Review of the annual report of Transport International Holdings Limited (“TIH”, Stock Code: 62) – Corporate Governance

學期尾，就隨心記錄番

Transport International Holdings Limited (“TIH”, Stock Code: 62) is the mother company of the well-known franchised bus operators: The Kowloon Motor Bus Company (1933) Limited, Long Win Bus Company Limited. The two companies have a fleet of more than 4200 buses operating a network of 470 routes, connecting between the New Territories, Kowloon City, and the Hong Kong Island. In Hong, TIH also is the holder company of two other companies, which provide rental and 24-hour cross boundary services. In the motherland, TIH has taxi-hiring operations in Shenzhen and Beijing. In terms of property holdings and development, TIH fully or partially owns office towers, a retail podium, a commercial building and a factory.

The TIH has a vision to be a global leader in public transport services field through understanding of the needs of various stakeholders, assisting with the innovative technological and environmental

solutions, and the attainment of new standards for safety, service, and efficiency. In the 2022 annual report, the TIH’s mission is to enhance shareholder value while contributing to the social and economic development of Greater China. The TIH, same as other corporates, is always facing various challenges, such as leading a cohesive organization, motivating employees, maintaining a safe and rewarding environment etc. To cope with these challenges, the TIH is trying to establish a culture with good Corporate Governance (CG) framework that is embedded in the business. The core values and principles include: Accountability, Caring, Teamwork and mutual respect, Integrity, Originality and Novelty, Safety and Self-discipline.

TIH, as a sizeable listed company, good corporate governance is indispensable. The conflict of interests is not uncommon between society, shareholders, employees, and management team. To help the group has a continuous development and expansion, the TIH must has a good management team, which make wise and transparent decisions balance the interests between various stakeholders. Moreover, effective governance is also important for any corporate. There are a list of factors that affect the outcome. In the TIH annual report, it stated that the group’s CG code has complied with the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”).  In the report, it also has explained for deviation from the code provisions. Indeed, the above information is abstracting from the group annual report, which is part of the evidence that the TIH is complying with the Part I A of the CG code.

In the CG code Part I B, C, D and E, it has requirements that a listed company shall demonstrate transparency in terms of the board of directors and board committees. TIH, as its name implied, is a corporation with limited liability. The TIH adopts an Unitary Board comprising of 15 members, including five (5) Independent Non-executive Directors (INED) , nine (9) Non-executive Directors (NED) and a (1) Executive Director (ED). Similar as other listed companies, the board has the role and responsibilities to promote the success of the group by directing and supervising various areas, including but not limited to setting the values and standards, ensuring the integrity of group financial reporting system and public announcement. Information from the report, The composition of the TIH board is diverse to ensure that members with a wide range of business and expertise experience can help to make the decisions correctly. However, there has only a female in the board, it has room for improvement Rightly, it is required by the code Part I J that the issuer shall explain how and when gender diversity will be achieved in respect of the board.

In respect of the role and responsibilities, the Senior Management are under the supervision of four designated Board Committees: the Standing Committee, the Audit and Risk Management Committee, the Remuneration Committee and the Nomination Committee.

The Standing Committee had six meetings with the Senior Management to review and discuss the group’s business strategies, with the role to make advises for the board in the matters from financial, operational, strategic planning to potential investment opportunities; The Audit and Risk Management had five meetings in total over the last reporting period. Three of the meetings were used for the safety issues and risk management with the Senior Management while two were spent with the group’s external auditors, KPMG;

The advantage of one-tier board is that there is closer relationship between members in the board, and so better information flow is expected, which may help in efficiency and accuracy. However, the major drawback is that the separation of supervision and management is not clear enough in some business examples. The reason caused this potential consequence is that the ownership of a so-called “limited company” is not belonging to the founder, nor the proprietor. Those “limited” are also can be distinguish from the partnership firms. In most cases, shareholders are those who bear the maximum loss.

To look into more deeply, the disadvantage of adopting one-tier board is about human behavior. According to the “Agency theory”, advocated by the Jensen and Meckling, selfish is the natural of human beings. We always want to maximize our own interest with no exception. As a result, the principle-agent relationship is possibly becoming “impure” with “dirt”. The principle has expectation on the agent to work and maximize the welfare, but the agent has his/her own interests and so the decision-making process affected by own “feeling”.

To reduce these innate weaknesses, the Chairman (INED) and the Managing Director (ED) are two distinct posts in the TIH. Since they don’t have any financial, business, family or other relationship with each other, a balance of power is expected being achievable.

The INEDs are not involved in the daily operations, but they are monitoring the performance in all aspects including group’s policy, strategy, and compliance of key indicators as well as the standard of conduct. In fact, the INEDs are those who are defending the general interests of shareholders. On the other hands, the Managing Director, as the ED has the role in realizing the objectives of for long-term sustainability. Also, he/she shall lead an effective and professional executive team to develop and implement policies and strategies that are aligned to group’s vision.

As mentioned above, there are various factors that affect the CG performance. From the report, we can observe that TIH’s Board consists of a balance mix of members, who possess distinguish expertise, experience, and business insights. Also, the Board appointments are merit-based: all candidates are considered against criteria and policy by the Nomination Committee. The selection policy is transparent and can be retrieved from the company’s website.

To comply with the CG code, the board shall meet regularly and boarding meetings shall be hold at least four times a year at approximately quarterly intervals. With reference to the TIH report, the bord has hold a meeting every other months generally, where members of Board discussed topics including but not limited to policy, strategy, and financial matters. In terms of the “conduct of board proceedings and supply of and access to information”, the report stated that the TIH group had complied with the CG code (Part II C.5) as well as had a even better performance – one month in advance for the notifications of board meeting, and seven (7) days prior to meeting for the details of agenda circulation.

Indeed, the Remuneration Committee and the Nominating Committee are playing crucial roles in the management and supervision of the board. The former one has the role and responsibility to formulate remuneration and retirement policies as well as the report while the later one are carrying out the duties of identifying, making evaluation and recommendations of suitable and competent board members.

Apart from the board and committees, the TIH is also complying with the CG code PART I F. The group has an internal Company Secretary, who is a fellow member of the Hong Kong Chartered Governance Institute.

From about information, the TIH is basically fulfilling the CG code in terms of organization structure. Now, the aspects about audit, internal control and risk management will be further discussed.

For every organization, a health financial status is important to maintain their normal operations and sustainability. The CG code PART I H has stated that an issuer shall report the effectiveness of risk management and internal control systems. Rightly, the Companies Ordinance (Cap.622 of the Laws of Hong Kong) requires the board to prepare the group’s financial statements. To comply with these regulations and best practices, the financial statements of TIH is included between page 168 to 239 of 2022 Annual Report.

For the seventy-pages section, tables with texts are used to explain the financial status of the group. Information about Profit and Loss (P&L) including revenue, profit from operations, before and after taxation, earnings per share etc. Since the group has a number of subsidiaries as well as properties, other comprehensive income (rental fee) is possible. On the other hands, the group may has various liabilities, such as contingency provision, insurance, bank loans, which may affect the overall capital and reserves. As a result, a table about the total equity (financial position) is reported. Last but not least, cash flow is important for any company and so the TIH has reported it. Basically, the TIH is complying with the CG Code PART II D.1 – the board has prepared a financial report to present a balanced, clear, and comprehensive assessment of the company’s performance, position and prospects.

Indeed, the TIH, as an issuer of the annual report, the effectiveness of risk management and internal control systems shall be reviewed and included, according to the CG Code PART I H and PART II D.2.

From the report, we have information that the TIH’s internal control framework is based on the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control – Integrated Framework issued in May 2023. There are various stakeholders playing roles for the internal control system – the board itself, the Audit and Risk Management Committee, and the Internal Audit Department. To comply with the requirements in the Listing Rules, Code of Conduct and Staff Handbook are accessible to all level of staff, including the board members. Also, whistleblowing policy and procedures are transparent to staff as well as the general public by publishing on the company’s website.

Moreover, the TIH understands that different types of risks have potential harm to the group success. To monitor and manage risk to an acceptable level, the TIH have taken reference to the COSO ERM framework. Both quantitative and qualitative factors are considered in risk assessment. A dynamic risk rating matrix as well as a Key Risk Indicator Report (“KRI Report”) is prepared and submitted to the Audit and Risk Management Committee every six months. Basically, the TIH adopts a structured and on-going methodology to risk management, which includes risk identification, controls and audit. In the annual report, it has stated that none of the members of the Audit and Risk Management Committee is a former or existing partner of the external auditors of the company. The integrity and transparency of the group can be maintained as a result. What is more is that the committee’s terms of reference are aligned with the recommendations of the Hong Kong Institute of Certified Public Accounts (“HKICPA”). From the above information, we can conclude that TIH is complying with requirements of CG code in terms of the risk management, internal controls and audits.

After discussing the board, the risk management and controls, we may move to the part related to communication and shareholder activism. Rightly, the annual report has disclosed the arrangement of shareholder’s policy and performance.

In conclusion, the TIH, as one of the listed companies in HKEX, we can obtain evidences that the group has a decent corporate governance based on its transparency in the annual report.