The Hong Kong Stock Exchange (HKEX) recently published a consultation paper proposing changes to the Corporate Governance Code and related amendments to the Listing Rules. The proposed changes represent the continuous effort by the HKEX to upgrade its corporate governance framework from time to time, with the last round of changes to the Code having occurred only two years ago. The HKEX’s proposals apply equally to both issuers listed on the Main Board and GEM, the secondary board of the HKEX.

The HKEX’s key proposals are discussed below:

Board Effectiveness Improvement

The HKEX’s focus is on the board composition of a listed issuer and ensuring a suitable balance of skills, experience, and diversity of perspective.

The HKEX proposes the following changes, which are significant as they move closer to the corporate governance requirements of other developed markets:

• Issuers without an independent board chair are required to designate one independent non-executive director (INED) as a Lead INED.
• Mandatory continuous professional development will be introduced, requiring all directors to receive training on a wide range of specified topics each year (with enhanced disclosure in the Corporate Governance Report), with First-time Directors being required to complete a minimum of 24 training hours within 18 months of their appointment. “First-time Directors” are directors who (1) are appointed as a director of an issuer listed on the HKEX for the first time or (2) have not served as a director of an issuer listed on HKEX for a period of three years.
• Board performance review must be conducted at least once every two years, on a “comply or explain” basis, with specific disclosure in the Corporate Governance Report on the scope of performance review conducted as well as the process and findings of the review, including any areas of improvement identified and measures taken or planned to address the findings.
• Issuers are required to maintain and disclose a board skills matrix in the Corporate Governance Report with enhanced disclosure, covering the current mix and further skills that the board is looking to acquire, if any. This new requirement seeks to ensure that the qualifications and skills of the directors are aligned with and support the long-term strategic goals of the issuer.
• A hard cap will be introduced on overboarding (i.e., an INED must not concurrently hold more than six listed issuer directorships), with a three-year transition period. The new rule is proposed to apply from 1 January 2028 onwards.

Strengthening Board Independence

Currently, the Corporate Governance Code requires that, where all INEDs of a listed issuer are long-serving INEDs (i.e., serving over nine years), the listed issuer must make specific disclosure regarding the length of tenure of each long-serving INED on the shareholders’ circular and/or the explanatory statement accompanying the notice of annual general meeting. The listed issuer must also appoint a new INED on the board at the forthcoming annual general meeting, while none of the long-serving INEDs will be required to step down so long as their further appointment is approved by a special resolution by the shareholders.

The HKEX proposed to introduce a hard cap on the tenure of long-serving INEDs, with a three-year transition period similar to the proposal on overboarding. Further, the HKEX proposed to introduce a two-year cooling-off period, after which the long-serving INED will be allowed to serve as an INED on the board of the same issuer. During the cooling-off period, the INED must also not serve as a director of the issuer’s holding company or any of their respective subsidiaries or any core connected persons of the issuer.

The HKEX also proposed to extend the disclosure requirement on the length of tenure to every director, not just the long-serving INEDs, and their current period of appointment in the Corporate Governance Report of the listed issuer.

Promoting Diversity

Consistent with the efforts being taken in the last round of amendments to the Corporate Governance Code two years ago, and despite progress that has been made since then in improving gender diversity among listed issuers in Hong Kong, the HKEX seeks to further promote board and workforce diversity of issuers in its latest proposals.

In addition to the requirements already introduced by the HKEX mandating single-gender board issuers to appoint at least one director of a different gender by no later than December 31, 2024, the HKEX proposes to introduce another new requirement that issuers must have at least one director of a different gender on the nomination committee. Additionally, an annual review of the implementation of the board diversity policy will become a mandatory requirement under the HKEX’s proposal.

Other than board diversity, the HKEX also proposes to introduce a new rule requiring issuers to have and disclose a diversity policy for their workforce (including senior management) and “any” plans or measurable objectives for achieving gender diversity.

Enhancing Risk Management and Internal Controls

Under the HKEX’s proposals, issuers will be required to enhance their disclosure in the Corporate Governance Report on the review conducted (at least annually) by the board of the effectiveness of their risk management and internal control systems.

Better Capital Management

The HKEX proposes to require issuers to disclose specific information in the Corporate Governance Report regarding their policy on the payment of dividends, or otherwise explain why there is no such policy, and the key factors that the board will take into account when deciding whether to declare, recommend, or pay a dividend during the reporting period. These proposals aim to ensure quality dividend disclosures would be made available to investors and align with the recent international regulatory developments.

CONCLUSION

While the HKEX seeks to introduce many significant changes to the Corporate Governance Code, it is expected that the exchange will continue to periodically enhance the corporate governance framework for Hong Kong listed companies in the coming years.

These proposals demonstrate the HKEX’s continued attention to the areas of focus for institutional investors and represent an ongoing effort in recent years to improve the attractiveness of Hong Kong’s listed market. The two-month consultation will end on August 16, 2024.

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