Introduction

On 16 April 2021, The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued a consultation paper on the review of corporate governance code and relating listing rules (the “Consultation Paper”) and invited public comments on the proposals.

Under the Consultation Paper, the Stock Exchange proposes changes in relation to (i) culture; (ii) directors’ independence; (iii) diversity; (iv) the nomination committee; and (v) communications with shareholders, and also in relation to other enhancements.

Culture

Current requirements and issues

Under the current requirement, the board of a company “should lead in shaping and developing the issuer’s risk culture, setting the tone at the top”. The UK, Singapore, Australia and Japan requires the board of an issuer to establish appropriate culture and reflect those in the company’s strategy, values and ethical standards while Korea even recommends issuers to have meetings of management with independent non-executive directors (“INED(s)”) separate from board meetings to reinforce a culture of transparency of corporate management.

Proposal

The Stock Exchange is of the view that an effective board should set the tone and define the company’s purpose and strategy, and the board should also monitor the culture, which needs to be continuous in order to ensure ongoing transparency and maintain visibility and insight into culture initiatives and differences. Therefore, it is proposed that a code provision be introduced to require an issuer’s board to align the company’s culture with its purpose, value and strategy.

In particular, (i) there should be a “tone from the top” i.e. the board should set the company’s culture and make sure the desired culture is embedded at every level of the organisation; (ii) the board is expected to conduct reviews periodically to ensure the culture is in line with the company’s purpose and value and is able to deliver long-term sustainable growth; (iii) the environment should be conducive to open communications and effective challenges in order to allow different views; and (iv) incentives should be given to support the company’s culture as performance and talent management encourage and reinforces maintenance of the company’s desired culture.

The Stock Exchange also proposes to introduce a code provision requiring establishment of an anti-corruption policy and a whistleblowing policy (instead of just a recommended best practice) in order the help maintain a healthy corporate culture.

Director’s independence

Current requirements and issues

The Rules Governing the Listing of Securities on the Stock Exchange and the Rules Governing the Listing of Securities on GEM of the Stock Exchange include a non-exhaustive list of factors in assessing an INED’s independence. As independence is crucial to an effective board, the Stock Exchange is of the view that there should be mechanisms to ensure independent views and input are available to the board. Further, statistics show that around 17.7% INED directorships were occupied by INEDs who had served for more than nine years (the “Long Serving INED(s)”) and those Long Serving INEDs served almost one-third of the listed issuers in Hong Kong. As such, the Stock Exchange suggests that it is necessary for INEDs to stay independent and to have a more frequent turnover of directors in order to ensure refreshing ideas and perspectives.

Regarding remuneration levels of directors, it is currently required that it should be at a level sufficient (i.e. no more than necessary) to attract and retain directors, but there is no provisions to the effect that non-executive directors’ remuneration should not include share options or other performance-related elements like those in the UK or Australia.

Proposal

It is proposed that a code provision be introduced to require disclosure of a policy to ensure independent views are available to the board and an annual review of the implementation and effectiveness of such policy. Regarding the re-election of Long Serving INEDs, the existing code provision is proposed to be revised to require such re-election be subject to independent shareholder’s approval and require additional disclosure as to why the Long Serving INED is still independent and should be re-elected.

As INEDs are crucial in providing objectivity and independence, a new recommended best practice that an issuer generally should not grant equity-based remuneration with performance-related elements to INEDs is proposed.

Diversity

Current requirements and issues

There must be a board diversity policy in place and the policy should be disclosed in the issuer’s corporate governance report. However, statistics show that the percentage of women serving on issuers’ board was generally low and there is room for improvement as to boardroom diversity, which ensures different perspectives and board’s effectiveness.

Proposal

The Stock Exchange proposes to ban single gender board and require list issuers to set and disclose the numerical targets and timeline for achieving gender level at board level and across workforce which includes senior management, and the board should review its board diversity policy annually.

Nomination committee

Current requirements and issues

Listed companies are required, on a “comply or explain” basis, to establish a nomination committee which should be chaired by an INED and comprise a majority of INEDs and disclose the policy for nominating directors in their corporate governance report. As directors play an important role in the governance of the company, appointments to the board should be subject to a formal, rigorous and transparent process.

Proposal

The Stock Exchange proposes to upgrade the existing code provision to a rule requiring issuers to establish a nomination committee chaired by and INED and comprising a majority of INEDs to strengthen the nomination and appointment process of directors.

Communication with shareholders

Current requirements and issues

In Hong Kong, the board should establish shareholder communication policy and review the same on a regular basis, and use AGM or other general meetings to communicate with shareholders and encourage participation. On the other hand, the UK imposes statutory obligation for directors to explain how they have had regard to various matters in performing their duty to promote the success of the company, and its corporate governance code requires issuers to ensure effective engagement, and encourage participation, from shareholders and stakeholders.

Proposal

Effective engagement with shareholders is important for a company to meet its responsibilities and it is proposed to upgrade the code provision to a mandatory disclosure requirement requiring disclosure of the issuer’s shareholders communication policy and annual review of such policy to ensure its effectiveness.

Others

Apart from the above, there are proposals in relation to other enhancements as follows:

1.             A new rule is proposed to require disclosure of directors’ attendance in the poll results announcements;

2.             Issuers are encouraged to provide summaries of the work carried out by each of the board committees; and

3.             The code provision requiring issuers to appoint non-executive directors for a specific term subject to re-election be deleted as issuers tend to align the appointment term with the period for rotation and every director should be subject to retirement by rotation at least once every three years.

Further, in relation to the environment, social and governance report (the “ESG report”), the Stock Exchange has the following proposals:

1.             Elaborate the linkage between the corporate governance report and ESG report by setting out the relationship between the two and including the ESG risk in the context of risk management under the Corporate Governance Code; and

2.             Require publication of ESG reports at the same time as publication of annual reports (commencing on or after 1 January 2022).

Proposed implementation timeline

The Stock Exchange suggests to implement the revised rules and code provisions for financial year commencing on or after January 2022 except for the proposed changes in relation to Long Serving INEDs which is suggested to be implement for financial year commencing 1 January 2023 to allow for more time to find new suitable INEDs.

The consultation will remain open until 18 June 2021 and a consultation conclusions paper can be expected afterwards.