97% of HSCI Companies had ESG disclosure prior to Key Performance Indicators Upgrade

Grant Thornton Hong Kong calls on regulator and companies to modernize ESG policy

Grant Thornton Hong Kong Corporate Governance Review 2017 (the “Review Report”) finds that 46% (2015: 41%) of the Hang Seng Composite Index (“HSCI”) companies claimed full compliance with the Corporate Governance Code (the “Code”) issued by Hong Kong Exchanges and Clearing Limited (“HKEx”), representing an increase of five percentage points from 2016. This reflects that listed companies are improving their disclosures on information regarding Code compliance, internal control and risk management. The Review Report also shows that around 97% of HSCI companies discussed or mentioned environmental, social and governance (“ESG”) issues either in their annual reports or in separate ESG reports, representing a considerable increase from the 80% report rate in Grant Thornton’s review in 2016.

Grant Thornton Hong Kong compared the 2016 annual reports of 472 HSCI companies and found that 87% of HSCI companies integrated the disclosure of risk management and internal control in their corporate governance reports.  While details of risk management system disclosed in the Corporate Governance reports are very limited, it was noted that only 30% of HSCI companies disclosed the name of approach / framework adopted for risk management system.  The upraised focus on risk governance requires companies to adopt a structured approach and process to risk management to mitigate risk that can threaten the achievement of objectives. However, the Review Report shows that 56% of the HSCI companies did not disclose the process used to identify, evaluate and manage significant risks. The disclosure rates of Hang Seng Index (HSI) and Hang Seng China Enterprises Index (HSCEI) companies were standing at 58% and 48% respectively, which still have much room for improvement.

Meanwhile, 70% of the HSCI companies had separated the roles of chairman and chief executive and had theroles performed by different individuals. 96% of the HSCI companies appointed board of directors of ages 40 or above, and 52% of the HSCI companies with female board members representation only accounted for up to 10%.

Commenting on the improvement of the listed companies’ disclosures on their internal control, Eugene Ha, deputy managing partner of Grant Thornton Hong Kong said, “According to the Review Report, around 97% of the listed companies had discussed or mentioned ESG in their 2016 annual reports, representing a rather high participation benchmark. We are eager to see how the participation would turn out after the upgrade of the Key Performance Indicators (KPIs) to “comply or explain” for accounting periods starting from 1 January 2017. In our opinion, regulators and companies are recommended to regularly review and update existing ESG policy to reflect an up-to-date financial landscape.”

ESG KPIs to be improved and enhanced

As a result of revisions made to the Review of the Environmental, Social and Governance Reporting Guide, listed companies are required to measure ESG effectiveness by KPIs for accounting ?periods starting from 1 January 2017, covering environmental issues (e.g.emissions and use of resources) and social factors (e.g. employment, staff training and labour standards).

Mian Wong, advisory director of Grant Thornton Hong Kong commented, “We recommend the promotion of a betterdisclosure and the adoption of best practices, so as to ensure long-term healthy development and sustainability of the companies, as well as to protect the overall interests of shareholders.

The increasing significance of cyber security or IT security

The issue of cyber security or ITsecurity is vitally important to companies amid the rapid advancement of technology, the Review Report shows that 18% of the HSCI companies mentioned cyber security or IT security in their annual reports, compared with the 8% ofthe HSCI companies which did so in their 2015 annual reports. Significant increaseof the concern in cyber security was reported by 52% of HSI companies in 2016,a major increase compared to 34% in 2015.

Mian Wong said, “With the growing impact of information technology on enterprises, we encourage regulators to promote more awareness on the threats of cyber security or IT security. On the otherhand, listed companies are recommended to enhance the transparency of theirdisclosures on how they manage information systems and IT risks to preserve investor confidence.

Little age diversity within the boardrooms

While diversity continues to be atopical discussion for corporate success, there is little age diversity within the boardrooms of HSCI and HSCEI companies. The Review Report shows that the age of the board of directors was mostly at the range of 51-60 and it is very rare to see them become board of directorsat age below 40. 54% of HSCEI companies had board members with an age between 51 and 60, compared with 40% of HSCI companies. Only 1% of HSCEI companies hadboard members aged 40 or below, compared with 4% of HSCI companies.

Eugene Ha concluded, “The companies should bear in mind of the business succession plan to be carried outas early as the growing stage of the business. It would be beneficial for the companies to early identify the key roles for succession from their staff andprovide relevant and adequate training in order to prepare them for the role of the board.

Please visit our Corporate Governor page for details of the report.