In June this year, Hong Kong Exchanges and Clearing (HKEX) issued a consultation paper containing wide-ranging proposals to amend the Corporate Governance Code (“CGC”) and related Stock Exchange of Hong Kong (SEHK) Listing Rules. The aim of the proposals is to promote stronger corporate governance practices by Hong Kong listed issuers. The consultation period closed on August 16, 2024 and the consultation conclusions will follow in due course. In this article, we outline the proposals. If you would like more information about corporate governance, please contact one of our corporate lawyers.
Table of Contents
The consultation published by Hong Kong Exchanges and Clearing ("HKEX") in June 2024 sets out a number of proposals to amend the Corporate Governance Code ("CGC") and related Listing Rules of the Stock Exchange of Hong Kong ("SEHK"). The aim of those amendments is to promote stronger corporate governance practices by Hong Kong listed issuers. Of particular interest is the proposal to phase out long-serving independent non-executive directors (“INEDs”) (i.e. INEDs who have served nine years or more) which, if implemented, will affect a large number of listed issuers, as approximately 31 per cent. of issuers listed on the Stock Exchange of Hong Kong as of December 2023 had long-serving INEDs on their boards.
Key proposals in the consulation that would apply on a mandatory basis include:
- prohibiting an INED from holding more than six directorhips at Hong Kong-listed issuers concurrently;
- capping an INED’s tenure at nine years, but allowing the clock to reset after a two-year cooling off period;
- requiring a diversity policy for the workforce, including senior management;
- disclosure of the annual review of the effectiveness of risk management and internal control systems;
- enhanced requirements in respect of training for directors, including a minimum of 24 hours of training within 18 months of appointment for first-time directors; and
- enhanced disclosures in respect of dividend policy and dividend decisions.
Some of the proposals would apply on a “comply-or-explain” basis (i.e. on a basis which allows a listed issuer to deviate from the CGC provisions provided it sets out in its corporate governance report its considered reasons for the deviation and explains how it achieved good corporate governance by means other than strict compliance with the relevant CGC provision), including:
- designating a “lead INED” as a communication intermediary for issuers whose board chair is not independent;
- ensuring that the nomination committee comprises different genders; and
- conducting and disclosing a board performance review at least every two years.
Timing
The amendments are proposed to come into effect on January 1, 2025 and would apply to corporate governance reports for financial years commencing on or after January 1, 2025, save for the proposals relating to long-serving and over-boarded INEDs, which will be subject to a three year transition period which will end on December 31, 2027.
Further details on the more significant proposals are set out below. Unless otherwsie stated, each proposed amendment will apply from January 1, 2025.
Key Action Points
If the proposals are implemented as set out, listed issuers will need to determine whether adjustments to their board composition are required and whether succession plans are required in light of the proposed requirements on over-boarded and long-serving INEDs.
Listed issuers may also wish to review and evaluate their existing policies and procedures on diversity, risk management and dividends in light of the enhanced requirements and disclosures on those matters under the consultation proposals. Unless a different approach can be explained, those listed issuers which have a chairman which is not an INED should consider the designation of a “lead INED” and conduct a board performance review at least every two years.
Action Item | Requirement | Mandatory or Optional |
|---|---|---|
Board Independence |
|
|
INED Term Limit | Maximum 9 year term followed by 2 year break | Mandatory |
INED Time Commitment | Maximum 6 directorships | Mandatory |
Lead INED Designation | Non-Executive Chairman or Key Point of Communication | Comply or Explain |
Director Training | Annual governance focused professional development | Mandatory |
Board Performance Reviews | Review at least once every 2 years; disclosure of results | Comply or Explain |
Board Skills Matrix | Disclosure of individual director skills available and needed | Comply or Explain |
Diversity |
|
|
Nomination Committee | Composition includes different genders | Comply or Explain |
Board Diversity Policy | Annual review of board diversity policy | Mandatory |
Workforce Diversity Policy | Adoption of policy and disclosure of senior management gender ratio | Mandatory |
Risk Management and Internal Controls |
|
|
Policy Review | Annual review of effectiveness of risk management systems | Mandatory |
Disclosure | Enhanced disclosures of risk management systems to enable board assessment | Mandatory |
Dividends |
|
|
Policy | Enhanced disclosures of distribution policy | Mandatory |
Disclosure of Dividend Rationale | Disclosure of reasons for changes in dividends or failure to declare | Mandatory |
Board Effectiveness and Independence
Long serving INEDs – Mandatory Requirement
INEDs that have served nine years or more will no longer be considered independent.
A long serving INED can be re-appointed as an INED of the same issuer after a two-year cooling-off period if they: (i) meet the independence criteria in Listing Rule 3.13 and (ii) have not, during the cooling-off period, served as a director of the relevant issuer, its holding company, any of their respective subsidiaries or any core connected persons of the issuer.
The nine-year period is calculated from the date of appointment or (if they were appointed prior to the listing) the listing date. Any breaks in tenure under two years will still count towards the nine-year period.
A three-year transition period is proposed and the rule will apply from 1 January 2028. As a result, a long-serving INED as at December 31, 2027 would not be considered independent at the conclusion of the lissted issuer's next AGM that follows December 31, 2027 and an INED who becomes a long-serving INED from January 1, 2028 onwards will not be considered independent at the conclusion of the listed issuer's next AGM of the issuer following the completion of the nine-year tenure. In both situations, the long-serving INED must step down as an INED by the conclusion of that next AGM.
Time commitment – Mandatory Requirement
INEDs must hold no more than six directorships simultaneously at Hong Kong listed issuers.
Disclosure must be made of the nomination committee’s assessment of each director’s time commitment and contribution, which must take into consideration, amongst other factors, their other listed issuer directorships and any other significant external time commitments.
The new rule is proposed to apply to INEDs of IPO applicants who submit A1 filings on or after January 1, 2025 and to INEDs of Hong Kong listed issuers from January 1, 2028. However, an INED holding too many directorships at Hong Kong listed issuers as of December 31, 2027 has until the conclusion of the earliest AGM after December 31, 2027 (of the Hong Kong listed issuers of which they are a director) to comply.
Designation of a Lead INED – Comply or Explain Basis
Where the board chairman of a listed issuer is not an INED, a Lead INED should be designated to (a) serve as an intermediary for the other directors and shareholders, and (b) be available to other directors and shareholders where normal communication channels with the chairman or management are not adequate. The rationale for requirement is to offer shareholders (especially minority shareholders) a clear point of contact for independent insight on aspects of a listed issuer's governance (e.g. scrutiny of loans granted by the issuer and connected transactions).
A board chairman who is an INED is expected to fulfil the role of the Lead INED unless another director has been appointed as a lead INED.
As this requirement applies on a “comply or explain” basis, those listed issuers subject to it may instead provide reasoned explanations for not appointing a Lead INED. In this regard, the consultation notes that one such explanation could be to provide details of the alternative shareholder communication channels that are in place to address the investor concerns underpinning this requirement.
Directors’ training - Mandatory
There must be continuous professional development for every director covering specific topics in each financial year. The relevant topics include, at a minimum (a) the roles, functions and responsibilities of the board, its committees and its directors, and board effectiveness, (b) issuer’s obligations and directors’ duties under Hong Kong law and the Stock Exchange’s Listing Rules, and key legal and regulatory developments, including Listing Rule updates, relevant to the discharge of such obligations and duties; (iii) corporate governance and ESG matters, including developments on sustainability or climate-related risks and opportunities relevant to the issuer and its business; (iv) risk management and internal controls; and (v) updates on industry specific developments, business trends and strategies relevant to the issuer.
At least 24 hours of training must be taken within the first 18 months of appointment for (i) first-time directors of Hong Kong listed issuers, and (ii) those who have not served as a director of a Hong Kong listed issuer for three years or more prior to the appointment.
There is also a requirement for enhanced disclosure on directors’ training.
Board Performance Reviews - Comply or Explain Basis
These reviews must be caried out at least every two years and disclosure of the findings made during the reporting period. The review should focus on the performance of the board as a whole and it will be open to issuers to decide whether the review is an internal or external review.
Board Skills Matrix – Comply or Explain Basis
There should be a disclosure of a board skills matrix showing the current mix of skills and further skills the board is looking to acquire, if any.
Diversity
Nomination Committee - Comply or Explain Basis
There should be a nomination committee which should comprise directors of different genders.
Annual reviews of board diversity policy – Mandatory Requirement
This is to be upgraded from a code provision to a mandatory disclosure.
Workforce Diversity Policy – Mandatory Requirement
Issuers must have in place and disclose a workforce diversity policy. This must include senior management and must disclose the gender ratio of senior management separately from the rest of the workforce. Issuers are also required to disclose any plans or measurable objectives for achieving gender diversity that they may have.
Risk Management and Internal Controls
Review and Disclosure – Mandatory Requirement
Issuers must review the effectiveness of their risk management and internal control systems and those of their subsidiaries on an at least annual basis. This has been upgraded from a code provision to being mandatory.
Issuers must also provide enhanced disclosures on their risk management and internal control systems, including supporting information necessary to enable the board to conclude whether those systems are effective.
Dividends
Dividend Policy – Mandatory Requirement
An issuer must make enhanced disclosures regarding its dividend policy. This will be upgraded from a code provision to being mandatory. An issuer is not required to have a dividend policy, but if it does not, the issuer must include a negative statement and disclose the reasons for not having one.
Disclosure of Dividend Decisions – Mandatory Requirement
An issuer must provide an explanation of the reasons for any material variation in the dividend rate between a dividend declared during the reporting period compared to that for the previous corresponding period.
Where the board of an issuer decides not to declare any dividend, the issuer must disclose the reasons and measures it intends to take to enhance investors’ returns, if any.