To achieve strategic value for businesses and stakeholders, companies should have a principles-based approach to corporate governance, rather than a rules-based one. As an accountant, Ernest Lee FCPA (practising) knows this all too well. The President of the Hong Kong Chartered Governance Institute tells Jemelyn Yadao how he wants to broaden awareness of the role of governance professionals and how, by partnering with CPAs, they can support the drive for sustainability
Photography by Raul Ariano
In January, the independent professional body that qualifies and represents governance professionals in Hong Kong and Mainland China, announced it had elected a new president – a proud CPA. “I’m very glad to be an accountant and a governance professional. The accounting qualification opens up a lot of opportunities for all of us,” says Ernest Lee FCPA (practising), President of the Hong Kong Chartered Governance Institute (HKCGI), and Technical Partner at Deloitte China.
For Lee, it led to his career in technical advisory, which involved directly contributing to financial reporting standard setting locally and to the development of International Financial Reporting Standards (IFRSs). He was the chairman of the Hong Kong Institute of CPAs’ Financial Reporting Standards Committee (FRSC) for the past three years, an experience, he says, that taught him the importance of being aware of baseline principles, whether as an auditor or a governance professional.
“I saw the development of these principle-based standards that you have to follow in financial reporting. I think to be a successful governance professional, we need to really understand the rationale behind the rules for better governance, rather than just tick the box, because rules cannot spell out exactly what you need to do in every possible situation,” says Lee, speaking to A Plus while on a business trip in Shanghai. “Given the complexity of transactions and the business environment, companies have to apply principles rather than just follow the rules. So I believe that my experience as the chair of the FRSC was invaluable for me to further strengthen my desire to contribute to the development of governance professionals.”
He also credits his time as FRSC chair for preparing him for his current role. Through the chairmanship, he was able to hone some crucial skills. “It required a lot of interaction with members of the committee, other stakeholders, including regulators, preparers and other standard setters from around the world, including the International Accounting Standards Board, so my organization and negotiation skills were developed through this. Another important attribute is the ability to listen and understand the needs and concerns of stakeholders. These kinds of attributes are very important for me as the president of HKCGI.”
With over 70 years of history, HKCGI is the Hong Kong/China division of the global Chartered Governance Institute (CGI), which was founded in 1891 in the United Kingdom as the Institute of Secretaries to represent the interests of the emerging profession of corporation secretaries. “The Hong Kong/China division is one of the fastest growing divisions of CGI, with over 10,000 members and students, and significant representations in many listed companies and cross-industry governance functions,” says Lee.
He decided to take the HKCGI’s Chartered Governance Qualifying Programme examinations after qualifying as a CPA. He was admitted as an associate of HKCGI and CGI in 1997 and elected a Fellow in 2013. “The qualification has been invaluable in my career as a professional accountant and auditor. The broad range of subjects in the qualification process equipped me with a good understanding of corporate governance, including directors’ responsibilities and duties, risk management, as well as strategic management. So as a professional accountant, in addition to proper financial reporting, best corporate governance is always something on top of my mind. I strongly believe that better governance leads to a better future for all organizations.”
Formerly known as The Hong Kong Institute of Chartered Secretaries, HKCGI took on its current name in July 2021 as part of a rebranding exercise. Lee says the rationale behind the name change was to raise awareness of the expanded roles of governance professionals, and how members – himself included – come from many different backgrounds.
“In the old days, the role of many of our members had a focus on compliance, helping their organizations to meet the regulatory and compliance requirements. Given that we are currently in a highly dynamic environment, governance professionals have become key advisors to the board, which is interested in a much wider range of issues, including for example, gender diversity, risk management, sustainability, etc.,” Lee explains. “Governance professionals today continue to be experts in regulatory compliance, but they are also specialists who help organizations to look at the purpose of the business and how the business can serve the community.”
Such a broader role and wider range of responsibilities are reflected in the composition of HKCGI’s membership and students in terms of their job titles and work activities, he adds. “Our new brand aims to reflect our unique position and critical role as the highly qualified experts in corporate governance in Hong Kong and Mainland China.”
“In my mind, explaining how you have complied with the principles in the Code in your corporate governance reports gives you a lot more scope to shine.”
Ernest Lee FCPA (practising) was Chairman of the Institute’s Financial Reporting Standards Committee in 2019-2021, and was also a member of sub-committees such as Revenue Recognition Advisory Panel and Disclosure Initiative Advisory Panel.
Focusing on purpose
According to Lee, some listed companies in Hong Kong and Mainland China view the implementation of best practices in corporate governance as just a compliance issue, rather than a performance enhancement opportunity. “For listed companies and the governance professionals advising them, it is easier to take the box-ticking approach to complying with Hong Kong’s Corporate Governance Code (Code). Taking a principle-based approach requires a lot more thought and board involvement,” he says, adding that while this approach may be difficult, the benefits are huge. “In my mind, explaining how you have complied with the principles in the Code in your corporate governance reports gives you a lot more scope to shine. What I observe is that analysts and investors, especially institutional investors, do rely on companies’ corporate governance reports because they demonstrate how good your governance standards are.”
While the tendency to view corporate governance as just a compliance issue still exists, Lee also observes a shift towards a stakeholder-responsive and purposeful approach to governance among some companies. “It’s certainly a trend that senior management of companies are not only focusing on short-term or even medium-term profitability. They are really looking more on the sustainability of the business. That requires what we call ‘purposeful governance’ – the approach that focuses on what organizations can provide to the community, rather than what they can take from the community,” explains Lee. “I’m a very strong supporter of the trend towards purposeful governance.”
To help equip governance practitioners with the relevant knowledge and enable them to support companies as part of this trend, HKCGI has developed practical guidance on purposeful governance. “The climate change conference that we held in January was a successful event where senior members of HKCGI teamed up with the Secretary for the Environment of the Hong Kong government. We also discussed climate-related issues with regulators at the Hong Kong Stock Exchange and industry leaders.”
Lee also believes more can be done to address the long-standing issue of low representation of women on Hong Kong boards. He cites a review report released by the HKCGI last year titled Missing Opportunities? A Review of Gender Diversity on Hong Kong Boards, which calls for the Corporate Governance Code to be amended in six years to include a target of a minimum 30 percent female representation on boards. “The target will be voluntary, but only in a sense that it will be subject to a comply or explain regime,” Lee says. The report also reveals that as at July 2020, the proportion of women on boards of the Hang Seng Index 50 listed companies stood at 13.7 percent. In other words, only around one-in-seven directors are female directors. “Diversity on boards encourage better corporate governance because it is well-recognized as contributing to more effective boards and better corporate performance. It matters because the under-representation of women on our boards fails to meet the standards of an international financial centre. If we don’t make full use of the talent available to serve on boards in Hong Kong, women miss the opportunity to develop their careers and serve the Hong Kong corporate community.”
Lee says governance practitioners must continuously stay informed of the potential areas of threat, particularly as they are increasingly relied on to pivot organizations across various social and economic challenges. “It can be quite challenging, especially at this point in time, given the dynamics of different things, such as the COVID-19 crisis, political matters, and the war in Ukraine, which may have significant impact on, let’s say, the going concern of the company. As a governance professional, it is really important to grasp the different aspects that could impact on the company, and advise the board efficiently.”
Fulfiling their evolving roles is another challenge for governance professionals, he says. HKCGI’s members advise not only on internal controls and regulatory compliance frameworks, but on diverse issues, including managing climate risk, setting environmental, social and governance (ESG) targets and adapting to the ever-changing expectations of their organization’s key stakeholders.
“The listing rules and the Code make it clear that company secretaries are key governance advisors to the board and are responsible for updating the board on latest laws and regulations relevant to the company. Therefore, our roles have become a lot more complex in the global pursuit of good governance,” he says. Under a new Listing Rule effective from 3 July 2021, a company secretary is recognized as part of senior management in a listed company. “Moreover, as new technologies increasingly enable the administrative side of the role to be automated, the strategic side of the role has grown in importance,” he adds. HKCGI helps members stay on top of changes through its continuing professional development programmes, says Lee, with prominent topics now including board dynamics, risk management and sustainability. These include, for example, HKCGI’s Annual Corporate and Regulatory Update, an annual conference which attracts about 2,000 governance professionals to learn the latest development of regulatory and related requirements.
Like the accounting profession, HKCGI is looking forward to seeing the first proposed standards of the newly created International Sustainability Standards Board (ISSB), the body formed to create a comprehensive global baseline of high-quality sustainability disclosure standards. “It will set some baseline principles to be followed – this approach is quite consistent with my experience as a standard setter in Hong Kong for financial reporting standards, as Hong Kong Financial Reporting Standards or IFRSs are principle-based rather than rule-based. The ISSB will certainly facilitate consistent and comparable disclosures on sustainability matters across different jurisdictions. Before the creation of the ISSB, there had been criticisms about the fragmented approach around standard setting in this area, which made it difficult for companies to follow and also for stakeholders to understand or compare the sustainability reports of different companies,” Lee says.
He hopes that the first proposed standards will be ready on a timely basis for global public consultation. “ESG matters are now constantly topics on board agenda, and I believe that governance professionals are instrumental in promoting better governance for organizations in this area.”
“A company secretary cannot replace an accountant, just as an accountant cannot replace a company secretary.”
Lee, Technical Partner of Deloitte China, is also an advisor to the Master of Accounting programme of Cambridge Judge Business School, University of Cambridge.
Working with accountants
According to Lee, accountants have been in high demand since he was first considering potential career paths. “There was a very good stock market and an expansion of economic activities and market transactions, so the demand for professional accountants was huge, but I think this is still the case nowadays. We are very lucky to be professional accountants,” he says.
He started his career at a Big Four firm as an auditor, during which he gained his CPA qualification. “At that time, I noted that many accountants in business did not only take up the role as financial controllers or finance directors, but many of them were also acting as the company secretaries of their organizations. I believed that gaining the professional qualification from HKCGI would bring me a competitive advantage if I later decided to develop my career in the business sector.”
Ultimately, Lee decided to stay working at a firm, where his knowledge in governance allowed him to question the effectiveness of boards. “As auditors, we focus on advising our clients on ways to improve their internal and board processes. By having a good understanding of corporate governance, I am in a better position to help my clients to identify opportunities that could bring improvements to their internal and board processes,” he adds.
Lee’s career changed course when he moved to the technical side, focusing on accounting and auditing standards and other relevant regulatory requirements, and eventually becoming Technical Partner at Deloitte China in 2017. One of the most memorable – and most chaotic – moments of his career was when he first joined the technical department at his previous firm 20 years ago. “My eldest daughter was born right before a client meeting! Luckily during that period, my colleagues were very supportive. I got to work with very good teammates who generously covered some of my work to make it possible for me to cope with both work and family,” he recalls, adding that at the time, he was developing his technical expertise, while also adjusting to being a first-time father.
Unsurprisingly, Lee believes that accountants have an important role to play in enhancing corporate governance standards within organizations, especially with the right mindset. “I think it’s important for accountants to believe that better governance would lead to a better future. I think what we believe in will certainly affect our actions. And this will have a positive impact, not only on the organizations we’re working in, but also the overall ESG environment, as better governance is key to corporate sustainability.”
He encourages his fellow accountants to actively build on their governance skills and knowledge. “The HKCGI’s fast-track professional route gives accountants the opportunity to join HKCGI by taking only two examination modules, and as members, they would be able to develop the skills and knowledge relating to corporate governance through events and seminars,” he says. The fast-track route is open to qualified accountants or lawyers with more than five years’ relevant post-qualifying experience.
Lee believes that accountants and governance professionals can work together in various areas, for example in ESG matters. “A governance professional cannot hope to be an expert in all areas relevant to governance. So a company secretary cannot replace an accountant, just as an accountant cannot replace a company secretary. Governance professionals need to bring relevant experience together to generate positive impacts for the company.”
Inspired by his daughter, who is now a medical student, he likens the roles of governance professionals to family medicine specialists. “Family medicine specialists provide continuous and comprehensive healthcare for individuals but they call for the specific experience and knowledge of other specialist doctors when they need to. Governance professionals and company secretaries know when to consult with an accountant or other parties.”
According to HKCGI’s report Missing Opportunities? A Review of Gender Diversity on Hong Kong Boards, 76 percent of the larger cap companies comprising the the Hang Seng Index (HSI) 50 listed companies has one woman on the board, as at July 2020. Of them, around half have more than one director, and some are executive directors. The remaining 24 percent of HSI 50 companies do not have women on boards.