Hong Kong Stock Exchange amends corporate governance requirements, effective from 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.

 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.

(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.

(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.

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.

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.

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.

Dividend policy

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