HSI constituents outperform HSCEI entities on corporate governance changes

Financial services performs best, while other sectors need to improve

Hong Kong, 29 Sep 2016

- According to Cracking the Corporate Governance Code, a PwC study about the degree of implementation of corporate governance regulatory changes, Hang Seng Index (HSI) constituents appear to be better prepared than Hang Seng Chinese Enterprise Index (HSCEI) entities. In terms of sectors, the study found that financial services companies outperform real estate, retail and technology businesses.

The study, launched by PwC Hong Kong’s Risk Assurance division, covers 230 listed companies in the HSI and HSCEI, including financial services, real estate, retail and technology sectors. 69% of the listed companies analysed were early adopters of a disclosure requirement regarding the annual review of internal control (IC) and risk management (RM) systems. Specifically, 86% of HSI constituents analysed were early adopters, while 60% of HSCEI entities have made such disclosure. Industry wise, Financial Services and Real Estate firms were in a better position to disclose these reviews than Technology and Retail companies.

Separately, 45% of the companies in the study had disclosed the process they used to identify, evaluate and manage significant risks. HSI constituents again performed better on disclosing RM practices: 64% disclosed the process they used to identify, evaluate and manage significant risks, while only 23% of HSCEI entities made such disclosures. Financial services companies again led the field.

“One of the reasons that HSI constituents perform better is because substantial emphasis and resources are put into risk management and internal control areas to respond to market expectations and regulatory changes. The majority of HSI constituents have made an effort to increase their voluntary disclosure beyond the level of mere compliance. This greater transparency and the additional information disclosed helps investors to analyse the overall risk profiles of the companies and facilitates more informed investment decisions,” says PwC Hong Kong Risk Assurance Partner Kanus Yue.

Hong Kong Exchanges and Clearing Limited confirmed a series of changes to the Corporate Governance Code in December 2014 to focus on risk management and internal controls. The changes were aimed at giving greater emphasis to risk management; to further define the roles and responsibilities of the board and management; emphasise the board of directors’ ongoing responsibility to oversee risk management and internal control systems; etc. The Code amendments became effective for accounting periods beginning on or after 1 January 2016.

The study also found that a majority of companies analysed claimed to have an internal audit function, while only 20% of them disclosed that they had sufficient resources, qualifications and experienced internal audit staff. The result reflects that listed companies are not fully confident of the adequacy of their internal audit function. It also indicates that they should have a more robust system and proper allocation of resources to deal with corporate governance, in order to increase their competitiveness, improve investor relations, and protect shareholders.

PwC’s Hong Kong and China South Internal Audit Service Leader Cimi Leung says, “Management of listed companies should take this opportunity to examine their current risk management and internal control practices to not only ensure they comply with the heightened regulatory requirements, but also be able to stay sustainable in the market by enhancing their abilities to respond to risks and other business challenges. They should also review their internal audit function, particularly focusing on the adequacy of resources, staff qualifications and experience, and training programmes. With our substantial experience in helping companies navigate the new requirements of the Corporate Governance Code, we have seen how listed companies’ operations could be more nimble and responsive.”

It is believed that the shifting regulatory environment adds even greater complexity, because companies must not only spend time to understand new regulations, but also allocate resources to comply with regulatory changes.

“To conclude, new regulations are not just a box ticking activity but an ongoing process. They allow companies to unlock value in key areas that will enhance management accountability and improve overall performance. At the same time, they help companies to reduce costs and establish solid foundations for growth,” says Kanus Yue.

About the study

This study, ‘Cracking the Corporate Governance Code - How ready are Hong Kong listed companies in meeting new requirements?’ has two main goals. First, the report provides directors, executives and managers with a comprehensive analysis on how ready listed companies are responding to the new requirements of the revised Corporate Governance Code (Appendix 14 of the Main Board Listing Rules). The analysis includes companies from the broader Hang Seng Index, the Hang Seng China Enterprise Index, as well as across four industries (i.e. financial services, real estate, retail and technology), which provides a starting baseline of listed company adoption practices in the key areas of risk management and internal controls.

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