The Stock Exchange of Hong Kong (SEHK) proposed enhancing corporate governance of its 2,600 listed issuers on the Main Board and GEM in a mid-summer consultation paper titled Review of Corporate Governance Code and Related Listing Rules.

The consultation period ended in mid-August and, based on market feedback, the revised code and listing rules are expected to take effect on 1 January 2025, with transition periods for certain proposals.

This article outlines key revisions as a point of reference.

Designating a lead independent non-executive director (INED).
Where the chairperson is not an INED and/or the chair and chief executive is the same individual, the listed company should designate a “lead INED” to serve as an intermediary for the other directors and shareholders. Any listed company not complying with this expectation must provide explanations.

Mandatory director training.
Currently, a listed company must disclose how its directors participate in continual professional development. The exchange proposes to require directors to receive mandatory continuing professional development annually on specified topics (including directors’ responsibilities, environmental and social governance [ESG], risk management and industry-specific updates).

Also, first-time directors and those who have not served as directors of listed companies for a period of three years or more must complete a minimum of 24 hours’ training within 18 months of appointment.

Board performance review.
The current recommended best practice is proposed to be upgraded to a code provision (on a “comply or explain” basis) requiring the board to conduct an evaluation of its performance at least once every two years, with specific disclosures to be made in the listed company’s Corporate Governance Report.

Board skills matrix. A listed company will be expected to maintain a board skills matrix and disclose in its Corporate Governance Report: (1) the board’s existing skills; (2) how the combination of skills, experience and diversity of directors serve the company’s purposes, values, strategy and desired culture; and (3) details and plans to acquire further skills.

The current practice of simply listing the directors’ qualifications and experience is considered insufficient by the exchange.

Overboarding INED and directors’ time commitment.
The exchange proposes to add a listing rule that each INED can only serve as a director of up to six listed companies. Also, the nomination committee of a listed company is required to annually assess and disclose each director’s time commitment and contribution to the board.

INED serving for more than nine years.
Currently, the listing rules impose no limit on the tenure of INEDs, although a listed company should put the appointment of a long-serving INED (i.e. serving the board for more than nine years) as a separate shareholders’ resolution, explain why such an INED is still regarded as independent, and appoint a new INED at the forthcoming annual general meeting.

Now a hard cap of nine years is proposed, i.e. from 1 January 2028 onwards a director will no longer be considered independent after serving as an INED for nine years or more.

Board and workforce diversity.
At present, the board must have a board diversity policy and annually review its implementation and effectiveness. At least one director of a different gender must be appointed to the board no later than 31 December 2024. The Corporate Governance Report must include details such as gender ratio in the workforce, how the board’s gender diversity is achieved, and mitigating factors in achieving gender diversity.

The exchange now proposes that:

• The nomination committee should also have at least one director of a different gender;
• A listed company must have and disclose a diversity policy for its workforce (including senior management);
• The board must review annually the implementation of its board diversity policy;
• The gender ratio of senior management and workforce must be disclosed separately; and
• If unable to meet board gender diversity, a listed company must make an announcement and give reasons, and recomply with such requirement within three months.

Risk management and internal control (RMIC).
Currently, the board is expected to oversee and conduct annual reviews of the effectiveness of RMIC systems and report its reviews in the Corporate Governance Report.

The exchange now proposes to make it mandatory for listed companies to conduct annual reviews of effectiveness of their RMIC systems and make detailed disclosures on: (1) RMIC systems in place; (2) the review process; (3) the board’s confirmation on the appropriateness and effectiveness of the RMIC systems with supporting information; and (4) significant control failings or weaknesses identified during the reviews, and remedial steps taken or proposed.

Dividends.
The exchange proposes to upgrade the current “comply or explain” code provision to a mandatory requirement that: (1) a listed company must have a dividends policy, including key factors deciding whether to declare a dividend; and (2) any listed company not having a policy on dividend payment must disclose such fact and give reasons.

In any event, each listed company must disclose: (1) where a dividend is declared during the year, reasons for any material variation in the dividend rate compared to the previous corresponding period; and (2) where the board decides not to declare any dividend, the reasons and measures the listed company intends to take to enhance investors’ return.

Conclusion.
The revisions will bring Hong Kong’s listing rules more in alignment with corporate governance requirements in other jurisdictions including mainland China, the UK, Australia and Singapore.