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Banking, Finance & Insurance(HKTDC Hong Kong Trade Services, Vol 02,2004)

Vol 2, 2004

Banking, Finance & Insurance

Safeguarding Against The Compensation Culture

Creating A Culture Of Compliance

Safeguarding Against The Compensation Culture

Protection pays: product liability insurance is becoming increasingly important to safeguard against the possibility of defective goods

Ask a selection of insurance experts whether Hong Kong has fallen victim to the "compensation culture" that is spreading rapidly around the world and there will be a mixed response.

"We're no worse than anywhere else," says Insurance Commissioner Richard Yuen, pointing to a lack of hard evidence showing increased payouts.

But others suggest that increased sympathy from the courts towards victims, coupled with lawyers and recovery agents actively seeking out "injured" clients, represents a very real change in Hong Kong's attitude to compensation claims.

"One can tell from court judgements that there's a leniency towards victims, both in commercial insurance and in personal cases," says Bernard Chan, the Legislative Council member representing the insurance functional constituency.

Sammy Lui, chairman of the Professional Insurance Brokers Association, is convinced "the culture has changed drastically" over the past two or three years. "Lawyers are diversifying and media reports of court awards attract claimants," he says.

The experts all agree that smaller firms are more vulnerable to the costs associated with a legal action, and are often not as well protected by insurance as their larger counterparts.

"I don't think smaller businesses are aware enough of liability insurance," says Yuen, noting that concern about insurance and risk control is not often a top priority for smaller firms.

"But, if a claim is made, legal costs can be high and the time and energy spent fighting it disproportionate," he says. "With good [insurance] protection, all this trouble can be taken care of by someone else - at no extraordinary cost."

So firms without access to a legal department or the funds to pay vast legal costs should be taking the potential threat of legal actions against them - and the possibility of having to make compensation payments - more seriously than ever.

That means thinking hard about liability insurance, only two kinds of which are compulsory:

  • employees' compensation (EC) insurance, which covers a firm against the cost of compensating staff who are injured or become ill as a result of their work
  • third party motor insurance, which protects against compensation claims if vehicles are involved in an accident

All other liability insurances are optional and include:

  • public liability insurance - which protects against claims from anyone injured on a firm's premises (although not compulsory, it is seen as essential if a company deals with members of the public or has customers visiting)
  • professional indemnity insurance - which covers claims made by clients who believe a firm has been negligent in its professional duties (this can be tailored to include cover for intellectual property issues, including copyright infringement)
  • product liability insurance - which protects against claims made by retailers or customers as a result of goods being defective (it is important to remember that insurance is not designed to protect a firm if it breaks the law - if it did, an insurer would pay out to the claimant but recoup the money from the business)

Often liability insurances include special terms and conditions firms must meet if the cover is to be valid or the premiums reduced, but these can sometimes be tricky to spot without the help of an insurance expert.

Small-andmedium-sized enterprises should also be wary of "package" policies, including "free" liability insurance. This type of policy is designed to cover shops and restaurants, but will not necessarily take into account the particular requirements of a business.

"Firms should find a broker to help tailor liability cover to their own needs, to add extension clauses, delete exclusions and work out how best to keep premiums down," advises Lui.

He argues that a broker, who acts on behalf of the policyholder and can shop around for cover, is a better option than an insurance agent, who may be selling policies on behalf of a small number of insurers.

Lui says brokers have a valuable role to play in alerting smaller firms to their potential liabilities, adding that the business community is only just beginning to become aware of the need for liability insurance.

"We have had some difficult economic times in Hong Kong and many small businesses, even if they were aware of potential liabilities, were restricted by budget," he notes. But times have changed, he says, and smaller companies "need to wake up and talk to brokers".

Chan urges firms not to be deterred by the idea that cover might be costly. "Liability cover is not as expensive as you'd think," he says. "The cost is still cheaper in Hong Kong than in many other developed countries."

And Chan believes that, as the community becomes increasingly aware of its legal rights, smaller firms must become insurance aware. "In Hong Kong, insurance is still sold rather than bought," he says. "That culture needs to change."

Keeping good company

Corporate governance is attracting more attention than ever in Hong Kong. Making sure that decision-making processes, directors' pay and share transactions are all above board and able to withstand tough scrutiny is important even for smaller companies.

According to Insurance Commissioner Richard Yuen, "increasing importance is being placed on corporate governance, so there is also an increasing need for company directors - including independent directors - to think about better protection."

Asia Pacific Underwriting Agencies (APUA) Hong Kong general manager Paul Bermon agrees. "Changes in the law in Hong Kong and throughout Asia are making people more aware of transparency, and they will sue if they don't get it."

Directors' and officers' liability insurance can protect firms against these types of financial claims and, like any other liability insurance, should be tailored to suit the requirements of a business.

Policies can include employment practices liability cover (which protects against claims for discrimination or sexual harassment, for example) and cover for claims arising from regulatory issues. "As more power is given to the financial authorities, there is a greater risk of falling foul of some of those procedures," Bermon notes.

He points out that the problem is not necessarily the amount claimed, but the legal costs can be huge - not to mention the time and effort it takes to defend actions.

Bermon urges small firms to be more aware of these new risks. "The compensation culture is definitely here and getting worse," he insists. "But firms are blind to it until they start paying the legal costs."


Creating A Culture Of Compliance

On track: Hong Kong's corporate culture is moving towards greater transparency and investor-friendliness

Corporate governance is a buzz phrase that is becoming increasingly popular beyond professional circles. However, it is also often poorly understood, largely because it covers a potentially enormous number of distinct economic phenomena.

Simply put, corporate governance is about promoting corporate fairness, transparency and accountability to an organisation's many stakeholders, including staff, suppliers, bankers, customers, the media and the general public.

It's a concept that is gaining ground in Hong Kong, where there are substantial signs that a generational change in attitude is taking place, and a trend to which small- and medium-sized enterprises (SMEs) are not immune.

Hong Kong Institute of Directors chairman Herbert Hui points to the popularity of the institute's training programmes for directors as proof of the need for companies of all sizes to develop and implement relevant corporate governance guidelines.

"We have a series of programmes and courses to meet different requirements," he says. "For instance, we can offer elementary courses for newly-inducted directors, or intensive and more directional courses for more experienced executives."

He says these courses offer variety of content, and the institute can also provide a variety of organisers. "There is a thriving service supply situation, and through us a client can choose among courses on offer from a number of commercial operations as well as from some academic institutions," Hui adds.

He points out the fact that executives are prepared to pay for their own training underlines the change in corporate culture that is underway in Hong Kong.

"Mostly, the courses are paid for by the individuals concerned, since they only cost a few thousand dollars," Hui notes. "Many conscientious directors take responsibility for augmenting their own professional abilities."

Perhaps the institute's greatest innovation is the training schemes for would-be listed company directors, the executives of Hong Kong's overwhelmingly important SME sector.

"SMEs have somewhat different requirements and are in a different situation to listed company directors," Hui explains. "Directors of SMEs will find that they are starting to need a corporate governance track record in order to establish business relationships and to keep their business options open at all levels."

However, he admits that some SMEs find it hard to justify the cost of corporate governance training. "Perhaps the link between profit and training is not so directly established in the SME community, but we are a two-level system, and we can see the difference that director training can make to these companies," Hui says.

His opinion is shared by others, such as the Hong Kong government's former permanent secretary for financial services and the treasury (financial services), Tony Miller.

"You cannot legislate for ethics, and a society has to be led rather than bullied into a particular direction," he observes.

Anecdotal evidence culled from today's marketplace, he feels, indicates that a corporate culture is being created whose ethics are relevant to today's business issues.

"From a situation where there was an absence of shareholder democracy, we now have multiple advocates and avenues for the expression of minority shareholders' rights," Miller notes.

He adds that the Hong Kong Institute of Directors recently proved this point by providing SMEs with pre-listing training and selling out its courses. "If anything points to a deep cultural change, this does," Miller maintains.

Miller feels that this change is ongoing, and he admits that it has not been easy shepherding changes in corporate reporting and boardroom behaviour through the Legislative Council.

"Partly because of vested interests, changes in Hong Kong's regulatory processes have to be measured, continuous and incremental," Miller believes. "It's also important to make sure that the proposals are not more than the system can bear, so people can accept such important changes as dual filing and statutory backing for regulations."

Hong Kong Exchanges and Clearing Ltd chief executive Paul Chow, speaking with particular reference to SMEs, says there is room for improvement and admits rules cannot regulate for common honesty.

"This is a matter of ethics and integrity, and it is a question of changing the culture so that compliance is easy and effective for issuers," he maintains.

Chow observes that there is also a difference in the way compliance is perceived in Hong Kong; noting that the mainland, for example, has strict supervisory controls.

"But in Hong Kong we rest on a series of checks and balances, with a demutualised exchange, an independent regulator, government-appointed listing committee members and the Independent Commission Against Corruption," he explains.

"This is our philosophy - we have multiple checks with a regulatory overlap."

Regardless of the compliance system, however, there is obvious agreement that Hong Kong's corporate culture is on track to greater transparency and investor-friendliness.

There is also unanimous accord that the process is ongoing, involves continuous improvement and that SMEs and listed companies alike ignore the ramifications of corporate governance at their peril.

Developing corporate governance skills

The Hong Kong Institute of Directors believes that good governance is essential, not just for listed companies but also for SMEs. As a consequence, the institute has started to offer training catering to the specific needs of SME directors.

This is principally presented in the form of seminars and forums on the various challenges and tasks that SME directors face. A pass in this course work leads to the granting of a professional diploma in SME directorship, which can have ongoing benefits for both individuals and companies after a listing.

The institute is concerned to ensure that two sets of parallel skills are developed, namely those relating to:

  • compliance and regulation
  • the day-to-day running of a company in today's increasingly complex business environment

It also draws a clear distinction between running a business merely to be regulated and running a business in order to make shareholders profits, so as to remove any temptation for directors to present impeccable paperwork and no results.

The essential issues that impinge on directors of SMEs are categorised as:

The role of a company director I:

  • an overview of the legal and regulatory framework

The role of a company director II:

  • fiduciary responsibilities
  • governance and management of SMEs
  • banking knowledge for SME directors
  • building family business boards
  • vision-based strategic planning
  • building tomorrow's company
  • finance for non-finance directors
  • charting a growth path for a company