Issue 6 Volume 16 June 2020 DRIVING BUSINESS SUCCESS TELLING A BETTER STORY PLUS: CORPORATE GOVERNANCE Exploring the best practices of public sector entities CHINA TAX A discussion on navigating China’s tax system ACCOUNTANT PLUS Simon Lee, Senior Lecturer at the Chinese University of Hong Kong Charles Tilley, Chief Executive Officer at the International Integrated Reporting Council, is focused on intensifing multicapital reporting HK$70.00
PRESIDENT’S MESSAGE APLUS June 2020 1 When thinking about what to include in my message this month, paying tribute to Past President Edward Chow, JP was the first thing on my mind. Ever since his sudden passing away on 1 June, every time I entered into the Institute’s Wu Chung House office premises I thought about Edward, who had the foresight and was instrumental in its acquisition during his presidency in 2005. This is his largest legacy to our members. Those members who regularly attend the Institute’s annual general meetings will understand and share my feeling that these meetings will lose a big attraction without Edward’s presence and his questions. Edward’s invaluable contributions to the accounting profession will never be forgotten and he will be deeply missed by all of us. At the end of my message last month I mentioned that we at the Institute endeavour to support our members’ preparation for the new normal of a weak economy and restrictions on travel. I am pleased to announce that the Council has determined to introduce a range of oneoff concessions for the 2021 membership renewal, which covers all existing members, firms, corporate practices and students. The concessions, an annual fee waiver to a maximum of one partner per firm or one director per corporate practice, waiving the capital levy for all members and students, a reduction of student annual fee, and offering more free or subsidized continuing professional development events in the year ahead, are other ways that the Institute will help its members during the economic recovery. I had the honour of being interviewed by Recruit and Metro Radio this month. During my interview with Recruit, I spoke about how becoming an accountant gave me the skills I needed to succeed and reach my goals. I hope my experiences will be read by their young readers and help to inspire them to handle adversity they are facing as a consequence of the COVID-19 pandemic and Hong Kong’s challenging year in general. I also explained how the Qualification Programme (QP) had been upgraded, and that the new QP offers its students the training they needed for a successful career. In this age of Accounting Plus, integrity and professional ethics are among the most important qualities for a professional accountant to have. Accountants have to analyse data, and we cannot just listen to what people say. We are at our best when we are independent and critical, and when problems arise, cooperation is needed to find solutions together. These are the foundations we build successful careers upon as trusted advisors and financial leaders, and are also the foundations for how we build a successful society. On the Metro Radio show HK Cheer Up, I spoke about the resilience of our auditors, who were able to meet audit deadlines, even though many of them were not able to travel to undertake their audits. I reiterated how the Institute had been regularly liaising with the regulators, including the Securities and Futures Commission and the Stock Exchange of Hong Kong, to advocate the importance of f lexibility while dealing with the pandemic. During my interviews with both outlets, I spoke about how the COVID-19 pandemic has posed unprecedented challenges to businesses, and forced all of us – and particularly the accounting practices – to move out of our own comfort zones and review our operation routines. I believe that this recent experience can help the profession to remodel and fine-tune the entire modes of operation when the pandemic is over. This will help us to better achieve work-life balance and increase the attractiveness of the profession to future generations. With that goal in mind, I am pleased that the Institute has released its Strategic Plan 2020-2022. Titled Building Trust in Our Profession, the plan sets out strategic objectives for the Institute that will help to prepare the profession for the challenges ahead. The plan includes key action items that the Institute will develop and implement over the next three years. I urge members to read the plan, to understand how the Institute will develop. Registration for the government’s HK$10,000 Cash Payout Scheme has started, and I understand that the first tranche of payments for electronic registrations submitted through banks by 30 June will be deposited from around 8 July. I appeal to you all to join together to boost local consumption. This could help improve our city’s retail and restaurant businesses, the income of smaller enterprises and employees, and save our ailing economy. “ In this age of Accounting Plus, integrity and professional ethics are among the most important qualities for a professional accountant to have.” Johnson Kong President Dear members,
CONTENTS Issue 6 Volume 16 June 2020 NEWS 01 President’s message 04 Institute news 06 Business news FEATURES 08 Leading by example A look at how the Best Corporate Governance Awards have led to better disclosures by public sector organizations 14 Second opinions What lessons should be taken by the workplace from the coronavirus pandemic? 16 Leadership: Charles Tilley The Chief Executive Officer of the IIRC on its revision of the International <IR> Framework 23 Meet the speaker What to expect from an e-learning webinar on the Annual Taxation Conference 2020 24 Navigating China’s tax system Experts discuss tax strategies at the China Taxation Conference 30 Accountant Plus: Simon Lee A Senior Lecturer at the Chinese University of Hong Kong on how he teaches accounting, and how to carefully manage one’s finances in tough times 36 How to Agnes Lo, a Gallup Strengths Coach and corporate trainer, on how to build a more flexible work culture 37 Thought leadership: How CPAs reacted to the COVID-19 coronavirus outbreak Highlights from the Institute’s COVID-19 survey report SOURCE 38 Risk-based supervision of accounting professionals concerning AML/CTF compliance A look at the developments in the Institute’s risk-based AML/ CTF supervisory plan 40 Taxation of charities A look at the IRD’s revised tax guide for charitable institutions 08 24 Navigating China’s tax system Leading by example Celebrating the 20th anniversary of the Institute’s Best Corporate Governance Awards, we look into why public sector organizations should aim to maintain transparency in their disclosures, and why values are crucial in upholding good corporate governance
DRIVING BUSINESS SUCCESS About our name A Plus stands for Accounting Plus. It represents a profession that is rich in career options, stays relevant amid rapid changes, and adds value to business. This magazine strives to present the global mindset and varied expertise of Institute members – Accountants Plus. Editor Gerry Ho Email: gerry.ho@mandl.asia Copy Editor Jemelyn Yadao Junior Copy Editor Jeremy Chan Contributors Nicky Burridge, Eric Chiang and Paul Smith Registered Office 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia President Johnson Kong Vice Presidents LamChi Yuen, Nelson, FongWan Huen, Loretta Chief Executive and Registrar Margaret W. S. Chan Head of Corporate Communications and Member Services Rachel So Editorial Manager Paul Smith Editorial Coordinator Maggie Tam Office Address 37/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Tel: (852) 2287-7228 Fax: (852) 2865-6603 Member and Student Services Counter 27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Website: www.hkicpa.org.hk Email: hkicpa@hkicpa.org.hk A Plus is the official magazine of the Hong Kong Institute of Certified Public Accountants. The Institute retains copyright in all material published in the magazine. No part of this magazine may be reproduced without the permission of the Institute. The views expressed in the magazine are not necessarily shared by the Institute or the publisher. The Institute, the publisher and authors accept no responsibilities for loss resulting from any person acting, or refraining from acting, because of views expressed or advertisements appearing in the magazine. ©Hong Kong Institute of Certified Public Accountants June 2020. Print run: 7,310 copies The digital version is distributed to all 46,002 members, 19,204 students of the Institute and 2,358 business stakeholders every month. 43 How to maintain an effective risk management system amid the COVID-19 crisis A look at how enterprises can adopt contingency plans to tackle the coronavirus 44 Technical news WORK-LIFE BALANCE 46 Cooked to perfection Three CPA home cooks share their secrets to cooking a delicious meal 52 Young member of the month Hyde Tse, Assistant Finance Manager at A.S. Watson Group 54 Leisure Plus Spotlight on dream holidays; what members are currently reading and listening to 56 Let’s get fiscal Don't ever leave your money lying around, says Nury Vittachi 30Always thinking ahead Simon Lee, Senior Lecturer and Codirector, International Business and Chinese Enterprise Programme at the Chinese University of Hong Kong, on nurturing the future of the profession and the importance of staying prudent 54 46 Cooked to perfection Leisure Plus
NEWS The sudden passing of Edward Chow, JP, Past President of the Institute, was a shock to the community. Whether as President of the Institute, Council member, Chairman of the Professional Accountants in Business (PAIB) Committee and the Corporate Governance Committee, Deputy Chair of the Ethics Committee and the Mainland Affairs Committee, or serving on the International Federation of Accountants’ PAIB Committee, in everything Edward did he brought his formidable energy and wisdom in realizing his vision of promoting the interests of PAIBs and corporate governance. Edward was first elected to Council in 1997, and served as vice-president in 2002, and 2004, before becoming president in 2005. He had the foresight and was instrumental in the acquisition of the Institute’s Wu Chung House office premises. He also spearheaded the Fifth Long Range Plan Task Force and played a leading role in setting up of the Best Corporate Governance Disclosure Awards, which went on to become the Best Corporate Governance Awards. Strategic Plan 2020-2022 The Institute recently released its Strategic Plan 2020-2022. Titled Building Trust in Our Profession, the plan sets out its vision, strategic objectives and related initiatives. The plan is a result of collaborative efforts from Council and committee members, management and many members who have provided their views. The plan can be found on the Institute’s website. COVID-19 survey report The Institute conducted a survey of executives and senior- and middlemanagement level members in business and practice, about the impact on their organizations of the COVID-19 pandemic. The survey investigates how the pandemic posed challenges to the accounting profession, how it changed how organizations operate, and the impact on the finance function. The respondents also discussed the support they need from the Institute. Read more about the survey in this month’s thought leadership on page 37. Members-Help-Members sharing session At the first Members-Help-Members sharing session on 10 July, the Institute’s Small and Medium Practices Committee’s Working Group on Technical Issues will provide their insights and comments to the technical enquiries received from small and medium practices. Join them to hear on the topics including accounting and financial reporting, auditing and assurance, ethics and regulation, taxation and more. ICAEW membership for younger members offer The Institute of Chartered Accountants in England and Wales (ICAEW) is inviting Institute members who are graduates of the Qualification Programme and who joined the Institute after 2011 to apply for ICAEWmembership at a special rate. Find out more at icaew.com/8reasons. Council meeting minutes The abridged minutes from the May Council meeting are now available for members to read. They can be found in the “Members’ area of the Institute’s website. Institute news Business news Remembering Edward Chow, JP Resolution by Agreement Li Wing Sum, Steven, CPA (practising), Tong Yat Hung, CPA (practising) and Cheng & Cheng Limited Complaint: Failure or neglect by Li and Cheng & Cheng to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Hong Kong Standards on Auditing, HKSA 300 Planning an Audit of Financial Statements, HKSA 330 The Auditor’s Responses to Assessed Risks, HKSA 500 Audit Evidence, HKSA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, HKSA 620 Using the Work of an Auditor’s Expert and HKSA 700 Forming an Opinion and Reporting on Financial Statements. Failure or neglect by Tong to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements. Cheng & Cheng was the auditor which expressed an unmodified auditor’s opinion on the consolidated financial statements of Natural Dairy (NZ) Holdings Limited, a Hong Kong-listed company and its subsidiaries (collectively, group) for the year ended 31 May 2012. 4 June 2020
APLUS Li was the engagement director and Tong was the engagement quality control reviewer. In 2010, the company acquired an equity interest in a foreign company which held several dairy farms in New Zealand. Consideration for the investment was settled with convertible notes issued by the company. Subsequently, the local authority in New Zealand refused the company’s application for retrospective consent for the acquisition. Following this, in the 2011/12 fiscal year, the group changed its business model to operating a dairy business on leased farmlands, amending the terms of the consideration, and appointing a manager for the dairy operations. In their audit, the respondents failed to perform sufficient appropriate procedures to address the risks of material misstatement associated with the investment, and assess the impact of the changed business model on the ownership and valuation of the investment. In addition, the respondents failed to obtain adequate evidence of the valuations in relation to the investment and convertible notes issued pursuant to the amended terms of acquisition, and the appropriate accounting treatment of securities issued in consideration for the manager’s services. Further, there were deficiencies in the procedures carried out by the respondents to verify the group’s sales revenue and assess possible impairment of the company’s interests in subsidiaries. Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint: 1. The respondents acknowledge the facts of the case and their non-compliance with the relevant professional standards; 2. They be reprimanded; and 3. Each of the respondents pay an administrative penalty of HK$50,000 and they jointly pay costs of the Institute and the Financial Reporting Council (FRC) totalling HK$53,078. Disciplinary finding Yuen Suk Ching, CPA and Leung Tai Keung, CPA Complaint: Failure or neglect by Yuen to observe, maintain or otherwise apply HKSA 200 Objective and General Principles Governing an Audit of Financial Statements, HKSA 230 Audit Documentation, HKSA 240 The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial Statements, HKSA 300 Planning an Audit of Financial Statements, HKSA 315 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, HKSA 500 Audit Evidence, HKSA 520 Analytical Procedures, HKSA 550 Related Parties and HKSA 700 The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements. Failure or neglect by Leung to observe, maintain or otherwise apply HKSA 220 Quality Control for Audits of Historical Financial Information and HKSA 230. Further, Yuen and Leung were guilty of professional misconduct. Yuen and Leung were partners of HLM & Co., a firm which is now de-registered. The firm expressed unmodified auditor’s opinions on the consolidated financial statements of Blue Spa Holdings Limited (currently known as SuperRobotics Limited), a Hong Kong-listed company, and its subsidiaries (collectively, group) for the years ended 30 June 2008 to 2010. Yuen was the engagement partner and Leung was the engagement quality control reviewer of the audits. The Institute received a referral from the FRC about audit irregularities. There were numerous unusual factors which indicated a heightened risk of irregularity. The risk indicators included the following: • The group had significant amounts of prepayments, and these had increased significantly over the three years. Some amounts were prepaid long before the goods bought were delivered; • Prepayments to the suppliers were made through a major customer by cash cheques; • The group’s revenue relied heavily on sales to the major customer, and some receivables were long outstanding; • Receivables from the major customer were settled in cash received from certain former directors of the company and could not match with individual sales invoices; and • Control over revenue recognition depended on only a few key management personnel. The respondents failed to conduct their audits with an attitude of professional scepticism. This led to their failure to adequately plan the audits and design appropriate procedures to address heightened risks, including the risk of material misstatement due to fraud in revenue recognition. In turn, the respondents failed to perform and document sufficient, appropriate audit procedures on the nature of the prepayments, identities of the major customer and suppliers, existence of sales recorded and recoverability of receivables. The respondents also failed to update the audit strategy and revise the audit plan upon having significant concerns about being unable to confirm that prepayments had been received by the suppliers or purchased goods had been received by the company. Further, the respondents failed to appropriately evaluate whether the evidence obtained on the prepayments, sales and receivables would support their unmodified opinion on the financial statements. Decisions and reasons: The practising certificate of Yuen was cancelled, with no issuance of practising certificate to her for 36 months, effective 4 June 2020. In addition, Leung was reprimanded and ordered to pay a penalty of HK$100,000. Further, Yuen and Leung were ordered to jointly pay HK$350,000 towards costs of the Institute and the FRC. When making its decision, the Disciplinary Committee took into account the serious deficiencies in the audit work performed and that the respondents’ disciplinary records showed they had persistently failed to comply with professional standards issued by the Institute. Details of the Resolution by Agreement and disciplinary finding are available at the Institute’s website. June 2020 5
NEWS Business PWC AUSTRALIA SLASHES 400 JOBS PwC in Australia confirmed that it is cutting 400 jobs from its consulting and advisory business as the firm seeks to slash costs amid a revenue downturn brought about by the pandemic. The news, revealed on 17 June by The Australian Financial Review, came after PwC Australia’s Chief Executive Officer Tom Seymour informed PwC of the changes in a firm-wide video call. The layoffs are contentious, as it follows the firm’s “reduced working week programme” earlier announced in April, which forced employees to cut back their working hours as a way to protect jobs. However, declining revenues from its consulting services as a result of clients delaying or cancelling projects amid the pandemic has led the firm to its decision. “We do not underestimate the impact this has on our people and we will work through this process as thoroughly and quickly as possible to bring our people certainty,” said Seymour in an interview. HEAD OF SFC TO STAY ON FOR THREE MORE YEARS The Chief Executive of the Securities and Futures Commission (SFC), Ashley Alder, has been reappointed for a third term. Alder, who was planning to step down from his role as head of the regulator in September, will remain at the SFC for an additional three years. In a statement issued in May, Alder said he is eager to guide the city’s financial system through the coronavirus pandemic and ensure it “functions reliably and with integrity throughout a period of exceptional stress.” His last-minute reappointment came as a surprise to rank-and-file and senior officials at the SFC as the commission had already begun searching for his successor. Many staff members and investors expected Alder’s long-time deputy and Executive Director of the SFC, Julia Leung, to take his place. There were 2,079 petitions for bankruptcy in Hong Kong in May, according to figures released by the Official Receiver’s Office on 19 June. The number of petitions is the highest since 2003 as the city’s businesses continue to face the impact of the COVID-19 pandemic and the damage caused by the social unrest of 2019. The number of bankruptcy filings for January to May stood at 3,605, 12.4 percent higher compared to the first five months of 2019, while the number of compulsory winding-up filings was 68 in May, the highest since 2009. The city’s economy fell by 8.9 percent in the first quarter compared to the same period last year, and posted the third straight quarter of year-on-year contractions. BANKRUPTCY FILINGS IN HONG KONG HIT 17-YEAR HIGH Hygeia Healthcare, Mainland China’s largest oncology healthcare group, could raise as much as HK$2.2 billion after obtaining commitments from nine cornerstone investors. The Shanghai-based provider of radiotherapy services is expected to raise that amount by selling 120 million shares at HK$17 to HK$18.50 each. According to the group’s listing prospectus issued on 16 June, the nine investors have offered to subscribe for HK$1.1 billion worth of stock. Based on interest shown by other institutional investors, the international placement tranche is expected to be oversubscribed by several times. The group’s decision to list comes amid more listings byMainland Chinese healthcare companies in Hong Kong. Kangji Medical, aMainland Chinese provider of minimally invasive surgical instruments, attracted upwards of HK$3.1 billion before its listing on the Hong Kong stock exchange this month. Hong Kong’s office vacancy rate has soared to 8.5 percent, its highest in more than a decade, as more businesses impacted by the COVID-19 pandemic vacate premises. Over one million square feet of office space has been left vacant in Central’s business district since May, with more companies expected to bail on their leases, according to market data provider Savvi. Office landlords are also facing more pressure to cut rents to retain tenants. However, cheaper rents may not be enough to lure tenants, reported the South China Morning Post, as 2019’s social unrest, this year’s pandemic, coupled with the United States-China trade war, have all added to uncertainty for the city. 8.5% HONG KONG OFFICE VACANCY RATE HITS HYGEIA HEALTHCARE TO RAISE UPWARDS OF HK$2 BILLION AFTER LISTING 6 June 2020
APLUS SoftBank Group Corp is launching a US$100 million fund to invest in companies led by founders and entrepreneurs of colour, according to an internal memo fromSoftBank’s Chief Operating Officer Marcelo Claure. “Only by acknowledging and acting on racism – even the most subtle forms of it – can we hope to eradicate it. Otherwise, it thrives in silence,” Claure wrote in the memo. Announced on 3 June, the fund is part of the Japanese multinational conglomerate’s plans to improve diversity and will invest in entrepreneurs “from communities that face systemic disadvantages in building that scaling their businesses.” The announcement came amid protests that have taken place across the U.S. and cities around the world, triggered by the death of George Floyd, an AfricanAmerican killed during his arrest. SOFTBANK ANNOUNCES US$100 MILLION FUND FOR PEOPLE OF COLOUR WIRECARD DISCOVERS US$2 BILLION MISSING Wirecard AG has been left fighting for survival after revealing that US$2 billion it had reported as assets does not exist, deepening an accounting scandal that saw its market value decrease by around 85 percent. The German payment giant, which is headquartered in Munich, said on 18 June that its auditor could not find the cash balances, which represent around a quarter of its balance sheet, leading the company to postpone its annual results. The company’s chief executive officer Markus Braun, who has since stepped down, was subsequently arrested on 23 June. Braun has been replaced by InterimCEO James Freis, who is now tasked with allaying investor fears. The company said it is in “constructive discussions” with banks on continuing credit lines and is “assessing options for a sustainable financing strategy for the company.” MARINA BAY SANDS IN MONEY LAUNDERING PROBE Marina Bay Sands casino, Singapore’s largest casino, is being investigated by the U.S. Department of Justice over claims that anti-money laundering regulations were breached in the handling of the accounts of top gamblers. The justice department issued a grand jury subpoena to a former compliance chief of Marina Bay Sands in January, seeking an interview or documents on “money laundering facilitation.” The subpoena is also seeking to identify any abuse of internal financial controls and whether there was any retaliation against whistleblowers. It has also requested information on another former casino employee who, according to people familiar with the matter, carried out fund transfers to high rollers. Chief financial officers in the U.S. are most worried about the possibility of the impact brought on by a second wave of COVID-19 infections on their business. This is according to PwC’s sixth COVID-19 CFOPulse Survey, released on 15 June. The study surveyed 330 CFOs and finance leaders across the U.S. this month and found that 59 percent are most anxious about a second round of coronavirus infections. Despite 54 percent fearing the impact of an economic downturn and expecting revenues to further decrease, their outlook has slightly improved, as 13 percent anticipate a revenue decrease of 25 percent or higher, compared with 20 percent of CFOs in the last survey. Almost all CFOs surveyed expect their businesses to improve within the next year, with 67 percent indicating a return to “business as usual” or revenues prior to COVID-19 in less than six months. U.S. CFOS MOST CONCERNED ABOUT SECOND WAVE OF COVID-19 The Hong Kong government announced on 9 June its plans to bail out troubled flag carrier Cathay Pacific Airways with HK$39 billion in a bid to save the city’s aviation industry, which has been battered by the coronavirus pandemic. In exchange, the government will take a 6.08 percent stake in the airline, which dominates more than half of passenger traffic and carries almost 40 percent of cargo in Hong Kong. The move aims to strengthen the city’s long-term economic development, according to Financial Secretary Paul Chan, who views the airline’s potential collapse as a fundamental threat to its aviation sector. “If this challenge is not properly addressed, it would harm Hong Kong’s international aviation hub status, and adversely impact other economic activities, to the detriment of the overall interest of Hong Kong,” Chan said. HONG KONG GOVERNMENT TO BAIL OUT CATHAY PACIFIC WITH HK$39 BILLION Deloitte in Hong Kong has resigned as auditor for 50 Hong Kong-listed companies this year to focus on higher-growth companies in Mainland China. The resignations will reduce the number of listed companies Deloitte audits from 350 to 300. The change, however, is unlikely to have an impact on the firm’s revenue, despite a drop in its audit income from 60 percent to 35 percent compared to a decade ago as a result of its shift in focus to advisory services. The move will see the firm hire 2,300 more people in Greater China, including 300 in Hong Kong, boosting its headcount to 20,000 in Hong Kong and Mainland China. Dennis Chow, China Chairman of Deloitte, said in an interview that the change is part of “client portfolio rebalancing” and the need to “focus on serving bigger customers who are market leaders.” The move will see the firm focus on drug makers, online shopping companies and delivery companies. DELOITTE RESIGNS AS AUDITOR FOR 50 LISTED COMPANIES June 2020 7
CORPORATE GOVERNANCE BCGA at 20 Organizations with government links may not face the same corporate governance requirements as their listed counterparts, but the public’s expectations of them are often higher. In the second of a series celebrating the Best Corporate Governance Awards’ 20th anniversary, Nicky Burridge finds out why there is a need for public sector organizations to be more transparent, and how they have a role to play in setting best practices I t is crucial for public sector companies to have high corporate governance standards because of their links to the government as well as their public role, according to Ruth Kung, Chief Executive of the Hong Kong Securities and Investment Institute, a member of the Hong Kong Institute of CPAs, and a long-time member of the judging panel for the Institute’s Best Corporate Governance Awards. “Because of where their funding comes from, people expect greater transparency and accountability compared with other companies,” she says. “Listed companies have listing rules that govern them, but public sector organizations are beyond the regulatory requirements, so good corporate governance is important to gain people’s trust.” The more transparent public entities are, the better the public can understand what is happening within them, Kung adds. As a result, if they run into difficulties, the public would see that the problem may not have been caused by an issue in governance, but rather by circumstances that were beyond their control. She also thinks larger and well-resourced public sector organizations have a role to play in increasing corporate governance standards in Hong Kong. “They tend to have high profiles. They are in the news a lot and get more public attention. They should lead by example,” she says. One thing that has struck Kung in the years that she has been a judge is the increase in the number of companies and organizations getting through to the later stages of the awards. She has also seen a greater variety, with entrants no longer limited to big names, but increasingly including smaller and less well-known organizations. Another change has been the decision for judges to not only look at entrants’ annual reports and sustainability reports, but also to consider news articles, enforcement cases, websites and even social media. “We try to look at what is actually happening, not just what is on paper, to see how good their corporate governance is,” she says. For Kung, a key aspect of good corporate governance is transparency, and she is pleased to see a trend in organizations increasing the voluntary disclosures they make. She adds that many are also making their disclosures more accessible by changing the way they present the information, with some even producing a shorter and easier to read version of their annual report. “Most annual reports have a lot of numbers, but now some organizations have changed their focus to be less financial and include more non-financial information. An annual report should be something people can understand and something they are interested in reading. Some annual reports are now much more user-friendly and easier to read, telling the story behind what they have done,” she says. Another area in which she thinks companies have improved in recent years is in their attitude to environmental, social and governance (ESG) issues. “I see more focus on ESG reporting, which may be due to the Stock Exchange of Hong Kong’s requirements or peer pressure.” THE BEST CORPORATE GOVERNANCE AWARDS AT 20: LEADING BY EXAMPLE 8 June 2020
APLUS Ruth Kung Tim Lui Alice Law Ricky Leung June 2020 9
CORPORATE GOVERNANCE BCGA at 20 Even so, Kung believes board diversity is one area that could be improved. “Good board diversity means different profiles in terms of, for example, age, gender, experience or nationality. It is important in both the private and public sectors as it can help to bring in new ideas and new perspectives, and to strengthen corporate governance.” Another area where improvements could be made is the disclosure of non-financial key performance indicators (KPIs) and targets. Companies and organizations should disclose whether they are achieving their KPIs, and their progress towards targets, including explanations, as well as any remedial measures, where they have fallen short. Kung thinks the COVID-19 pandemic has been a good test for companies’ corporate governance, pointing out that companies with high standards in this area tend to be agile and better able to adapt. “COVID-19 has been a very good learning exercise for everyone. It is like a report card on how good organizations’ risk management is and how adaptable they are to challenges without compromising standards,” she says. Managing risks Tim Lui, Chairman of the Securities and Futures Commission (SFC), and a Past President of the Institute, also thinks exceptional times, such as the current COVID-19 situation, highlight why good corporate governance is so important for all organizations. “Companies that have good corporate governance frameworks and practices in place are in a better position to manage the operational risks arising from unforeseeable disruptions, such as the COVID-19 pandemic,” he says. The SFC was given a Special Mention in the Public Sector/Notfor-profit (Large) Category last year, and one of its main objectives as a regulator is to ensure that Hong Kong’s international financial market functions efficiently during times of extreme stress. “Making sure that companies practice effective corporate governance is a big part of what we do to maintain the integrity of the market,” Lui says. In its work to promote good governance, the SFC puts a lot of emphasis on corporate culture and management accountability. “We let senior management know that we expect them to set the right tone from the top,” Lui says. The importance of a strong and effective board of directors is also something it emphasizes in its regulation of listed companies. Lui says the SFC is pursuing more investigations into corporate misgovernance through its enforcement work compared to only a few years ago, while it has also stepped up its collaborations with its regulatory and law enforcement counterparts in other jurisdictions Ruth Kung is Chief Executive of the Hong Kong Securities and Investment Institute. “ I see more focus on ESG reporting, which may be due to the Stock Exchange of Hong Kong’s requirements or peer pressure.” “Making sure that companies practice effective corporate governance is a big part of what we do to maintain the integrity of the market.” 10 June 2020
APLUS to reflect the interconnectedness of global financial markets. He thinks good corporate governance is just as important for the public sector as it is for the corporate sector, although he adds that public sector organizations likely have to use different metrics to measure their performance due to their very different operations. “Statutory bodies, such as the SFC, have public service mandates, and we are accountable to the public. This means we have to abide by the highest standards of transparency and accountability, and I do believe that our main focus should be on meeting the expectations people have of us.” He adds that the SFC’s traditions of independence, impartiality and public accountability are the values that form the foundation of its work. Lui stresses that it is important for companies to make genuine efforts when it comes to disclosures and compliance, and they should not just adopt a box-ticking approach. He adds that while 20 years ago, companies were, for the most part, compliant, their disclosures were largely designed to meet the minimum statutory or regulatory requirements. But in the intervening years, the importance of corporate governance has been increasingly recognized, and this change has coincided with Hong Kong’s development into a leading international financial centre. The SFC has also introduced the Principles of Responsible Ownership, a guidance for investors on how they should fulfil their ownership responsibilities. “We hope this will promote more and better engagement with investee companies, and in turn, help to strengthen the corporate governance culture in Hong Kong.” Going forward, Lui expects investors to be increasingly looking at ESG factors when making decisions, and he warns that companies that do not pay attention to disclosures in this area risk being left behind. He thinks the Institute deserves high praise for its efforts to help raise corporate governance standards in Hong Kong, adding that the awards have had a significant impact on driving developments in the city’s governance regime. “The awards have not stood still and have changed with the times. New categories are created to keep up with market trends. This helps inspire companies and public sector organizations to aim higher and do more year after year.” Moving beyond compliance Alice Law, Deputy Chairman and Managing Director of the Mandatory Provident Fund Schemes Authority (MPFA), thinks having the right values in place is key to helping organizations move beyond compliance to implementing good governance. “Compliance is doing the minimum – it is ticking a box – but good governance is setting and truly embracing the values within an organization. We should make good decisions, not just for the sake of responding to internal audit exercises, but because it is in the public interest to do so,” she says. She stresses that it is also important to have visibility on how decisions that affect public interest were made. “It has to be clearly explained on paper, so that anyone can understand the basis for the decisions and see that they are well-thought out, well-reasoned and objective.” She adds that, unlike the private sector, public organizations are entrusted with a public mandate, so the organization must be supported by a good governance framework to ensure they can execute this mandate. “Public bodies are also entrusted with public money, so we have to be fully accountable and have transparency,” she says. Law says the MPFA, which was given a Special Mention in the Public Sector/Not-for-profit (Large) Tim Lui is Chairman of the Securities and Futures Commission. June 2020 11
CORPORATE GOVERNANCE BCGA at 20 Category of last year’s awards, has a clearly stated mandate and its structure is designed to uphold its mission and values. But she concedes that for many people, this is quite abstract, and they also need to be given the tools to fulfil the mandate, while the right culture must also be put in place. “You have to change the culture and the mindset of how people see things as a public officer. You can make many rules for your staff to comply with but if they are not truly embracing the values, it is only a paper exercise for them,” she says. “Clearly, in a setting like this, we are not driven by maximizing profits, so sometimes people lose a sense of why they are here, and it can be harder to measure performance.” Since it was first set up just over 20 years ago, the MPFA has been working continually to improve its governance standards. Its internal audit process was set up in 2002, with the audit committee put in place three years later, followed by internal training and the creation of codes of conduct for directors and staff. “It has been an evolving process and a learning process as well. It is not straightforward. We need to provide frequent communication and a lot of briefings to remind staff why they are here and what their mission is. We want them to see themselves as providing regulatory services in the provident fund space,” Law says. Alongside ensuring that the MPFA itself has good governance, the organization also promotes high governance standards across the MPF industry. It has done this in different phases since it was first launched, initially raising awareness and producing a set of governance principles as a benchmark, then encouraging MPF providers to carry out their own internal self-assessments, and finally provided training for directors to help them improve standards within their organizations. In 2018, it organized the trustees of MPF schemes to pledge a Governance Charter committing to putting scheme members’ interests first. It also holds regular roundtable events and seminars, as well as an annual symposium to promote high governance standards. Law says: “It is important that people share their experiences and are not shy about discussing their problems, so that we can all learn from each other. Enforcement can be a blunt tool, and it is also important to offer coaching and mentoring, share experiences and to collaborate as a partner.” She thinks the Institute’s awards are important for public organizations because they provide them with recognition that they are doing a good job. “For us, winning a governance award was recognition, not just of what our organization is doing itself, but also our work lifting governance standards and awareness across the industry. This is our biggest source of satisfaction.” Leading the way Public sector organizations should lead by example when it comes to sustainability, according to Ricky Leung, Executive Director, Engineering and Technology, at the Airport Authority Hong Kong (AA). He adds that as a statutory body, the public often has higher expectations of the AA in terms of corporate governance, sustainability reporting and disclosures. Sustainability has become “You can make many rules for your staff to comply with but if they are not truly embracing the values, it is only a paper exercise for them.” Alice Law is Deputy Chairman and Managing Director of the Mandatory Provident Fund Schemes Authority. 12 June 2020
APLUS increasingly important to the AA over the years, with the organization rolling out an array of programmes, ranging from carbon management and waste management, to green procurement and a sustainable dining policy, to setting up an environmental fund. “We believe sustainability has become a focus across Hong Kong against the backdrop of growing awareness of its potential impact on businesses, as well as increasingly proactive government policymaking and the growing body of international agreements related to the environment. The public, especially consumers, have become more conscious of companies’ sustainability efforts and performances,” Leung says. The AA, which won a Gold Award in the Public Sector/Not-forprofit (Large) Category, together with a Special Mention for its sustainability reporting, in last year’s awards, adopts an airport-wide approach to sustainability, moving beyond areas that are under its direct control, to engage with its business partners in order to have a greater impact. “We try to frame these programmes to be easy, useful, and, wherever possible, free to our airport business partners,” Leung says. An example of one of these initiatives is its food waste recycling programme, under which it collects food waste from Hong Kong International Airport (HKIA) and its partners, and transports it to an organic resources recovery centre for conversion into biogas. Meanwhile, the HKIA food rescue programme, which is run in partnership with Food Angel, a local food rescue organization, collects surplus food and uses it to put together hot meal boxes for distribution to people in underprivileged communities. Leung thinks organizations will need to be increasingly focused on sustainability as the world copes with COVID-19, and companies not only need to enhance their resilience to face future challenges, but also to contribute to a community-wide recovery effort. He adds that accountants have an important role to play in helping organizations improve their performance in terms of sustainability. “Incorporating accounting into sustainability would help companies visualize and measure the efforts and impact of their sustainability work. It would also enable them to determine how they could further enhance their work and allocate resources to maximize the positive impact,” he says. Leung thinks the inclusion of sustainability and social responsibility in the Institute’s awards has helped to elevate the importance of these issues among both C-suite executives and accounting professionals. He adds that winning one of the Institute’s awards is an honour for the AA. “It recognizes our effort in upholding corporate governance and improving our sustainability performance and will further motivate us to continuously improve.” Many public sector organizations recognize the role they have to play in raising governance standards in Hong Kong, seeing their public service mandates, and the increased need for transparency and accountability as strong reasons to focus on excelling in this area. Read the first part of the BCGA at 20 series in the March 2020 issue of A Plus. The Best Corporate Governance Awards, organized by the Hong Kong Institute of CPAs, are proudly celebrating their 20th anniversary this year. The awards are open for entry in early July across seven categories of listed companies and public sector/ not-for-profit organizations. Ricky Leung is Executive Director, Engineering and Technology, at the Airport Authority Hong Kong. June 2020 13
SECOND OPINIONS: WHAT LESSONS SHOULD BE TAKEN BY THE WORKPLACE FROM COVID-19? SECOND OPINIONS Business planning EDWARD AU SOUTHERN REGION MANAGING PARTNER DELOITTE CHINA, AND AN INSTITUTE MEMBER Based on our analysis of the leading practices of multinational companies in business continuity planning and emergency management of major infectious diseases, lessons from the coronavirus pandemic include the following: Assess the risks and clarify emergency response mechanisms, plans and division of labour. Many multinational companies have established contingency plans or business sustainability plans, usually implementing these immediately in the event of a major emergency. If a company has no such plan, it should conduct a comprehensive assessment of all risks, including employee, outsourcing, government, public and supply chain issues. According to the risk assessment, the company should respond to issues around office space, production plans, procurement, supply and logistics, personnel safety and financial capital, as well as arrange other major matters related to emergency plans and division of labour. Establish a positive information communication mechanism and create standardized communication documents. It is important to stabilize supply chains and the mindsets of internal employees and external partners, as well as strengthen the management of publicity and customer services to avoid negative public opinion caused by negligence or inconsistency. At the same time, a company’s existing information system should be used to collect, transmit, and analyse epidemic information and issue prompt risk warnings. Maintain the physical and mental well-being of employees, and analyse the nature of different businesses and jobs to ensure appropriate resumption of work. According to Deloitte’s latest human resources survey on epidemic responses, 82 percent of companies believe flexible work arrangements are now the most important means of employee management. We recommend companies to immediately establish flexible vacation and work mechanisms, using technical means to establish non-face-to-face or off-site work parameters during special periods. Besides this, a company should establish a staff health monitoring system and keep employees’ personal health information confidential. For example, during the most critical period of the pandemic, our firm immediately implemented a weekly self-declaration digital survey to ensure that we are aware of our people and their family’s safety and health situation. Upgrade the company’s risk management mechanisms. We believe companies could face unexpected risk events at any moment. They should establish or upgrade their risk management systems to identify the key risks and build risk mitigation plan. Strengthening risk management systems is just as important as dealing with negative events when they arise. 14 June 2020 “ 82 percent of companies believe flexible work arrangements are now the most important means of employee management.”
APLUS While the lessons from the pandemic are not new, they have never been more important. The crisis has taught us to always be prepared. As part of that, it’s critical to create a cross-functional team to provide the framework and strategic guidance for tackling the issues. When the crisis started, IBM immediately set up a crisis management team to assess and address the dynamic impacts of the virus, from workplace and work-from-home adjustments to healthcare and financial questions. The team saw the importance of meeting on a daily basis to receive feedback from the leaders, to make decisions and drive actions. During these meetings, the work-stream leaders would typically report on their own area, raise issues and ask for help. Another takeaway is that the remote work model is doable and could be here to stay. Acknowledging that working-from-home is the new norm, IBM’s crisis management team provides employees with hints and tips to effectively work at home. The company has also seen the importance of developing initiatives with an objective of building a more flexible and productive workforce. For example, IBM developed the following work-from-home pledges during the pandemic: • I pledge to be family sensitive: Putting a call on hold to handle a household issue is OK. • I pledge to support flexibility for personal needs: Respect social boundaries when scheduling meetings. • I pledge to support “not camera ready” times: It’s OK to turn off video as needed. Try to have a profile picture, which allows people to “see you without seeing you.” • I pledge to be kind: I will keep in mind that I am “showing up” in others’ homes for the first time and want to be a good guest. • I pledge to set boundaries and prevent video fatigue: Use new time limit boundaries for meetings, recognizing video fatigue is a new phenomenon for all of us. Strong communication is also key during times of crisis. A critical lesson for us is that timely and effective communication from one voice (human resources) can resolve most questions from employees and managers, avoid unnecessary anxiety and win trust. This can include an informative questions and answers channel, case management and reporting processes, and manager and employee responsibilities. MOHAMED BUTT EXECUTIVE DIRECTOR HONG KONG PRODUCTIVITY COUNCIL BONNIE CHAN TRUST AND TRANSFORMATION LEADER IBMGLOBAL BUSINESS SERVICES, GREATER CHINA GROUP, AND AN INSTITUTE MEMBER Despite signs of COVID-19 receding in some parts of the world, pandemic-triggered new norms remain – from remote working, maskwearing, to technology inventions that alter almost all aspects of our lives. The extensive adoption of top-notch technologies like artificial intelligence (AI), robotics, Internetof-Things and big data, has rapidly reshaped our workplace and business operations. Once transformation begins, businesses will not necessarily go back to the old days. The Hong Kong Productivity Council (HKPC) has seen the following transformations take place. Commercialization of research and development (R&D) is on the rise: The pandemic has propelled us to fast-track technology adoption, not only for the well-being of our society, but also to generate new business opportunities. Thanks to our in-house experts, HKPC quickly debuted anti-pandemic smart initiatives. One of which is a touchless elevator panel, “kNOw Touch,” making use of the sensor-enabled application to remove the need to physically touch buttons. To facilitate early detection of visitors’ body temperatures, HKPC’s experts developed an AI thermal camera, which can alert frontline personnel with prominent sound and visual images in case a fever is detected. The “kNOw Touch” has also been patented for further commercialization. Reindustrialization to drive economic resilience: Grappling with the tough times, successful enterprises are those that look introspectively and are dynamic in transforming their operations with the market. Take, for example, the many local manufacturers that have started establishing mask production lines in light of local shortages. Engaged by the Hong Kong government, HKPC’s tech experts worked round-the-clock to provide technical support on machine adjustment and testing for 50 mask production lines. This alleviated the mask shortage, and most importantly, reignited Hong Kong’s reindustrialization. Sure enough, this will play host to the city’s economic resilience, as local manufacturing steers towards high value-added production and supply chains. Be aware of cyber lockdown: The pandemic also teaches us to put cybersecurity on top of our minds, given how quickly most organizations found themselves shifting to remote working, and hackers seeking to take advantage and launch cyber-attacks. Advice to the IT and risk management teams is to be more vigilant than ever – since “cyber lockdown” could be as disastrous as “coronavirus lockdown.” “ The team saw the importance of meeting on a daily basis to receive feedback from the leaders.” “ Successful enterprises are those that look introspectively and are dynamic in transforming their operations with the market.” June 2020 15
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