Jul 3, 2024
The Hong Kong Exchange & Clearing Limited (HKEX) published a Consultation Paper on Corporate Governance Code and Related Listing Rules on 14 June 2024.
The key proposals set out in the Consultation Paper aim to:
(i) improve board effectiveness;
(ii) strengthen board independence;
(iii) promote board and workforce diversity;
(iv) enhance risk management and internal control; and
(v) promote better capital management by enhancing issuer’s disclosure on dividend.
The consultation period will end on 16 August 2024.
Subject to the responses to the consultation, the revised Corporate Governance Code (CG Code) and related Listing Rules are expected to come into effect on 1 January 2025 and apply to corporate governance reports and annual reports in respect of financial years commencing on or after 1 January 2025.
KEY PROPOSALS
BOARD EFFECTIVENESS
Designation of Lead INED
New Code Provision under the CG Code (CP): require issuers without an independent board chair to designate one INED as a Lead INED. A board chair would not be considered independent if he or she is not an independent director. This would include circumstances where the board chair is also the chief executive of the issuer.
Mandatory director training
New rule: require all directors to receive mandatory continuous professional development each year, on specified topics, with First-time Directors required to complete a minimum of 24 training hours within 18 months of their appointment. “First-time Directors” are directors who: (a) are appointed as a director of an issuer listed on the Exchange for the first time; or (b) have not served as a director of an issuer listed on the Exchange for a period of three years or more prior to their appointment. Revised mandatory disclosure requirements under the CG Code (MDR): require enhanced disclosure in the CG Report on director training.
Board performance review
Upgrade to CP: require a board performance review to be conducted at least every two years, with specific disclosure in the CG Report.
The HKEX will provide further guidance on the areas to be covered in a board performance review.
Disclosure of board skills matrix
New CP: require issuers to maintain and disclose a board skills matrix in the CG Report, with enhanced disclosures in the CG Report on the board’s skills (current mix and further skills that the board is looking to acquire).
Overboarding INED and directors’ time commitment
New rule: hard cap on overboarding (i.e. an INED must not concurrently hold more than six listed issuer directorships), with a three-year transition period.
This means, the proposed rule will apply from 1 January 2028 onwards. An overboarding INED as at 31 December 2027 must comply with this new rule by the conclusion of the earliest AGM after 31 December 2027 held by any issuer that he or she serves (i.e. the first AGM held amongst the issuers of which he or she is a director).
New MDR: require the nomination committee to annually assess and disclose (as part of its summary of work done during the year) its assessment of each director’s time commitment and contribution to the board, taking into account their listed issuer directorships and other significant external time commitments.
INDEPENDENCE OF INEDs
Independence of INEDs after nine years
New rule: hard cap on the tenure of INEDs who has served for more than nine years on the board of a listed issuer (Long Serving INEDs), with a three-year transition period. Long Serving INEDs will be allowed to serve again as an INED on the board of the same issuer upon completion of a two-year cooling-off period.
During the two-year cooling-off period, such individuals must not serve as a director of the relevant issuer, its holding company or any of their respective subsidiaries or any core connected persons of the issuer.
This means, the relevant rules will apply from 1 January 2028 onwards, with compliance required by the conclusion of the AGM following 31 December 2027 at the latest.
BOARD AND WORKFORCE DIVERSITY
(i) New CP: require issuers to have at least one director of a different gender on the nomination committee
(ii) Upgrade to MDR: require an annual review of the implementation of the board diversity policy
(iii) New rule: require issuers to have and disclose a diversity policy for their workforce (including senior management)
(iv) Revised MDR: require separate disclosure of the gender ratio of (i) senior management and (ii) the workforce (excluding senior management)
(v) New rule: codify the HKEX’s existing guidance on the arrangements during temporary deviations from the requirement for issuers to have directors of different genders on the board
RISK MANAGEMENT AND INTERNAL CONTROLS
(i) Upgrade to MDR: require enhanced disclosures in the CG Report on the review conducted (at least annually) by the board of the effectiveness of the issuer’s and its subsidiaries’ risk management and internal control systems (RMIC Systems), including supporting information for the board’s conclusion that the RMIC Systems are effective and adequate and details of the review findings.
(ii) Other enhancements to the risk management and internal control sections of the CG Code.
DIVIDENDS
New MDR: require issuers to disclose specific information regarding their policy on the payment of dividends (or otherwise explain the reason(s) for not having such policy), as well as the dividend decisions made by the board during the reporting period, in the CG Report.
OTHER MINOR RULE AMENDMENTS
There are a few other minor amendments to the Listing Rules:
To codify the existing guidance to require issuers to set a record date for general meetings and for receiving entitlements.
To codify the HKEX’s recommended disclosures in respect of issuer’s modified auditor’s opinions.
To clarify in existing CP the HKEX’s expectations with regards to the provision of monthly updates by management to the board and to make it clear that directors are entitled to and should request such information if the management does not provide it.
To align requirements for the nomination committee, the audit committee and the remuneration committee on establishing written terms of reference for the committee.
OTHER HKEX GUIDANCE ON CORPORATE GOVERNANCE
The HKEX has also updated its webpage and added guidance materials and resources on relevant topics on Corporate Governance. Issuers are encouraged to visit the relevant webpages.
INED Corner
A new webpage designed for INEDs providing focus guidance, with case studies, on an INED’s roles and responsibilities and how they can best discharge their duties.
Board Diversity Hub
A new diversity hub that provides information on issuer’s board diversity.