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[Music] [Music] in the following talk on corporate governance jill meller legal and european business director of mtr corporation limited discusses the importance of corporate governance she starts by giving examples of corporate governance failures and illustrates why getting it right is important she then chooses 11 hot topics that she deals with every day and discusses some recent trends in corporate governance providing statistics and examples to make her points my name is jill meller and i'm mtr's legal and european business director i should say that this isn't really an academic lecture tonight so there's no right or wrong in in lots of areas of corporate governance and so what i'm trying to give you is my view on some of the hot topics in corporate governance at the moment and you will know mtr as the owner and operator of the metro system here in hong kong but also as you may see from my title we have operations now around the world so in europe we operate in both the uk and in sweden we have operations in three cities in the mainland of china and also down in australia and so corporate governance is a subject very close to my heart not just as mtr's legal director and company secretary to the board of our listed company here in hong kong but also as the executive that has oversight for our european business because i have to ask myself what controls do we put in place over our european business to make sure that that business is run in the way that we would wish and in accordance with mtr's corporate values which are very important to us recently in hong kong you may have read i think it was only last week or at the end of april the consultation conclusions which were published by the stock exchange in relation to the listing of companies with what are called weighted voting rights so this is rather than every shareholder having one share and titling them to one vote certain groups of shareholders having a certain class of shares entitling them to more votes on certain issues and this you may recall when alibaba was listening and alibaba chose to list in new york rather than in hong kong because they weren't allowed to have their weighted voting structure here in hong kong so the stock exchange is now changing the listing rules to allow these kind of companies to list here but one of the conditions that they have laid down is that these companies must have a corporate governance committee and a corporate governance committee chaired and comprised only of independent non-executive directors who will have a number of specific duties but in particular are required to review and monitor whether the listed issuer the company is being operated and managed for the benefit of all of its shareholders so corporate governance continues to be important and continues to be in the news here in hong kong and around the world and why is corporate governance important well i'll start from talking about the people that got it wrong and the list of corporate governance failures around the world is long and distinguished so i'll start back in 2001 with the enron scandal this was probably the first big corporate scandal to really hit the headlines around the world but what they did was developed a scheme that was designed to hide some of the losses that the business was making and to make it appear to be more profitable than the company was and this was a scheme that the cfo was aware of that the ceo was aware of and this was a company that was audited by arthur anderson which at the time was one of the big five accounting firms you now hear that we only have a big four accounting firms because this scandal ultimately took not only enron down put some of its executives in prison but also was responsible for the downfall of arthur anderson as an accounting firm so you would think that we would start to learn lessons but in 2010 and a little bit closer to home there was uh the mining company rio tinto who had executives that admitted to taking bribes in a trial in the mainland of china a few years later and again in china gatso smith climbed the pharmaceuticals company admitted eventually that some of its salesmen were bribing doctors in the mainland of china to buy gsk products as opposed to other pharmaceuticals and you'll see there find 492 million us dollars so these are not just big reputational issues but can also have large financial consequences for the companies involved moving on a year in 2015 and there have been lots of scandals involving financial services companies but five here of the world's largest banks pleaded guilty to rigging the currency markets the bill they were expected to be hit with was more than 5 billion us dollars alongside criminal charges moving on a year and this is one of my favorite stories in some ways and it's a sad story wells fargo is an american bank and it's american bank that was very well run historically so before the 2008 global financial crisis they were renowned as being a bank that didn't take a lot of risk that were very responsible as a bank and so they came through the 2008 financial crisis relatively unscathed and in fact very well thought of from a corporate governance perspective but more recently and again this came from the top down there was a lot of pressure on their sales people to cross-sell products so if you had a bank account with wells fargo they wanted you to buy an insurance policy from them to uh buy a credit card from them uh to take out some investments with them and the pressure from the top was such that the employees started opening fake bank accounts millions of fake bank accounts and eventually this was found out and while the fine associated with this was relatively small 185 million us dollars it had a huge reputational hit on the bank there were senate hearings that followed they had to close 400 of their 6 000 branches the ceo lost his job and indeed they lost a lot of major customers so this is something from which i'm not sure they will ever fully recover and it's very surprising given the way that the bank was previously run and the values that they prided themselves on 2017 the head of samsung jailed for five years in a scandal that also brought down the president of south korea and here it was alleged that contributions that were made by samsung were made to entities controlled by a close friend of the president in return for government support for a merger of two samsung affiliated companies coming right up to date in uh earlier this year in january a company called carillion in the uk was put into liquidation and this company was one of the largest suppliers of facilities management and construction services to various industries in the uk issues again here were around the efficacy of external audits so carillion was obviously having issues with cash flow it changed its payment terms from 30 days to 60 days and nobody was putting up the flags from a disclosure and transparency perspective and warning that perhaps this might mean that the company had some problems so not only are the management under the spotlight but also kpmg their auditors for having signed off a clean bill of health when they did their external audits there were also stories there about payments into pension schemes being inadequate about payments of wages being withheld and about executives dumping their own shares once they realized that the company was in trouble also this year harvey weinstein you must all know who this guy is would you as an investor want to invest in a company that had the culture of harvey weinstein's company there must have been people within that business that knew what was going on that knew that non-disclosure agreements were being signed in relation to some of these alleged uh assaults and yet we're ignoring it and just continuing to run their business so would you want to invest in a company like that would you want to work for a company like that and if not and what we'll come on to think about is what role might the board of directors have of a company having setting the corporate culture to make sure that things like happened in the weinstein company um can't exist and finally in the bad news stories to bring it right up to date uh the facebook data privacy scandal so you will have read i'm sure about facebook using a quiz or there was a quiz on facebook personality quiz where you typed in answered the quiz and it told you what kind of person you were but the fact that you had accessed this quiz enabled a company called cambridge analytica to access a lot of your data and they were then the allegation is using this to influence political processes uh in different countries so you will have seen mark zuckerberg at a senate hearing last week trying to explain facebook's uh position you will have seen perhaps earlier this week at their their global corporate conference him explaining the steps that they're taking to try and make sure these things don't happen again so i hope with these bad news stories i've illustrated to you that corporate governance is important and that getting it right is important and so what i've chosen to talk to you about today is 11 and i'm not quite sure why i picked 11 but 11 hot topics in corporate governance things that for me as a company secretary for the institute of chartered secretaries are very topical at the moment issues that come across my desk every day and before i get on to the promised hot topics there are two overarching trends that i just wanted to share with you this afternoon which to my mind underlie a lot of these hot topics and a lot of the current changes in corporate governance so corporate governance used to be about shareholders so you may have learnt about milton friedman who had a very strong view that the role of a company was to make profits for its shareholders and it was then up to its shareholders what they did with those profits they could choose to give money to charity they could choose to invest in other companies but the company's real sole stakeholder was it's its shareholders and a good company would also pay taxes to the local government and then it was up to a government to look after social problems so that's really where corporate governance started and one definition here from not too long ago was a set of internal control mechanisms that a company puts in place to dissuade potentially self-interested managers who may have a very short-term view in their own paycheck and a short-term increase in the value of the shares from uh being detrimental to the longer-term welfare of shareholders and stakeholders so originally the view around corporate governance was worry about your shareholders they are the prime stakeholder that you have make money for them and don't worry about anything else i think then this view has shifted to take into account more shareholders and i've slightly cheekily put up there a quote from myself which is one that i came up with to try and in layman's terms explain corporate governance and i describe it as the checks and balances that a company puts in place to ensure that it is properly run in the interests of all of its stakeholders and i wouldn't there pick out shareholders as the prime group of stakeholders they're clearly very important but i think there are a lot of other very important stakeholder groups and that could be for mtr our customers it could be our employees it could be the community in which we operate because the services that mtr provides are fully integrated with the community here in hong kong it could be the environment it will no doubt still be our investors both shareholders and our debt providers but i would take a much broader view of the stakeholders that you have to take into account when you're thinking about corporate governance and then i'll shift this on slightly with a quote from a guy from deloitte's he's the head of their uk center for corporate governance and he said in a report they issued earlier this year that if not done already companies should now be defining and beginning to report on their purpose as a company what are they about as a company and how are they engaging with what he calls their ecosystem of employees of customers and suppliers and they should be reviewing their impact as a company on society as a whole so this is making companies a lot more responsible than just taking account of their shareholders it's saying you also have to look at your broader stakeholder groups and indeed your impact on society as a whole and when i come on to talk about some of the more specific uh hot topics i think you will see this trend sort of threading through the different topics that i will touch on and the second overarching trend i wanted to talk about is a shift from compliance to doing the right thing so i think again in the past there was a requirement an expectation that companies would comply with all laws and regulations to which they were subject and that somehow that was enough and i actually think in today's world it is no longer enough so you take a company like starbucks and i'll use this example because their general counsel here in hong kong likes me to tell this tale but starbucks had a tax avoidance scheme in europe it was a perfectly legal scheme and it was a way that they organized their business in order to pay effectively the minimum amount of tax so if you were just thinking about your shareholders then they were doing the right thing they complied with all relevant laws all relevant regulations and it was a legal scheme all of a sudden people in the uk decided that this scheme wasn't the right thing because by putting this scheme in place they weren't paying as much tax in the uk as they would otherwise have done now this may not be a fair view because actually starbucks employs a lot of people in the uk like in hong kong you find starbucks on just about every high street so they were regenerating high streets they must have been using a lot of local suppliers and engaging with a lot of local businesses but none of that was taken into account somehow society and social media decided that what starbucks was doing was the wrong thing and that's a very difficult role as a corporate lawyer as a company secretary it's very easy to advise on what the law says and what you should therefore do but if you have to try and work out what the right thing is that's a much more difficult question and i think in today's day and age particularly with social media what the right thing is can also change very quickly so some news will get out on social media it will immediately spread around the world and lots of people may have a view about whether something is right or wrong and all of a sudden as a company you find yourself trying to respond to that crisis that you've ended up in because you didn't think beyond what was legal compliance but really what are my stakeholders going to think about this what is society going to think about the way that we operate as a company and again i think you'll see this shift in these broader group of stakeholders and the higher expectations that they have run through these themes on corporate governance it's not an easy subject i often say as the company secretary and the legal director at mtr i have to give my legal advice um not in a vacuum but in the middle of three moving pieces and one piece that moves is our business so i mentioned uh some of mtr's global businesses earlier and when i joined mtr 14 years ago we didn't have any international businesses we were purely a hong kong company so as our company has changed we need to think about how our corporate governance should change to fit with that expanding company to fit with the fact that we're now operating in five different jurisdictions around the world the regulatory environment has also changed 14 years ago there was no competition law in hong kong the company's ordinance hadn't been refreshed in the way that it was a couple of years ago and there are now laws and regulations around the world which are having multinational effect so fat kerp is something you may have heard of is a u.s tax avoidance law which has a direct impact here in hong kong the uk bribery act is is something similar so not only is our business changing the regulatory environment is changing and on top of that stakeholders expectations are just getting tougher and tougher so i think when you're thinking about corporate governance try to think of it not as something that is static something that is constantly moving to reflect the changing environment so on to the hot topic this was a paper recently issued by deloitte suggesting a number of issues that should be on company's board of directors agendas in 2018 and you'll be glad to know that i'm not going to cover all of those tonight or we could be here until about midnight i think but i have selected um a few of them and the first one i want to talk about is activist investors now i'm not sure if these guys are people that you've heard about in previous lectures but i'll take uh to give you an example one type of activist investor called a short seller and a short seller is somebody who borrows the shares in a company so somebody else shares they borrow them they sell them on the basis that they think the share price is going to go down and that they will then be able to rebuy those shares at a lower price and give them back to the person that they borrowed them from so it's it's a restricted practice in some geographies but it is permissible in lots of places and so when they're borrowing their shares they're doing on the basis they think the share price will go down and what we're increasingly seeing around the world now is some what are called activist investors who actually take deliberate action to try and make sure the share price goes down during that period that they've borrowed the shares you can be safe hopefully from these activist investors if your corporate governance is good enough and you are being transparent enough in terms of the information that you're releasing to the market and there are some mixed views around shareholder activism in asia i have a couple of quotes here um unsurprisingly fund managers don't really think that activist investing will take hold so they have said aggressive activism hasn't worked very well in asia i think any change will be very incremental there will be no dramatic change somebody else another hedge fund manager the activist approach is not for asia you can't use a pure north american approach people don't react the same way here but then in contrast a quote from anonymous analytics which a fascinating website if you ever want to take a look who said the road ahead for hong kong to clean up remains long and will be littered with the corpses of more fraudulent companies to come so despite some of those views activist investors are active here in hong kong so 78 companies were publicly targeted by activists in asia in 2016 and they weren't all targeted by short sellers some of them were targeted by uh investors who wanted a change to the board membership they may have wanted a change in corporate strategy they may have wanted a change in the remuneration policy of the executives so there are different ways that investors go about making their demands and in the first half of 2017 i don't have figures for 2018. a further 38 companies faced public demand from activist investors and 42 percent of them would claim to be successful so they made some demands of a company and the company reacted to those demands made by the investors and there's a number you'll have read some of the famous cases here um in hong kong and their claims that their demands relate to the board as i mentioned to the balance sheet to strategy to remuneration to m a activity that the companies may be engaging in and they may try and rally other investors they may write letters to the ceo and the chairman they may turn up at your agm and cause noise they may propose a vote of no confidence in the board an agm they may try and instruct the board to behave in a particular way they may vote against certain resolutions and they will certainly make a lot of noise in the media all of which as a company secretary you need to be prepared for moving on to a second uh hot topic board composition and i'm not going to talk here specifically about diversity because i'll come on to talk about diversity and gender diversity a little bit later but there is a broader issue i think in corporate governance around board structures and composition so that could be thinking about the size of the board it could be thinking about the number and nature of committees that a company has in place so at mtr we have the usual three an audit a nomination and a remuneration committee but on top of that we have a corporate responsibility committee a risk committee and a capital works committee because of the large capital projects that were undertaking here in hong kong at the moment so we possibly have have more than most there's also some discussion around the balance of non-executive and independent non-executive directors on a board with the listing rules obviously specifying a minimum of a third ined's but again there being a push for more companies to have more independent non-executive directors and indeed there are questions asked in hong kong but this hasn't yet been addressed by the stock exchange as to whether majority shareholders should be able to vote on the appointment of an independent non-executive director with the argument being that if the majority shareholder votes them in how can they be independent how can they be looking after the interests of the minority shareholders so that's something i think for the future there's also been some comments and a recent stock exchange consultation exercise did look at this which was the nomination process how are boards finding new directors and i've got the little cartoon at the bottom there saying how do we break the old boys network lots of search firms around the world will be engaged by companies to find new non-executive and particularly independent non-executive directors but i think in hong kong that's still a relatively low proportion of companies that find new directors that root it's more often than not likely to be somebody the chairman knows who they think will add value to the business and particularly so given such a majority of companies in hong kong have such concentrated ownership in our case in the government or more often in families and so the hkex consultation paper did attempt to address a number of these issues they are now requiring that companies disclose their nomination policies in their annual report so companies talk about the process that they go through to find new directors and show how in finding those directors they will add to the diversity of the board and bring different perspectives skills and experience to the board they've also looked at factors affecting an ined's an independent non-exec director's independence and try to tighten the rules around that and one issue they have looked at is overboarding which is a director who sits on too many boards to be able to properly do his job so i'm full of admiration for you guys because i suspect a lot of you have full-time jobs and you study as well in the evening but if you have a director that perhaps sits on 15 different boards of companies can they really do their job properly on each of those 15 boards and so what the stock exchange is requiring they're not putting in place a cap saying you can't have more than a certain number of directorships but they are saying uh when you are appointed to your seventh or more than seventh directorship then in the circular that is proposing your nomination the company has to give reasons for their belief that you will be able to perform your job properly and so i think hong kong is making steps in this direction other jurisdictions in the world have much tighter rules um other jurisdictions would also impose for example a time limit so a director could only serve three-year terms again not yet here in hong kong but i think it will be coming and very much a hot topic moving on i promised that i would talk a little bit about the role of a board in determining a company's culture and i think this is very relevant to a few of the kind of bad news stories that i told you earlier and particularly the weinstein company so this is a company where you had a very powerful guy running this with his brother i believe who was engaging allegedly in acts of sexual assault and misconduct and it's very difficult to think that a lot of people within that company must have known this was going on similarly in wells fargo they were setting these very aggressive sales targets and people must have known that these millions of new accounts that were being opened can't have all been real so did people know and were they turning a blind eye and what could the board of directors have done of that you may say you know what the board only meets a few times a year it's not involved in the day-to-day management of the business and so how could it influence the culture of the company well there was a recent uk financial reporting council paper and they came up with a number of key observations in terms of the role that a board of directors can play in setting and then monitoring and reviewing a company's culture and they said it was critical for the leaders of a company including the board to embody the desired culture of a company the board role was to determine the purpose of a company and to ensure that the company's values strategy and business model were aligned to that purpose so if you have a value as i'm sure lots of the companies that we saw earlier failed had very good corporate values but you have to make sure your strategy and your business model are aligned to those values they also felt that the voice of certain functions of a company should be emboldened or strengthened in the boardroom so functions like human resources like internal audit like ethics like compliance and risk and so the board of directors has a role in asking to hear from those functions asking to meet people from the internal audit team and asking them what have you found in your audits recently are you seeing anything that worries you in having that access to those people that are directly involved in influencing the corporate culture they also felt that the board had a responsibility to understand behavior throughout a company because culture is effectively a combination of values attitudes and behaviors so the board should understand the behavior through the company and challenge the company where they found misalignment between the behavior and the values or whether they needed better information in order to really assess whether these sales figures could possibly be true there was also a finding that the border is responsible for aligning explaining the alignment between values culture and behavior and incentives to shareholders so on what basis are you remunerating your executives are you paying them for success in achieving the right culture within the business and if not why not and finally they felt that the board should engage in effective stewardship including engagement about culture and better reporting so you won't generally in many companies annual reports find much about culture but why not because it's an incredibly important attribute of a company and if you get it wrong as we've seen it can have catastrophic consequences i'll move on to cyber risk and cyber risk data privacy is something you see just about everywhere every day when you open a newspaper and it's also an issue i find that terrifies most company secretaries because i think i don't know much about technology and i don't possibly know what this can have to do with me but there was a survey done by a company called protivity in 2016 looking at executive perspectives on top risks and three of the top ten one was cyber threats one was privacy or identity management and information security and a third was the rapid speed of disruptive innovation and new technologies and we've seen far more recently the facebook scandal that i referred to earlier and so if this is on the board of directors agenda or at the top of their agenda then it's something that company secretaries and governance professionals also need to think about financial consequences can be high but also the reputational consequences from those of you that were around and reading newspapers in 2008 you may recall the octopus data privacy issue where octopus had transferred data of some of its customers to third parties and this led indeed to an investigation into octopuses practice but also to some changes in the data protection guidelines here in hong kong and i think to a tightening of the approach from the data privacy commissioner in terms of the way that he has gone about his business so as a company secretary or a corporate governance professional what can you do about cyber risk well you could think about your board composition do you have somebody on your board that understands cyber risk that understands new technologies and can ask the right questions of management in this area can you make sure that technology comes up on the board agenda as a regular topic of discussion so it's something that's top of mind for board members can you make sure we just talked about the role of the board in setting culture but can you make sure the board has the right level of oversight on i.t and technology issues can you look at the internal controls you have in place around technology and perhaps prompt some of your it colleagues to see if these should be strengthened or at very least reviewed in light of some recent cyber attacks that have occurred somewhere around the world how do you manage the classified information that you deal with as company secretaries you come across huge amounts not only of personal data about board members but also aboard papers which may contain classified or secret information about the company how do you make sure either the hard copies or soft copies of those are not being leaked around which could cause a huge potential disadvantage to your company so lots i think in this space for the company secretary or the corporate governance professional to think about so i promised i'd talk about diversity and obviously as a woman a subject close to my heart i will uh focus a little bit if you'll allow me on gender diversity statement in the middle of the screen there that in australia there are fewer women running top australian companies then there are men named john or peter or david so you have more johns as ceos more peters as ceos and more davids and ceos than you have women which is frankly quite an astounding statistic and there has i think in the world from investors and from other studies that have been done there's become an increasing consensus that gender diversity makes sense and it improves the overall economic and social performance of a company my view on this has always been that having diverse views in a room generally means that you make better decisions and not all women will think alike and not all men will think alike but just having a diversity of perspectives must help when you think about your employee base you will probably have you may have 50 40 60 percent of women so why shouldn't you have the same on an executive committee or a board think about your customers for mtr just about everybody travels on the mtr and i don't know the gender diversity balance in hong kong but it's probably round about 50 50. so again why shouldn't that be reflected in our management committees and our board there's a lot of research they've been caused by influential organizations such as the world economic forum on the need for greater respect and opportunities for women but despite this i have to say progress in hong kong has been somewhat glacially slow so community business have been producing a report on women and boards for the last nine years and they have said that we've seen only a nominal improvement so back nine years ago uh we had eight point nine percent of women on boards and anybody know what the figure would be this year any guesses we've crept up very slowly to the the grand figure of 13.8 so that's only what eight to thirteen five percent increase in nine years so very slow progress we lagged behind other countries so singapore for example has moved up from 10.9 percent to 13.1 in a single year and it's important to say they don't set quotas for women on board so this is just through voluntary action um there are some positive steps i think uh there are organizations like the 30 club setting voluntary targets for companies here in hong kong but i think there is more that all of us can do um for chairman to do when they're thinking about searching for new directors for women to do in terms of encouraging other women coming up through the workforce to be considered for executive or board level positions so lots more i think for us to do in this space esg environmental social and governance issues and i think the reason that this is a hot topic really goes back to the earlier comment that i made about companies needing to take into account a much broader group of stakeholders so not only looking at their shareholders but looking at their environmental performance looking at their social performance looking at their corporate governance and you can't really see the numbers in the chart on the top right there it doesn't matter it's just to illustrate from 2005 to 2016 what an increase there has been an investors looking to invest funds in companies that they believe has good esg performance so investors are looking to allocate funds to sustainable investments and they're requiring companies or expecting companies to manage some longer-term risks such as climate change risk regulators are tightening requirements in the environmental space and if you talk to millennials or other younger employees i don't quite consider myself in that category anymore then they're interested and they ask you in interviews about your esg performance what do you do in terms of community investment what do you do to control your environmental emissions um so these are all issues that are incredibly relevant and i think are not just or should not just be in the realm of a corporate social responsibility department that is thinking about charitable donations but they need to be really embedded within a company's business and you're seeing again not so much here yet in hong kong but a shift from companies producing an annual report which looks at their financial performance and a sustainability report which looks at their esg performance to actually putting those together as an integrated report to explain how they're thinking about all of these different dimensions of their business when they're setting their strategy and they're making decisions moving on and i love this cartoon up here on the left board evaluation i've talked a lot tonight about boards of directors and how important they are in getting corporate governance right so if a board is so essential to remaining in business and being effective in business why are companies generally so reluctant to assess the performance of their board i have to go through an annual appraisal exercise every year with my boss and he looks at the targets he set me a year before and he assesses have i met those targets and we talk about targets for the following year but boards of directors tend to be much much more reluctant and there was a recent study by spencer stewart the recruitment company who suggested that only 21 of hang seng large cap index companies have performed a board evaluation exercise now i suspect some of the reluctance here in hong kong is connected to the concentrated ownership structure of a lot of hong kong companies where perhaps a family owner is reluctant to get an independent evaluation of how the business is performing but this is something that we've done at mtr and it's something we've tried to think about in a number of different ways so if you were thinking ever about starting a board evaluation process i'd suggest you start with an internal process so for us this consisted of me working with the chairman to come up with a list of questions that we could send to our board members we then asked them to fill in a questionnaire or i gave them a call and they talked me through their responses and we then on an anonymous basis collated their responses and we made certain changes on the back of what they'd suggested and that could be around the frequency of board meetings the length of board meetings the nature of the discussion at board meetings it could be around the papers that they receive it could be around the communications between the board management lots of different areas that you can choose to cover now the challenge as this cartoon shows is that if you do a form of self assessment if you ask somebody how well they think they're doing there will generally be a bit of optimism bias in their answer so i think it's great up there how have we performed brilliantly extremely well stunningly or outstandingly so the next step is to think about an external evaluation where you bring in a third party um to work with the chairman and the company secretary to perhaps interview the board members there may still be a questionnaire for them to fill out but to interview them separately and we've found that in doing that board members tend to be a little bit more open when they're talking to a third party and so you perhaps get some more honest feedback that you can then take into account one very tricky issue and this is something i've not been brave enough to address yet is whether you take into account individual performance of directors when you're doing a board evaluation so do you say well how has mr x performed this year did he contribute properly at board meetings did he attend enough board meetings did he come on the company visit was he there at the agm that gets very difficult because it tends to get a little bit personal and so that's not somewhere that we as mtr have gone yet might you include a review of the chairman's performance again it can be a very very sensitive issue and how if you're going to do these things on a regular basis do you keep them fresh so in the uk for example the corporate governance code requires companies to complete a board evaluation every year and to do an external review every three years so you can't just send the same questionnaire to your board members year in year out so perhaps the second year you might think about looking at the performance of a particular committee or you might think about looking at how has the board performed in relation to a particular transaction so when we were acquiring company a did you feel you got the right information did you have uh the right access to management to discuss your concerns about the acquisition so try and just be a little bit more specific or think about doing things differently so that you can keep it fresh for board members executive pay this is an issue that's not really had that much attention in hong kong but i think has had a huge amount of attention from around the world from politicians investors and the media and the discussion has moved here from being around absolute levels of pay is somebody paid too much to being around diversity in pay so there are requirements in some countries now to publish uh the difference between the ceo's pay and the average pay of all other employees they've also been discussions around how much control should shareholders have should shareholders have what is called a say on pay should they be able to approve how much remuneration the ceo receives every year in the uk again there's been a say on pay in terms of an advisory vote on the remuneration report since 2002 and since 2013 the shareholders have a binding vote on the remuneration policy so they don't have a binding vote on exactly how many dollars somebody receives but they would have a binding vote on the way that the remuneration is structured what is taken into account in determining the remuneration how are any incentive schemes structured so very few remuneration packages are being voted down around the world but there is certainly uh heightened attention in this area and i think therefore an incentive on companies to be more transparent to disclose in their annual reports voluntarily how they think about remuneration how they think about incentives so that hopefully when you do get to an agm you don't get these questions from shareholders i'll move on to regulation and this is an area i think we're all aware has been increasing in the amount of regulation in the complexity of the legislation legislation is increasingly cross-border in nature and the fines associated with breaches of regulation and legislation are only increasing so hong kong is generally seen as a very friendly place to do business with relatively low levels of regulation but i mentioned data privacy earlier the competition ordinance is something that has the last couple of years come into force and there are new european regulations the gdpr the general data privacy regulations which have an impact on pretty much any company in hong kong which has employees or does certain types of business in the eu so this is an area that's got more difficult and i think it's only going to get more difficult going forward and there was a great quote from the u.s a former us deputy attorney general if you think compliance is expensive try non-compliance so this is an issue that is not going away risk and crisis management you need both i think you need to be prepared you need to take steps to avoid a crisis arising hopefully by having an appropriate risk management framework in place but you also need to be prepared such that if your risk management framework fails and you end up in a crisis how are you going to respond to a crisis at mtr we have what we call an enterprise risk management framework and this we started back in around 2003 we'd always been very good we felt at managing operational and safety risks it's kind of in the nature of our business as a railway company had we thought about corporate risks had we thought about risks from changes to the prices of some of our resources that we needed had we thought about political risks had we thought about some of the reputational risks we weren't sure that we had and so we put in place a new system that was intended not just to look at operations and safety but really to look at holistically um what were the key risks to uh the company and the company as an enterprise as a whole lots of which actually spread across our different divisions and so we have a top-down and bottom-up process so we have individual department divisions thinking about the risks that are relevant to their own departments and their own operations and those then bubble up into a top risk map which is looked at by the executive committee our board and our board risk committee who then provide their top-down input to say okay you guys are too much in the weeds have you thought about these big picture issues have you thought about this have you thought about what property prices might do in hong kong and what that might do to our business before we had our new chief executive did we think about what the election of carrie lam might do to mtr's business so they're just prompting us to make sure we're thinking about the bigger picture as well as the management of the day-to-day risks and i think around risk you have to find a language that everybody can understand and the corporate governance code here in hong kong now requires an assessment every year not only of the effectiveness of your internal control systems but also of your risk management framework and what to do when risk management fails crisis management have a plan practice it and then follow it so we at mtr have a crisis management plan we run crisis exercises um every six months or so a scenario is selected and we all get a phone call to go into our executive conference room and we play out the crisis and you learn some real lessons through those exercises so things like having very clear lines of communication working out who your key stakeholders are because if you're the executive sat in headquarters in an executive conference room and we've had an issue with a train um out somewhere in up on west rail the guys who are actually managing the incident on the ground will be our operations colleagues up in the new territories so actually a lot of what our role is back at headquarters is liaising with stakeholders making sure the right information and accurate information is provided to the right people at the right times and it's very difficult because when an incident first happens chances are you don't know what's happened you don't know the root cause you don't necessarily know what you can do how long it will take to fix it you don't necessarily know what you can do to stop it happening again and so it's that challenge of responding quickly but making sure you've got the right information and my final one i think this is number 11. uh shareholder engagement there's a lovely quote at the top there a continent marching slowly but steadily towards an era of shareholding engagement and i think that's true i think a lot of times in the past people thought about engaging with shareholders through their annual reports perhaps once a year through their agms but uh from talking to some people a lot of agms in hong kong tend to be very short affairs without really much chance for shareholders to engage with the management and the board of the company and so i think this is changing there's a lot more work now being done in investor relations so throughout the course of the year in good times particularly as well as in bad talking to your investors talking to them about your financial performance talking to them about your esg performance holding your agm in such a way that it is really an opportunity for them to meet with your management and your directors if you're a small shareholder of a big company it's the only chance you get to speak directly to the chairman and to ask him a question about strategy or where a business is going so i would say take them seriously another advent is is for shareholders asking to have meetings directly with independent non-executive directors it hasn't come up yet for us but i think if we did get that request we would agree to it albeit we would want to know what they wanted to talk to the ineds about because you couldn't expect an ined to have day-to-day in-depth knowledge of the operations of a business but they would know hopefully about the values about the strategy about the culture and so if sheldon wanted to talk to them about that that's something that we would be open to so i hope in conclusion that i've shown you tonight that corporate governance does indeed matter i hope i've shown you that corporate governance needs to encompass both hard internal controls things like risk management systems things like cyber security systems but it also needs to incorporate the soft internal controls you need to get the culture right you need to get the communications right you need to get the people right i hope i've shown you that corporate governance isn't a static thing that it needs to be agile and it needs to respond to the changing needs of a business to the changing regulatory environment and importantly to changing stakeholder and societal expectations but it's still a very difficult thing to see corporate governance and so i say good corporate governance may almost be invisible but on the other hand as i started off bad corporate governance is only too visible to everybody so with that thank you very much [Music] you