Corporate governance practices vary internationally, but is a global consensus emerging on corporate
governance best practice? Moreover, how will the changing attitudes to governance affect the
company secretary role? Edward Speed, the London-based Chairman; and Alice Au, the Hong Kong-based
director; of the global executive search and leadership consulting firm Spencer Stuart, give a
global and a local perspective on these questions.
There used to be an assumption
that corporate governance
standards would converge around the
world on the back of globalisation, but
many differences still remain in the
way different jurisdictions approach
governance issues – do you think
a global consensus is emerging on
corporate governance best practices?
Edward Speed: ‘I think we have to recognise that
there are different mixes of public
companies and private companies in
various geographies, and that many listed
companies have a controlling shareholder
– that is true in Hong Kong for example
– and that does impact on governance.
However, I do think there are three
generally accepted principles of good
governance coming through which are
relevant wherever companies are based.
One of these principles is that of
independence: are all shareholders’
interests being protected by a board of
directors? We have seen an increasing
focus, certainly in the US and here in the
UK, on the real independence of board
directors. Secondly, I think there has also
been a focus on boards taking a longerterm
view of the objectives and the
strategic direction of the company. This
is a reaction against ‘short termism’ that
companies are often accused of. Thirdly,
I think people are increasingly seeing the
need for a separation of the chairman
and the CEO roles. This is a little more
contentious, certainly in the US, but we
have seen convergence towards this.
Companies are either separating the roles, or,
in the case of the US, they are strengthening
the position of the lead independent director
so that there is a strong counter-balance
to the executive power of the combined
chairman and CEO role.
In addition to these three themes coming
through, I think generally, globally there
is also a recognition that some limits to
board tenure are required. This links to
independence in that independence only
lasts so long – directors who have been
on the board for 20 years can be perceived
as having “gone native”.’
Looking at the situation here in Hong
Kong, would it be fair to say that some
of the principles you mention – the
separation of the chairman and the
CEO roles and the need for independent
directors in particular – have met
some resistance?
Alice Au: ‘We would be the first to say that one
size does not fit all as far as corporate
governance is concerned. That has to do
with the different regulations, as well
as the different shareholding structures
in different jurisdictions. But here in
Hong Kong and China, I don’t think there
is resistance to having independent
directors. The listing rules in Hong Kong
make it very clear that a third of the
board needs to be independent and
that there needs to be at least three
independent directors on the board – and
all companies are complying with that.
There is more of a grey area when you
come to define independence, of course.
The Stock Exchange has a definition of
independence but the grey area really
comes when you get to issues such as
the one Edward was just referring to –
the need for term limits. Now, when an
individual has been on the board for a
long time, we often hear the argument
that the individual is very independent-minded so there shouldn’t be a problem.
We accept that there will sometimes be
exceptions, but as a general rule term
limits are a good thing because they
revitalise the board.
I would add that where our clients
have listed subsidiaries outside of
Hong Kong, in London or in the US for
example, they are facing shareholders
who are increasingly asking about the
independence of their directors. I have
a case that we are working on where
the overseas shareholders are asking
whether directors who have been on the
board for 10 years can still be considered
independent. So shareholders do look
at this issue, they will question it at the
subsidiary level and then at the group
level as well. So I think this plays a part
in changing attitudes. If shareholders ask
these questions often enough, companies
come to realise that, even though it
may not be a legal requirement, having
term limits is part of good governance.
I am seeing this here in Hong Kong and
I think it also applies to Greater China
companies as well.’
ES: ‘I think that corporate governance
is a journey and Hong Kong has come
a long way. I don’t think we want to be
demonising very successful Hong Kong
businessmen and women who hold
combined chairman and CEO positions.
All we have to make sure is that we have
strong independent oversight of the
executive. That could be carried out by a
highly respected director who would be
seen as holding executives, including the
chairman and CEO, accountable. In a way
we would rather have that than having
someone made chairman and the previous
chairman/CEO going on as before.’
Could we turn to board evaluation.
Are you seeing more acceptance of
this as a good governance practice
globally?
ES: ‘It was Socrates who said “the
unexamined life is not worth living”. I
think all boards should from time to
time stop and think about how effective
they are and examine the way they
work. That is part of good corporate
governance. We have a rule in the UK
that a review should be undertaken every
year and every third year it should be
done with an external independent party.
I think there is a strong role for the
corporate secretary to play here; on my
board the corporate secretary undertakes
the annual survey of my directors. We
have a pretty vigorous process which
includes peer evaluation. I think that is
a good thing to do so that the chairman
can give feedback to individual directors
on how they are performing in the eyes
of their peers. This includes an evaluation
of how the chairman is performing in
his role, so I have the same thing done
to me.
Of course, we have the role of the senior
independent director on British boards
and that person, together with the
corporate secretary, plays an important
role in effecting board evaluations. I
think that is good corporate practice and
it is very prevalent now in continental
Europe, as well as here in the UK.
Increasingly we are seeing externally
facilitated board evaluations in the US
as well.’
Why do you think board evaluation, at
least in terms of a formal process, is
still relatively rare in Hong Kong?
AA: ‘We highly recommend that
boards take this up and there have
been more board evaluations in Hong
Kong since the Stock Exchange made
it a Recommended Best Practice in
the Corporate Governance Code. Our
2015 Board Index found that 21% of
Hang Seng Composite LargeCap Index
(HSLI) companies are now doing board
evaluations. Of those companies only 8%
engaged an external facilitator, but, as
Edward was saying, Hong Kong boards
are on a journey. Doing an internal
evaluation is a first step and still gives a
health check for your board.
The number one reason many companies
are not engaging external facilitators
is that they are still thinking about the
cost. We would argue that this cost is
relatively low and it is an investment in
your board – if you do an assessment of
your executive level why don’t you also
do an assessment of your board?
I think another factor is the reluctance
to open up the company to an outside
party. This is a common concern where
the chairman is the owner/founder
of the business. The companies that
are getting external facilitators are
usually the companies with a more
diversified ownership and it is often the
independent non-executive directors
(INEDs) in these companies who are
advocating it because they have seen the
benefits on the other boards they sit on.
So I think that this will be an evolution
and it will also be an area where the
company secretary, together with the
INEDs, can be an advocate. For a small
cost you obtain rich data on the health
or otherwise of the board.’
We have discussed the signs of
convergence towards key governance
principles – where do you think this
is going to take us? If we have this
conversation again in 20 years time
will the best practices of today have
been universally adopted?
AA: ‘I don’t think there is something we
could call perfect corporate governance,
though there will be common themes –
such as the need for transparency and
independence – which investors, no
matter where they are from, will want.’
ES: ‘I think we should look at this from
the other end of the telescope. We
should look at the sources of capital
and what are the owners of that capital
require in terms of governance. The big
institutional shareholders, such as the
pension funds, want companies to behave
in a certain way and have their own
reporting requirements. The sovereign
wealth funds and private equity owners
will have different requirements. The
state-owned enterprises in China have
a different source of capital and will
be subject to different expectations.
So I think there will be parallel regimes
dependent on the requirements of the
sources of capital. You will have US
pension funds wanting, wherever they
invest in the world, to have an “all the
bells and whistles” form of governance,
while others might be happy with a more
streamlined version. Now, it is a bit like a
country, you get the constitution and the
political environment that you deserve in
a way. I really don’t think there is a one
size fits all and that will be the case in 20
years’ time.’
Could we turn to the role of the
company secretary? Company
secretaries are increasingly relied
on as advisers to the board and as a governance gatekeeper – what’s
your view on how the role has
changed, and how it will change in
the years ahead?
ES: ‘I think that journey will continue,
moving from a purely administrative
and back office role to playing a
much more active role as part of the
triumvirate of the chairman, the CEO
and the corporate secretary facilitating
best decision making in boards. And
that calls for much more active
engagement with all of the directors.
In particular, it calls for more active
liaison and vital connectivity between
the executives and the non-executives.
It’s a role that is critical to the smooth
functioning of the board and it calls
for very special skills. It’s all about
discretion, touch, judgement and
having very high standards of integrity
because if you don’t have that you can’t
build trust.
Corporate secretaries can be in an
invidious position because while they
are on the company payroll, they are
primarily aligned with the chairman.
The role calls for very high levels of
moral fibre and backbone. The corporate
secretary is also a real repository of
institutional knowledge and continuity.
Directors come and go, chairmen come
and go, but the corporate secretary can be
a constant.’
AA: ‘I think if you look at the really
good corporate secretaries among the
Hang Seng Index companies in Hong
Kong, they have a trusting relationship
with the chairman, they have that touch
and discretion, that understanding of
the business and that EQ that Edward
was talking about. I think this is where
The Hong Kong Institute of Chartered
Secretaries (HKICS) has an important
role – the HKICS can help to build the
soft skills of the next generation coming
through and help them recognise the full
potential of the role.’
Could we go deeper into the company
secretarial role in board support,
in particular facilitating effective
decision making? That can be a tricky
area because, as you both mention,
it takes a great degree of tact and
people skills.
ES: ‘Directors are feeling more and
more, as they should do, their fiduciary
responsibilities and they feel they need
to engage much more than they used to
in the past with the company’s business.
Now some very big companies, Shell
for example, have a corporate board
office that arranges inductions for newly
appointed directors, provides information
to directors and helps them with
additional data if they want to go deeper
into a particular issue.
I think that trend is going to grow as
well, and corporate secretaries, with the
agreement of their chairman, need to
be ensuring that individual directors are
as effective as they can be. Obviously
without “leading the witness” in a
particular way but to offer information.
It is really critical because you can’t get
good decision making unless you have
good debate based on facts and rigorous
data. My corporate secretary will go to a
board director and say “it doesn’t sound
like you really understood all the issues” in a non-negative way, “should I give you
a bit more reading on this?”
When the chairman is driving an agenda
he or she has to be thinking three
moves ahead, so it is quite difficult
to spot everything that is going on
with the board. So it is useful to have
an independent observer watching
the dynamics in the boardroom. The
corporate secretary can whisper in the
chairman’s ear when someone is not
happy with where things are going,
or when someone is harbouring a
misunderstanding about something,
so that the chairman can have a chat
with that director in the break. These
are all very sensitive matters which is
why corporate secretaries need to have
the EQ and the interpersonal skills we
discussed earlier. Plus the humanity and
the low ego needed for the job because
the last thing you want in your corporate
secretary is a “wannabe chairman”.’
Should the corporate secretary answer
to the chairman or the CEO?
ES: ‘Definitely to the chairman. Pay and
rations comes from the executive, but in
terms of where they get their orders from,
it is from the chairman of the board.’
One final question. Integrated
reporting gets businesses to think in
terms of their six capitals – including
natural and social capitals. Do you
think that how businesses address
their environmental and social
impacts and performance is going
to be a major part of what state the
world will be in in the medium and
long term?
ES: ‘One would hope that all boards are
thinking in an integrated way. We need
to be thinking about the role of our
businesses in particular communities.
Are we engaging around climate
change and the responsible harvesting
of resources? Are we contributing to
society on a wider level? So it is not just
pure return to financial shareholders, it
is a broader contribution to the wider
stakeholder community in which the
company operates.
The King IV Report on Corporate
Governance has just come out in South
Africa, and it puts a lot of emphasis on
integrated reporting and sustainability.
They led the way. In the UK right now
we have a political imperative around
this kind of contract with broader
society, looking at things like societal
representation on boards in terms of
gender and ethnicity, pay and having
broader stakeholder representation on
the board.’
Do you think that getting it right
in these areas will be a licence to
operate issue for businesses?
ES: ‘Yes. I think these are two sides
to the same coin. A societal contract
becomes a licence to operate but it also
makes very good business sense. If you
look at what companies like Unilever
have done around sustainability, that
has been incredibly effective in helping
them attract high-calibre talent; it has
added lustre to the company and made
it easier for the company to engage
with governments, business partners,
and the wider communities in which
they operate.’
AA: ‘I think that this is another area
where corporate secretaries can
add value to the board and also the
chairman. A lot of time the chairman
has to be so focused on the business
that they might miss some of the
governance trends we are discussing
here. A good corporate secretary can
keep track of these trends and help
enhance the functioning of the board
by bringing them to the attention of
the chairman.’