24 Dec 2021

THE EXCHANGE PUBLISHED CONSULTATION CONCLUSIONS ON REVIEW OF CORPORATE GOVERNANCE CODE

Background

On 10 December 2021, The Stock Exchange of Hong Kong Limited (the “Exchange”) published its consultation conclusions (the “Consultation Conclusions”) as to its review of the Corporate Governance Code (the “CG Code”) and the related Rules Governing the Listing of Securities on the Exchange (the “Listing Rules”). The Exchange has received positive feedbacks from the public on its proposals outlined in its “Consultation Paper on Review of Corporate Governance Code and Related Listing Rules” (the “Consultation Paper”) on 16 April 2021.

The requirements under the new CG Code will be applicable to CG reports for financial year commencing on or after 1 January 2022 with certain exceptions as explained below.  The Exchange will also publish a new set of guidance (the “CG Guidance”) to facilitate issuers’ compliance with the corporate governance requirements.  The capitalised terms used herein shall have the same meaning as defined in the Consultation Conclusions and Consultation Paper.

The new CG Code and amended Listing Rules will become effective from 1 January 2022.

Summary of the key revised Listing Rules and new CG Code

The below table sets out a comparison between the original proposals and the conclusions:

Original Proposals

Conclusions

Implementation

1. Culture 
1.1 Require the board to align the company’s culture with its purpose, values and strategy
  • Adopt
  • The Exchange will include suggestions on the issue of alignment with a list of self-check questions and suggested disclosures in the CG Guidance.
Financial year commencing on or after 1 January 2022
1.2 Establish anti-corruption and whistleblowing policies
  • Adopt
  • The Exchange will provide guidance on the formulation of the anti-corruption and whistleblowing policies
Financial year commencing on or after 1 January 2022

 

2. Board independence, refreshment and succession planning 
2.1 Require disclosure of a policy to ensure independent views and inputs are available to the board, and annual review of the implementation and effectiveness of such policy

 

Adopt, with revised wordings to clarify on the focus on “mechanisms” in place to allow strong independent element on the board, which may cover the following:

 

i.    INED’s recruitment process.

ii.   Number of INEDs and their time contribution.

  1. Assessment or evaluation of INEDs’ contribution.
  2. Other channels where independent views are available.
Financial year commencing on or after 1 January 2022
2.2 NEDs serving more than nine years (the “Long Serving INED”):
  • Independent shareholders’ approval for re-election of Long Serving INED
  • Additional disclosures on factors considered, process and the board or NC’s discussion in determining that the Long Serving INED is still independent and should be re-elected (the “Additional Disclosures”) in the relevant papers to shareholders for the relevant AGM or general meeting (where applicable)
  • Appoint new INED if all INEDs on board are Long Serving INEDs at the forthcoming AGM (the “New INED Proposal”) and disclose the length of the tenure of the Long Serving INEDs on the board on a named basis in the shareholders’ circular (the “Tenure Disclosure”)
Not adopt

 

Adopt

 

 

 

 

Adopt

 

 

Financial year commencing on or after 1 January 2022

 

 

 

Financial year commencing on or after 1 January 2023 for New INED Proposal

 

Financial year commencing on or after 1 January 2022 for Tenure Disclosure

 

2.3 No equity-based remuneration (e.g. share options or grants) with performance-related elements to INEDs Adopt Financial year commencing on or after 1 January 2022
3. Diversity 
3.1 No single gender board (with a 3-year transition period for existing issuers) Adopt, with revised wordings and modification to transition period For issuers: Rule effective from 1 January 2022

Single gender board issuers: 3- year transition (i.e. appoint a director of a different gender no later than 31 December 2024)

Issuers with commitment in listing document:

Appoint a director of a different gender in accordance with such commitments

IPO applicants:

Effective for A1 submission filed on or after 1 July 2022 (i.e. a 6-month transition period)

3.2 Set and disclose numerical targets and timelines for achieving gender diversity at board level and across workforce

 

  • Adopt at the board level
  • Modification to the requirements at the workforce to disclose:

                     i.       gender ratios in the workforce (including senior management);

                   ii.        plans or measureable objectives the issuer has set for achieving gender diversity; and

 

                 iii.         mitigating factors or circumstances which make achieving gender diversity across the workforce (including senior management) more challenging or less relevant.

Financial year commencing on or after 1 January 2022

 

3.3 Annual review of board diversity policy Adopt Financial year commencing on or after 1 January 2022
3.4 Include directors’ gender information in forms upon appointment Adopt Rule effective from 1 January 2022

 

4. Nomination Committee (the “NC”) 
Chaired by an INED and comprising a majority of INEDs Adopt, with modification to also allow board chairman to chair the NC Rule effective from 1 January 2022
5. Communications with shareholders 
Disclosure and annual review of shareholders communication policy Adopt Financial year commencing on or after 1 January 2022
6. Other enhancements 
6.1 Disclose directors’ attendance at general meetings in the poll results announcements Adopt Rule effective from 1 January 2022
6.2 NEDs no longer need to be appointed for specific term Adopt Rule effective from 1 January 2022
7. Linkage between CG and ESG 
Elaborate the linkage between CG and ESG in the Code Adopt Code effective from 1 January 2022
8. Timely disclosure of ESG reports 
Publish ESG reports at the same time as publication of annual reports Adopt Financial year commencing on or after 1 January 2022
9. Re-arrange the Code 
9.1 Rename Appendix 14 to “Corporate Governance Code” Adopt Code effective from 1 January 2022
9.2 Mandatory disclosure requirements set out upfront in Appendix 14 (instead of being in the last part of Appendix 14) Adopt Code effective from 1 January 2022
9.3 Re-organise the structure of Appendix 14 to enhance flow and readability Adopt Code effective from 1 January 2022

 

Analysis and Takeaways
The importance of good corporate governance cannot be overlooked as it is the cornerstone of any good business, long-term success and business sustainability of a corporation. The main focuses of the consultation are to promote good corporate governance standards among listed issuers in Hong Kong, to instill changes in the board’s mindset, to enhance communication between issuers and their shareholders and to encourage further environmental, social and governance (ESG) disclosures and standards. The consultation shows the Exchange’s commitment to continue to formulate a robust corporate governance framework in ensuring market quality, aligning the interest of all its stakeholders and adopting international best practices.

Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

This article has been prepared for clients and professional associates of Stevenson, Wong & Co. While every effort has been made to ensure accuracy as at the date of issue, this document is a general outline for reference only, and is not an exhaustive treatment of the areas discussed. Accordingly, this document cannot be relied upon as legal advice in any individual case and we bear no responsibility for any loss occasioned to any person acting or refraining from action as a result of the contents in this document.