptions. The consultation conclusion was published in December 2014. We summarize the conclusion as follows:
Incorporate risk management into the Code where appropriate
In order to emphasis on risk management and internal controls, a substantial majority of respondents and the Exchange consider it appropriate to amend the Section C.2 of the Code to “Risk management and internal control”.
Define the roles and responsibilities of the board and management
Many supporters believed that a clear delineation of the duties of the board and the management would enhance the effectiveness of the internal control and risk management systems and promote accountability. They also believed that it would emphasis the management’s responsibility, for designing, implementing and monitoring the systems. Given the significant support and the reasons expressed by the respondents, the Exchange amended the Principle to define the roles of the board.
Clarify that the board has an ongoing responsibility to oversee the issuer’s risk management and internal control systems A number of respondents shared their view that risk management should be an ongoing process which does not end with the establishment of internal control systems. The Exchange considered that it may not be possible for the board to supervise the risk management and internal control systems on a day-to-day basis, however they would expect the board to seek and receive regular reports on the operation of these systems. As a result, they adopted the proposed amendments which are in line with international practices.
Upgrade to Code Provisions (“CP”) the recommendations in relation to the annual review and disclosures in the Corporate Governance Report
Supporters recognized that the proposed upgrade would provide more guidance to issuers on the particular matters on which they should focus during the review and that it would facilitate comparability across issuers. The Exchange considered there is substantial support for the upgrade and adopted the amendment accordingly.
Upgrade to a CP the recommendation that issuers should have an internal audit function, and those without to review the need for one on an annual basis
Many supporters and the Exchange recognized the importance of an internal audit function in ensuring the effectiveness of an issuer’s risk management and internal control systems. In addition, the supporters submitted that the upgrade aligns with global practices. In turn, the Exchange adopted the proposal to upgrade.
The Code has been amended and approved by the Board of the Exchange and the Securities and Futures Commission. It will become effective for accounting periods beginning on or after 1 January 2016. We agree with the consultation conclusion and are willing to assist the listing companies to enhance their corporate governance practice.
If there are any aspects which we may assist, please do not hesitate to contact our partner in charge Mr. Roy Lo at 3583 8048 (email@example.com) or our Risk Manager Ms. Gloria So at 3583 8517 (firstname.lastname@example.org).
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