OPINION – New Regulations on Public Assets Supervision and Planning and the Need for Corporate Governance Code in Macau

The Chief Executive has issued the Guidelines for Information Disclosure by Enterprises with Public Capital(No. 133/2020) on June 15, 2020.

Professor Jean Jinghan Chen

Dean of Faculty of Business

Administration and Chair Professor in Accounting and Finance

University of Macau

Phillip Law

Assistant Professor in Accounting

Faculty of Business Administration

University of Macau

The new guidelines require enterprises with public capital to disclose more information such as the company name, shareholder details, shareholding ratio, company structure, capital amount, audit committee, annual financial statement and operation report, opinion of the auditor or the supervisory board, information on acquisition and bidding, and guarantee information, as well as matters relating to enterprises with public capital such as material investments, asset arrangements, losses, loan defaults, litigations or liabilities and dissolution.

It is necessary to help improve the current operations of public capital companies by increasing corporate value and improving the effectiveness of organizational operations, risk management and corporate governance, and to add value to organizations by improving the operational efficiency of public capital companies. Specific measures include: 1) improving the reliability and integrity of information to meet more requirements for disclosure; 2) enhancing the transparency of financial information of enterprises with public capital; 3) ensuring the compliance with policies, laws and regulations issued by the Government of the Macau SAR concerning procurement contracts from suppliers; 4) protecting assets, avoiding false financial reports, and meeting the requirements for the setup of an audit committee and the audited financial statements; 5) issuing advice or suggestions on the improper practicesof public capital companies on the public website set up and managed by the Office.

The new guidelines aim to ensure that enterprises can efficiently, effectively and economically obtain, protect and use public resources, so as to ensure the implementation of the “three E’s” raised by the government and operational audit. In operational audit, the first E (efficiently) defines the degree of cost reduction without lowering efficiency. The second E (effectively) defines the level of goal achievement by enterprises, and the third E (economically) defines the extent to which enterprises use their resources economically. With the new guidelines, local companies with public capital will be better supervised, and be more transparent and accountable to their stakeholders.

Terms requiring public capital companies to disclose detailed information on the procurement contracts have also been set up in the new guidelines, specifying that the bidding information and bidding results of the suppliers must be disclosed if the procurement amount exceeds MOP4.5 million or the construction project exceeds MOP15 million. In addition, the guidelines also require the disclosure of events related to material investments, asset arrangements, material losses, loan defaults or liabilities; it has also supplemented the description of events, further clarified the time limit and methods for submitting such information and specified that the events shall be reported to the Office within 30 to 90 days depending on the circumstances. The annual audit report shall be submitted to the Public Assets Supervision and Planning Office within six months. The new regulation allows the office implementing supervision to provide advice or suggestions to enterprises with public capital that have improper practices  or do not comply with the regulations issued by the Government of the Macau SAR.

Although the Commercial Code of Macau is provided for companies to abide by, it is only a general regulation not specifically devised for public capital companies, nor is it a specific code (corporate governance code) for enterprise operations. It is pointed out in literature on corporate governance issues that, the sound corporate governance is inseparable from the complete laws and regulations. The concept of corporate governance includes corporate governance in narrow and generalized senses.

Corporate governance in a narrow sense aims to ensure the interests and responsibilities of shareholders and operators by supervising the company operations through some mechanisms. It mainly covers the supervision of company operations and internal governance through a balance mechanism, such as a governance structure consisting of the shareholders’ general meeting, the board of directors, the board of supervisors, the compensation committee and the management, thereby ensuring the rights and responsibilities between the shareholders and operators. Broadly speaking, corporate governance refers to the supervision and coordination of the interest relationship between the company and all stakeholders through complete laws and regulations, so as to ensure that the company protects the interests and responsibilities in all aspects. The complete laws and regulations are the key to the balance of corporate governance, so that a sound corporate governance structure and efficient operations can be established. Corporate governance not only provides an important governance framework for modern enterprises, but also enhances their competitiveness and provides a mechanism for corporate governance.

The regulators in Macau, such as the Monetary Authority of Macau (AMCM), the Financial Services Bureau, and the Gaming Inspection and Coordination Bureau (DICJ) have issued laws, regulations and guidelines for different industries, including the Commercial CodeFinance LawInsurance LawMacau Gaming LawGuidelines on  Corporate Governance of Authorized InsurersAnti-money Laundering Law, and Guidelines on Management of Corporate Bond Issuance and Trading. However, these are only regulations on corporate governance practices rather than a unified corporate governance code. With the diversified development of Macau’s economy, it is crucial to establish an effective corporate governance code. Multinational corporations and institutional investors will be more confident in the investment and business operations in Macau only when local governance criteria are in line with international standards. In addition, Macau also has an increasing demand for the establishment of unified corporate governance code for local companies.

For example, the Guidelines for Information Disclosure by Enterprises with Public Capitaldoes not raise requirements for the submission of internal control reports to relevant departments. There are many international practices that can be referred to, such as Section 404 of theSarbanes Oxley Actof the US, which requires listed companies to submit internal control reports to the regulatory authorities. Many countries have followed these best practices, which are also the trend of corporate governance models in order to achieve sound corporate governance and operations. Such provision can be included in Macau’s unified corporate governance code. In addition, there is no existing law that requires companies to issue reports on their social, ethical and environmental responsibilities.

With regard to sound corporate governance and international best practices, companies in countries and regions such as the US, the UK, Singapore and Hong Kong SAR have all stated their social, ethical and environmental responsibilities in their annual reports, indicating a trend of sound corporate governance. Currently, there is no such provision in the Guidelines for Information Disclosure by Enterprises with Public Capital. It can be included in Macau’s unified corporate governance code that companies shall state their corporate social responsibility in their annual reports. As public capital companies utilize government funds, the report on corporate social responsibility is conducive to improving their transparency, accountability and social responsibilities to the community and stakeholders.

In summary, as a Special Administrative Region of China, Macau should consider establishing its exclusive corporate governance code. China has approved its first Code of Corporate Governance in 2001, which were updated in 2011 and 2016. To diversify Macau’s industries, support the development of all industries in Macau and improve their competitiveness, it is increasingly necessary and urgent to formulate a unified corporate governance code. Financing in the international capital markets based on the funds held by institutional investors and international fund managers has become a trend. Without the unified corporate governance criteria, it is difficult to compare Macau’s corporate governance practices to international standards and the best practices of major financial markets around the world. With the highly globalized capital flow, institutional investors will also be extremely prudent when investing in the Macau market.