Grant Thornton's 1st Annual

HK Corporate Governance Review

By Leanne Palmer

The Hang Seng Index (HSI), calculated using the current stock prices of 34 of Hong Kong's major listed companies, serves as a key indicator of the performance of these companies and of the Hong Kong market as a whole.

Whilst stock price is appreciated as a major element of the measurement of corporate performance, the marketplace regards corporate governance as another key element. This became further evident when the Hong Kong Stock Exchange revised the listing rules in 2004 to include a revised Code on Corporate Governance Practices (the Code) and additional clauses that require companies to publish a set of mandatory corporate governance disclosures in a separate section of their annual and interim financial reports, called the Corporate Governance Report (CGR).

To further progress the education and knowledge management of corporate governance, Grant Thornton's Business Risk Services division recently performed an extensive analysis of the corporate governance practices of 200 major Hong Kong main board listed companies. The companies chosen were those that make up the Hang Seng Composite Index (HSCI) which includes the companies in the main index, HSI, as well as the Hang Seng China Enterprise Index (HSCEI), (the 37 mainland enterprises that have a H-share listing in Hong Kong).

Grant Thornton's review was carried out by answering 36 survey questions using information disclosed in the annual reports and in particular the CGRs of the companies making up these indices. The basis of the survey questions was the Code, the CGR disclosure requirements in the Hong Kong main board listing rules and, the annual survey that has been performed since 2002 by Grant Thornton LLP in the UK of FTSE 350 corporate governance practices and compliance with the UK Combined Code. Survey questions not only covered compliance with mandatory code provisions, but also recommended best practices of the Code and particular subjects of interest. Key corporate governance topics of interest covered in the review therefore included:
 

	compliance with the Code;
	main areas of non-compliance;
	level of corporate governance documentation;
	independence of the board;
	auditor independence;
	internal control & risk management practices;
	family relationships within the Board;
	remuneration of directors & senior management;
	nomination of directors;
	Corporate Social Responsibility.

It is important to note that Grant Thornton's review was designed to give a holistic view of the Hong Kong market. This means by reading our review you should gain a sense of the market's corporate governance performance as a whole. Our survey results therefore provide the overall level of corporate governance achievements without identifying a particular company's performance.

After reviewing the most recently published annual reports of the 200 companies for financial years ending on or after 31 December 2005, Grant Thornton not only gained extensive insights into the corporate governance practices of companies but also witnessed the extent of the effort that companies have made in documenting their corporate governance practices.

To appreciate the level of information that has been collected and analysed, Figure 1 illustrates some of the key results.

One of the most noticeable results presented in the illustration here is shown in column 6: the annual internal controls review. This review is still a work in progress for 39% of HSI companies, 76% of HSCI companies, and 89% of HSCEI companies. Whilst compliance with the Code provision on internal controls, C.2, is only required for financial years ending on or after 30 June 2006 (which includes only 2% of the companies surveyed), it could be inferred from these statistics and from observations of limited disclosures made on the internal controls systems in place, that internal controls effectiveness reviews are not an easy project for companies to undertake. The Hong Kong reviews must not only cover financial reporting controls as required by the Sarbanes Oxley Act Section 404 that US listed companies must comply with, but must also include material operational and compliance controls as well as risk management systems.

As specialist advisors within the Hong Kong market, we encourage directors of Hong Kong listed companies to carefully ensure that their internal control reviews cover all the areas suggested by the Code.

The complete set of answers to the 36 survey questions can be found in "Grant Thornton's First HSCI Corporate Governance Review." For more information, please visit www.gthk.com.hk.

Grant Thornton plans to conduct this review annually, which means next year's review will be able to include comparisons with the 2006 review results announced.

For more information and to request a copy of this publication please email Patrick Rozario, Principal - Business Risk Services at patrick.rozario@gthk.com.hk or Leanne Palmer, Manager - Business Risk Services at leanne.palmer@gthk.com.hk

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