Introduction

On 19 December 2024, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued the consultation conclusions (the “Consultation Conclusions”) following the consultation paper on “Review of Corporate Governance Code (the “CG Code”) and Related Listing Rules” published on 14 June 2024. The proposed amendments are set to take effect on 1 July 2025 with some amendments effective in phases.

The key amendments

The Stock Exchange has focused its proposals on several key areas aimed at improving board effectiveness, strengthening board independence, promoting board and workforce diversity, enhancing risk management and internal control, and ensuring better capital management.

Board effectiveness

The key amendments relating to board effectiveness include:

·           Lead INED: Introducing a new recommended best practice (RBP C.1.8) that listed companies should appoint a lead independent non-executive director (“Lead INED”) if the chairman of the board is not an independent non-executive director (the “INED”). The Lead INED will facilitate communication among directors and shareholders and ensure that independent voices are heard in board discussions; 

·           Directors’ training: Introducing the new rules to the Rules Governing the Listing of Securities of the Stock Exchange (the “Listing Rules”) (Rule 3.09F, 3.09G and 3.09H of the Listing Rules) that (i) all existing directors will be required to undergo mandatory director training annually with specific topics such as directors’ duties, legal and regulatory updates, corporate governance and ESG, risk management and industry updates; and (ii) first-time directors (i.e. directors who are appointed for the first time as a director of a Hong Kong listed company or directors who have not served as a director of a Hong Kong listed company for the last three years) must complete 24 hours of training within 18 months of their appointment. Directors with experience in overseas listed companies will be required to complete 12 hours of mandatory director training. Disclosure relating to the details of the training has to be made in the corporate governance report (the “CG Report”); 

·           Board performance review: Upgrading as a code provision of the CG Code (CP B.1.4) that requires listed companies to conduct a board performance review at least every two years on areas including the overall effectiveness of the board and areas identified for improvement. The findings and details of the performance review will be disclosed in the CG Report;

·           Board skills matrix: As a new code provision (CP B.1.5), listed companies must also maintain and disclose a board skills matrix that details the qualifications and skills of board members; and

·           Cap of six directorships on INEDs: A new rule to the Listing Rules (Rule 3.17A of the Listing Rules) is introduced to impose a hard cap that an INED must not concurrently hold more than six Hong Kong listed companies directorships to ensure their adequate time and contributions. The nomination committee will be required to assess directors' time commitments annually and disclose evaluations regarding each director's contributions to the board under the revised paragraph E(d)(iii) of the  mandatory disclosure requirements (“MDR”) of the CG Code. The above cap will be effective on the first annual general meeting (“AGM”) held on or after 1 July 2028 for existing listed companies as a transitional arrangement.

Independence of INEDs

To further enhance the independence of INEDs, an INED can serve no more than nine years consecutively under the new Rule 3.13A of the Listing Rules. After serving for nine years, the long serving directors (“Long Serving INEDs”) will no longer be considered independent, such that the INED may be re-designated as a non-executive director and may go over a cooling-off period of three years before reappointment. Listed companies will also be mandated to disclose each director's tenure and appointment periods in their CG Reports under the revised paragraph B(a) of the MDR of the CG Code. A transitional arrangement will also be adopted for this amendment as follows:

·           Phase one: By the first AGM held on or after 1 July 2028, a listed company must not have Long Serving INEDs representing the majority of the INEDs on the board; and

·           Phase two: By the first AGM held on or after 1 July 2031, a listed company must not have Long Serving INEDs on the board.

Board and workforce diversity

The key amendments relating to diversity include:

·           Composition of the nomination committee: Introducing a new code provision (CP B.3.5) that at least one director of a different gender must be included on the nomination committee. 

·           Review of implementation of board diversity: Upgrading as a mandatory disclosure requirement (paragraph J of the MDR of the CG Code) that requires listed companies to conduct annual reviews of their board and workforce diversity policies and disclose plans for achieving gender diversity. 

·           Disclosure on gender ratios: Revising as a mandatory disclosure requirement (paragraph J of the MDR of the CG Code), separate disclosures regarding gender ratios in senior management and the broader workforce are required in the CG Report. 

·           Announcement for non-compliance: Introducing as a new Listing Rules (Rule 13.92 of the Listing Rules), if a listed company fails to meet the gender diversity requirements at any time, they must announce this situation immediately, providing details and reasons for the deviation. The company must rectify any gender diversity deficiencies within three months of the announcement.

Risk management and internal control

With the revised mandatory disclosure requirements (paragraph H of the MDR of the CG Code), listed companies are required to conduct annual reviews on risk management and internal control systems. The annual review will include disclosures of identified weaknesses and the remedial actions taken or proposed. The Stock Exchange seeks to ensure that listed companies are proactive in identifying potential risks and implementing necessary controls to mitigate them.

Dividend policy

Under a new mandatory disclosure requirement (paragraph M of the MDR of the CG Code), listed companies will have to disclose their board’s dividend policy, including the objectives and factors influencing dividend decisions. They will also have to disclose (i) where a dividend was declared during the year, the reasons for any material variation in the dividend rate compared to that for the previous corresponding period; and (ii) where the board decided not to declare any dividend, the reasons for the board’s decision and the measures that the issuer intends to take to enhance investors’ return.

Conclusion

Listed companies should be aware of the amendments and their respective implementation dates. For most of the amendments, they will take effect on 1 July 2025 and therefore apply to CG Reports and annual reports in respect of financial years commencing on or after 1 July 2025.