HKEX Reviews Corporate Governance Code and Related Listing Rules

Background

On 14 June 2024, The Stock Exchange of Hong Kong Limited (the Exchange) released a Consultation Paper (Consultation Paper) on Review of Corporate Governance Code (CG Code) and related Listing Rules.

Following the last round of amendments to the CG Code that came into effect on 1 January 2022, this consultation forms part of the Exchange’s periodical review of the CG Code and the corporate governance standards set thereunder. In developing the present proposals, the Exchange has drawn from regulatory developments in jurisdictions including the UK, Australia, Singapore, Malaysia and Mainland China, its findings from the CG Disclosure Analysis published in November 2023, and preliminary feedback from market participants, practitioners and industry bodies.

The consultation period will end on 16 August 2024. The Exchange expects to be able to implement the proposed changes, based on market feedback, on 1 January 2025 with a 3-year transitional period.

Key proposals

The Exchange has focused its proposals in accordance with several aims, namely, improving board effectiveness, strengthening board independence, promoting board and workforce diversity of issuers, enhancing risk management and internal control, and ensuring better capital management.

Board Effectiveness

Designation of lead INED: It is proposed that issuers without an independent board chair, including where the board chair is also the issuer’s chief executive, be required to designate an independent non-executive director (INED) as the “Lead INED”. The Lead INED would be primarily responsible for enhancing communication among INEDs, with the rest of the board and with shareholders. If an issuer already has an independent board chair, it is expected that the board chair would fulfill the role of the Lead INED unless another INED is designated for this role.

Mandatory director training: To ensure directors are well-informed and capable of fulfilling their roles and responsibilities, it is proposed that all directors of listed issuers will be required to undertake mandatory training for their continuous professional development. First-time directors or those who have not served as a director for 3 years or more prior to their appointment would be required to complete a minimum of 24 hours of training within 18 months of their appointment. The requirement would apply irrespective of whether the directors are also directors of companies listed on other exchanges. The Exchange noted that while the current CG Code states that directors should participate in continuous professional development and issuers need to disclose in their Corporate Governance Report (CG Report) how directors have done so, disclosures often lacked detail as to topics, hours and providers of such training.

Board performance review: It is proposed that issuers should conduct a board performance review at least every 2 years to assess the overall performance of the board. This is currently required as a “Recommended Best Practice” under the CG Code, but the proposal would require compliance on a “comply or explain basis”. Issuers would have discretion to determine the format of the review. Further, specific disclosure regarding the board performance review would be required in the CG Report.

Disclosure of board skills matrix: It is proposed that issuers be required to maintain a board skills matrix. In the matrix, issuers would be obliged to disclose information related to: (i) the current skills mix of their boards, (ii) how the combination of skills, experience, and diversity aligns with the company's purpose, values, strategy, and desired culture, and (iii) details and plans for acquiring further skills. The Exchange cited insufficient disclosure in issuers’ annual reports as to whether their directors’ qualifications and skills are aligned with and support the issuer’s long-term strategic goals.

Overboarding INED and directors’ time commitment: It is proposed that there be a 6-directorship cap on the number of Hong Kong listed issuer directorships that an INED may hold. The current requirement is that where a proposed INED would be holding their 7th (or more) directorship of a listed issuer, the board seeking to elect this candidate must state in the circular to shareholders and/or explanatory statement to the notice of the relevant general meeting why the board considers this individual to be able to devote sufficient time to the board. In addition, individual directors must ensure they can devote sufficient time and attention to the issuer’s affairs before accepting a directorship. Under the new requirement, the nomination committee must annually assess and disclose their evaluation of each director's time commitment and contribution to the board.

Independence of INEDs

Independence of INEDs after 9 years: It is proposed that there be a limit of 9 years on the tenure of INEDs. An individual is not considered to be independent if they have served as an INED of an issuer for 9 years or more. An individual who is so disqualified from continuing their service as INED would be eligible to serve again as INED for the same issuer following a cooling-off period of 2 years. Further, all issuers would be required to disclose in their CG Reports the length of tenure and current period of appointment for each director.

Board and Workforce Diversity

Gender diversity on the nomination committee: It is proposed that issuers be required to have at least 1 director of a different gender on the nomination committee.

Board diversity policy and workforce diversity policy: It is proposed that issuers be required to conduct and make disclosures in respect of an annual review of the implementation of their board diversity policy. On the workforce level, issuers would be required to disclose any plans or measurable objectives for achieving gender diversity.

Gender ratio: It is proposed that issuers make separate disclosure of the gender ratio in respect of its senior management and its workforce (the latter excluding senior management).

Arrangements during temporary deviations: It is proposed that the existing guidance in respect of temporary deviations from the requirement to have directors of different genders on the board be codified. Issuers will be required to immediately publish an announcement with relevant details and reasons if they fail at any time to have directors of different genders on the board. The issuer would then be required to satisfy such requirement within 3 months.

Risk Management and Internal Control

Annual review of systems: To ensure effective risk management and good corporate governance, it is proposed that issuers be required to review, on an annual basis, their risk management and internal control systems. Issuers would then be required to provide details of the review, including the weaknesses identified, any remedial steps taken or proposed to be taken, as well as a confirmation from the board on the appropriateness and effectiveness of the risk management and internal controls systems of the issuer.

Dividends

Dividend policy and decisions: It is proposed that issuers be required to disclose, in addition to the board’s policy on payment of dividends, the aim or objective of the policy, and key factors considered by the board when making dividend decisions, or otherwise the reasons for not having such policy. Issuers would also be required to confirm that all dividend decisions align with the policy, or to explain any deviations.

Other amendments to the Listing Rules

Record date: It is proposed that issuers be required to set a “record date” on which the issuer will determine the identity of holders of its securities who are eligible to take corporate actions such as attending and voting at general meetings, or receiving entitlements. The Exchange noted that unlike other major jurisdictions such as the US, the UK and Mainland China, there is currently no such requirement in the Listing Rules. Setting a record date would provide clarity as to the point at which eligibility to participate in relevant corporate events is determined.

Disclosure on modified auditors’ opinion: It is proposed that issuers receiving a modified auditors' opinion be required to make specific disclosures in respect of the modified opinion in their annual report disclosure. This requirement was first made as a recommendation from the Exchange’s Review of Issuer’s Annual Reports 2023. While the Listing Rules require an issuer to provide more detailed information should its financial statements not give a true and fair view of its state of affairs, results of operations and cashflows, there is no requirement on the information to be disclosed. Issuers would be required to make disclosures in respect of, among others, the modifications and their impact on the issuer's financial position, management's position, the audit committee's view towards the modifications, and the issuer's proposed plans to address the modifications.

Provision of information to the board: It is proposed that the existing CG Code provision D.1.2 and the note thereto be clarified as to the Exchange’s expectations on provision of information by management to the board, and to emphasise that directors have the right to request information if management does not provide it.

Requirements for nomination, audit and remuneration committees: It is proposed that the requirements on establishing written terms of reference for the committees and the arrangements during temporary deviations from requirements in respect of an issuer’s nomination committee, audit committee and remuneration committee be aligned for consistency. The relevant Listing Rules would be revised to ensure consistency of approach across the 3 mandatory board committees (i.e. nomination committee, audit committee and remuneration committee).

Conclusion

In Hong Kong’s dynamic markets, periodic review of listed issuers’ corporate governance is crucial for ensuring a high standard of corporate governance and maintaining investor confidence. The proposed amendments represent a measured review of the CG Code, targeting a full scope of key areas including board effectiveness, board independence, board diversity, risk management and internal control, and capital management. Further, the proposed codification of some existing guidance and recommendations will help to clarify regulatory expectations.
These proposals reflect the Exchange’s commitment to promoting good practices of corporate governance and bolstering the highly regarded status of the Hong Kong capital markets.