Hong Kong needs to have vision if it wants to maintain its status as world’s leading financial centre. The Hong Kong Stock Exchange, with a vital role to play in leading with vision, needs to be more forward-looking in reforming Hong Kong’s corporate governance. In this issue, Prof. Judy Tsui, PolyU’s Vice President (International and Executive Education) Director of the Graduate School of Business and Chair Professor of Accounting, shares her views on corporate governance.

Q1: The Hong Kong Stock Exchange was regarded quite slow to adopt some of the forward-thinking corporate governance practices and policies in the world. Could you quote some evidence?

Back in 2003, three consultancy reports on corporate governance review, of which I was the Lead Consultant, and which were commissioned by the Financial Services and the Treasury Bureau, were published. The reports recommended, among others, establishing corporate governance committees and requiring the establishment of remuneration committees by listed companies, with the chairman and the majority being Independent Non-Executive Directors. These were cutting-edge practices at that time. Eight years on, the Exchange has finally adopted these proposals in its recently released Consultation Paper on corporate governance. They should have done it years ago.

Q2: What do you think about the Consultation Paper on corporate governance recently released by the Exchange?

It still falls short of being visionary, leaving out some of the cutting-edge themes and practices. This can be seen in two aspects — the definition of corporate governance in the Paper and the issue about board diversity.

Q3: Can you elaborate more on the latest concept of corporate governance?

Over the years, the definition of corporate governance has evolved to be more encompassing, incorporating social and environmental responsibility. A company that is well governed is thought to be one that is accountable and transparent not only to its shareholders, but also to other stakeholders such as employees, customers and society at large. Corporate governance for sustainability is now widely accepted and promoted internationally.

However the Exchange’s proposals have not taken into consideration this progressive development. Its proposal of director training in the areas of law and regulations, and advocacy for greater involvement of Independent Non-Executive Directors while ignoring the concept of sustainability belies the fact that it retains the mainstream conversation on corporate governance, focusing only on legal issues, independence and individual competence rather than a more comprehensive approach to corporate governance.

Q4: Can you share with us your latest research in this area?

Academic research over the years has shed light on the benefit of appointing female directors, including my recently published research, showing a positive relation between the presence of female directors and earnings quality. Yet the Exchange is not able to address this issue in its Consultation Paper.

Q5: What should the Exchange do to be visionary?

1. The Exchange can, for instance, encourage listed companies to produce an integrated report, incorporating both their all-round view of a company, including social and environmental performance, along with the company’s financial performance.

In February 2010, the Johannesburg Stock Exchange made it compulsory for all listed companies to produce an integrated report, being the first to make such a pioneering move among the world’s stock exchanges.

2. Board diversity comes in a number of ways - age, experience, expertise, gender and so on. It has been proved to be of importance in improving corporate governance and firms’ performance. Globally, this is increasingly on the agenda of major companies and organizations like World Bank. The International Finance Corporation of the World Bank Group hosted its first Global Roundtable on Board Diversity last year, an indication that board diversity is gradually the par for the course.

Gender diversity is one of the major representation of board diversity. Women hold only 9% of directorships in the listed companies in Hong Kong, showing that it is lagging behind in gender diversity.

In my view, to address board diversity in particular gender diversity, and sustainability, test the boldness and commitment of our political and economic leaders in building Hong Kong’s future and leading it to continue to be the world’s leading financial centre.