THE STOCK EXCHANGE OF HONG KONG LIMITED PUBLISHED CONSULTATION PAPER ON CORPORATE GOVERNANCE CODE

Introduction
On 14 June 2024, the Stock Exchange of Hong Kong Limited (the “Exchange”) of the Hong Kong Exchanges and Clearing Limited published a consultation paper (the “Consultation Paper”) inviting public feedback on the proposed enhancements to the Corporate Governance Code (the “CG Code”) and related amendments to the Listing Rules by 16 August 2024. It is proposed that the amendments will apply to corporate governance reports (“CG Reports”) and annual reports for financial years commencing on or after 1 January 2025, with a 3-year transition period for specified proposals pertaining to independent non-executive directors (“INEDs”).

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The main areas of focus in the Consultation Paper are: (i) board effectiveness, (ii) independence of INEDs, (iii) board and workforce diversity, (iv) risk management and internal controls, and (v) dividends.

Board Effectiveness
Enhancing board effectiveness is essential for strengthening corporate governance. This involves ensuring that the board composition reflects a well-balanced blend of skills, experience, and diverse perspectives, enabling it to function effectively in an ever-changing market environment.

Proposals	Details
Designation of a Lead INED	To better facilitate communication between investors and the board; among INEDs; and between INEDs and other directors, the Exchange propose to state that issuers should designate one INED as a Lead INED. For issuers with an independent board chair (i.e. a board chair who is an independent director) – the board chair will fulfil the role of the Lead INED, unless the issuer designates another INED as the Lead INED. For issuers without an independent board chair (i.e. a board chair who is not an independent director, including board chairs who is also the chief executive) – designate one INED as the Lead INED. Where an issuer does not designate a Lead INED, it may provide reasons to explain, for example, the issuer already has in place alternative shareholder communication channels. Roles and responsibilities of a Lead INED: With regards to the roles and responsibilities of the Lead INED, the Lead INED: · is primarily responsible for strengthening communication between INEDs, the board, and shareholders, to enable shareholders to better understand the decisions made by INEDs; · is expected to attend the issuer’s AGM with the board committee chairs; and · is subject the same fiduciary duties and responsibilities as all directors in respect of the issuer on whose board they serve.
Mandatory director training and disclosure	For all directors of issuers listed on the Exchange	Mandatory continuous professional training: All such directors must participate in mandatory continuous director training on specific topics. There is no specified minimum training hours or training format requirement.For directors appointed to fill a casual vacancy, the proposed training requirements will apply from the issuer’s full financial year following the appointment.Disclosure requirement: Issuers must confirm that directors have participated in the required training, and disclose the following:· the number of hours; · the topics of the training attended; · the format of the training (e.g. by physical attendance or remotely); and · the names of relevant training providers (if external).
	For first-time directors (i.e. directors who are appointed as a director of an issuer listed on the Exchange for the first time, or have not served as a director of an issuer listed on the exchange for a period of 3 years or more prior to their appointment) (with a 3-year transition period)	Mandatory 24-hour training requirement: First-time directors must undergo a minimum of 24 hours of training, to be completed within the first 18 months of the date of appointment.If a first-time director leaves the issuer before completing the 24-hour training, the requirement resets for the subsequent appointment.Additional Disclosure requirement: Issuers must confirm that first-time directors have completed the minimum of 24 training hours within 18 months following their appointment.
Board performance review and disclosure	A board performance review must be conducted at least once every 2 years, with specific disclosures in the CG Report, on a “comply and explain” basis. Format: Issuers has discretion to determine the format of the review, including whether it is conducted internally or through external providers. Content: The review should focus on the board’s performance as a whole, rather than assessing each director individually.
Board skills matrix and disclosure	Issuers must maintain a board skills matrix in the CG Report, with enhanced disclosures on the following information: (i) the existing skills mix of their boards; (ii) how the combination of skills, experience and diversity of their directors serves the purpose, values, strategy and desired culture of the company; and (iii) details and plans to acquire further skills.
Overboarding INED and directors’ time commitment (with a 3-year transition period)	A hard cap will be imposed on INEDs such that INEDs can only take up a maximum of six Hong Kong-listed issuer directorships. The nomination committee must annually assess and disclose 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
The proposed amendments aim to promote periodic board refreshment and strengthen independent voices on issuers’ board. This is intended to bring in fresh perspectives and maintain the objectivity of INEDs.

Proposals	Details
Cap on Long Serving INED (“INED who has served for more than nine years on the board of a listed issuer”)	It is proposed to impose a hard cap of nine years on the tenure of INEDs.
Two-year cooling off period	An INED will be allowed to serve as an INED of the same issuer again after a 2-year cooling off period. During this cooling-off period, such individual must not serve as a director of the issuer, its holding company, any of their subsidiaries, or any core connected persons of the issuer.
Three-year transition period	The proposed rule will apply from 1 January 2028 onwards. A three-year transition period is proposed for the implementation of this regulation to ensure board continuity and provide sufficient time for affected issuers to conduct proper succession planning and adjust their board composition.

Board and Workforce Diversity
In order to facilitate unique perspectives, robust discussions and resilient decision-making, the Exchange focuses on improving diversity and inclusion in the boardroom as well as all levels of the company.

Proposals	Details
Nomination Committee Composition	The nomination committee must comprise directors of different genders.
Diversity Policies	Issuers are required to establish and disclose a diversity policy for their workforce (including senior management). Issuers are required to make separate disclosure of the gender ratio of senior management and the workforce (excluding senior management).
Arrangements during temporary deviations from board gender composition requirements	if an issuer fails at any time to have directors of different genders on the board (e.g. where the only female director resigns), it would be required to immediately publish an announcement containing the relevant details and reasons.

Risk Management and Internal Controls
The proposed amendments aim to improve market quality and corporate governance through continuous monitoring, periodic reviews and reporting on risk management and internal controls (“RMIC”).

Proposals

Details

Annual review of RMIC systems

The requirement to conduct (at least) an annual review of RMIC systems of the issuer and its subsidiaries will be upgraded to a mandatory requirement. It will be the responsibility of the board to ensure that the necessary reviews are conducted, and for management to confirm to the board the effectiveness of these systems.

Detailed disclosures

The board is required to make detailed disclosures on the following:

(a) the RMIC systems in place (including any significant changes made to the RMIC Systems);

(b) the process through which the review of the RMIC Systems was conducted;

(c) a confirmation from the board on the appropriateness and effectiveness of the RMIC Systems, as well as information supporting the board’s conclusion (including confirmations received (as applicable) from management, the relevant board committee(s) with responsibility for the issuer’s RMIC Systems, any other internal departments, the issuer’s independent auditors and/or other external providers); and

(d) details of any significant control failings or weaknesses identified during the review and/or previously reported but unresolved, and any remedial steps taken or proposed.

Dividends
The Exchange proposes imposing an enhanced disclosure requirement in the CG Report on an issuer’s dividend policy (or an explanation as to the reasons for not having such policy) and its board’s dividend decisions, in order to promote transparency and facilitate shareholders and investors in making informed investment decisions.

Proposals	Details
For issuers with a dividend policy	It is required to (i) disclose the aim/objective of the policy and the key considerations in deciding whether to declare, recommend or pay any dividend; and (ii) confirm board adherence to the dividend policy (or otherwise, explanation for any deviations).
For issuers without a dividend policy	A statement of the absence of a dividend policy and the reasons.
In relation to the board’s dividend decisions	Disclosure is required of (i) an explanation for any material variations in dividend rates during the reporting period as compared to the previous corresponding period; and (ii) the reasons for non-declaration of dividend and the planned measures to enhance investors’ return (if any).

Analysis and takeaways
The Consultation Paper reflects the Exchange’s dedication to fortifying corporate governance practices across multiple key areas. The focus on board effectiveness, INED independence, and diversity indicates a strong commitment to enhancing governance structures. Furthermore, the proposals on the review of RMIC systems and the enhanced disclosures in relation to RMIC and dividend policies signal a move towards greater transparency in these vital areas, underscoring the importance of investor and shareholder protection and market quality.

Overall, these proposed amendments demonstrate a proactive approach to promoting robust corporate governance practices that prioritize transparency, accountability, diversity, and sustainability in Hong Kong’s listed companies.

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

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