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Sep 17 Legal Update

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New COSO ERM Framework

The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) published a new framework – “Enterprise Risk Management—Aligning Risk With Strategy and Performance”, updating its widely-followed “Enterprise Risk Management (“ERM”) — Integrated Framework” (2004).

A key theme is to better “integrate” risk management. As reflected in the document title, risk management should be aligned with strategy and performance. It should also be embedded throughout an organization, including its governance, culture, decision-making, systems and processes.

Thus, the framework is written from the “perspectives of businesses” — its document structure and graphics are based on a “business model” approach, instead of being isolated risk process and concepts. Some concepts, like “risk appetite” and “risk tolerance” are also refined.

(Click: COSO press release; (COSO site) (free) executive summary; (free) frequently asked questions;  purchase full document; summary by PwC (engaged by COSO in the update project)

What you should know:

  • Introduces 5 “components” to assist organizations in designing and implementing ERM practices (see new COSO graphics: P.6, COSO executive summary):
    (i) Governance and culture
    (ii) Strategy and objectivesetting
    (iii) Performance
    (iv) Review and revision
    (v) Information, communication, and reporting
  • The 2004 “ERM cube” is replaced by new graphics based on the “business model”
  • Linking strategy with risk management in 3 ways:
    (i) Possibility of strategy not aligning with mission, vision, and values
    (ii) Implications from strategy chosen
    (iii) Risks in strategy execution
  • Internal controls are part of ERM.  This update has a different focus and does not replace the separate framework on Internal Controls (2013)

What you should do:

  • COSO stated that it is not mandatory to adopt the updated framework. The 2004 framework can continue to be used, though COSO may retire it in the future (P.3-4, frequently asked questions)
  • We regard “integration” as the key. It is important to focus on the overarching principles, instead of treating it as a technical checklist
  • A compendium with case studies is expected to be published during Q4 — we shall provide further updates generally


Also in this issue


(i) SFC successfully obtained, in the Court of First Instance, disqualification orders against the former chairman/executive director (8 years), and four current independent directors (ranging from 3-4 years) of Hanergy Thin Film Power Group (the “Company”). (Under s.214, Securities and Futures Ordinance) (Click: press release)

In addition, SFC also obtained a court order requiring the former chairman (being the controlling shareholder of such entities) to procure that the Company’s parent and/or affiliates pay all outstanding receivables due to the Company.

These actions followed SFC’s investigation into various very substantial connected transactions between the Company and its parent and/or affiliates since 2010. The Company relied on sales to these parties as a main source of revenue.  In July 2015, SFC suspended the Company’s share trading.

What you should know:

  • the former Chairman’s breaches of directors’ duties found to be very serious:
    (i) Serious conflicts of interest: his position as chairman/ executive director of the Company, and ultimate controller of both the Company and its parent
    (ii) Very substantial amounts, and time involved
  • The independent directors found to be incompetent, as well as showing a marked indifference to their directors’ duties:
    (i) Failed to make appropriate disclosure as to the viability of the Company’s business model, which a reasonable director should have questioned
    (ii) Failed to properly assess the financial positions of the connected parties and hence the recoverability of the receivables due
    (iii) Failed to take proper steps to recover these receivables, and so did not act in the Company’s best interest
  • For share trading resumption, SFC would require publication of a disclosure document with detailed information (on the Company, its activities, business, assets, liabilities, financial performance and prospects) to address SFC’s concerns

What you should do/watch out for:

  • SFC stated that it will continue to take action to “hold listed company directors accountable for corporate misconduct”
  • SFC’s active enforcement and use of various powers — including the power for mandatory suspension of share trading (Click: our July 17 legal update, for SFC’s “early intervention” approach)


(ii) HKEX published two consultation papers on (1) Capital Raisings by Listed Issuers and (2) Delisting and other Rule Amendments. (Click: press release; consultation papers: capital raisings; delisting)

The first consultation seeks to address potential abuses related to large scale deeply discounted capital raising activities, including rights issues, open offers, specific mandate placings. The second consultation aims to improve the effectiveness of the delisting framework and address the issue of prolonged suspension of trading in listed securities. These concerns have been addressed in our previous updates.

What you should do/watch out for:

  • The proposals should not affect genuine capital raisings
  • Some key proposals:
    (i)  Prohibition of capital raisings with a material value dilution (25% or more within a rolling 12-month period when aggregated)
    (ii) Mandatory minority shareholders’ approval for open offers
    (iii) Specific proposals to address potential abuse where a connected person acts as the underwriter of rights issues and open offers
    (iv) Automatic delisting for issuers where share trading has been suspended continuously for a prescribed period (proposed: 12,18, or 24 months)


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