Hong Kong Stock Exchange amends corporate governance requirements, effective from 1 January 2019

On 27 July 2018, The Stock Exchange of Hong Kong Limited (Exchange) published conclusions from its consultation launched in November 2017 on its review of the Corporate Governance Code (CG Code) and related Listing Rules (Consultation Conclusions).

The Exchange noted strong support for its proposals and decided to implement them to:

  • strengthen the transparency and accountability of the board and/or nomination committee and election of directors, including Independent Non-Executive Directors (INEDs);
  • improve transparency of INEDs’ relationships with issuers;
  • enhance criteria for assessing independence of potential INED candidates;
  • promote board diversity, including gender diversity; and
  • require greater dividend policy transparency.

The amendments to the CG Code and related Listing Rules will take effect on 1 January 2019

The key amendments are summarised below:

Current position

Amendments that will take effect on 1 January 2019

INED’s overboarding and time commitment

There are market concerns that where a director sits on too many boards, particularly if they are listed companies’ boards, it is questionable whether they would be able to devote sufficient time to their duties in respect of each issuer on whose board they sit.

Amend Code Provision (CP) A.5.5 so that an issuer should explain in the circular to shareholders accompanying the proposed resolution to appoint an INED why it considers the proposed INED holding a seventh (or more) listed company directorship would still be able to devote sufficient time to the board.

 Factors affecting independence of INEDs

(1) Cooling off periods for former professional advisers

  • Main Board Rule 3.13(3) (or GEM Rule 5.09(3)) currently states that the Exchange may take into account whether the proposed INED is a director, partner, principal or an employee of a professional adviser which currently provides or has within one year immediately prior to the date of his proposed appointment provided services to the issuer and related entities.
  • CP C.3.2 currently states that a former partner of the issuer’s existing auditing firm should be prohibited from acting as a member of its audit committee for a period of one year from the date of his ceasing to be a partner of the firm or to have a financial interest in the firm, whichever is later.
  • Amend Main Board Rule 3.13(3) (or GEM Rule 5.09(3)) to extend the cooling off period for a proposed INED who has been a director, partner, principal or an employee of a professional adviser from one year to two years (instead of three years as originally proposed).
  • Amend CP C.3.2 to extend the cooling off period for former partners of the issuer’s audit firm to act as a member of the issuer’s audit committee from one year to two years (instead of three years as originally proposed).

 (2) Cooling off period in respect of material interests in business activities

Under the existing Main Board Rule 3.13(4) (or GEM Rule 5.09(4)), the Exchange will take into account a proposed INED’s current material interests in issuer’s principal business activities whilst making no mention of past material interests.

Amend Main Board Rule 3.13(4) (or GEM Rule 5.09(4)) to introduce a one-year cooling off period for a proposed INED who has had material interests in the issuer’s principal business activities in the past year.

(3) Family ties

Under the existing Main Board Rule 3.13 (or GEM Rule 5.09), a proposed INED’s immediate family members’ independence is not an independence consideration.

Introduce a new note to Main Board Rule 3.13 (or GEM Rule 5.09) to require inclusion of an INED’s immediate family members’ connection with the issuer in the assessment of the director’s independence.

(4) Cross-directorships or significant links with other directors

There are no restrictions on cross-directorships or having significant links with other directors through involvements in other companies or bodies under the current Listing Rules.

Introduce a new Recommended Best Practice to encourage disclosure of INEDs’ cross-directorships or significant links with other directors through involvement in other companies or bodies in the corporate governance reports.

Board diversity

Under the existing CP A.5.6, the nomination committee (or the board) should have a policy concerning diversity of board members, and should disclose the policy or a summary of the policy in the Corporate Governance Report.

  • Upgrade CP A.5.6 to Main Board Rule 13.92 (or GEM Rule 17.104) requiring issuers to have a board diversity policy and to disclose the policy or a summary of it in their corporate governance reports.
  • Amend CP A.5.5 to require disclosure in the circular to shareholders accompanying the proposed resolution to appoint an INED of the process used for identifying the INED nominee and how a proposed INED may contribute to the board in terms of perspectives, skills and experience and also to board diversity.

Nomination policies

The existing Mandatory Disclosure Requirement L.(d)(ii) of Appendix 14 requires disclosure of the summary of work performed by the nomination committee during the year, including determination of the nomination policy; and the nomination procedures and the process and criteria adopted to select and recommend candidates for directorship.

Amend Mandatory Disclosure Requirement L.(d)(ii) of Appendix 14 to state that the issuer should disclose its nomination policy adopted during the year.

 

Directors’ attendance at general meetings

CP A.6.7 currently provides that INEDs and NEDs should attend general meetings and develop a balanced understanding of the views of shareholders.

A strict interpretation of this CP would suggest any directors’ absence from a general meeting would result in a deviation from the CP.  A Frequently Asked Question published in March 2013 has clarified that the Exchange does not consider any directors’ absence from a general meeting a deviation from the CP. However, the Exchange still noted inconsistencies in the market’s interpretation of this CP.

Amend the wordings of the relevant part of CP A.6.7 to read “Generally they should also attend general meetings to gain and develop a balanced understanding of the views of shareholders.”

Chairman’s annual meetings with INEDs

Under the existing CP A.2.7, the chairman should at least annually hold meetings with the NEDs (including INEDs) without the executive directors present.

The purpose of this provision is to enable NEDs (including INEDs) to serve as a more effective check on executive directors and management by meeting separately with the chairman of the board.  In some cases, a meeting of INEDs including NEDs may not serve the purpose of meeting without the management.

Amend CP A.2.7 to require that INEDs should meet at least annually with the chairman without the presence of other directors.

Dividend policy

Under the current Listing Rules, there are no disclosure requirements on dividend policy by listed issuers.

Introduce CP E.1.5 requiring issuers to disclose their dividend policies in their annual reports.

 

On 27 July 2018, the Exchange also published a new publication “Guidance for Boards and Directors”, which provides some practical advice to boards and directors on their roles and responsibilities, covering:

  • directors’ duties and board effectiveness;
  • board committees’ role and functions;
  • board diversity and policy;
  • risk management and internal control;
  • company secretary’s role and function; and
  • corporate governance for weighted voting rights issuers.

It is noteworthy in particular that this Guidance encourages new listing applicants to appoint INEDs at least two months prior to listing.