Introduction

On 14 June 2024, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) published a consultation paper (the “Consultation Paper”) seeking public feedback on proposals to amend the Corporate Governance Code (“CG Code”) and the related Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). This article will highlight and summarise several key amendments proposed by under the Consultation Paper.

A.   Board Effectiveness

Lead INED: Currently, there is no requirement for issuers to designate an independent non-executive director (“INED”) to serve as a lead INED. The Stock Exchange proposes a new code provision under the CG Code requiring each issuer to designate a lead INED. The major responsibilities of such lead INED is to strengthen and facilitate communication (i) among INEDs, (ii) between INEDs and the rest of the board and (iii) with shareholders. The Stock Exchange also makes it clear that the lead INED will not be subject to a higher level of responsibility or liability relative to other INEDs.

Mandatory Director Training: Currently, there is no requirement for directors to undergo mandatory director training. It is proposed to require all existing directors of issuers to participate in mandatory continuous professional development, without specifying a minimum number of training hours. For directors who are appointed as a director of a listed issuer for the first time or have not served as such director for a period of three years or more before the appointment, the Stock Exchange proposes a minimum training requirement of 24 hours which must be completed within 18 months of the date of appointment.

Board Performance Review: The Stock Exchange noted that board performance reviews are not common among issuers. The Stock Exchange proposes to upgrade the recommended best practice of holding a board performance review to a code provision to require issuers to conduct a board performance review biannually.

Board Skills Matrix: The Listing Rules do not currently require issuers to disclose a board skills matrix. The Stock Exchange proposes to introduce a new code provision to require issuers to maintain a board skills matrix to disclose information on the present skills mix of the board, how the combination of skills, experience and diversity of directors serves the purpose, values, strategy and desired culture of the company and plans to acquire further skills.

Overboarding INED and directors’ time commitment: The current CG Code provides that if an INED proposed will be holding their seventh or more listed issuer directorship, the board should provide explanation as to why the board believes the individual would be able to devote sufficient time to the board. It was mentioned in the Consultation Paper that as of 31 December 2023, there were 23 overboarding INEDs serving on the boards of 181 listed issuers.

A new Listing Rule is proposed to stipulate a six-directorship hard cap on an INED of listed issuer. This new requirement will be implemented over a three-year transition period such that an overboarding director as at 31 December 2027 must comply with this requirement by the conclusion of the earliest AGM after 31 December 2027.

B.   Independence of INEDs

The Listing Rules currently does not set any limit on the tenure of INEDs. A substantial percentage of issuers still retain Long Serving INEDs (i.e. INEDs who have served as director for more than nine years) on their boards. The Stock Exchange proposes a new Listing Rule to provide for a limit of nine years on the tenure, failing which the Stock Exchange will no longer consider the INED be independent. Upon reaching the limit of tenure of nine years, an INED will be subject to a cooling-off period of two years, during which such individuals must not serve as a director of the relevant issuer, any member of its group or any core connected persons of the issuer.

C.   Board and workforce diversity

The nomination committee or the board must now have a board diversity policy and disclose such policy (or a summary of it) in the corporate governance report. The Stock Exchange does not consider a single gender board to have achieved diversity and require such board to appoint at least one director of a different gender no later than 31 December 2024. As of 31 December 2023, approximately 17% of directors on the boards of listed issuers were female and percentage of single gender board issuers was still approximately 19%.

The Stock Exchange proposes: (i) to require issuers to have at least one director of a different gender on the nomination committee, (ii) to upgrade the requirement of annual review of board diversity policy from a code provision to mandatory disclosure requirement, (iii) to require issuers to have and disclose a diversity policy for their workforce including senior management, (iv) to require a separate disclosure of the respective gender ratio of the senior management and workforce and (v) to codify the Stock Exchange’s existing guidance on arrangements during temporary deviation from requirement for issuers to have directors of different genders on the board.

D.   Risk management and internal control

Currently, it is mandatory for the board under the CG Code to oversee the issuer’s risk management and internal control system (“RMIC System”) on an ongoing basis, ensure that a review of the effectiveness of the issuer’s and its subsidiaries’ RMIC Systems has been conducted at least annually and report to shareholders that it has done so in its CG Report. Nonetheless, in enforcement cases the Stock Exchange has noted that they often involve failures to establish or adequate monitoring of the RMIC System.

The Stock Exchange proposes to upgrade the requirement to conduct annual review of the effectiveness of the RMIC Systems to a mandatory code provision and require disclosures on various areas, including the RMIC Systems in place, the review process, a confirmation on the appropriateness and effectiveness of the RMIC Systems by the board with supporting information and the major controlling failings and weaknesses identified during the review.

E.   Dividends

To improve transparency and accountability on issuers’ dividend policy, the Stock Exchange proposes to require issuers who have a dividend policy to disclose the aim of such policy and the key factors that the board will consider in its decision to declare dividends or not. Issuers who do not have such policy have to disclose the reasons for the absence. The Stock Exchange also proposes to require disclosure in relation to explanation of the reason behind any material variation in the dividend rate or (where the board decided not to declare dividend) the reasons for its decisions and measures to enhance investors’ return (if any).

Conclusion

The proposed amendments show that the Stock Exchange reviews its corporate governance framework from time to time to ensure the framework remains fit for purpose and effective in promoting high quality corporate governance standards and maintaining investors’ confidence. The two-month consultation period will conclude on 16 August 2024.