Dentons US LLP
11/11/2024 | News release | Distributed by Public on 11/11/2024 04:23
HKEX proposes enhancements to Corporate Governance Code
November 11, 2024
In June 2024, the HKEX released a consultation paper proposing amendments to the Listing Rules aimed at enhancing corporate governance for listed companies. 1 These amendments seek to improve board effectiveness and independence, promote diversity, and strengthen risk and capital management.
The new rules are set to take effect on 1 January 2025, and will apply to corporate governance reports for financial years starting on or after this date. The proposals concerning long-serving and over-boarded independent non-executive directors (INED(s)) will have a three-year transition period ending on 31 December 2027.
A significant aspect of the proposal is the gradual removal of long-serving INEDs who have been in their roles for nine years or more. If adopted, this change will impact many companies, as approximately 31% of issuers had long-serving INEDs on their boards as of 31 December 2023.
Key proposed amendments
| Topic | Before | After | Requirement(s) | Details |
| Designation of Lead INED | No requirement for a Lead INED. | New Code Provision (CP) | "Issuers without an independent board chair should designate one INED as a Lead INED" (Newly added CP C.1.7). | Facilitate communication among INEDs, between INEDs and the board, and with shareholders. The Lead INED will act as a channel of communication with shareholders and facilitate communication among INEDs and between INEDs and the board. |
| Director Training | Directors encouraged to participate in continuous professional development. | New Rule |
"Every director of a listed issuer must receive continuous professional development in each financial year of the issuer"(Newly added Main Board Listing Rules (MB Rule) 3.09F / Growth Enterprise Market Listing Rules (GEM Rule) 5.02F). "First-time directors must complete no less than 24 hours of the continuous professional development required by rule 3.09F within 18 months of the date of their appointment"(Newly added MB Rule 3.09H / GEM Rule 5.02H). |
The mandatory training must cover areas such as the roles, functions, and responsibilities of the board and its committees, directors' duties under Hong Kong law and the Listing Rules, corporate governance and ESG matters, risk management and internal controls, and industry-specific developments. Training can be conducted internally or externally, and in any format (in-person or online). |
| Board Performance Review | Regular evaluation of board performance was a Recommended Best Practice. | Upgraded to CP | "An issuer should conduct a formal evaluation of the board's performance at least every two years" (Newly added CP B.1.4). | The Corporate Governance Report must include details of the board performance review. |
| Disclosure of Board Skills Matrix | No requirement for a board skills matrix. | New CP | "An issuer should maintain and disclose in the Corporate Governance Report a board skills matrix" (Newly added CP B.1.5). | The board skills matrix should include the existing board skills mix, how the skills, experience, and diversity of the board serve the company's purpose, values, strategy and desired culture, and plans to acquire further skills. |
| Directors' Time Commitment | Disclosure required if an INED holds seven or more listed issuer directorships. | New Rule | "An INED must not concurrently hold more than six listed issuer directorships" (Newly added MB Rule 3.12A/GEM Rule 5.07A). | The nomination committee must annually assess and disclose its assessment of each director's time commitment and contribution to the board. The hard cap of six listed issuer directorships for INEDs will apply from 1 January 2028, with compliance required by the conclusion of the next annual general meeting (AGM). For IPO applicants, the rule will apply starting 1 January 2025. |
| INED Term Limit | Further appointment of long serving INEDs (more than nine years) subject to separate shareholders' resolution. | New Rule | "The Exchange will not consider a director to be independent if the individual has been an INED of the issuer for a period of nine years or more" (Newly added MB Rule 3.13A / GEM Rule 5.09A). | Long serving INEDs can serve again after a two-year cooling-off period. After serving nine years, an INED may continue as a non-executive director (not independent) or become an INED again after a two-year cooling-off period. The hard cap on the tenure of long serving INEDs at nine years will apply from 1 January, 2028, with compliance required by the conclusion of the next AGM. |
| Board and Workforce Diversity | Issuers required to have a board diversity policy and disclose it. |
New CP Upgraded to Mandatory Disclosure Requirement (MDR) New Rule |
"Issuers should appoint at least one director of a different gender to the nomination committee"(Newly added CP B.3.5). Separate disclosure of the gender ratio of senior management and the workforce. "The gender ratio of: (i) senior management; and (ii) the workforce (excluding senior management)" (Revised MDR paragraph J(c)). "The issuer must have a policy concerning the diversity of its board members and the diversity of its workforce (including senior management), and must disclose such policy or a summary of the policy in the corporate governance report" (Revised MB Rule 13.92(1)/GEM Rule 17.104(1)). |
If a company fails to have directors of different genders on its board, it must immediately publish an announcement detailing the reasons and comply with the requirement within three months. |
| Risk Management and Internal Controls | Annual review of risk management and internal control systems was a CP. | Upgraded to MDR | Require enhanced disclosures in the Corporate Governance 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 (Revised MDR paragraph H). |
Key required disclosures include:
|
| Dividends | Issuers should have a policy on payment of dividends and disclose it. | Upgraded to MDR | "The issuer must have a policy on payment of dividends and should disclose it in the annual report" (Newly added MDR paragraph M). |
For issuers with a dividend policy: Disclose the aim or objective of the policy and the key factors the board considers when deciding on dividends. Confirm that all dividend decisions made by the board during the reporting period were in accordance with the dividend policy, or explain any deviations. For issuers without a dividend policy: State the absence of such a policy and provide reasons for it. Regardless of having a dividend policy or not: Explain any material variation in the dividend rate compared to the previous period. If no dividend is declared, provide reasons and any measures intended to enhance investor returns |
Key points to note:
| Topic | Details |
| Over-boarding INEDs | Starting from 1 January 2025, the HKEX will not accept IPO applicants with INEDs who hold seven or more directorships in listed companies. |
| Appointment Considerations | IPO applicants should carefully consider the number of directorships potential INED candidates hold in Hong Kong listed companies. |
| Tenure Counting | If an INED temporarily ceases their role for less than two years and is reappointed to the same issuer, the period of absence will still count towards their total tenure. |
Conclusion
The proposed amendment is designed to enhance board effectiveness, ensure directors' time commitment and phase out over-boarding INEDs. This change will transform corporate governance in Hong Kong, leading to more effective, diverse and independent boards, and setting a higher standard for corporate accountability. Listed companies should be aware of the proposed amendments and make adjustments accordingly.
Acknowledgements to Trainee Solicitor Elaine Ng and Karen Lee for research and contribution to this article.