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Corporate Governance In Hong Kong

Q&A — An Interview with Alice Au
January 2019

In her second policy address on October 10, Carrie Lam, the chief executive of Hong Kong SAR, called for all Hong Kong-listed companies to appoint more women as board members. This came as women have long been minority on the boards in Hong Kong, currently making up less than 15% of directors — far below the global average.

Alice Au is a member of Spencer Stuart’s global board of directors and leads the firm’s global Financial Services Practice and Board Practice in China. She specializes in searches for directors, CEOs and other executives for various industries in China and across Asia, particularly in the fields of private equity and financial services. Au has more than 20 years of experience in executive search in Hong Kong. In this interview, she shares with us her insights into what makes for healthy corporate governance and what Hong Kong companies can do to improve diversity.

What should we make of corporate governance in Hong Kong?

From what I have observed over the past decade, corporate governance in Hong Kong has always been evolving. While most people try to gain a better understanding of corporate governance in Hong Kong or China as a whole through a comparison to governance practices in the Western world, particularly North America and Europe, I believe an important overlay is understanding the ownership structure of Hong Kong companies.

To track how corporate governance evolves in Hong Kong, Spencer Stuart publishes a Board Index biannually for constituent companies in the Hang Seng Composite LargeCap Index (HSLI). Of the 105 companies in our most recent study, only 14% have a diversified ownership structure typical of companies in Western countries, where the majority shareholder is neither a family nor the state, compared with 47% and 37% categorized as family-controlled and Chinese state-owned respectively, and another 2% as local Hong Kong state-owned companies. I believe this understanding of ownership structure is more helpful than the indiscriminate application of Western corporate governance models.

What are some of the effects of the lack of ownership diversity?

First, let me clarify that a family or state with big chunks of company stock is nonetheless a shareholder entitled to its legitimate rights like other shareholders and should be treated equally. However, what deserves our attention is why certain things happen in certain ways. Family and state ownership do not necessarily pose major challenges, but they may give rise to diversity-related issues.

If you look at the data, you will find that Hong Kong companies, particularly those state-owned or majority-owned companies, have fewer nomination committee meetings than their more diversely owned counterparts worldwide. I always believe that nomination committees play a very important role in promoting board diversity. Ideally, nomination committees regularly review board composition and recommend necessary changes to ensure that the composition aligns with the company’s future strategies. The committee also fuels discussions on whether to increase diversity in terms of gender, experience and nationality, among other areas.

Our analysis has found that the nomination committees of Hong Kong companies meet less frequently than their counterparts elsewhere. To my knowledge, some of them do not meet at all and, even when they meet, they talk little about diversity. I believe this has something to do with the family ownership widely seen in Hong Kong companies: the nomination committees do not see the need — neither do they seek the opportunity — to push the boards for greater diversity.

What areas of corporate governance does Spencer Stuart track and analyze?

We focus on four main areas in our report. The first is board composition, including board size, independence, diversity, tenure and term limits, among others. Next is board organization and procedure, where we look at how often the board and its committees meet, how many people are in attendance at the meetings, and whether the board has an independent chair. The third consideration is director compensation and the fourth is whether the board conducts self-assessments.

How has corporate governance in Hong Kong evolved and progressed in recent years?

We are making progress, but rather slowly. There is, however, one positive sign in our recent analysis: more companies are assessing their boards, with the percentage up from 21% in 2015 to 27% in 2018. Board assessment is recognized as an essential component of good governance, a health check on the board. Since we have periodical performance reviews on management, there is no reason why we should not assess the board that oversees the management.

For all the improvement I’m talking about, board assessments in Hong Kong are largely conducted internally, without any involvement of professional third parties like Spencer Stuart. Nonetheless, this is still a good start, an achievement attributed in part to the Hong Kong Monetary Authority’s (HKMA) governance suggestions and board review requirements for financial institutions in its memo. The memo really works: among the HSCLI constituents, 48% financial institutions assess their boards, far above the average of 27%. That is what I call progress.

Where are we seeing less progress?

When it comes to increasing the representation of women on boards, our progress is depressingly slow. Gender diversity is an important — though not the only — component of board diversity. Our report shows that the percentage of female directors in 105 HSCLI companies rose from 11% in 2015 to 11.9% in 2018. The increase might have something to do with constituent changes of the index, specifically the inclusion of 24 companies and removal of six companies. But whether we are at 11% and 11.9%, we shouldn’t be content with where we are today.

Let’s look at the new director appointments. Female directors account for 15% of the 106 directors newly appointed by the 105 companies from 2015 to 2018. If this is the pace of change, it will likely take a long time before we finally achieve gender parity in boardrooms. It is progress, but at an unsatisfactorily slow pace. My colleagues did a similar analysis in the US, and they found that 36% of the directors appointed by the S&P 500 companies last year were women. Obviously, Hong Kong companies still have much room for improvement.

What should companies do to increase the number of women on their boards?

To start with, companies should review board composition regularly, which I believe is the best governance practice and it can be adopted without any headwind. During the review, it is essential to consider one question: is the board diverse enough to guide the company’s future strategies? The diversity here is not only about gender. Take the example of AIA. Operating in over a dozen countries across Asia, the group has built a diverse board of directors who intimately understand its major markets, rather than having all the directors based in Hong Kong. This is the diversity AIA needs.

On the supply side, some claim that there is a dearth of qualified women to take board seats. I don’t see it that way. As I mentioned before, directorship does not necessarily require experience as a CEO, CFO or general manager; anyone with demonstrated professional competence and business acumen can be considered a candidate. By this standard, you will find a larger talent pool to choose from.

Some women may not have experience as a general manager, but they excel in other fields such as human resources and digital functions. Spencer Stuart once helped placed two female directors on the board of a large company. One candidate was in her early forties with digital background, and the other previously worked as the HR head of an insurance company. They did not fit the traditional profile of a director, but that did not prevent them from doing a good job at their new position. My point is, if you really care about what your organization needs for success and want the right talent, then you will be more open-minded in selecting board members and more likely to find qualified female candidates.

Last but not least, companies should develop a talent pipeline, providing necessary mentorship and sponsorship for promising candidates, including women, and keeping them in contact with the board on a regularly basis. In doing so, potential candidates learn how the board actually operates and get better prepared for a future career as director.

What are your suggestions for women who want to beat a path to the board?

Seek mentorship and sponsorship whenever possible. My suggestion is to actively engage in two-way communication, go for opportunities when they arise, and never be afraid of failing. Since no one likes to spend time on those who are not committed to or passionate about what they are doing, you need to show your passion and motivation, to impress your mentors that you are the one worth spending time on and referring to senior positions.

Never underestimate the power of networking. Make the right connections and be generous with your time on things you love, because you will never know what is around the corner. Also, avail yourself of an opportunity to present in front of the board, to gain a better understanding of the board while helping directors to get to know you. My final advice is to do some reading about corporate governance and attend related seminars and programs to acquire in-depth knowledge about governance codes and good governance practices. These are my suggestions for those who are interested in getting senior positions.

What have you learned from your service on Spencer Stuart’s global board of directors?

Serving on the Spencer Stuart board of directors has been a good learning experience. It has given me a broader perspective on certain issues and taught me how to operate in a board context — how and when to make your points and when not to push your points. I’ve also seen for myself the value of having multiple women on a board. We now have three female directors on the board, and it’s powerful to have one another to count on and support. I will continue to encourage boards to not only increase their gender diversity, but also to consider having multiple women on the board because it improves their effectiveness. Numerous studies have confirmed that having one women on a board, or any minority, is actually not enough, the ideal situation is having two and maybe three women on the board.

The original interview was published by Bloomberg Businessweek: