HKEX announces consultation conclusions on Corporate Governance Code

Background

The Stock Exchange of Hong Kong Limited (the Exchange) is dedicated to the continuous enhancement of corporate governance practice and reporting standards among issuers. Recognising the importance of evolving corporate governance frameworks in sustaining and elevating investor confidence in the market, the Exchange routinely reviews its corporate governance framework to promote high quality corporate governance standard. Following the latest amendments to Corporate Governance Code (CG Code) introduced on 1 January 2022, the Exchange has identified the need for further refinements to certain areas to further improve the corporate governance standards and enhance the CG Code to be in line with the regulators in other jurisdictions.

On 19 December 2024, the Exchange released its conclusions (Consultation Conclusions) to its consultation on the proposed modifications to the CG Code and the accompanying amendments to the Listing Rules. These changes are primarily directed at improving board effectiveness, fortifying board independence, fostering board and workforce diversity, augmenting risk management and internal controls, and ensuring better capital management.

The Exchange received a total of 261 public responses. Each of the proposed amendments to the CG Code and the Listing Rules has received support from a majority of the respondents. In light of the market feedback, the Exchange has decided to adopt all proposed changes with certain modifications or clarifications in response to market comments. The proposed changes will take effect on 1 July 2025, with transitional arrangements for the cap on “overboarding” and the cap on independent non-executive director (INED) tenure.

Key changes to be adopted

The key changes to the CG Code include:

Board Effectiveness

• Recommended Best Practices: Designation of Lead INED

  • where the board chairman is not an INED, issuers are strongly encouraged to designate one INED to be the “Lead INED”. This role involves acting as an intermediary for the other directors and shareholders, especially when regular communication channels with the chairman of the board or the management of the issuer are insufficient. The Lead INED is expected to engage in discussions on matters such as strategy, governance and capital management with the shareholders.

• Mandatory Disclosure Requirements: Disclosure regarding the board’s engagement with shareholders in the Corporate Governance Report (CG Report)

  • issuers must detail the board’s shareholder engagement in the CG Report, including:
    • the nature and number / frequency of these engagements;
    • the groups of shareholders and representatives of the issuer involved; and
    • the issuer’s follow-up actions on the outcomes of these engagements.

• Listing Rules: Mandatory director training

  • all directors of listed issuers must participate in continuous professional development annually, covering each of the following topics:
    • the roles, functions and responsibilities of the board, its committees and its directors, and board effectiveness;
    • issuers’ obligations and directors’ duties under Hong Kong law and the Listing Rules, and key legal and regulatory developments (including Listing Rules updates) relevant to the discharge of such obligations and duties;
    • corporate governance and ESG matters (including developments on sustainability or climate-related risks and opportunities relevant to the issuer and its business);
    • risk management and internal controls; and
    • updates on industry-specific developments, business trends and strategies relevant to the issuer.
  • individuals that have no prior experience as a director of an issuer listed in Hong Kong on the Main Board or GEM or have not served as a director of an issuer listed in Hong Kong on the Main Board or GEM within the three years prior to their appointment (First-Time Directors) must complete a minimum of 24 hours of continuous professional development within 18 months from their appointment, unless such First-Time Director has served as a director of an issuer listed on any other exchange within the three years prior to their appointment, in which case the First-Time Director must complete a minimum of 12 hours of continuous professional development within 18 months of their appointment.

• Code Provisions: Board performance review

  Issuers are required to conduct a formal evaluation of the board’s performance biennially. The board performance review can be conducted either internally or with externally facilitation. The results of the board performance review must be disclosed in the issuers’ CG Report.

• Code Provisions: Disclosure of board skills matrix

  Issuers are required to maintain and disclose in the CG Report a board skills matrix that illustrate the board’s collective experience, skills, qualifications and expertise. This disclosure should also detail how these attributes support the issuer’s long-term strategy, purpose, values and desired culture.

• Listing Rules: Limitation on INED directorships

  An INED will no longer be permitted to hold more than six directorships in Hong Kong-listed issuers simultaneously (the 6-Directorship Cap). Currently, if a proposed INED is to hold their seventh (or more) directorship in a Hong Kong-listed issuer, the board intending to elect this individual must explain in the circular to shareholders and/or explanatory statement accompanying the notice of the relevant general meeting why the board believes this candidate would still be able to dedicate sufficient time to their duties.

  From 1 July 2025, initial public offering applicants will not be permitted to have INED(s) who already hold six, or more, Hong Kong listed-issuer directorships on their board at the time of listing. For existing issuers, as a transitional measure, their INEDs will need to adhere to the 6-Directorship Cap by the first AGM held on or after 1 July 2028.

• Mandatory Disclosure Requirements: Disclosure of directors’ time commitment

  The nomination committees of issuers are required to annually evaluate each director’s time commitment and contribution to the board, as well as their capability to effectively discharge his or her responsibilities. This evaluation should be disclosed in the CG Report.

Independence of INEDs

• Listing Rules: Limitation on Tenure of INEDs

Issuers are prohibited from having an INED who has served on the board as an INED for a period of nine years or more (Long Serving INED). In light of the feedback received and to minimise the potential negative impacts of this transition, the Exchange plans to implement this change in two phases:
- Phase one: by the first AGM held on or after 1 July 2028, the majority of an issuer’s INEDs must not be Long Serving INEDs;

• Phase two: by the first AGM held on or after 1 July 2031, an issuer must not have any Long Serving INED on their board.

Issuers may re-designate Long Serving INEDs as non-executive directors following the completion of their nine-year tenure, and/or re-appoint former Long Serving INEDs following the completion of their three-year cooling-off period.

• Mandatory Disclosure Requirements: Disclosure of length of tenure of each director

  Issuers are required to disclose in their CG Report the length of tenure and current appointment period of each director.

Board and Workforce Diversity

• Code Provisions: Gender diversity on the nomination committee

  Issuers are required to have at least one director of a different gender on their nomination committee. The Exchange further encourages issuers with only one director of a different gender on their boards to appoint additional directors from the under-represented gender.

• Listing Rules: Disclosure of workforce diversity policy

  Issuers are required to have and to disclose a diversity policy for their workforce (including senior management), in addition to the already required board diversity policy under the Listing Rules. The Exchange encourages issuers to focus on how to better improve diversity and inclusion beyond the boardrooms when establishing their workforce diversity policy.

• Mandatory Disclosure Requirements: Disclosure of the annual review of implementation of board diversity policy

  Issuers are required to disclose the results of its annual review concerning the implementation of its board diversity policy. This includes progress towards the issuer’s objectives and the rationale behind their conclusions.

• Mandatory Disclosure Requirements: Disclosure of gender ratio of senior management and the workforce

  Issuers are required to disclose the gender ratio of senior management and the broader workforce (excluding senior management) separately in the CG Report.

• Listing Rules: Temporary deviation from gender diversity requirement

  Where an issuer lacks board members of different genders, it is required to:

  • publish an announcement detailing the situation and its reasons; and
  • appoint appropriate member(s) to the board to rectify the single-gender board issue within three months.

Risk Management and Internal Control

• Mandatory Disclosure Requirements: Annual review of the risk management and internal control systems

  Issuers are required to conduct an annual review on their risk management and internal control systems. The details of the annual review, including the identified weaknesses, remedial actions taken or planned, and a board confirmation regarding the appropriateness and effectiveness of the issuer’s risk management and internal control systems, should be disclosed in the issuers’ CG Report.

• Code Provisions: Scope of annual review(s) of the risk management and internal control systems

  Issuers are required to conduct an annual review of the effectiveness of their own and their subsidiaries’ risk management and internal control systems. The review must specifically address their financial, operational, and compliance controls.

Dividends

• Mandatory Disclosure Requirements: Disclosure of dividend policy and decisions

  If an issuer has a policy on payment of dividends, it is required to disclose the policy or a summary thereof. Additionally, the issuer must confirm that all dividend decisions made by the board align with this policy, or provide explanations for any deviations. In cases where an issuer does not have a dividend policy, an explanation for its absence is required.

  Furthermore, issuers are required to disclose the reasons for any material variations in the dividend rate compared to the pervious corresponding period and any decisions not to declare any dividend.

Other amendments to the Listing Rules

The Exchange will also adopt the following amendments to the Listing Rules:

• issuers are required to establish a record date to determine the identity of security holders eligible to attend and vote at general meetings or to receive entitlements;
• issuers receiving a modified auditors’ opinion are required to disclose:
  • details of the modifications and their impact on the issuer’s financial position;
  • management’s perspective and basis on major judgmental areas, and how these differ from the auditors;
  • the audit committee’s stance on the modifications and whether it has reviewed and concurred with management’s views on significant judgmental areas; and
  • the issuer’s intended actions to address the modifications;
• directors are entitled to, and should, request information related to monthly updates from the management of the issuers; and
• aligning the requirements for the nomination committee, the audit committee and the remuneration committee on establishing written terms of reference and arrangements during temporary deviations from requirements.

Conclusion

The Exchange’s amendments to the CG Code, set to take effect on 1 July 2025, signify a progressive stride towards promoting high standard of corporate governance. These modifications, which received broad support from the public, are designed to address contemporary challenges in corporate governance. Notably, the introduction of a Lead INED role, mandatory director trainings, and a cap on the number of directorships an INED, alongside the emphasis on board and workforce diversity, underscore a commitment to elevating standards of transparency, accountability, and inclusivity.

In conclusion, these amendments demonstrate the Exchange’s proactive approach to adapting high quality corporate governance standards in response to evolving market dynamics and stakeholder expectations. By implementing these changes, the Exchange aims to fortify investor confidence in the market, thereby ensuring a resilient and dynamic investment landscape.