Following the previous practice, it marks the 10^th consecutive year that Grant Thornton Hong Kong issues the Corporate Governance Review. The 2021 Review (the “Review Report”) finds that 47% of the HSCI companies claimed that they had fully complied with the code provisions of the Corporate Governance Code (the “CG Code”) issued by Hong Kong Exchanges and Clearing Limited (“HKEx”), the same as 2019. For the HSCI companies that did not comply with the CG Code, almost all of them provided explanation for the non-compliance. The common areas of non-compliance were similar to that of last year, including the separation of roles of chairman and chief executive and the nomination committee, attendance of chairman, non-executive directors (“NEDs”) or independent non-executive directors (“INEDs”) at annual general meetings, and the re-election issues of NEDs.
 
Under the revised Environment, Social and Governance (“ESG”) Reporting Guide and related Listing Rules effective from financial years commencing on or after 1 July 2020, companies will be required to enhance the quality of their ESG reports by adopting a number of mandatory disclosure requirements. Grant Thornton’s study shows that the trend of early adoption of measures to meet the new disclosure requirements by listed companies is steadily growing. 58% of HSCI companies described the impact of significant climate-related issues, compared with 46% in 2019. 55% of them also disclosed the actions taken to manage climate-related issues.
 
Eugene Ha, Deputy Managing Partner of Grant Thornton Hong Kong commented, “Sustainability, ESG and climate change related issues will be the new norm in the foreseeable future.  It will change the way that businesses operate significantly. Not only will we see more regulations for ESG governance, more emphasis will also be placed on business continuity plan and risk management given the growing uncertainties amidst the COVID-19 pandemic. All these go hand in hand with board effectiveness in corporate governance to create higher business value. It is pressing for companies to get themselves ready for the new era.”
 
From an industry perspective, disclosure rates of the impact of significant climate-related issues of the companies in materials (83%) and telecommunications (80%) industries have shown significant improvement with an increase of 50 percentage points and 30 percentage points respectively compared to 2019. These two industries are exposed to certain climate change risks, for example, the increased occurrence of extreme weather events might interrupt materials supply and manufacturing operations of the materials companies; telecommunications companies are subject to infrastructure vulnerabilities such as damage to the telecommunication assets caused by catastrophic weather conditions. The disclosure rate of financials companies also significantly increased by 23 percentage points to 61% in 2020, which could be a result from the development of green and sustainable finance initiatives from parties like the SFC in Hong Kong over the past years. On the other hand, healthcare and information technology companies had the lowest disclosure rates with 33% and 35% respectively.
 
However, a majority of the HSCI companies still did not meet the new ESG reporting requirements in 2020. The Review Report reveals that 39% of the HSCI companies included the board statements in their ESG reports, only 20% of them disclosed the targets regarding emission, energy use, water efficiency and waste reduction and only 27% upgraded the disclosure obligation of all social KPIs to “comply or explain”.
 
Grant Thornton Hong Kong studied the 2020 annual reports of 490 HSCI companies and 2020 ESG reports of 453 HSCI companies to assess the level of early adoption with respect to the new ESG reporting requirements and examine how well they have done in relation to the establishment of ESG governance framework, which is an important step towards successful implementation of sustainability strategies.
 

Risk Management is Increasingly Important for Companies to Sustain under Adverse Economic Environment that is Full of Uncertainties

The Review Report reveals that 95% of the HSCI companies mentioned the impacts of the COVID-19 pandemic, which is constant as compared with the figures in 2019. This shows that the impact of the pandemic in 2020 remained to be a huge threat to the operations of the companies. 91% of the companies that mentioned the impact also discussed the mitigation measure that they implemented towards COVID-19, which is a significant increase from 54% in 2019. This indicated that more companies were able to react and implement measures to respond to the drastic changes in the business environment. The measures that the companies deployed largely remained in place as the pandemic has progressed, which include deploying epidemic prevention measures, responding to government policies, changing investment and financial decision, offering support to customers and employees, monitoring risks and exploring potential business opportunities.
 
In 2020, 75% of the HSCI companies disclosed their principal risks, representing a slight increase from 74% in 2019. The common principal risks faced by the companies were market risks (87%), financial risks (68%), and operational risks (76%). The percentage of companies disclosing disease risk as one of their principal risks increased slightly from 27% in 2019 to 29% in 2020. As for risk mitigation measures, 64% of HSCI companies that disclosed their principal risks have also provided mitigation measures for addressing the principal risks in their annual reports, representing a slight increase in comparison to 61% in 2019.
 
Mian Wong, Advisory Director of Grant Thornton Hong Kong commented, “The global economy continues to be volatile as the profound consequences of COVID-19 keep unfolding in various aspects. In this regard, risk management remains essential for corporates to reduce probability that their objectives will be jeopardised by unforeseen events.”

Gender Diversity is Instrumental in Enhancing Board Effectiveness

Board diversity is an important element to facilitate the board’s effectiveness as it can provide different thinking and expertise. Nevertheless, little improvement has been seen in board diversity over the past years and boardrooms of Hong Kong listed companies are still male dominated. In terms of gender diversity, women constituted 13% of the boardrooms in the HSCI companies, compared with 12% in 2019. Furthermore, 30% of HSCI companies have a single-gender board in 2020, while 46% of the non-single gender boards have only one female board director.
 
Mian Wong said, “We are of the view that by merely having one female director in the board is not a true representation of gender diversity, instead it merely serves the purpose of including directors of both genders. Diverse voices from opposite genders may not be welcomed in the board and will ultimately become a meaningless representation. The percentage of female directors on the boards of Hong Kong-listed companies
remains low compared to other countries, such as Norway, which has regulations to require at least 40% female board representation.”  
 
Besides, it is noted that equity-based remunerations with performance related elements to INEDs is quite common in the current practice. 47% of the HSCI companies offered equity-based remuneration with performance-related elements to INEDs in 2020, which is not on the same page with HKEx’s proposal in its consultation paper of not granting equity-based remuneration with performance-related elements to INEDs due to concerns of bias in INED’s decision making and compromising their objectivity and independence.

Growing Sustainability Awareness to Stimulate Technology Advancement

Technological advancements remained to be a significant trend for companies. In 2020, 65% of the HSCI companies disclosed that they had improved their technologies, where the disclosure slightly reduced from 67% in 2019. Amongst the 9 technology megatrends, namely Mobile Technology, Blockchain, Cloud Computing, AI, IoT, RPA, Big Data, VR/AR and 3D printing, Big Data and Cloud Computing were the most commonly applied and discussed topics.
 
The continuous improvements of these technologies have also increased the challenges for companies to keep their intellectual property safe from cyber-attacks and data breaches. In 2020, 46% of the companies disclosed that they had implemented measures to improve their IT security, which is a slight drop from 54% in 2019.
 
Eugene Ha concluded, “In the post-pandemic era, businesses are more encouraged than ever to dedicate more resources to accelerate digital transformation and enhance business operations in order to gain a strategic competitive advantage in the rapidly evolving market. The growing demand for clean and affordable energy globally will also stimulate technology advancement in the coming years as the world adopts a new norm of sustainability to make a better future. Meanwhile, we strongly recommend that listed companies should continuously invest in adequate security resources and input proper control measures to keep abreast of ever-changing cybersecurity threats.”