The Stock Exchange of Hong Kong Limited (“Exchange”) published the Consultation Conclusions (“Consultation Conclusions”) on the Review of Corporate Governance Code (“CG Code”) and Related Listing Rules on 19 December 2024. The Exchange received more than 260 responses from a wide variety of stakeholders, including listed issuers and market participants.
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While the majority supported the proposals outlined in the June 2024 Consultation Paper on Corporate Governance Code (“Consultation Paper”),[1] notable divergences were observed regarding the appointment of a lead independent non-executive director (“INED”) and the limit on INED’s tenure.
Following a review of the feedback, the Exchange has set the implementation date for the suggested modifications as 1 July 2025. Transitional arrangements will apply to certain rules regarding “overboarding” and tenures of INEDs. The latest guidelines will be provided by the Exchange in the first half of 2025 to facilitate the listed companies in complying with the most updated requirements.
A. Major Revisions to the CG Code and Related Listing Rules
The following table presents the primary focuses on the fundamental changes in the CG Code and the relevant Listing Rules, namely (i) Board Effectiveness; (ii) INED’s Independence; (iii) Board and Workforce Diversity; (iv) Risk Management and Internal Controls; and (v) Dividends.
| Proposals | Final Amendments |
| Board Effectiveness | |
| Designation of a lead INED (“Lead INED”)
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· The functional role of a Lead INED is to facilitate discussions among the INEDs on the board and provide stakeholders with greater insight into the roles and contributions of the INEDs.
· The newly introduced Recommended Best Practice C.1.8 recommends appointing a Lead INED in listed companies where the chairman is not an INED. This arrangement enables the Lead INED to act as an intermediary for the board members and shareholders, as well as providing an alternative communication channel when standard communication with the chairman or management proves insufficient. · The Exchange clarifies that the designation of an INED is not essential if the board chair is an INED and does not fall under the categories that necessitate an announcement in accordance with Main Board Listing Rules 13.51(2). Any alterations in the appointment of a Lead INED shall be promptly published via an updated list of directors and their roles and functions on both the Exchange’s and listed companies’ websites. · The listed companies are mandated to disclose the board’s interaction with the shareholders in the Corporate Governance Report (“CG Report”). · The latest Mandatory Disclosure Requirements section L(d) and Code Provision F.1.1 provide that the following details must be included in the disclosure: – The nature and number or frequency of such engagements; – The group(s) of shareholders and representatives of the issuer involved; and – The issuer’s approach to following up on the outcomes of these engagements
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| Mandatory director training | · The Exchange emphasises the importance of maintaining director competence and expertise by mandating compulsory training, particularly for First-time Directors (“First-time Directors”).
· The First-time Directors refer to individuals who (1) do not have previous experiences in being appointed as a director of a listed company on the Exchange; or (2) not being designated as a director of a listed company on the Exchange for a minimum of three years preceding their appointment. They are required to undergo a minimum of 24 hours of training within a period of 18 months following their appointment. · For the First-time Directors who possess experience serving as directors of a listed company on the exchanges in foreign jurisdictions within the past three years before their designation, a total of 12 training hours are necessary within the initial three years of appointment. · A confirmation listing the details of the directors taking part in the continuous professional development is specified under the Mandatory Disclosure Requirements section B(i), which includes: (i) the total hours of continuous professional development accomplished; (ii) the format or mode of continuous professional development engaged in, specifying whether an external or internal provider was utilised or if the development resulted from self-study; and (iii) the total number of hours completed, the training subjects addressed, and a description of the relevant training provider(s) for each mode of continuous professional development undertaken.
Note: For the First-time Directors, a confirmation statement indicating that they have fulfilled the basic training requirement is compulsory pursuant to new Main Board Listing Rules 3.09H and GEM Listing Rules 5.02H.
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| Board performance review | · The proposal will be implemented accordingly as Code Provision B.1.4, which mandates the issuer to perform an official review of the board’s performance a minimum of every two years.
· The Exchange clarifies that the emphasis of the review is predominantly based on the holistic performance of the board, such as whether it corresponds with the company’s overall business objectives and strategies, instead of an individual assessment of each director. · Additional guidance in the New Corporate Governance Guide (“New CG Guide”) regarding the anticipated scope and level of details required for the related disclosure will be provided.
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| Board skills matrix | · Code Provision B.1.5. will be implemented, which will require the issuer to maintain and disclose a board skills matrix in the CG Report, including details such as the combination of skills possessed by the board at present.
· The New CG Guide will include guidance on the recommended format and requisite level of detail for the maintenance of a board skills matrix and enhancement of disclosure.
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| Overboarding INED and director’s time commitment | · The revised Main Board Listing Rules 3.12A and GEM Listing Rules 5.07A provide that an INED must not simultaneously hold more than six directorships of listed companies listed on the Main Board or GEM.
· Listed companies with overboarding INEDs will be given a three-year transition period starting from 1 July 2025, with compliance required by the first Annual General Meeting (“AGM”) held on or after 1 July 2028. IPO applicants are obliged to ensure their INEDs adhere to the respective cap on the simultaneous directorships effective from 1 July 2025. · The nomination committee is required to adopt consistent assessment requirements to evaluate the director’s time commitment and board contribution alongside his or her capacity to fulfill obligations in an effective manner on an annual basis as stipulated in the Mandatory Disclosure Requirements section E(d)(iii). · Factors such as the directorships of the listed issuers on the Exchange and other significant external time commitments will also be taken into consideration.
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| INED’s Independence | |
| Cap on INED’s tenure | · An INED of the issuer’s board is not allowed to serve for over nine years (“Long Serving INED”), which will be implemented in two phases over a six-year transition period to encourage board renewal, as elucidated in the revised Main Board Listing Rules 3.13A and GEM Listing Rules 5.09A.
Phase 1 Requirement: A listed company on the Exchange shall not comprise Long Serving INEDs constituting the majority of INEDs on the board.
With the three-year transition period commencing from 1 July 2025, adherence to the requirement must be completed by the first AGM carried out on or after 1 July 2028.
Phase 2 Requirement: A listed company shall not include any Long Serving INEDs on the board.
With the six-year transition period commencing from 1 July 2025, adherence to the requirement must be completed by the first AGM carried out on or after 1 July 2031.
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| Disclosure on INED’s tenure | · The duration of the tenure and the current appointment period of each director is required to be disclosed in the CG Report as provided in the updated Mandatory Disclosure Requirements section B(a).
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| Board and Workforce Diversity | |
| Composition of the nomination committee | · Code Provision B.3.5 will be introduced to require listed companies to designate a minimum of one director of a different gender to be part of the nomination committee to foster great diversity within the board.
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| Workforce diversity policy | · The revised Main Board Listing Rules 13.92(1), GEM Listing Rules 17.104(1) and Mandatory Disclosure Requirements section J(b) require the listed companies to implement a workforce diversity policy alongside a board diversity policy.
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| Annual review of board diversity policy and disclosure of gender ratio | · The updated Mandatory Disclosure Requirements section J(a) specifies that listed companies are obliged to conduct a review of the board diversity policy annually to encourage increased accountability for the measurement of progress and pursuit of diversity objectives.
· The revised Mandatory Disclosure Requirements section J(c) states that the issuers are required to disclose separately in the CG Report regarding the gender ratio of (i) senior management and (ii) the workforce (excluding senior management) to update the market and investors that enable them to perform a more sophisticated examination on the diversity and inclusion initiatives.
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| Arrangements during temporary deviation | · The revised Main Board Listing Rules 13.92(2) and GEM Listing Rules 17.104(2) stipulate that the current guidance provided by the Exchange on temporary deviations from the requirement that issuers have listed companies consist of directors of various genders on the board will be codified.
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| Risk Management and Internal Controls | |
| Strengthened the board’s obligations in conducting annual reviews on the risk management and internal control system (“RMIC Systems”) | · The obligation to perform annual reviews on the effectiveness of the RMIC Systems in the listed companies is stated in the revised Mandatory Disclosure Requirements section H to promote a systematic approach in identifying potential risks and vulnerabilities.
· The revised Code Provision D.2.1 has been refined to specify the scope of the review, encompassing the coverage of material controls of both the listed companies and its subsidiaries’ RMIC Systems. · A comprehensive evaluation of the RMIC Systems by the listed companies are expected to establish proper procedures and controls to mitigate business risks.
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| Dividends | |
| Disclosure of the listed companies’ policies concerning dividends payments and the board’s dividend decisions | · The newly amended Mandatory Disclosure Requirements section M has provided that there is an enhanced disclosure requirement of the companies’ dividend policies and board’s dividend decisions to enhance transparency and accountability in financial reporting.
· Details such as the policy’s aim and objective and the primary considerations in determining whether to declare, recommend or pay any dividend; and confirm the board’s compliance with the dividend policy (or otherwise, an explanation of its departure from the policies). · For listed companies without a dividend policy, it is necessary to disclose reasons for the non-existence of such policies. · For all listed companies, it is a mandatory requirement to state clearly whether (i) there are material variations in the dividend rate compared to the prior corresponding period; and (ii) the reasons for non-declaration of the dividends and the intended measures taken by the issuer to improve investors return.
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B. Analysis and takeaways
The Exchange has strived to review and refine the Consultation Paper based on the recommendations and opinions provided by multiple industrial stakeholders and professional bodies. This has apparently reflected the Exchange’s efforts to enhance the sound corporate governance of the listed companies in multiple essential areas. The proposed amendments to the respective rules, provisions and requirements regarding Board Effectiveness, INED’s Independence, Board and Workforce Diversity, Risk Management and Internal Controls and Dividends, reveal the Exchange’s commitment to foster a structured and robust framework within the regulatory and compliance regime. As reflected in the Consultation Conclusions, the listed companies on the Exchange are expected to adhere to the most recent guidelines and their respective timelines to ensure effective compliance.
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[1] Please see our news update on the Exchange’s June 2024 Consultation Paper on Corporate Governance Code here.