Clinton Morrow participates in the IR Global Guide – International Governance: The Risks You Face as a Global Director
Foreward by Andrew Chilvers
As companies continue to look for opportunities in global markets, directors from diverse jurisdictions are hired to serve on the boards of foreign businesses as well as domestic ones that have operations and assets in other countries.
Enterprises across the world look for directors from other jurisdictions for any number of reasons. Hiring board directors from other countries can help to build investor confidence, for example. Likewise, an enterprise that is headquartered in a different jurisdiction but with a subsidiary in the US or Europe could seek directors to gain expertise and credibility. The director may have valuable international or local geographic expertise regarding business objectives, strategy, operations and risk management.
Nevertheless, serving as a director on the board of a global enterprise can bring major challenges. It’s true that during the past few years corporate governance laws and regulations have started to converge across regions, but there remain critical international differences regarding the responsibilities and liabilities of directors.
With recent data protection legislation across different jurisdictions, companies are now being held to account regarding their use of personal data. Will this result in a more litigious culture for companies and what does this mean for boards?
Generally speaking, I would not consider Hong Kong to have a litigious culture when compared to other jurisdictions. An example of this in the context of personal data is one of the most high-profile Hong Kong cases involving Hong Kong’s flagship airline, Cathay Pacific. In 2018, the airline reported a data breach affecting some 9.4 million records. Notwithstanding the airline is based in Hong Kong and the majority of affected customers were in Hong Kong, reportedly the airline was not involved in any material litigation in Hong Kong regarding the data breach, with the biggest fine coming from UK regulators. This being said, the reputational damage to Cathay Pacific, mainly due to the handling and late reporting of the incident, was substantial and a reminder to Boards that potential regulatory liability is not the only factor when considering corporate governance and compliance.
Other than from a cultural perspective, one other reason that Hong Kong tends to be a less litigious environment is that class action law suits are not recognised (albeit joint plaintiffs are permitted under Order 15 Rules of the High Court (Cap. 4a)) and contingency fee arrangements are generally treated as illegal and unenforceable.
However, the world is increasingly becoming a smaller place and the risks associated with conducting cross-border activities means that Boards in Hong Kong must increasingly move to protect themselves as well as their companies against any such claims.
With global directors now increasingly in demand, how important is it for boards and directors to understand the different expectations of directors and different cultures of governance?
Hong Kong markets itself as “Asia’s global city”, which is no more evident than in the composition of the Stock Exchange of Hong Kong (“HKEx”). At the end of 2019 approximately 90% of HKEx-listed companies were incorporated outside Hong Kong. This, coupled with the cross-border nature of a large number of Hong Kong companies, has meant that there has always been a high demand for directors who have a global outlook.
To understand the corporate governance culture in Hong Kong it is important to recognise the influence of closely held shareholding groups. The OECD noted that about 75% of listed companies in Hong Kong have a dominant shareholder (e.g. family/individual or state-owned entity) owning more than 30% of issued shares. The prevalence of family-controlled listed companies, historical shareholder unwillingness to challenge management teams, and a cultural etiquette that discourages public confrontation have historically resulted in a dearth of shareholder activism. Therefore regulators, in particular the HKEx, have taken a fairly active approach in encouraging and implementing best practice corporate governance. For example, the HKEx Listing Rules adopt some of the most strict connected transaction rules globally.
The HKEx will often look to offshore jurisdictions and their corporate governance practices when reviewing and amending their Corporate Governance Code and their Environmental, Social and Governance Reporting Guide, which generally require listed companies to take a comply or explain approach. An example of this was that the HKEx recently allowed technology companies with weighted voting rights to list as an exception to its one share/one vote requirement.
Given the approach taken by the HKEx and the potential ramifications for listed companies and Directors if they fail to comply with the Listing Rules and Codes, it is important for Boards in Hong Kong to be aware of relevant corporate governance requirements and the changing attitudes and standards towards corporate governance globally.
How important is an effective board that follows core principles of international corporate governance? Does this give boards a shield against litigation and other issues such as bankruptcy and bribery?
The Hong Kong regulatory regime generally adheres to the core principles of international corporate governance and is made up of inter alia the Companies Ordinance, the Securities and Futures Ordinance, the Financial Reporting Council Ordinance and HKEx Listing Rules and Code on Corporate Governance.
Within Asia, Hong Kong prides itself on upholding the core principles of corporate governance and was ranked second behind Australia and ahead of Singapore by CLSA and the Asian Corporate Governance Association in its 2018 Corporate Governance Report. Given Hong Kong’s position as an international financial centre, it is especially important for Hong Kong to have, and retain, the confidence of international investors when it comes to corporate governance.
Adhering and complying with core corporate governance principles is technically not a complete shield against litigation and potential director liability. Under Hong Kong law, a director of a Hong Kong company may be liable for offences committed by the company. Section 101E of the Criminal Procedure Ordinance provides that where a company commits an offence under any Hong Kong Ordinance and the offence was committed with the consent or connivance of a director, the director is also guilty of the same offence. While technically not a complete defence to liability, the requirement of the director’s “consent or connivance” in practice means that a director would likely not be pursuing internationally accepted core corporate governance principles in committing the offence.
As such, for the purposes of compliance, avoiding potential liability and upholding investor confidence, following core principles of international corporate governance is of the upmost importance.