Hong Kong Stock Exchange proposes to enhance corporate governance code

On 16 April 2021, The Stock Exchange of Hong Kong Limited (Exchange) published a consultation paper outlining proposed enhancements to the Corporate Governance Code and Corporate Governance Report (Code) set out in Appendix 14 to the Rules Governing the Listing of Securities on the Exchange (Rules), as well as related amendments to the Rules.

The proposals include new measures aimed at further enhancing corporate governance (CG) standards among listed issuers in Hong Kong, specifically in the areas of corporate culture, director independence, diversity, and in Environmental, Social and Governance (ESG) disclosures and standards.

Consultation period will end on 18 June 2021.

Key proposals include:

A.

CG

1.

Corporate culture – in particular, anti-corruption and whistleblowing

(1) 

New Code Provision (CP) – To require an issuer’s board to align the company’s culture with its purpose, value and strategy.

(2) 

New CP – To require establishment of anti-corruption policy.

(3) 

Upgrading Recommended Best Practice (RBP) to CP – To require establishment of a whistleblowing policy.

2.

Independent non-executive directors (INEDs)

(1)

New CP – To require disclosure of a policy to ensure independent views and input are available to the board, and an annual review of the implementation and effectiveness of such policy. 

(2)

Revised CP – To require re-election of an INED serving more than nine years (Long Serving INED) to be subject to independent shareholders’ approval (Note); and additional disclosure on the factors considered, the process and the board or nomination committee’s discussion in arriving at the determination in the explanation on why such INED is still independent and should be re-elected. 

Note:

The consultation paper does not elaborate on the meaning of independent shareholders’ approval. Presumably, “independent shareholders” would bear the same meaning as set out in the note to Rule 13.39, i.e. any shareholders other than controlling shareholders of the issuer and their associates or, where there are no controlling shareholders, any shareholders other than directors (excluding INEDs) and the chief executive of the issuer and their respective associates, except that in this context the Long Serving INED in question would not be considered as an independent shareholder.

(3)

New CP – To require issuers whose INEDs are all Long Serving INEDs to appoint a new INED at the forthcoming annual general meeting and disclose the length of the tenure of the Long Serving INEDs on the board on a named basis in the shareholders’ circular.

(4)

New RBP – An issuer generally should not grant to INEDs equity-based remuneration (e.g. share options or grants) with performance-related elements.

3.

Diversity – in particular gender diversity

(1) 

Revised note to a Rule – To highlight that diversity is not considered to be achieved by a single gender board.

(2) 

New Mandatory Disclosure Requirement (MDR) – To require all listed issuers to set numerical targets and timelines for achieving gender diversity at both: (i) board level; and (ii) across the workforce (including senior management).

(3) 

New CP – To require the board to review the implementation and effectiveness of its board diversity policy annually.

(4) 

The Exchange intends to display board diversity related information (including director’s age, gender and directorships) on the HKEX website.

If the proposals are implemented, existing issuers with single gender boards will be allowed a three year transition period to appoint at least a director of the absent gender on their boards, while IPO applicants are not expected to have single gender boards.

4. 

Nomination committee

Upgrading CP to Rule – To require establishment of a nomination committee chaired by an INED and comprising a majority of INEDs. 

5. 

Communications with shareholders

Upgrading CP to MDR – To require issuer to disclose its shareholder communication policy and review the effectiveness of the policy on an annual basis.

6. 

Others

(1) 

New Rule – To require disclosure of directors’ attendance at general meetings in the poll results announcements.

(2) 

Deletion of CP that requires issuers to appoint non-executive directors for a specific term (given that directors are already subject to retirement by rotation and shareholders’ approval for re-election).

(3) 

The Exchange will prepare a new guidance letter to provide more comprehensive guidance in assisting issuers’ compliance with the CG requirements.

B. 

ESG

7. 

Linkage between CG and ESG

New introductory paragraph in Code and revised Principle and CPs – To elaborate the linkage between CG and ESG in the Code by: (a) setting out the relationship between CG and ESG in the introductory section in the Code; and (b) including ESG risks in the context of risk management under the Code.

8. 

Timing of publication of ESG reports

Revised Rule and ESG Guide – To require publication of ESG reports at the same time as publication of annual reports.

C. 

Re-naming and re-arranging the structure of Appendix 14

9. 

Re-naming Appendix 14

To re-name Appendix 14 to “Corporate Governance Code” rather than the current name of “Corporate Governance Code and Corporate Governance Report”. 

10.

Re-arranging the structure of Appendix 14

To re-arrange the structure of Appendix 14 to enhance the flow and readability by:

  • amending the introductory paragraphs to reflect the CG reporting framework;

  • moving the MDRs upfront in Appendix 14;

  •  re-organising the provisions by topics; and

  • making drafting amendments to improve clarity of the requirements (including deleting duplicative requirements).

Please refer to Appendix II to the consultation paper which sets out a reference table comparing the structure of the current Appendix 14 and the proposed re-arranged Appendix 14.

D. 

Proposed implementation dates

Subject to responses to this consultation, the Exchange intends to implement the revised Rules (including Appendix 14) (except for those on Long Serving INEDs) for financial years commencing on or after 1 January 2022.

In respect of the proposals on Long Serving INEDs, the Exchange intends to allow a longer transition period such that changes will be effective for financial years commencing on or after 1 January 2023.