June 2015
Second Edition
CONTENTS
Preface to Second Edition • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •1
Foreword • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 2 Key Points • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 4 Introduction • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 6 Chapter 1: Overview of Corporate Governance • • • • • • •• • •• • •• • •• • •• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 9 Chapter 2: Board Structure and Composition • • • • •• • • • • • • • • • • • • • • • • • • • • • • • • ••••• • • • • • •17 Chapter 3: Board Operation and Effectiveness
• • • • • • • • • • • • • • • •• • • •• ••• •• • • •• • • • • • • • • • • • ••• • • • • • • • •
• • • • • • • • • • • • • • • • • • • • • •• •• •• •• •• • • • • • • • • • • • • • ••• • • • • • • • • • • •
• • • • • • • • • • • • • • • • • • • • • • • • • • •• •• •• •• •• •• • • • • • • • • • • • • • • • • • • • • • • • • • • •
• • • • • • • • • • • • • ••••••••••• • • • • • • • • • • •••• • • • • • • • • • •• • •
• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •••• • • • • • • • • • • • • • • ••
• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • ••••• • • • • • • • • • • ••
• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •
• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •• • • • • • • • • • • • • • • • • • • •• • •••
• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •• • • • •• •
• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •• • • • • • • • • • • • • • •• • • • • • •• • • • • • • • • • • • • • • •• • • •• • • •• • • •• • • • • • • • • • • • • • • • ••• • • • • • • • • • • 33
Chapter 4: Strategy, Planning and Monitoring 45
Chapter 5: Transparency and Disclosure 67
Chapter 6: Corporate Citizenship 79
Chapter 7: Risk Management and Compliance 91
Chapter 8: Legal Issues 99
Abbreviations and Glossary of Terms 110
Annexes 114
References 130
Other Useful Reading Materials 136
Acknowledgements 140
Preface to Second Edition
The first edition of this guide was published in May 2010 to provide user-friendly advice on good practice in corporate governance for all those responsible for management and oversight of subvented agencies. The guide was produced with the help of expert practitioners in the private sector, academia and the public sector.
With the new Companies Ordinance (Cap. 622) having
come into effect in March 2014, this second edition is
being issued to update Chapter 8: Legal Issues, and
revise related sections in other chapters.
• • • • • • • • • • • • • • • • • • • • • • • •
Foreword
In Hong Kong, a myriad of quality public services have been put in place to benefit the whole community. While some of such services are directly delivered by the Government, many are provided by numerous subvented organisations, ranging from large statutory bodies to small associations that offer education, health, welfare, sports, cultural and other support services at city-wide as well as neighbourhood level. They are our valuable partners and through this partnership, the Government seeks to give opportunities for the talented and skilled from various backgrounds so that they can help provide effective and flexible services for the community. Good governance is essential for these organisations to ensure proper use of public resources to the benefit of the people they serve.
I welcome the timely issue of this revised Guide to Corporate Governance for Subvented Organisations.
believe that those who hold responsibility for the governance of subvented organisations have continuously assessed their organisations’ achievement in good governance since publication of the first edition in 2010. I sincerely hope that with this updated version, they will map out the next steps to implement effective governance practices with an innovative mindset, thereby furthering the cause of building a better society.
Carrie Lam
Chief Secretary for Administration
I
photo
• • • • • • • • • • • • • • • • • • • • • • • •
Foreword
Good governance is needed in every area of activity to which public funds are applied. The public has a right to know that their money is being put towards purposes of public value and that the organisations through which these funds flow are conducted in a manner that inspires confidence that the money is being used wisely and well for the public benefit.
With about 40% of recurrent government expenditure being channelled through subvented organisations each year, the need for careful attention to this matter is obvious.
I welcome the production of this guide and trust that it will prove helpful to all those who hold responsibilities for the governance of subvented organisations.
John C Tsang Financial Secretary
K EY P OINTS
•
•
•
•
•
•
•
•
Corporate Governance refers to the processes by which organisations are directed, controlled and held to account. It encompasses authority, accountability, stewardship, leadership, direction and control exercised in the organization.
T h e G o ve rn men t c ons id er s it e ss e n t i a l t h a t s ubve n t e d organisations attain, and maintain, high standards of corporate governance.
Many subvented organisations receive substantial recurrent funding from the public purse, and so must be accountable to both the Government and the community.
The board of each subvented organisation is responsible for its activities and performance.
T h e board and individua l board member s of subvente d organisations have important responsibilities for corporate governance. They need to discharge their responsibilities with a serious, professional, committed and honest approach.
There is no “one-size-fits-all” corporate governance model.
Subvented organisation s should establis h effective and appropriate arrangements for their board of directors, to ensure that it has the necessary skills and experience available to it, that board meetings are conducted in a professional manner, and that board decisions are implemented in a timely and effective way.
Boards need to consider the various arrangements necessary and
appropriate to the subvented organisation’s circumstances, then
implement, monitor and review these arrangements. Of particular
importance are –
–
–
–
– – – –
–
–
•
compliance with relevant legislation and common law requirements;
compliance with Memorandum of Administrative Arrangements or other funding agreements with the Government;
compliance with the organisation’s Articles of Association, if one exists (The Memorandum of Association of a company incorporated before 3 March 2014 is deemed to be part of the Articles of Association under the Companies Ordinance (Cap. 622));
sound budgetary and financial management;
internal and external auditing arrangements;
effective performance monitoring;
appropriate levels of transparency within the organisation, and between the organisation and its stakeholders;
proper management of conflicts of interest and establishment of codes of conduct; and
maintenance of effective communication between the board and its stakeholders including its staff.
Subvented organisations need to establish a clear working relationship between the chairperson and the Chief Executive Officer, and between the board and the senior management.
There should be a clear understanding of the relevant roles, responsibilities, delegations of authority, checks and balances and so on.
•
•
The Government is responsible and accountable for the proper use of public funds, and is duty bound to monitor the activities and performance of publicly funded bodies to ensure that public monies are properly used for their intended purposes. Subvented organisations are obliged to cooperate with the Government’s monitoring.
Subvented organisations should aim to introduce the best
practices outlined in this Guide. Where this is not appropriate,
the organisation should be prepared to explain to its members
and stakeholders why not– the “comply or explain” principle.
• • • • • • • • • • • • • • • • •
I NTRODUCTIO N
(1) This Guide to Corporate Governance for Subvented Organisations (the Guide) is intended to help board members and senior executives of these organisations.
By setting out principles and best practices relating to the corporate governance of such organisations, advising on matters that have raised concern, and providing checklists, it is intended to help individuals and organisations to assess the way in which they are discharging their duties and decide whether changes need to be made. The goal is to help sustain public trust in bodies which receive public funds.
(2) The Guide is aim ed primarily at organisations that re ceive re current subventions from the Government to cover part or all of their operational expenses. Nevertheless, organisations that receive capital grants, non-cash concessions or one-off payments, and companies in which Government holds shares are also encouraged to refer to the best practices promulgated in the Guide.
(3) The primary responsibility for the be haviour a nd pe rfor ma nce of a ny subvented organisation lies with the board of that organisation.
(4) Subvented organisations are diverse in size, purpose and the extent of public funding prov ided. There are over 1 000 organisations receiving recurrent subve ntio ns from the Gover nm e nt, i ncludi ng schools, welfar e non- governmental organisations ( NGOs), hospitals and clinics, National Sports Associations, statutory organisations such as the Consumer Council, arts and sports bodies, youth groups, and district and rural associations.
(5) Clearly, there is no “one-size-fits-all”
corporate governance arrangement that is appropriate to all. Subvented organisations are encouraged to draw on the advice and guidance contained herein to establish their own directives.
Common sense and judgement should be used to apply the basic expectations and principles set out in the Guide to each organisation’s circumstances.
An organisation may not find it appropriate to adopt a particular practice suggested in the Guide, or may not be able to do so. In either case it is important to understand and be ready to explain the reason why this is so.
Proper planning and training so that any necessary changes are implemented effectively is also advisable. Identifying
priorities and a practical timetable for
phasing in new practices is better than hasty reaction.
(6) The Guide does not have a binding effect on subvented organisations. To render the Guide or any government regulations binding over a subvented organisation, a specific requirement of compliance should be contained in an agreement, such as a Memorandum of Administrative Arrange me nts (MAA), or funding agreement with a specified subvented organisation.
(7) High standards of corporate governance are critical for public trust in subvented organisations. Failure to me et such standards is damaging to reputations and calls into question continued public funding.
(8) The Guide does not compromise, or limit the effect of statutory provisions, d ecisions of th e Chie f Execu tive in Council or the Finance Committee of the Legislative Council governing the operation and control of a subvented o rganisatio n . Those provisi o n s o r decisions prevail until they are superseded, updated or amended. Similarly, the terms of existing MAA and other tailor-made instruments such as the relevant codes of aid for aided schools, the Lump Sum Grant (LSG) Manual for Welfare Services, University Grants Committee (UGC) Notes on Procedures, terms and conditions of the Direct Subsidy Scheme, terms and conditions for subsidies to subsidised schools, and various grant agreements between departments and organisations, continue to take precedence. Internal circulars or m emoranda issued by individual departments should also be
observed in the event of conflict with this Guide.
(9) Corporate governance is an evolving concept. Many of the good practices set out in this Guide are recent developments. Some dated legislation, MAA or other tailor made instruments may need to be reviewed and amended in light of these developments.
Readers are also advised to conduct regular reviews of their corporate governance practices to take account of changes in need and expectation.
This Guide will be reviewed and updated from time to time to assist subvented organisations with relevant new practices.
(10) Subvented organisations have a wide range of structures, sizes and complexity.
No single Guide can prescribe what is appropriate for all of them. Nor can legislation, regulations, funding agreements or codes dictate how people will think, act or behave. The most important thing is that all concerned adhere to the spirit and ethics of good corporate gove rnanc e. The Unite d Kingdom Independent Commission on Good Corporate Governance in Public Services1 identifies the key principles of good governance:
•
–
– –
Focusing on the organis ation’s purpose and on outc omes for citizens and service users
being clear about the organisation’s purpose and its intended outcomes for citizens and service users
making sure that users receive a high quality service
making sure that taxpayers receive
• – –
–
•
– –
• – – –
Performing effectively in clearly defined functions and roles
being clear about the functions of the board
being clear about the responsibilities of directors and the staff, and making sure that those responsibilities are carried out
being cle ar about re lationships between directors and the public
Promoting values for the whole organisation and demonstrating the values of good governance through behaviour
putting organisational values into practice
individual directors behaving in ways that uphold and exemplify effective governance
Ta king informed, tra nspa ren t decisions and managing risk
being rigorous and transparent about how decisions are taken having and using good quality information, advice and support making sure that an effective risk management system is in operation
•
–
–
–
• – –
– –
Developing the capacity and cap ability of the bo ard to be effective
making sure that directors have the skills, knowledge and experience they need to perform well
developing the capability of people with governance responsibilities and evaluating their performance, as individuals and as a group
striking a balance, in the membership of the board, between continuity and renewal
Engaging stakeholders and making accountability real
u nderstanding accou ntability relationships
takin g a n active a nd pla nned approach to dialogue with and accountability to the public
takin g a n active a nd pla nned approach to responsibility to staff engaging effectively with institutional stakeholders
(11) A checklist to assess whether suitable administrative arrangements are in place is at Annex 1.
C HAPTER 1
O VERVIEW OF C ORPORATE G OVERNANCE
What is Corporate Governance?
1.1 Corporate governance refers to the processes by which organisations are directed, controlled and held to account. It encompasses authority, accountability, stewardship, leadership, direction and control exercised in the organisation2.
1.2 An organisation exists to achieve certain objectives on behalf of its stakeholders (key stakeholders could be individual service users, the community as a whole, government as regulator, government and other funding sources, sponsors, staff and, if applicable, volunteers). The goal of corporate governance is to create safeguards3 enabling these objectives to be achieved. For this purpose, the organisation should be managed and controlled, and should be accountable for its activities to its s takeholders through a board of directors (board) or supervisor appointed on behalf of the stakeholders.
Corporate governance concerns the principles and practices adopted by a board that assure its key stakeholders that the organisation is being managed effectively.
1.3 The concept of corporate governance originated in the private sector, but is very relevant to the public sector. Good corporate governance means that the organisation’s stakeholders can rely on the organisation to do its work well, with integrity, transparency and accountability.
1.4 It is most important that subvented organisations, even if of a voluntary natur e, unde rstand th at they ar e publicly accountable bodies and conduct themselves accordingly.
Why is Corporate Governance Important?
1.5 The Government provides subventions to a large number of non-departmental public bodies and NGOs to deliver public services. The non-departmental public bodies are usually statutory organisations such as the Hospital Authority or the Trade De v elo p m e nt Co un cil. NGOs are usually incorporated under the Companies Ordinance (Cap. 6 2 2 , o r C a p . 32 before 3 March 2014) as limited companies or as societies registered under the Societies Ordinance (Cap. 151). In som e cases large amounts of public assets, funds and resources are governed by the boards of these organisations. Furthermore, users of their services often have little or no option to go elsewhere to obtain such services.
It is particularly important, therefore, that appropriate steps are taken to ensure that high quality services are provided.
1.6 There are other organisations which receive one-off capital gr ants or non- cash conce ssions such as fre e o r co ncessio n ary land fro m the Government. There are also entities which receive grants under various funds, e.g. the funds established by the Innovation and Technology Commission or the Sustainable Development Fund.
Whilst strictly speaking these are not covered by this Guide, these and other entities may also consider whether their corporate governance arrangements would stand up to public s crutiny, and whether they would benefit from following this Guide.
1.7 In the past few years the Director of Audit has conducte d a number of reviews on subvented organisations4 . Varying degrees of inadequacies in their corporate governance systems, processes and practices have been found in all cases. Issues as fundamental as basic accounting practices have been found wanting.
K EY Q UOTE
“Good Corporate Governance is essential to the credibility, success and sustainability of an organisation, whether it is in the private or public sector. While achieving good corporate governance may not guarantee success, without it, failure is almost certain”.
Benjamin Tang, Director of Audit (2003-2012)
Examples of Inadequacies among Subvented Organisations
5(1) Board structure and composition
Poor composition and mix of board membership and too many board members The posts of chairperson and Chief Executive Officer (CEO) are filled by the same person
Reappointing board members with low attendance rates (2) Board operation and effectiveness
Lack of guidelines/manual on meeting proceedings
Lack of records on votes taken at board/committee meetings Late submission of papers to board/committee members No declaration of interests by board members
(3) Strategy, planning and monitoring
Not preparing strategic plans in a timely manner No annual business plan
Lack of budgetary control requirements, processes and management systems (4) Transparency and disclosure
Non-disclosure of performance measures No periodic reviews of performance measures Lack of outcome indicators
(5) Risk management and compliance
Non-compliance with rules on management of investments
Requirements for submitting annual reports to oversight departments not followed
Reporting errors in organisation’s annual accounts, e.g. ineligible expenditure claims, spending limits exceeded
(6) Corporate citizenship
Not providing community services in the organisation’s area of expertise Register of directors’ interests not available for public inspection
Corporate Governance Model
1.8 The Guide follows the generic structure outlined in the following corporate governance model. There is no single structure or practice that is applicable to all organisations. Readers should
not blindly follow all the practice s promulgated in the Guide but adapt them as appropriate. Readers should take into consideration the size, nature and activities of an organisation when adapting the best practices set out in this Guide.
Authority Accountability Stewardship
Direction Leadership Control
roles & responsibilities composition &
organisation induction & training
boardroom conduct &
relationship committees conflicts of interest
vision, mission
& values
strategic planning
budgeting &
financial management
human resources management
performance monitoring
disclosure of
information reporting performance
measures
reporting malpractices
ethics code of conduct environment stakeholder relationships risk
management
internal control &
audit audit committee external audit Legal Compliance
Outcomes
Processes
Components
Board structure &
composition
Board operation &
effectiveness
Strategy, planning &
monitoring
Transparency
& disclosure
Corporate citizenship
Risk management
& compliance
Governance Outcomes:
Confidence in the organisation
Figure 1.1
The House of Corporate Governance
K EY Q UOTE
2“Good corporate governance is more than just prescribing particular corporate structures and complying with a number of accepted rules.
Instead, it is about a range of broad principles which should be applied flexibly to the varying circumstances of individual organisations in a way that facilitates appropriate accountability and performance.”
Australian National Audit Office (1999)
Managing the Relationship
1.9 The successful delivery of subvented services hinges on the clarity of the subvention agreement and the quality of t he relat ionship betwee n t he three related parties, i.e. sponsoring department, subvented organisation and service users.
•
–
–
–
– Sponsoring department –
Departments should not micro- manage any subvented organisation.
Nor should they take any action inconsistent with a statutory body’s
legislation, or interfere with the substance of an oversight agency’s tasks. However, it is proper that they should take into account the quality of corporate governance in a subvented organis ation and the evidence of its commitment to achieve and sustain good standards when considering the allocation of public funds. Officers with oversight responsibilities are obliged to follow the guidelines and broad principles laid down by:
Administration Wing Circular Memorandum “No. 2/2003 - Internal Review of Remunerations of Senior Executives of Government-funded Bodies and New Guidelines Arising from the Review” and “CSO/AW L/M 1/2011
- Sharing Good Records
Management Practices with Government-owned or Funded Statutory Bodies"
F ina ncia l Circula r No. 9/2004 - Guidelines on the Management and Control of Government Funding for Subvented Organisations
General Circular No. 8/2008 - Governance of Government-owned or Funded Statutory Bodies
Other relevant departmental circulars
•
•
Subvented organisation – An organisation should deliver services to its end users in accordance with the agreed service requirements. It must also satisfy the depar tment and the public that it is achieving acceptable standards of corporate governance and is being prudent in its expenditure of public funds.
The organisation should understand that the department must monitor the use of public funds for public accountability’s sake, and it should cooperate with government officials who have oversight responsibilities.
Service users – End users play an important role in monitoring the quality of service delivery. The organisation concerned should put in place mechanisms to encourage regular and structured feedback.
K EY Q UOTE
“It is important that we are clear about what kind of a role we want to define for ourselves. Do we want to be a micro-manager or do we want to take a macro view of how a subvented organisation is delivering its services? The bureau’s role should be commonly understood by all concerned.”
Ms Sandra Lee, Permanent Secretary for Food & Health (Health) (2007-2011)
•
•
e
• 1.10 It is important that the relationship
between the three parties is properly managed.
Managing expectations. To avoid unnecessary disputes, both the organisation and the department must cooperate and manage each other’s expectations.
The department must e xplain to the subvented organisation how the department operates and how to work effectively within its environment. For example, the organisation should be notified of how long it will take to obtain approval from the department for changes to the agreed service delivery standards.
The s ub vented o r ganisa tio n o n the other hand mus t inform the department of how it is going to meet the service requirements.
Keeping to defined roles. The sponsoring department’s role is to allocate funding, monitor whether the service provider delivers the agreed outputs a nd outcom e s, ma na g e the service delivery relationship and monitor resources being spent.
The subvented organisation should act within the scope of its service requirements. Any change in the scope of its role must be agreed through a formal process. Otherwise, the organisa tion ma y find its e lf performing tasks outside its scope for no recompense. This may adversely affect its ability to deliver the services originally agreed. Formal variation processes are required even where the pa rties a re only seekin g to substitute different activities for the
same amount of service payment.
Achieving and maintaining a partnership. While well-drafted service requirements lay the foundation for success, there is no substitute for maintaining a constructive partnering relationship between the department and the subvented organisation. The objective of a partnering relationship is to ensure that both parties work towards the common goal of achieving agreed service outcomes.
If the relationship is not well maintained, both parties may be distracted from achieving the desired outcomes and spend time and energy in unproductive arguments and exchanges, or
C HAPTER 2
B OARD S TRUCTURE AND C OMPOSITION
Roles and Responsibilities
••
•
•
•
•
•
–
–
•
•
•
•
•
•
• 2.1 The general role of the board is to:
Provi de t he organisation wit h strategic guidance, leadership and overall direction, and monitor o rganisati o nal and managerial performance;
Ensure appropriate stewardship of the organisation’s financial resources;
Provide guidance in balancing competing demands on the organisation in the pursuit of its mission;
Ensure that the organisation fulfils its objectives of being open, solvent, and efficient, and works for the best long- term interests of its stakeholders; and Ensure that public funds and assets are use d in a n a ppropria te an d transparent manner.
Responsibility of the Board
2.2 Generally speaking t h e board is responsible for:
Establishing and maintaining an up- to-date framework of delegated or reserved powers, including a formal schedule of:
those matters specifically reserved for the board (see the box below for details); and
those matters delegated to the management. T he board may dele gate ma ny p owers to th e management if it so wishes.
Adopting a strategic planning process (including setting out and regularly reviewing the mission and the annual and longer term objectives, approving and monitoring plans to achieve them, and ensuring that corrective action is taken when necessary);
Overseeing the appointment, performance evaluation, c ompe nsation , and dismissal of senior executives;
Dealing with complaints from staff/
public against the senior executives of the organisation;
Ensuring the integrity of the organisation’s financial and non- fina ncia l re porting syste ms a n d formally approving and adopting the financial statements and the annual report;
Ensuring that high s tandards of corporate governance are observed at all times;
E nsuring that the organisation complies with an y statutory or administrative requirements for the use of public funds and that the board itself operates within the limits of its statutory and /or delegated authority;
Ensuring effective systems are in pla ce for the id e ntification a n d management of risk, internal control activity and its review, promulgation of codes of conduct and complying with legal requirements; and
Ensuring that an effective communication policy is in place for both internal and external communications, and that these communications are monitored.
B EST P RACTICES
6Matters reserved for the board
1. Appointments
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Appointment of the CEO and senior management.
Appointment or removal of the Secretary to the Board.
Membership and terms of reference of board committees.
2. Matters concerning board and senior management Delegations of authority to the CEO.
Ratification of the organisation chart.
Approval of remuneration and incentive policies.
Management contracts.
Overseas visit approvals.
Approval of succession plans.
Disclosure of conflicts of interest.
Assessment of the organisation’s and CEO’s performance.
Assessment of board performance.
Matters concerning the governance of the organisation.
3. Relations with the members and stakeholders
Arrangements for the Annual General Meeting (AGM) and other members’ meetings [if any].
Matters relating to reports as required by the Law.
Suggestions for nomination of directors for election by the members.
4. Financial matters
Approval of annual finan cial statements and directors’ reports.
Approval of accounting policies.
Approval of the internal audit plan.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Any question of borrowing or giving security over assets.
Treasury policies, e.g. foreign currency and interest rates.
Bank accounts and signatories.
Acceptance of audit reports including management letters.
5. Business strategy
Approval of strategic objectives and strategic plan.
Approval of proposals for major expansion or closures.
Approval of budgets.
Approval of priorities and performance indicators/measures.
6. Capital expenditure
Approval of the capital expenditure budget.
Approval of priorities.
Approval of individual expenditure items above $....
7. Lease or purchase of buildings
8. Major transactions not included in the budget
9. Actions or transactions involving legality or propriety 10. Internal control and reporting systems
Risk assessment and insurance.
Risk management policies, e.g. hedging.
Approval of company policies, including legal compliance.
Approval of reporting systems.
11. Use of the seal, if any
12. Donations and sponsorships above approved limits
2.3 Most of the roles and responsibilities
and matters reserved for the board are not requirements of law, but in the case of a l i m i t e d company, a matter for i t s m e m b e r s to determine when agreeing on the Articles of Association of the company.
Board Charter
2.4 Every board is encouraged to have a board charter/ terms of reference, outlining its roles and responsibilities, which is accessible by the public and may include:
•
•
•
•
•
•
•
•
A general description of the board’s • purpose;
An overview of the board’s monitoring role;
Structure and membership, including any re quirem ent of the mix and co mpos ition of bo ard m e mbe rs (e.g. number or proportion of Non- executive Directors (NEDs));
Matters re serve d for the board, d eleg a tion s to c om m ittees a nd executives and authority levels;
A position description of the role of the chairpers on, CEO, s enior executives, Executive Directors (EDs) and NEDs;
Appointment of board committees;
Bo ard m ember’s induction and training programme;
Agreed procedure for taking independent professional advice (whether as a board or in an individual capacity) on matters where there may be material risk to the organisation, or where the board members may be in breach of their duties; and
The board’s policy on transparency/
disclosure.
Composition and Organisation
Board Structure
2.5 In Hong Kong, the unitary board structure, in which one single board comprises both EDs and NEDs, is most common. Companie s incorp orate d under the Companies Ordinance (the majority of subvented organisations) are required to have a unitary board.
The Guide will not elaborate on other board structures.
General meeting of members
Board of directors
CEO and top management
Managers and employees
Figure 2.1 Key features of unitary
board
•
•
The board usually consists of a majority of NEDs.
EDs and NEDs are both integral to the board as they work together, often with the NEDs providing the necessary and healthy questions and challenges to suggestions and plans proposed by EDs.
Size of the Board
2.6 There is no guideline about the optimal size of a board but le gislation, for example, establishing a statutory body may specify the maximum or minimum number of directors allowed. A subvented organisation should consider the following factors when determining the appropriate board size:
•
•
•
•
•
•
The size of the organisation;
The scope and complexity of activities (e.g. diversity of stakeholders);
The desired ratio of EDs to NEDs;
Independence requirements of NEDs;
Board diversity in terms of professional experience, gender, age, technical expertise /knowledge, and level of experience in the board;
Number of board committees and their compositions (e.g. if committees include members of the board); and
• Other specific requirements, e.g. those specified in funding agreements.
2.7 As a general principle, the number of board members should be kept to a minimum. Practical experience suggests that board management, achieving con sen s us, making decision s and arranging for board meetings is more difficult with larger boards.
5
Board Structure and Composition
Inadequacies
One subvented organisation operated 15 subsidiary service units to provide public services to over 10 000 beneficiaries. Its board comprised over 100 members from the Government, the community, service recipients, staff and management within the organisation. It had the following inadequacies –
The board was too large and was not conducive to effective decision making;
Over 40% of the board m embers were staff of the organisation; and
Three members of a nine-member Executive Committee were staff members, who should abstain from voting on matters concerning staff benefits.
Audit recommended that the organisation should – Reduce the size of its board;
Review the composition of the board with a view to creating a majority of external members (independent NEDs); and
Ensure that staff members of the Ex-Com abstained from voting on matters concerning staff benefits.
Improvements made
The organisation established a new board of 25 members, with a substantial majority being independent members, service recipients and chairpersons of subsidiary service units.
Directors were required to declare possible conflicts of interest at the beginning of each board meeting. No staff members would be appointed to committees on audit, finance and remuneration.
Key members of the Board
Chairperson
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• 2.8 The chairp e rson is responsible for
leading the board and must demonstrate the ability to manage the board, obtain the support and confidence of the board members and stakeholders, and devote sufficient time to the organisation’s affairs. T he res ponsibilitie s of the chairperson include:
Chairing AGMs and board meetings.
The chairperson must ensure that every board member contributes to the functioning of the board.
Decisions should only be made with due reference to views expressed by boa rd me m be rs . Disse n tin g views should be fully explored with dis cus sion focusing o n the be st outcome;
Providing leadership to the board;
Upholding the highest standards of integrity and probity;
Promoting the highest standards of corporate governance;
Dealing with conflict or disagreement within the board;
Establishing an effective working relationship with the CEO, providing support and advice while respecting executive responsibility, and ensuring that board decisions are carried out;
Building an effective and complementary board, initiating change and planning succession in board appointments, subject to board and stakeholders’
approval;
2.9 A checklist for the chairperson is at Annex 2.
Ensuring the appropriate induction of new board members, making sure that they are fully briefed on their duties and responsibilities;
Setting the agenda, style and tone of board dis cussions to promote effective decision-making and constructive debate;
Ensuring that there is an effective performance rev ie w proce s s for individual board members and for the board as a whole;
Ensuring that the board takes proper accou nt of sta tutory a nd othe r requirements and makes decisions based on a full consideration of all relevant issues;
E ns uring th at the bo ard m eets regularly and that minutes of meetings accurately record decisions take n, inte re sts d e cla re d, vie ws expressed and, where appropriate, the attribution of views to individual board members;
Ensuring that key issues are discussed by the board in a timely manner, that the board has adequate support and resources and is provided with all the necessary information on which to make decisions;
Taking decisions between meetings where necessary and within parameters agreed by the board;
E nsuring that the organisation communicates effectively
with its s takehold er s ; and
Communicating with external stakeholders.
2.10 Day-to-day management of the organisation is not the role of the chairperson. In order to strengthen the structural checks and balances, the roles of chairperson and CEO should be separated and fulfilled by different persons.
B EST P RACTICE
Main Responsibilities of a CEO
Provide strategic vision and high-level business judgement and wisdom to facilitate the board’s decisions;
Oversee the day-to-day running of the business and executing the board’s decisions/instructions;
Provide leadership to achieve the organisation’s purposes and objectives;
Develop rules and procedures within which the executive carries out its operations;
Meet performance targets;
Build necessary internal infrastructure to ensure the cost effectiveness of operations; and
Maintain good relationships with the organisation’s stakeholders.
–
–
– – – –
B EST P RACTICE
7The chairperson’s relationship with the CEO
It is important for the chairperson and CEO to discuss and agree between them their respective roles, to ensure the organisation provides a united and coordinated front and to avoid potential friction.
More broadly, the chairperson will need to agree with the CEO how they are going to work together. This will include:
1. Agreeing the key things they need to achieve;
2. Confirming the expectations each has of the other;
3. Confirming how the board will interact with and as sist the organisation and the CEO:
What support and advice does the CEO want
What are the protocols for board-staff communication
4. Confirming how the CEO will report to the board and how the CEO’s performance will be reviewed;
5. Discussing how board meetings will be organised/serviced:
How to prepare board agendas
What are the key areas the board needs to focus on What papers will be prepared and in what format Who will minute the meetings and in what detail
6. Clarifying the role of the CEO in making the board effective, including recruitment of future board members;
7. Clarifying what information the chair wants/doesn’t want; and 8. Confirming who will be the principal external spokesperson for the
organisation.
Directors
2.11 Directors of an organisation are collectively responsible for corporate governance and make the decisions that determine the organisation’s prosperity and integrity.
The legal duties of directors are explained in Chapter 8. Some additional considerations specific to EDs and NEDs are shown in the following box:
Additional considerations relevant to EDs and NEDs
In cases where EDs are current employee s of the organis ation, they must leave their functional responsibilities at the boardroom door.
Ensure appro priate staff and infrastructure systems are in place.
Know when to call on NEDs’
support or involvement in a specific activity.
Must balance the detailed day-to- day business operations with the board’s overall strategy.
•
•
•
•
• Scrutinise the or gan isa tion’s performance in achieving agreed corporate goals and objectives and monitor performance reporting.
• Satisfy themselves that financial information is accurate, and that financial controls and systems of risk management are robust and defensible.
• Provide an independent view on strategy, policy, performance, accounta bility, re s ource s, key appointments and standards of conduct.
• May nee d to que stion the judgement of executives or make a stand against them.
• Serve on audit and other committees as custodians of the governance process.
• Monitor the executive activity and contribute to the development of strategy.
• Address succession planning and other sensitive Human Resources (HR) matters.
•
•
•
•
•
•
•
•
•
B EST P RACTICE
The effective non-executive director
Upholds the highest ethical standards of integrity and probity;
Supports executives in their leadership of the organisation while monitoring their conduct;
Questions intelligently, debates constructively, challenges rigorously and decides dispassionately;
Listens sensitively to the views of others, inside and outside the board;
Gains the trust and respect of other board members; and Promotes the highest standards of corporate governance.
Source: Adapted from Derek Higgs (Jan 2003)8
2.12 A sample appointment letter for a NED is at Annex 3.
Personal and Ethical At tributes of Board Members
2.13 Boa r d me m b e r s should have t h e following personal and ethical attributes:
Selflessness – board members should take decisions in the interest of the organis ation, not to gain financial or other material benefits for themselves, their family, or their friends.
Integrity – board members should not place themselves under any obligation to outside individuals or organisations that might influence the performance of their board duties.
Objectivity – board members should make board business choices purely on merit.
• Accountability – board members are accountable for their decisions and actions and must submit themselves to the appropriate level of scrutiny.
•
•
•
•
Openness – board members should be as open as possible about the decisions and actions that they take.
Honesty – board members have a duty to declare any private interests relating to their board duties.
Leadership – board members should promote and support these principles by leadership and example.
Commitment – board members who do not attend meetings and other tasks regularly cannot fulfil their roles.
2.14 A checklist for the board is at Annex 4.
Induction and Training
2.15 New board members should undergo a full induction, in which they receive the training and information they need to carry out their new role. They should also meet key staff, service users and beneficiaries, and other stakeholders.
2.16 Training should enable board members to understand both the public sector context in which the organisation operates and its specific operations and environment.
2.17 Information provided to new board m embers should include the organisation’s aims and objectives, control environment, organisational risks and risk management practices, key personnel, delegation arrangements, board and staff structure, and budget planning and performance management processes.
2.18 The training should explain the expected standards of integrity and accountability.
Board members need to understand their legal duties (see Chapter 8) to the organisation.
2.19 The board should have a strategy for the support and personal development of board members so that they can keep abreast of the knowledge and skills they need. This can include training / familiarisation in areas such as public sector de velop me nts , go v e rna n ce practices, financial literacy and risk management.
2.20 Board members should continue to visit the organisation’s facilities regularly.
This serves both to ensure that they remain familiar with the organisation’s operations and staff as well as helping the m to pe rform t heir ove rsight function.
Succession Planning
2.21 In many statutory bodies, it is Government that makes the appointments. In other circumstances, the board should ensure timely replacement of directors resigning or reaching the end of their terms.
Attention should be given to:
•
•
Determining an appropriate length of service so as to balance the need for a retention of corporate knowledge with a healthy turn-over of board members; and
Succession planning for replacement of the chairperson and other directors.
2.22 Before new bo ard m embers are appointed, the board (perhaps on the advice of a Nomination Committee) should determine what attributes and knowledge are needed, and document these in the form of a role description or profile. All board members including government representatives should be appointed for their relevant skills and experience. The board should ensure that the recruitment process is able to attract a wide range of candidates who possess the necessary skill sets to support the board. Under the new Companies Ordinance Cap 622, employment of a director for a term that exceeds or may exceed three years requires approval of the members of the company.
2.23 It is particularly important that individual board members realise that an invitation to join the board of a statutory body or NGO is not merely an honour. Such a role carries real responsibilities and should be treated seriously.
B EST P RACTICE
Elements of a good succession planning process:
•
•
•
•
•
•
A continuous process
Driven and controlled by the board, with the CEO’s participation
Easily executable in the event of a crisis or any adverse event Considers succession requirements based on corporate strategy Geared towards finding the right leader at the right time Develops talent pools at lower levels
Appointment of Government
Officials to a Board
2.24 The purpose of appointing government officials to the board of a subvented or gan isa tio n differs fr o m case to case. Each case should be considered on its m erits, with regard to its circumstances and the legal implications of different arrangements. The role of a government official on a board, apart from his/her legal duties as a director of the organisation, is mainly to act as a link between the Government and the organisation. The intended role(s) of government officials should be clearly stipulated in writing. Their functions may include:
•
•
•
•
•
•
Monitoring the performance of the organisation;
Enhancing understanding of service delivery expectations;
E nsuring t h a t p ublic fun d s are properly used;
Safeguarding government investments;
Looking after the public interest; and Offering advice on government policy.
2.25 There may be times when the government representatives should not be present in a board discussion, or receive the pape rs , for fe a r of b re achin g the l e g a l duties owed to the organisation, e.g. in relation to the organisation’s budget or bid for funding from the Government.
Le g al Position of Government Representatives on Boards
2.26 The duties of any board memb e rs are governed by company law, unless modified by a relevant
Government officials appointed as board members are governed by company law when they discharge duties in this role, unless their duties as members are specifically modified by a relevant ordinance or the Articles of Association.
2.27 In the case of an organisation established by an ordinance , the duties of directors will depend on that ordinance. Where the ordinance does not vest specific duties on its directors the court would naturally extend the company law principles to the directors.
Other Forms of Government Representation in S u bvented Organisations
2.28 Organisations may benefit from access to public sector decision makers. To avoid the potential difficulties involved in appointing government representatives to the board, other means are sometimes adopted. These include:
•
•
•
G overnment offic ers attending board meetings as observers, and/or advisers. Such attendance should be based on prior agreement between the sp onso ring d ep artme nt a nd the subvented organis ation, e.g.
documented in the MAA or funding agreement;
Government officers chairing or sitting on the Advisory Board of the organisation; and
Stipulating measures to protect the Government’s interest in the MAA or funding agreement (e.g. having access to papers and minutes, and the right to conduct independent audits).
The role of observers
There may be times when observer status, or appointment as an adviser may be more appropriate for government representatives, allowing some of the advantages of membership of the organisation whilst avoiding the pitfalls.
Observers attend board meetings, but may not vote on matters.
Depending on the organisation /board and its understanding with the Government, observers may participate in discussions or may be expected to remain silent.
Observers may be excluded from meetings when their presence may potentially compromise the organisation’s position, e.g. when the board is discussing sensitive personnel matters, strategic issues or litigation.
An observer should remove himself/herself from a discussion when there is a potential conflict of interest. For example, an observer representing the sponsoring department should not be involved in the board’s budget decision process. Having said that, depending on the circumstances, there might be merit in the observer being involved in the initial discussion to learn about the development and rationale of a particular funding proposal.
In any case, a list of issues with potential for conflicts of interest should be identified early, and protocols for handling them should be developed.
Appointment by Government of Non-Officials to Boards
2.29 Where board members are appointed by the Government, the board should ensure that the Government is aware of the specific skills and experience required o f new board members.
2.30 The Government aims to appoint the best available people, i.e. individuals who are willing, committed, competent, experienced and meet the specific needs of the board. Due regard will be given to ensure a good balance of expertise, experience and backgrounds among board members.
2.31 Women's participation in statutory bodies is encouraged. Where possible and appropriate, young “fresh blood” will be considered for appointment in order to bring in new ideas and broaden representation.
2.32 Non-officials are not normally appointed to serve on more than six advisory and statutory bodies at any one time or to sit on the same body for more than six years - the so-called “Six Year” and “Six Committee” rules. This is to ensure a reasonable distribution of workload and turnover of membership. Departments need to pay particular attention to the attendance record of board members being considered for re-appointment.
