HSBC-全球投资策略-聚焦治理了解董事会有效性审查-2021518-35

Disclosures

&

DisclaimerThis

report

must

be

read

with

the

disclosures

and

the

analyst

certifications

inthe

Disclosure

appendix,

and

with

the

Disclaimer,

which

forms

part

of

it.Issuer

of

report:

HSBC

Bank

plcView

HSBC

Global

Research

at:Board

effectiveness

reviews,

if

conducted

properly,

provide

aninsight

and

independent

view

on

board

practices

and

dynamicsAlthough

they

are

becoming

the

norm

globally,

their

purposeand

practical

implications

are

often

misunderstoodWe

explore

the

key

aspects

and

international

requirements

for

reviews

to

assist

investors

in

their

engagement

with

companiesImportance

of

board

effectiveness

reviews.

Evaluating

board

effectiveness

is

achallenging

task,

but

is

crucial

when

it

comes

to

improving

companies’

performanceand

reducing

the

likelihood

of

corporate

failures.

Company

disclosure,

which

focuseson

the

measurable

aspects,

provides

only

a

partial

picture

of

a

board’s

functionality.Ticking

all

the

boxes

does

not

necessarily

translate

into

good

governance

and

canadversely

give

a

false

sense

of

security.We

think

that

board

effectiveness

reviews

(BERs),

especially

those

that

areexternally

facilitated,

are

an

effective

tool

for

assessing

the

qualitative

andquantitative

aspects

of

board

effectiveness

and

giving

the

level

of

insight

to

investors,which

they

would

struggle

finding

elsewhere.BERs

are

particularly

helpful

when

it

comes

to

assessing

board

dynamics,

which,

asrecent

research

suggests,

is

a

better

predictor

of

company

profitability

than

anyindividual

director

demographic

characteristics.The

role

of

investors.

BERs

are

slowly

becoming

the

norm

in

many

markets.

Surveydata

suggests

that

investors

are

interested

in

companies’

BER;

however,

most

of

thecompanies

say

that

investors

have

never

shown

interest

in

BER

processesand

outcomes.We

think,

the

review

adds

value

only

when

it

is

not

perceived

as

a

basic

complianceexercise.

We

think

investors

should

ask

for

greater

visibility

from

both

companies

andreviewers

as

to

how

board

reviews

are

conducted.

The

role

of

the

reviewer

is

toidentify

any

issues

related

to

effectiveness;

the

role

of

the

board

is

to

takeappropriate

action

to

address

them;

and

the

role

of

investors

is

to

hold

the

board

toaccount

for

the

effectiveness

of

those

actions.In

this

report

we:provide

our

view

on

the

purpose,

benefits

and

concerns

associated

with

BERs;suggest

a

framework

for

how

to

conduct

an

external

BER;explain

the

key

stages

and

outcomes

of

BERs

with

a

case

study;compare

international

regulatory

frameworks

for

BERs

in

20

markets;present

a

list

of

ten

questions

to

assist

investors

in

their

engagement.18

May

2021Yaryna

KobelCorporate

Governance

AnalystHSBC

Bank

plcyaryna.kobel@+44

20

3359

6152Camila

SarmientoESG

AnalystHSBC

Securities

(USA)

Inc.camila.sarmiento@+1

212

525

5901Dylan

Whitfield,

FCAHead

of

Forensic

AccountingHSBC

Bank

plcdylan.b.whitfield@+44

20

3359

5903Wai-Shin

Chan,

CFAHead,

Climate

Change

Centre;

Head,

ESG

ResearchThe

Hongkong

and

Shanghai

Banking

Corporation

Limitedwai.shin.chan@.hk+852

2822

4870ESGGlobalGovernance

in

focusUnderstanding

board

effectiveness

reviews

ESG

●

Global

18

May

2021Board

effectiveness

reviews

(BER)Source:AllPartyParliamentaryCorporateGovernanceGroup2018,UK;Corporategovernancecodes,regulationsandlistingrules;HSBCanalysis21What

are

the

market-

or

stockexchange-specific

BER

requirementsor

recommendations?

5

To

what

extent

should

investors

get

involved

in

the

BER

process?2Does

the

board

undertake

aregular/annual

BER,

and

when

isthe

next

one?

Has

the

companyhad

an

external

BER

within

thelast

three

years?

3

What

areas

have

been

addressed

in

the

BER?

More

specifically,

does

it

review

boardroom

dynamics?4Who

facilitated

the

externalreview?

Does

this

organisation/person

have

any

connections

tothe

company?What

questions

should

investors

ask?38%of

listed

companies

inEurope

carry

out

anexternal

BER

at

leastevery

three

years66%of

UK

listed

companieswould

undertake

anexternal

review

absentthe

requirement

10

How

do

the

company’s

BER

practices

compare

with

those

of

its

global

peers?

9

What

progress

has

been

made

towards

the

agreed

actions

from

the

last

BER,

and

how

should

this

influence

other

areas

of

engagement?

8

Are

there

any

concerns

about

the

robustness

of

the

process?

7

Does

the

board

use

the

BER

to

evolve

and

develop

its

governance

practices?

6

What

are

the

board’s

key

strengths

and

areas

for

development?

What

follow-up

actions

have

been

agreed?Conflict

of

interests?123annuallyyearsyearsUAE*the

requirement

is

for

an

external

or

internal

review**not

specified:

Singapore,

IndiaSouth

Africa*France,

Italy,Saudi

Arabia,Spain,

UKUS

56%

of

companies

say

that

investors

have

never

shown

interest

in

BER

processes

and

outcomesExternal

BER

frequency

by

market

75%

of

investors

say

they

are

very

interested

in

companies’

BERsKey

facts

and

figures(BER)Importance

of

boardeffectiveness

reviewsBoard

effectiveness:

what

does

itmean?Why

should

investors

care

aboutboard

effectiveness

reviews?Internal

and

externally

facilitatedBERs:

positives

and

negativesThe

purpose

of

external

BERs244567The

key

aspects

of

external

BERs

9Our

frameworkWhen

it

should

take

placeThe

main

objectives

of

BERsWho

should

deliver

the

review

9101111Who

and

what

should

be

evaluated

12How

it

should

be

conductedBER

outcomes

and

reporting1416Case

study

on

reporting:

SSE

plc

16BER

international

frameworksOverviewAmericasAsia-PacificEuropeMiddle

East,

Turkey

and

AfricaIn

conclusion…Disclosure

appendixDisclaimer191921222429313234

ESG

●

Global

18

May

2021ContentsBoard

effectiveness

reviewsWe

acknowledge

the

contribution

of

Sanchit

Sethi,

ESG

analyst,

Bangalore,

in

the

preparationof

this

report.

3

ESG

●

Global

18

May

2021Importance

of

boardeffectiveness

reviewsData

suggest

that

investors

are

interested

in

BERs;

however,

thereis

scope

for

investor

engagement

to

improveGiven

the

mixed

views,

we

think

that

BERs’

benefits,

shortcomingsand

practical

implications

should

be

further

exploredWe

give

our

view

on

its

purpose

and

provide

an

insight

into

BERs’

key

benefits

and

concerns

Board

effectiveness:

what

does

it

mean?

There

is

no

one

comprehensive

definition

of

board

effectiveness.

The

UK

corporate

governance

regulator

states:

An

effective

board

defines

the

company’s

purpose

and

then

sets

a

strategy

to

deliver

it,

underpinned

by

the

valuesandbehavioursthatshapeitscultureandthewayit

conducts

its

business.

Financial

Reporting

Council,

UK

In

our

view,

for

the

board

to

be

effective,

it

needs

to

fulfil

its

role

and

responsibilities

and

maximise

value

for

companies’

investors

and

other

key

stakeholders

over

the

long

term.

The

board

should

clearly

define

its

role

and

company

purpose,

have

directors

who

can

work

well

as

a

group

while

fulfilling

their

individual

duties,

and

ensure

that

new

business

opportunities

are

identified

while

effectively

managing

all

material

existing

and

emerging

risks.

We

think

that

individual

boards

are

to

decide

on

the

governance

arrangements

most

appropriate

for

them

to

be

effective.

At

the

same

time,

there

is

some

degree

of

consensus

on

important

drivers

of

a

board’s

effectiveness:

an

appropriate

structure,

size

and

composition,

including

diversity

of

skills,

background

and

personal

strengths.1

Much

more

of

what

constitutes

board

effectiveness

is

behavioural:

the

behaviours

directors

display

individually

and

board

dynamics

as

a

team.

Trust,

openness,

robust

debate

and

constructive

challenge

signal

an

effective

board.

______________________________________

1

FRC,

Guidance

on

Board

Effectiveness,

July

20184ESG

●

Global

18

May

2021We

think

there

are

two

broad

categories

of

board

and

director

characteristics

influencingboard

effectiveness:quantitative

aspects

that

are

easy

to

assess,

including

structure

and

size

of

the

board,independence,

age

and

tenure

of

directors,

gender

diversity,

number

and

level

of

meetingattendance,

andqualitative

aspects

that

are

more

difficult

to

assess:

human,

psychological

and

behavioural.Researchers

have

tested

a

number

of

board

and

director

quantitative

characteristics

and

theirdirect

impact

on

financial

performance.

Results

are

inconsistent.

Some

of

them

established

apositive

(or

negative)

impact

of

these

attributes

on

a

company’s

financial

performance

andpromoting

shareholder

value,

including

board

size2,

independence3,

gender

diversity4

andseparate

chair

and

CEO

roles5,

while

others

found

no

link.On

the

qualitative

characteristics,

research

suggests

that

board

dynamics

has

a

significantimpact

on

profitability.

The

impact

of

a

board

functioning

as

a

cohesive

team

is

an

eight

timesgreater

predictor

of

corporate

profitability

than

individual

director

demographics6.Why

should

investors

care

about

board

effectiveness

reviews?We

think

investors

should

consider

board

dynamics

and

other

qualitative

aspects

in

theirassessment

of

a

company

to

receive

a

more

comprehensive

picture

of

board

practices

andpotential

associated

governance

risks.In

our

view,

investors

should

better

understand

how

to

use

a

board

effectiveness

review(BER)7,

which

provides

a

better

view

of

how

effective

the

board

is.As

figure

1

shows,

investor

respondents

to

the

survey

carried

out

by

Lintstock

for

The

All

PartyParliamentary

Corporate

Governance

Group

indicated

that

they

are

interested

in

companies’

BER;however,

companies

do

not

observe

the

same

level

of

interest.

Given

the

mixed

responses,

wethink

BERs’

purpose

and

practical

implications

should

be

further

explored

by

investors.______________________________________2

Kiel,

G.C.,

Nicholson,

G.J.,

2003.

Board

composition

and

corporate

performance:

how

the

Australian

experience

informscontrasting

theories

of

corporate

governance.

Corp.

Govern.:

Int.

Rev.

11(3),

189205.3

Klein,

A.,

2002.

Audit

committee,

board

of

director

characteristics

and

earnings

management.

J.

Account.

Econ.

33

(3),375400.4

Nielsen,

S.,

Huse,

M.,

2010.

The

contribution

of

women

on

boards

of

directors:

going

beyond

the

surface.

Corp.

Govern.:Int.

Rev.18

(2),

1361485

Coles,

J.,

McWilliams,

V.,

Sen,

N.,

2001.

An

examination

of

the

relationship

of

governance

mechanisms

to

performance.J.

Manage.27

(1),

2355.6

Charas

S,

2015,

Improving

corporate

performance

by

enhancing

team

dynamics

at

the

board

level,

International

Journalof

Disclosure

and

Governance

Vol.

12,

2,

107–1317

Also

known

as

board

effectiveness/performance

evaluation

or

review,

or

self-assessment.

All

terms

are

usedinterchangeably.

5Two

categories

of

boardeffectiveness

aspectsLink

to

financial

performanceA

comprehensive

view

isrequired

to

understand

howeffective

the

board

isBERs

are

useful…

however,they

are

not

widely

employedby

investorsESG

●

Global

18

May

2021Figure1.

[To

companies]

Have

investorsshown

an

interest

in

the

boardeffectiveness

review

processes

andoutcomes?

(2018)Source:AllPartyParliamentaryCorporateGovernanceGroup2018,UK[To

investors:]

How

would

you

rate

yourlevel

of

interest

in

companies'

boardeffectiveness

reviews?

(2018)Source:AllPartyParliamentaryCorporateGovernanceGroup2018,UKThe

BER

is

a

feedback

mechanism

for

improving

board

and

director

effectiveness,

maximisingtheir

strengths

and

highlighting

areas

for

further

development

and

focus.

BERs

are

useful

toolshelping

companies

to

improve

and

evolve

in

the

interests

of

investors

and

other

stakeholders.BERs

are

particularly

helpful

when

it

comes

to

capturing

board

dynamics

and

culture.

It

ischallenging

otherwise

to

get

insight

into

some

behavioural

and

psychological

aspects

withoutthe

ability

to

observe

the

board

in

action.

BERs

can

be

used

to

get

an

insight

into

board

practices

and

dynamics;

however,

we

believe

its

potential

has

not

been

fully

used

by

investors.Company

disclosure,

which

focuses

on

the

measurable

characteristics

of

board

structure,meetings,

and

composition,

provides

only

a

partial

picture

of

a

board’s

functionality.

Reviewingpublic

disclosures

and

ticking

all

the

boxes

does

not

necessarily

translate

into

good

governanceand

can

adversely

give

a

false

sense

of

security,

especially

when

there

are

no

obviousred

flags.Internal

and

externally

facilitated

BERs:

positives

and

negativesThere

are

two

main

types

of

BERs:

internal

and

external

reviews,

which

differ

in

formality

andmethods.

Both

have

clear

benefits

and

will

help

with

recalibrating

focus,

raising

issues

orprompting

open

discussion.However,

we

think

that

an

externally

facilitated

BER

is

a

more

effective

tool

for

assessing

all

aspects

(especially

qualitative

aspects)

of

board

effectiveness

and

giving

the

level

of

insight

to

investors

that

they

will

struggle

to

find

elsewhere.

Internal

BER,

which

is

conducted

by

a

company

on

itself,

may

feature

a

greater

depth

of

company

knowledge

and

a

more

personal

reflection

on

a

board’s

functioning.

Internal

review

also

lessens

concerns

over

commercial

confidentiality.

At

the

same

time,

its

shortcomings

include

less

objectivity,

as

it

is

hard

to

achieve

impartiality

in

self-evaluation.

External

BER,

which

is

facilitated

by

a

third

party,

offers

a

fresh,

independent

and

objective

perspective,

new

ways

of

thinking,

an

insight

into

best

practice

and

breadth

of

experience.

Third6

What

is

BER

What

BERs

can

captureReviewing

public

disclosuresis

likely

to

be

ineffectivewhen

attempting

to

evaluatea

board

An

internal

review

offers

more

personal

reflection,

while

an

external

review

brings

objectivity

ESG

●

Global

18

May

2021parties

are

able

to

view

a

company’s

practices

dispassionately

and

free

from

pre-existingbiases.

They

should

also

feel

more

comfortable

asking

challenging

questions

(or

‘stupid’questions)

and

delivering

challenging

recommendations

in

their

final

report.

Board

membersmay

also

be

willing

to

discuss

their

concerns

more

freely

with

an

external

facilitator.

However,

inaddition

to

concerns

about

commercial

confidentiality

and

insufficient

understanding

of

thecompany,

an

external

BER

brings

extra

cost.Despite

these

concerns,

companies

see

great

value

in

externally

facilitated

reviews:

66%

of

UKlisted

companies

say

they

would

still

undertake

an

external

BER

every

three

years,

absent

therequirement

in

the

UK

Corporate

Governance

Code8.66%of

UK

listed

companies

would

undertakean

external

review

absent

the

requirementThe

purpose

of

external

BERsBroadly

there

are

two

main

views

on

its

purpose,

which

inform

expectations

about

how

the

BERis

carried

out

and

what

it

is

expected

to

achieve.

According

to

the

recent

review

of

independentBERs

in

the

UK

listed

sector,

they

are:that

the

purpose

of

evaluation

is

to

support

a

continual

process

of

self-improvement,

whichmight

include

making

changes

to

the

board,

and

that

disclosure

should

provide

evidence

ofa

robust

process

and

a

willingness

to

act

on

the

outcomes.

By

doing

so,

the

board

canprovide

some

reassurance

to

investors

and

others

that

it

takes

its

responsibilities

seriouslyand

is

endeavouring

to

carry

them

out

to

the

best

of

its

ability;

orthat

the

purpose

of

evaluation

is

to

provide

an

assessment

of

whether

the

board

is

or

is

not

effective,

in

either

absolute

or

relative

terms,

and

that

the

purpose

of

disclosure

is

to

provide

assurance

as

to

the

future

performance

of

the

board

and

company.9In

our

view,

external

BERs

are

not

intended

to

provide

assurance

as

this

would

dramaticallyreduce

the

directors’

openness

with

the

reviewer;

and

it

would

raise

unrealistic

expectations

asto

the

ability

of

the

review

to

prevent

any

failings.We

think

the

main

purpose

of

external

BERs

is

to

ensure

that

the

board

improves

its

owneffectiveness

and

the

performance

of

the

company

(in

line

with

its

strategy

as

measured

by

theKPIs).

At

the

same

time,

we

think

a

reviewer

should

include

their

opinion

or

indication

onrelative

effectiveness

according

to

the

framework

or

methodology

used,

which

would

allow

theboard

to

better

track

its

progress.______________________________________8

15

Years

of

Reviewing

the

Performance

of

Boards,

The

All

Party

Parliamentary

Corporate

Governance

Group,

20189

Review

of

the

effectiveness

of

independent

board

evaluation

in

the

UK

listed

sector,

The

Chartered

Governance

Institute,2021

7ESG

●

Global

18

May

2021In

order

to

provide

some

reassurance

to

investors,

companies

should

also

disclose

orcommunicate

to

shareholders

and

other

stakeholders

their

progress

against

agreed

objectives(and

not

only

their

willingness

to

act

on

the

outcomes).BER,

in

our

view,

is

likely

to

reduce,

rather

than

eliminate,

the

risk

of

corporate

governancefailure.

This

is

only

true,

however,

when

the

review

is

not

perceived

as

a

basic

complianceexercise,

but

rather

when

the

board

is

committed

to

continuous

improvement,

and

investors

areactively

following

the

outcomes.Key

benefits,

insights

and

challenges

for

investorsIn

addition

to

providing

some

reassurance

by

the

board,

reporting

on

outcomes

of

externallyfacilitated

BERs

gives

investors:more

comprehensive

information

on

qualitative

characteristics

of

board

effectivenesscombined

with

other

qualitative

facets,

which

is

specific

to

the

company;an

independent

and

objective

view

of

board

practices

to

enhance

their

understanding;

anda

clear

set

of

areas

for

consideration

together

with

the

reviewer’s

recommendations

(in

other

words,

focus

areas

for

further

engagement

and

follow

up,

if

needed,

and

risk

assessment).

Some

companies,

especially

in

emerging

markets

where

there

is

no

established

practice

of

board

reviews,

may

be

reluctant

to

involve

an

external

party

(for

the

reasons

mentioned

above)

and/or

share

any

details

of

the

review.

This

may

create

a

tension

or

conflict.

We

think

investors

should

ask

for

greater

visibility

from

both

companies

and

reviewers

as

to

how

board

reviews

have

been

conducted

to

satisfy

themselves

that

they

are

being

undertaken

robustly.

At

the

same

time,

engaging

a

reviewer

does

not

transfer

overall

responsibility

for

the

review

to

them

–

it

stays

with

the

board.

The

role

of

the

reviewer

is

to

identify

and

report

on

any

issues

to

improve

board

effectiveness,

while…

…

the

role

of

the

board

is

to

take

appropriate

action

to

address

them;

and

the

role

of

investors

is

to

hold

the

board

to

account

for

the

progress

on

those

actions.

ICSA:

The

Chartered

Governance

Institute

And

now

let

us

dive

into

the

BER

process

and

outcomes.8The

purpose

of

BER

is

toprovide

some

reassurance

toinvestorsBER

is

likely

to

reduce

therisk

of

corporate

governancefailureThere

are

multiple

benefitsand

uses

of

BERs’

outcomes

ESG

●

Global

18

May

2021The

key

aspects

of

externalBERsThe

practices

of

reviewers

vary

in

approach

and

quality,

as

externalBER

is

a

relatively

new

phenomenonWe

think

that

clarity

around

the

process

and

outcomes

is

of

crucialimportance

to

achieve

BERs’

purposeWe

suggest

a

BER

framework

of

how

reviews

could

be

conducted

to

maximise

their

benefitsOur

frameworkThe

practices

of

reviewers

vary

significantly.

We

believe

that

robustness

of

the

review

processis

key,

so

a

clear

framework

should

be

used

by

companies.

The

process

outline

should

be

alsoshared

with

investors.In

figure

2,

we

suggest

a

structure

to

aid

thinking

through

the

process.

The

board

should

agreeon

every

question

and

look

for

investor

input

on

some

(if

not

all)

of

the

steps.Figure

2.

Board

effectiveness

review

frameworkSource:HSBC

9

ESG

●

Global

18

May

2021When

it

should

take

placeIn

practice,

the

decision

to

conduct

a

review

is

mostly

triggered

by

the

country-,

regulator-

orstock

exchange-specific

requirements.

The

most

common

practice

is

for

boards

to

undertake

areview

on

an

annual

or

biannual

basis,

which

is

in

line

with

most

of

the

rules

orrecommendations

specifying

the

frequency

of

BERs.We

are

supportive

of

the

recommendation

to

conduct

a

BER

at

least

annually.

At

the

sametime,

BERs

are

dynamic

in

nature

and

boards

are

free

to

undertake

them

anytime,

especiallywhen

serious

issues

feature

prominently.

It

is

a

good

response

strategy

for

the

boards

to

decide(and

for

investors

to

suggest)

to

have

a

review

when

they

encounter

challenges

of

some

kind,e.g.

changes

in

the

company’s

operations

or

board

composition,

appointment

or

departure

ofthe

chair

or

CEO.We

think

that

boards

should

assess

their

effectiveness

more

often

than

once

a

year

or

evencontinuously

conduct

internal

reviews

on

specific

issues.

However,

reporting

on

the

reviewoutcomes

may

only

be

necessary

once

a

year.A

more

comprehensive

externally

facilitated

review

is

typically

undertaken

every

three

years.

Itshould

cover

all

key

areas,

as

we

discuss

below,

adjusted

in

line

with

the

company-specificneeds

and

circumstances.

Overall,

38%

of

listed

companies

across

Europe

carry

out

anexternally

facilitated

review

at

least

every

three

years.10External

reviews

should

beconducted

at

least

everythree

years,

while

internalreviews

should

be

morefrequent

or

continuous

38%

of

listed

companies

in

Europe

carry

out

an

external

BER

at

l