Corporate Governance Report
The Company is committed to upholding high standards of corporate governance which, it believes, is crucial to the development of the Company and protection of the interests of the shareholders of the Company. The Company has adopted sound governance and disclosure practices, and will continuously improve these practices and create a highly ethical corporate culture.
Composition of the Board
As at the date of this report, the board of the directors of the Company (the “Board”) consisted of 15 directors (the “Director(s)”), including three executive Directors, Mr. Li Zhiming, Mr. Yu Qingming and Mr. Liu Yong; seven non-executive Directors, namely Mr. Chen Qiyu, Mr. Ma Ping, Mr. Hu Jianwei, Mr. Deng Jindong, Mr. Wen Deyong, Ms. Guan Xiaohui and Ms. Dai Kun; and five independent non-executive Directors, namely Mr. Yu Tze Shan Hailson, Mr. Tan Wee Seng, Mr. Liu Zhengdong, Mr. Zhuo Fumin and Mr. Chen Fangruo. To the knowledge of the Company, there is no financial, business and family relationships or material/relevant relationships among members of the Board or between the Chairman and the President.
Biographical details of the Directors are set out in the section headed “Biographies of Directors, Supervisors and Senior Management” of this annual report.
Major Responsibilities of the Board
The Board is the core of the Company’s corporate governance framework and it takes several roles in representing interests, supervising resources and coordinating interests. The main functions of the Board are strategic planning, guidance on operation management and inspection and supervision. The responsibilities of the Board include formulating operation plans and investment proposals of the Company, preparing the proposed annual budgets and final accounts of the Company, assessing the performance of the Company and overseeing the work of senior management, formulating and reviewing the corporate governance policies and practices of the Company.
The Board shall represent the long-term interest of the Company and the interest of shareholders and related party when making scientific and strategic decisions, be effectively supervised and evaluated when controlling corporate resources and conducting operation management and maintain effective stimulation and supervision over the senior management when duly delegating its power to the senior management. The Board is the core of the Company’s corporate governance framework and its role is clearly separated from that of senior management. Being different from the function and duties of the Board, the senior management of the Company are mainly in charge of the Company’s production, operation and management; organizing the implementation of the Company’s annual business plan and investment proposal; drafting plans for the establishment of the Company’s internal management structure; drafting plans for the establishment of the Company’s branch offices; drafting the Company’s basic internal management system and formulating basic rules and regulations of the Company; within the authority delegated by the Board, appointing, changing or recommending shareholder representatives, directors and supervisors in its holding subsidiary or joint stock subsidiary; deciding on the establishment of the Company’s branches; and other powers delegated by the Board.
The Company has separated the roles of Chairman and President. The Chairman is responsible for managing the Board, steering the Board to formulate overall strategies and business development plans, ensuring the receipt of sufficient, complete and reliable information by each Director and the receipt of reasonable explanations for all the issues raised in the Board meetings. The President is responsible for managing the business of the Company and implementing policies, business objectives and plans formulated by the Board, and is accountable to the Board for the Company’s overall operation.
Mr. Li Zhiming has served as the Chairman of the Company since March 2017. Mr. Liu Yong has served as the President of the Company since November 2017.
The Board has established an audit committee, a remuneration committee, a nomination committee, a strategy and investment committee and a legal and compliance committee. Please see below for the composition and responsibilities of each special committee. Each committee shall provide its recommendations to the Board based on its respective terms of reference. The decisions of the Board on such recommendations shall be final, unless otherwise clearly stated in the terms of reference of these committees.
During the Reporting Period, the Board made a lot of efforts in improving the corporate governance system of the Company and enhancing the corporate governance standards, including amending relevant internal management rules in accordance with the requirements of relevant laws, regulations and regulatory rules as amended from time to time, as well as the practice of the Company; monitoring and organizing the Directors and company secretary to participate in relevant training courses; regularly reviewing the Company’s compliance with the domestic and overseas regulatory requirements and its implementation of various internal corporate governance rules and policies, and reviewing the Company’s compliance with the Corporate Governance Code and the disclosures in the Corporate Governance Report.
Changes of Directors, Supervisors and Senior Management
- On 11 January 2019, as considered and approved by the Board, Mr. Wen Deyong was elected as a member of the Strategy and Investment Committee and a member of the Remuneration Committee of the fourth session of the Board for a term of office equal to that of his directorship; Ms. Guan Xiaohui was appointed as a member of the Audit Committee, subject to the approval by the shareholders at the general meeting of her appointment as a Director.
- On 11 January 2019, as considered and approved by the Board, Ms. Wang Jie was appointed as the Company’s vice president.
- On 8 March 2019, as considered and approved at the 2019 first extraordinary general meeting of the Company, Ms. Guan Xiaohui was appointed as a non-executive Director of the fourth session of the Board for a term from 8 March 2019 to 20 September 2020.
- On 22 March 2019, Mr. Wang Qunbin resigned as a non-executive Director, a member of the Nomination Committee and a member of the Strategy and Investment Committee of the fourth session of the Board due to work arrangements.
- On 22 March 2019, as considered and approved by the Board, Mr. Deng Jindong and Mr. Tan Wee Seng were appointed as members of the Remuneration Committee of the fourth session of the Board for a term of office equal to that of their directorship.
- On 27 June 2019, as considered and approved at the 2018 annual general meeting, Ms. Dai Kun was appointed as a non-executive Director of the fourth session of the Board for a term from 27 June 2019 to 20 September 2020.
- On 27 June 2019, as considered and approved by the Board, Ms. Guan Xiaohui was appointed as a member of the Strategy and Investment Committee of the fourth session of the Board of the Company for a term of office equal to that of her directorship; Ms. Dai Kun was elected as a member of the Nomination Committee of the fourth session of the Board of the Company for a term of office equal to that of her directorship.
Board Meetings and General Meetings
The Board convened twelve Board meetings, seven of which were by voting through electronic means of communications, and two general meetings during the Reporting Period. All Directors actively participated in the affairs of the Company.
During the Reporting Period, the attendance record of each Director at the Board meetings and general meetings is as follows:
|Directors||Board meetings Attendance in
person/No. of meetings held
|General meetings Attendance in
person/No. of meetings held
|Mr. Li Zhiming||12/12||2/2|
|Mr. Yu Qingming||11/12||1/2|
|Mr. Liu Yong||10/12||2/2|
|Mr. Chen Qiyu||12/12||2/2|
|Mr. Wang Qunbin (resigned)||1/2||1/1|
|Mr. Ma Ping||12/12||2/2|
|Mr. Hu Jianwei||11/12||1/2|
|Mr. Deng Jindong||12/12||1/2|
|Mr. Wen Deyong||11/12||2/2|
|Ms. Guan Xiaohui||11/11||2/2|
|Ms. Dai Kun||8/8||0/0|
|Independent Non-executive Directors|
|Mr. Yu Tze Shan Hailson||12/12||1/2|
|Mr. Tan Wee Seng||12/12||2/2|
|Mr. Liu Zhengdong||11/12||2/2|
|Mr. Zhuo Fumin||12/12||2/2|
|Mr. Chen Fangruo||10/12||1/2|
Note: The Directors of the Board who did not attend the meeting in person have all entrusted proxies to attend the meeting, which was not counted into their attendance record.
At Board meetings, the Company’s senior management reported the information of business activities and data of development of the Company to all Directors on a timely basis. If any Director has conflict of interests in any proposed resolution to be considered at the Board meeting, such Director shall abstain from voting on such resolution. The Chairman also met with the independent non-executive directors on a regular basis for their opinions on the Company’s business development and operations.
Training for Directors
The management of the Company has provided members of the Board with appropriate and sufficient information including the financial briefings so as to update them with the latest operations and developments of the Company and facilitate their discharge of duties. All Directors have participated in continuing professional development by attending training or reading relevant materials to broaden their knowledge base and sharpen their skills.
The training record of Directors during the Reporting Period is as follows:
|Directors||Special training (Note)|
|Mr. Li Zhiming||√|
|Mr. Yu Qingming||√|
|Mr. Liu Yong||√|
|Mr. Chen Qiyu||√|
|Mr. Wang Qunbin (resigned)||√|
|Mr. Ma Ping||√|
|Mr. Hu Jianwei||√|
|Mr. Deng Jindong||√|
|Mr. Wen Deyong||√|
|Ms. Guan Xiaohui||√|
|Ms. Dai Kun||√|
|Independent Non-executive Directors|
|Mr. Yu Tze Shan Hailson||√|
|Mr. Tan Wee Seng||√|
|Mr. Liu Zhengdong||√|
|Mr. Zhuo Fumin||√|
|Mr. Chen Fangruo||√|
Note:On 22 March 2019, all Directors of the Company attended the training on the management of inside information and connected transactions, non-competition agreements, and a review of Directors’ responsibilities provided by the Company’s Hong Kong legal adviser DLA Piper.
In addition, Directors newly-appointed during the Reporting Period attended the training for new directors provided by DLA Piper. The company secretary Mr. Wu Yijian completed the training on the 51th joint member ECPD seminar provided by The Hong Kong Institute of Chartered Secretaries during the Reporting Period.
As at the date of this report, the audit committee of the Company (the “Audit Committee”) comprised five Directors, including three independent non-executive Directors, namely Mr. Tan Wee Seng, Mr. Liu Zhengdong and Mr. Zhuo Fumin and two non-executive Directors, namely Mr. Deng Jindong and Ms. Guan Xiaohui, with Mr. Tan Wee Seng serving as the chairman of the Audit Committee. The primary responsibilities of the Audit Committee are to inspect, review and supervise the Company’s financial information and reporting process for financial information. These responsibilities include, among others:
- making recommendations to the Board on the appointment, re-appointment and removal of the external auditor;
- reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process in accordance with applicable standards;
- formulating and implementing policies on the engagement of an external auditor to supply non-audit services; and
- monitor integrity of the Company’s financial statements and annual report and accounts, half-year report and, if prepared for publication, quarterly reports, and to review significant financial reporting judgments contained in the statements and reports.
During the Reporting Period, four meetings were held by the Audit Committee. The attendance record of the committee members at the meeting during the Reporting Period is as follows:
|Directors||Attendance in person/No. of meetings held|
|Mr. Tan Wee Seng||4/4|
|Mr. Deng Jindong||4/4|
|Ms. Guan Xiaohui||4/4|
|Mr. Liu Zhengdong||4/4|
|Mr. Zhuo Fumin||4/4|
During the Reporting Period, the Audit Committee reviewed the Group’s 2018 annual report, 2019 interim results announcement, 2019 interim report, 2019 first quarterly results and 2019 third quarterly results, and received the auditor’s report on the audit results. The Audit Committee also reviewed the resolutions on audit fees for 2018, appointment of auditors for 2019, internal audit work plans for 2019, and compliance and overall risk management report for 2019.
The Audit Committee has reviewed the audited consolidated financial statements of the Group for the year ended 31 December 2019 and believes that the Company has complied with all applicable accounting standards and regulations and made sufficient disclosures. The audit committee has reviewed all material internal control rules, including the financial and operational and compliance controls, as well as risk management in 2019. The audit committee was satisfied with the effectiveness and sufficiency of the internal control mechanism in its operations. In addition, the audit committee has also reviewed the adequacy of resources, qualification and experiences of employees in relation to the accounting and financial reporting function of the Company and the adequacy of training courses taken by the employees and the relevant budgets. The Audit Committee has also reviewed the 2019 annual results announcement and the 2019 annual report of the Company.
The Audit Committee has reviewed the remuneration of the auditors for 2019 and recommended the Board to re-appoint Ernst & Young and Ernst & Young Hua Ming LLP as the auditors of the Company for 2020, subject to the approval of shareholders at the forthcoming annual general meeting.
As at the date of this report, the nomination committee of the Company (the “Nomination Committee”) comprised seven Directors, including four independent non-executive Directors, namely Mr. Yu Tze Shan Hailson, Mr. Liu Zhengdong, Mr. Zhuo Fumin and Mr. Chen Fangruo; two non-executive Directors Mr. Hu Jianwei and Ms. Dai Kun; and one executive Director Mr. Li Zhiming with Mr. Li Zhiming as the chairman of the Nomination Committee. The primary responsibilities of the Nomination Committee are to formulate the nomination procedures and standards for candidates for Directors. These responsibilities include, among others:
- reviewing the structure, size and composition of the Board on a regular basis and making recommendations to the Board regarding any proposed changes;
- assessing the independence of independent non-executive Directors;
- making recommendations to the Board on relevant matters relating to the appointment or re-appointment of Directors, and the succession plans for Directors (in particular the Chairman and the President); and
- formulating, implementing and reviewing from time to time the policy concerning diversity of Board members.
The nomination procedures of the Directors are as follows: the nomination committee shall firstly propose and consider a list of candidates for Directors, which shall then be submitted by the committee to the Board for review; the Board shall then submit the relevant proposal to the general meeting for shareholders’ approval.
The examination procedures of the candidates for Directors are: (1) to collect, or require relevant department of the Company to collect the particulars of the occupation, education, designation, detailed work experience and all part-time jobs of the candidates and summarize the same in written materials; (2) to hold nomination committee meetings to examine the qualifications of the candidates in accordance with the requirements applicable to a Director and to state the opinion and recommendations on appointments in the form of proposals; and (3) to carry out other relevant work according to decisions of or feedback from the Board.
In order to ensure a diversity on the Board members and improve the Company’s corporate governance, the Board has approved the Board diversity policy formulated by the Nomination Committee. This policy sets out the Company’s policy guidelines for achieving Board diversity. To achieve Board diversification, other than complying with relevant requirements under the relevant laws, regulations and rules (including but not limited to the Company Law of the PRC, the Listing Rules and the Articles of Association), the Company should also consider various diversity factors, including but not limited to professional qualifications, industry experience, culture and education background, ethnicity, gender, age, etc. when designing the Board’s composition. The above factors should be balanced as appropriate in determining the optimal composition of the Board. For appointment of each Director, the above factors shall be considered in light of the actual circumstances of the Company and its business operations and development strategies. The selection of candidates will finally be determined based on their merits and contribution to the Board. Meanwhile, the Company’s diversity policy also includes monitoring, reporting and reviewing system to ensure the effectiveness and successful implementation of the policy.
During the Reporting Period, two meetings were held by the Nomination Committee. The attendance record of the committee members at the meeting during the Reporting Period is as follows:
|Directors||Attendance in person/No. of meetings held|
|Mr. Li Zhiming||2/2|
|Mr. Wang Qunbin (resigned)||2/2|
|Mr. Hu Jianwei||2/2|
|Ms. Dai Kun||0/0|
|Mr. Yu Tze Shan Hailson||2/2|
|Mr. Liu Zhengdong||2/2|
|Mr. Zhuo Fumin||2/2|
|Mr. Chen Fangruo||2/2|
During the Reporting Period, the Nomination Committee mainly reviewed the resolution on nominating Ms. Guan Xiaohui as a non-executive Director of the fourth session of the Board of the Company and the resolution on nominating Ms. Dai Kun as a non-executive Director of the fourth session of the Board of the Company. The Nomination Committee carefully discussed the work experience and professional qualifications of Director candidates and the benefits they may bring to the Board while fully considering factors under the board diversity policy, and recommended the candidates to the Board after arriving at opinions at the Nomination Committee’s meeting.
As at the date of this report, the remuneration committee of the Company (the “Remuneration Committee”) comprised five Directors, including three independent non-executive Directors, namely Mr. Liu Zhengdong, Mr. Yu Tze Shan Hailson and Mr. Tan Wee Seng, and two non-executive Directors Mr. Deng Jindong and Mr. Wen Deyong, with Mr. Liu Zhengdong serving as the chairman of the Remuneration Committee. The primary responsibilities of the Remuneration Committee are to formulate and review the remuneration policies and schemes for the Directors and senior management of the Company. These responsibilities include, among others:
- making recommendations to the Board on the Company’s overall remuneration policies and structure for Directors and senior management of the Company;
- determining the specific remuneration packages of all executive Directors and senior management, and making recommendations to the Board in relation to the remuneration of non-executive Directors; and
- reviewing and approving performance-based remuneration by reference to corporate goals and objectives determined by the Board from time to time.
During the Reporting Period, seven meetings were held by the Remuneration Committee. The attendance record of the committee members at the meeting during the Reporting Period is as follows:
|Directors||Attendance in person/No. of meetings held|
|Mr. Liu Zhengdong||7/7|
|Mr. Deng Jindong||4/4|
|Mr. Wen Deyong||7/7|
|Mr. Yu Tze Shan Hailson||7/7|
|Mr. Tan Wee Seng||4/4|
During the Reporting Period, the Remuneration Committee mainly reviewed the following resolutions: Resolution on Changing the Authorized Representative for the Implementation of the Share Incentive Scheme of the Company, Resolution on Determination of the Remuneration of the Secretary to the Board of the Company for the Year 2019, Resolution on the Advance Payment of Annual Salary to the 2018 Management Team of Company, Resolution on Increasing Authorized Representatives for the Implementation of the Share Incentive Scheme of the Company, Resolution on Determination of Remuneration of the Directors of the Company for the Year 2019, Remuneration Standard Scheme for the Management Team of the Company for the Year 2019, the Assessment Scheme for the Management Team of the Company for the Year 2019, Report on the 2nd Unlock Report of the Initial Grant of the H Shares Restricted Share Incentive Scheme, and the 2019 Remuneration Incentive Scheme for the Management Team of the Company.
Strategy and Investment Committee
As at the date of this report, the strategy and investment committee of the Company (the “Strategy and Investment Committee”) comprised eleven Directors, including three executive Directors, namely Mr. Li Zhiming, Mr. Yu Qingming and Mr. Liu Yong, six non-executive Directors, namely Mr. Chen Qiyu, Mr. Ma Ping, Mr. Hu Jianwei, Mr. Deng Jindong, Mr. Wen Deyong and Ms. Guan Xiaohui; and two independent nonexecutive Directors, namely Mr. Tan Wee Seng and Mr. Chen Fangruo, with Mr. Li Zhiming serving as the chairman of the Strategy and Investment Committee.
The Strategy and Investment Committee is a special operating organization under and accountable to the Board. It is mainly responsible for conducting research and making recommendations on the long-term development strategies and major investment decisions of the Company, and supervising and reviewing the implementation of annual operation plans and investment proposals under the authorization of the Board.
During the Reporting Period, eight meetings were held by the Strategy and Investment Committee. The attendance record of the committee members at the meeting during the Reporting Period is as follows:
|Directors||Attendance in person/No. of meetings held|
|Mr. Li Zhiming||8/8|
|Mr. Chen Qiyu||8/8|
|Mr. Wang Qunbin (resigned)||0/2|
|Mr. Ma Ping||8/8|
|Mr. Hu Jianwei||8/8|
|Mr. Deng Jindong||8/8|
|Mr. Yu Qingming||7/8|
|Mr. Liu Yong||6/8|
|Mr. Wen Deyong||7/7|
|Ms. Guan Xiaohui||2/3|
|Mr. Tan Wee Seng||8/8|
|Mr. Chen Fangruo||6/8|
Note: Member of the Strategy and Investment Committee who did not attend the meetings in person have all entrusted proxies to attend the meetings, which was not counted into their attendance record.
uring the Reporting Period, the Strategy and Investment Committee mainly reviewed the Report on the Threeyear Work Plans Related to Government Public Relations of the Company, the Discussion on 2018 Strategic Evaluation Report of the Company and various equity investment projects.
Legal and Compliance Committee
As at the date of this report, the legal and compliance committee of the Company (the “Legal and Compliance Committee”) comprised three Directors, including one independent non-executive Director, namely Mr. Liu Zhengdong and two executive Directors, namely Mr. Li Zhiming and Mr. Yu Qingming, with Mr. Liu Zhengdong as the chairman of the Legal and Compliance Committee.
The Legal and Compliance Committee is a special operating organization under and accountable to the Board. It is mainly responsible for promoting the rule of law of the Company and guide the Company’s compliance management works.
During the Reporting Period, one meeting was held by the Legal and Compliance Committee. The attendance record of the committee members at the meeting during the Reporting Period is as follows:
|Directors||Attendance in person/No. of meetings held|
|Mr. Liu Zhengdong||1/1|
|Mr. Li Zhiming||1/1|
|Mr. Yu Qingming||1/1|
During the Reporting Period, the Legal and Compliance Committee mainly reviewed the 2019 Report on Compliance and Comprehensive Risk Management of the Company.
Term of Office of the Non-Executive Directors
|Name||Position||Commencement Date||Expiry Date|
|Chen Qiyu||Non-executive Directors||21 September 2017||20 September 2020|
|Ma Ping||Non-executive Directors||21 September 2017||20 September 2020|
|Hu Jianwei||Non-executive Directors||28 December 2018||20 September 2020|
|Deng Jindong||Non-executive Directors||21 September 2017||20 September 2020|
|Wen Deyong||Non-executive Directors||21 September 2017||20 September 2020|
|Guan Xiaohui||Non-executive Directors||8 March 2019||20 September 2020|
|Dai Kun||Non-executive Directors||27 June 2019||20 September 2020|
|Yu Tze Shan Hailson||Independent Non-executive Directors||21 September 2017||20 September 2020|
|Tan Wee Seng||Independent Non-executive Directors||21 September 2017||20 September 2020|
|Liu Zhengdong||Independent Non-executive Directors||21 September 2017||20 September 2020|
|Zhuo Fumin||Independent Non-executive Directors||21 September 2017||20 September 2020|
|Chen Fangruo||Independent Non-executive Directors||28 December 2018||20 September 2020|
Compliance with the Corporate Governance Code
The Company has adopted all the code provisions contained in the Corporate Governance Code as the Company’s code on corporate governance. During the Reporting Period, the Company had complied with the code provisions set out in the Corporate Governance Code.
Securities Transactions by Directors and Supervisors
The Board has adopted the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules (the “Model Code”) as the standards for governing the transactions of the Company’s listed securities by the Directors and the supervisors of the Company (the “Supervisor(s)”). Having made specific enquiries with all Directors and Supervisors, all of them confirmed that they had complied with the requirements set out in the Model Code during the Reporting Period.
Remuneration of Auditors
The Company’s domestic auditors, Ernst & Young Hua Ming LLP and overseas auditors, Ernst & Young has served as the independent external auditors of the Group since the date of 2016 AGM. The remuneration paid and payable by the Group to Ernst & Young Hua Ming LLP and Ernst & Young in respect of the services provided during the Reporting Period is as follows:
|Services provided||Fee paid and payable|
|Statutory audit service provided for 2019||RMB42,045,000|
|Non-statutory audit service provided for 2019||RMB1,707,000|
|Non-audit service – tax consultancy services||RMB2,082,000|
Confirmation by the Directors and Auditors
The Directors have reviewed the effectiveness of the internal control system of the Group. The review covered all the material aspects of its internal controls, including the supervision of the financial and operational and compliance affairs, as well as risk management.
The Directors are responsible for supervising the preparation of annual accounts in order to give a true and fair view of the financial position, operating results and cash flow of the Company during the year. For the purpose of the preparation of the financial statements for the Reporting Period, the Directors have selected appropriate accounting policies, adopted applicable accounting principles, made judgments and assessments that are prudent and reasonable and ensured the financial statements were prepared on a going concern basis. The Directors have confirmed that the Group’s financial statements were prepared in accordance with the requirements of laws and applicable accounting principles.
The Directors are not aware of any material uncertainties relating to events or conditions that may cast doubt upon the ability of the Company to operate as a going concern. The statement of auditors about their reporting responsibilities on the financial statements is set out in the section headed “Independent Auditor’s Report” of this report.
Two or more shareholders representing a total of over 10% (inclusive) shares carrying the right to vote at the meeting to be convened may sign one or more written requests of the same format and contents, and submitted to the Board for the convening of an extraordinary general meeting or a class meeting. The Board shall furnish a written reply stating its agreement or disagreement to convene the extraordinary general meeting or a class meeting within ten days upon receipt of such requisition.
When the Company convenes an annual general meeting, shareholders who individually or jointly hold three percent (3%) or more of the shares of the Company shall be entitled to propose provisional motions and submit the same in writing to the Board ten (10) days prior to the date of the general meeting, the details of which please refer to Article 58 of the Articles of Association of the Company.
The shareholders may put enquiries to the Board via the office phone number and email address of the Board office as stated in this annual report.
Amendments to the Articles of Association, the Rules of Procedure of the Board of Directors and the Rules of Procedure of the General Meeting of the Shareholders
On 22 March 2019, the Board has resolved to make certain amendments to the Articles of Association and the Rules of Procedure for the Board of Directors. The proposed amendments have been duly approved at the annual general meeting of the Company held on 27 June 2019. For details, please refer to the Company’s announcements dated 22 March 2019 and 27 June 2019.
On 29 March 2020, the Board resolved to propose amendments to certain articles of the Articles of Association and the Rules of Procedure of the General Meeting of the Shareholders of the Company. The proposed amendments are subject to the consideration and approval by the shareholders’ general meeting and class meetings of the Company. For details, please refer to the Company’s announcement dated 29 March 2020.
Effective Communications with Investors
The Group had made effective improvements in investor relations in 2019 under the leadership and support of the Board and management. The Group has participated in a number of investment forums and effectively communicated with domestic and overseas investment institutions through various means. The Group organized on-site visits to its logistics centers, distribution centers and retail drug stores for a number of investors to allow investors to better understand Company and experience in person the Company’s leading industry position and competitive advantages. During its daily work, the Company received various fund investors for on-site visits and answered investors’ questions to maintain close and smooth communication. In the future, the Company will maintain on-going communications with Shareholders of the Company and investors through road shows after the issuance of interim/annual results as well as through general meetings, so as to protect the rights and interests of investors.
Implementation of Non-Competition Agreement
The independent non-executive Directors have reviewed the compliance by CNPGC of the Non-Competition Agreement and confirmed that CNPGC has complied with the terms of such agreement during the year ended 31 December 2019. CNPGC also confirmed to the Company that it has complied with the terms of the Non-Competition Agreement.
The independent non-executive Directors were not aware of any breach of the terms of the Non-Competition Agreement by CNPGC and therefore, no remedy action was taken by the Company during the year ended 31 December 2019.
In accordance with the Non-Competition Agreement entered into between the Company and CNPGC, if CNPGC or any of its subsidiaries (other than the Company) is aware of any business opportunity to own, invest in, participate in, develop, operate or engage in any business or company which directly or indirectly competes with the core business of the Company (the “Business Opportunity”), it will inform the Company of the aforesaid Business Opportunity in writing immediately in the first place. Whether to take up the Business Opportunity is up to the independent non-executive Directors.
During the Reporting Period, the independent non-executive Directors of the Company did not make any decisions in relation to the exercise or termination of the option or the right of first refusal or take up or waive any Business Opportunity.
Risk Management and Internal Control
The Board has established a risk management and internal control system in accordance with the requirements of paragraph C.2 of the Corporate Governance Code of Appendix 14 of the Listing Rules and continues to monitor and review the effectiveness of its operation. The system is designed to manage rather than eliminate the risk of failure to meet business objectives, to promote effective and efficient operations, to ensure reliable financial reporting and compliance with applicable laws and regulations, as well as to safeguard the assets of the Group.
Characteristics of the Risk Management and Internal Control Organisation System
In accordance with the requirements of code provision C.2.2 of the Corporate Governance Code of Appendix 14 of the Listing Rules, the Group has established a sound risk management and internal control organization system which includes the Board, its legal compliance committee, management of the Group, the risk and operation management department, legal compliance department, audit department, discipline inspection committee and other departments to ensure that the Group has sufficient resources, qualified and experienced staffs, training courses and related budget for risk management and internal audit. Each department of the Group serves as the frontline in risk management and internal control; and the risk and operation management department, legal compliance department and the management of the Group are the higher level supervisors for risk management and internal control; while the highest level of supervision is carried out by the Audit Committee under the Board and the audit department, with the discipline inspection and supervision department and the audit department serving as an independent supervision department that conducts internal audit for the Group’s risk management system. As the highest decision maker for the Group’s risk management and internal control, the Board assumes the full responsibility for the establishment of a sound risk management and internal control system as well as the effectiveness of the risk management work carried out across the Group.
Implementation of Risk Management and Internal Control
The Group reviews the effectiveness of the risk management and internal control systems every year and assesses all important aspects of internal control such as supervision on financial, operation and compliance affairs, etc. based on the five elements of internal control, namely, the internal environment, risk assessment, control activities, information and communication as well as internal supervision.
After risk assessment, the three major risks faced by the Company in 2019 were account receivable and cash flow risk, compliance risk and group management and control risk.
As for the cash flow and account receivable risk, affected by the “Two-invoice System”, the business structure has changed as the proportion of the distribution business decreased and the proportion of direct sales to hospitals increased, resulting in corresponding changes in the account receivable structure and an overall increase trend. With the continuous advancement of grass roots clinics’ diagnosis and treatment policies, the Group’s terminal sales network has further extended downward to third- and fourth-tier cities and small terminals, resulting in an increase in the number of payment collection days. Policies such as “Zero Markup”, “Reducing Drug Proportion”, “Restricting the Use of Adjuvant Drugs”, and “Tiered Diagnosis and Treatment” have led to funding shortage and thus delayed payment of hospitals.
As for the compliance risk, the pharmaceutical industry was faced with very stringent regulations, and compliance will become an important topic for the pharmaceutical industry. The implementation of various regulations and measures such as the “Two-invoice System”, “Zero-markup for Drugs” and “Centralized Bidding and Procurement” continued to be strengthened in 2019, imposing greater responsibility and pressure on the Group.
As for the group management and control risk, frequent issue of industry policies, market hierarchic reshuffling amidst increasing market concentration, and further narrowed profit margins have led to intensified challenges for business in 2019, imposing greater pressure on the Group’s operations and management. Moreover, with the continuous changes in external markets and policies, the Company’s top-down design and rapid adaptive adjustment of business processes may lead to risks that affect the steady development of the Company.
In 2019, the Group formulated practical and feasible management proposals based on its actual situation and carried out effective risk management in various approaches.
Inside the Group, management strengthened its supervision, management and review for strategy implementation. After the strategy was set, the Group gave more attention to strategy implementation and reviewed the effect of strategy implementation. The Board periodically organized strategy review work to understand the implementation progress of strategy and management’s feedback on strategy, and supervised and encouraged the Company’s strategy to be effectively implemented to avoid mistakes.
Outside the Group, the Group strived to analyse market environment, policy trend and competition pattern, strengthened its annual planning review for the headquarters and its subsidiaries. It continued to advance promulgation and supervision work for planning implementation and assigned the coordination of planning implementation to specific persons. It analysed the key development direction for next-stage planning implementation and provided its subsidiaries with practical and reliable analysis guidance of planning objective.
The Group strived to further improve its risk and internal control management system, establish sound system and procedures and implement its supervision work effectively. It also sought to carry out the risk control thoroughly by means of prevention in advance, supervision during the process and following up afterwards. In 2019, the Company organized multiple departments to jointly carry out special supervision and inspection on the risks and compliance of multiple subsidiaries, and followed up and implemented rectification on each of the potential risks discovered. In 2019, the Company held two compliance management committee meetings, launched on-site compliance inspection and relevant rectification on 15 subsidiaries, completed the amendment and compilation of Sinopharm Group Compliance Operation Manual (Special Business), and trained employees and newly appointed general managers of third-tier subsidiaries on compliance.
Meanwhile, the Group strengthened its management on each professional business in its headquarters as well as its supervision on and guidance to the second-tier subsidiaries. It also enhanced its audit supervision and inspection on the implementation of key internal control systems by its subsidiaries in every level by conducting follow-up activities, inspection and ad-hoc audit thereon. Based on an interactive supervision mechanism, departments including, among others, the audit, legal compliance and discipline inspection departments cooperated in the supervision to form resultant force in order to strengthen management vulnerabilities, ensure implementation of the system, carry out rectification and follow-up activities and improve the accountability mechanism.
Formation of a Long-term Risk Management and Internal Control Mechanism
Focusing on the overall strategic objective, the Group has established the risk management system by implementing the basic procedures of risk management in each stage of management and its course of business. It sorted out and identified potential risks thoroughly from the headquarter level to the operational level, developing a risk database of the Sinopharm Group, a systematic and sophisticated database peculiar to the Group, as the foundation of its risk management and internal control.
Every year, the Group instructs each department to identify, analyse and assess the material risks of the Group on the basis of the changing internal and external environment and taking into consideration the possibility and impact of the risk. In light of the actual operation and management of its professional business, each department formulates detailed risk management proposals against material risks on a case by case basis.
The risk and operation management department prepares the Report on Overall Risk Management of the Sinopharm Group annually to summarise the risk management work of the previous year and review the supervision, inspection and timely rectification of all material risks. The report also sets out the risk management plan for the next year as well as resources and events that need coordination and further instruction, and is finally submitted to the management of the Company and the Board for approval.
The Group’s management procedures for financial reporting and information disclosure, etc. are in strict compliance with the requirements of the Listing Rules. Office of Board of Directors enacted the Rules on the Inside Information Management of Sinopharm Group Co. Ltd., which was approved by the Board, and has set up standard control procedures for information collection, classification, approval and disclosure. Prior to disclosing relevant information to the public, the Group will ensure that such information is kept strictly confidential and will maintain a registration of insiders as required. The Supervisory Committee is responsible for the supervision of inside information management.
On the Board meeting held on 29 March 2020, the Board reviewed the risk management and internal control during the Reporting Period and concluded that there had been no deficiency in material risk control nor any weakness in material risk control based on the outcome of the risk management and internal control work implemented by the Group during the period from 1 January 2019 to the date of this Report. The Board was of the view that the risk management and internal control system of the Group is effective and sufficient.