Legal development

Enhancements to the corporate governance code

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    The Hong Kong Stock Exchange (the Exchange) is committed to promoting good corporate governance amongst listed issuers, and reviews its corporate governance framework from time to time.

    In mid-December 2021, it released its consultation conclusions on this topic, which adopted most of its previously proposed enhancements, set out in its consultation paper dated April 20211, to the Corporate Governance Code and Corporate Governance Report contained in Appendix 14 to the Listing Rules (the Code).

    Changes to the Code and the new Guide

    The main changes to the Code relate to corporate culture, board independence, diversity, and communication with shareholders.

    The implementation dates are set out below:

    • the revised Listing Rules and the new Code will come into effect on 1 January 2022, other than the New INED Proposal (defined under "Board independence" below);
    • the requirements under the new Code will apply to corporate governance reports for financial years commencing on or after 1 January 2022, other than the New INED Proposal; and
    • the New INED Proposal will apply to financial years commencing on or after 1 January 2023.

    In addition, the Exchange has published a new Corporate Governance Guide for Boards and Directors (the Guide) to assist issuers to comply with the new requirements set out in the consultation conclusions.

    The Guide covers: (i) directors' duties and board effectiveness; (ii) company culture; (iii) whistleblowing and anti-corruption; (iv) board committees' role and functions; (v) board diversity and policy; (vi) risk management and internal control; (vii) company secretary; and (viii) corporate governance for issuers with weighted voting rights.

    The main changes to the Code, and selected guidance from the Guide, are set out below.

    Corporate culture

    A new Code Provision (the CP) has been included to require an issuer's board to align the company's culture with its purpose, values and strategy

    This new CP is not intended to codify "culture", but serves to highlight the board's role in defining the company's purpose, values, and strategy, and to develop its culture to support the company in its pursuits.

    Although the Exchange recognises that each company will have their unique culture, it has identified some common elements in sound culture. As set out in the Guide, the Exchange recommends listed companies to:

    1. set the tone from the top and lead by example;
    2. hold everyone accountable for their actions – from the board level to employees at all levels;
    3. promote open communication and encourage a range of views, both from within the company and with its stakeholders; and
    4. ensure that its financial and non-financial incentives, performance management and talent development processes encourage and support the issuer's desired culture.

    The Exchange emphasises that the board must ensure that the company's purpose, values, strategies and business models are aligned. Please refer to the Guide for further guidance, which includes:

    1. a list of self-check questions that boards could consider when considering the issue of alignment;
    2. the respective roles of the board and senior and middle management when handling company culture; and
    3. suggested disclosures relating to culture.

    This new requirement regarding culture is in line with other jurisdictions that have incorporated the concept of culture in their corporate governance framework in recent years (such as the United Kingdom, Singapore, Australia and Japan).

    Anti-corruption and whistleblowing policies are required under new CP provisions

    A new CP will be included to require an anticorruption policy.

    In addition, the current Recommended Best Practice (the RBP) requiring a whistleblowing policy will be upgraded to a CP.

    The Exchange has adopted new CPs requiring anti-corruption and whistleblowing policies as it believes these elements are crucial in establishing a healthy corporate culture.

    The Guide includes detailed information on the matters that should be covered by these two policies including its purpose and scope. In addition, the Guide includes a list of matters that may be covered in each policy, such as reporting channels, internal guidelines, and consequences of breaches.

    Board independence

    Additional requirements applicable to Long Serving INEDs

    Independent non-executive directors (the INEDs) that have served for more than nine years on the board (the Long Serving INEDs) raise the question as to whether these directors may still be considered independent. Although Long Serving INEDs may be familiar with the listed issuer, the need for INEDs to remain independent, board refreshment and succession planning are also crucial matters.

    Given the relevant prevalence of Long Serving INEDs in Hong Kong, the Exchange has adopted a new CP that applies if all INEDs are Long Serving INEDs:

    1. such issuers will be required to appoint a new INED at the forthcoming annual general meeting (the New INED Proposal); and
    2. the length of tenure of the Long Serving INEDs is required to be disclosed in the circular on a named basis (the Tenure Disclosure).

    In addition, an existing CP will be tightened, requiring the issuer to state why the board or the nomination committee believes that the Long Serving INED is still independent and should be re-elected, including the factors considered, the process and the discussion of the board (or nomination committee) in arriving at such determination (the Additional Disclosures).

    The Tenure Disclosure and the Additional Disclosures will apply to financial years commencing on or after 1 January 2022. However, the New INED Proposal will apply to financial years commencing on or after 1 January 2023, as the Exchange recognises some listed issuers may face challenges in finding a new INED that is suitable for the company.

    The previous proposal requiring independent shareholder approval for re-election of long serving INEDs was not adopted in the consultation conclusions.

    The above changes have adopted a progressive approach to the regulation of Long Serving INEDs to reduce impact upon listed issuers. Nevertheless, the Exchange has indicated in its consultation paper dated April 2021 that they may consider phasing out Long Serving INEDs in the long run.

    Strengthening board independence

    A new CP will be included, requiring disclosure of a mechanism to ensure independent views and input are available to the board, and an annual review of the effectiveness of the mechanism.

    As stated in the consultation conclusions, the mechanism does not necessarily need to be a standalone policy. It may be covered in various parts of the company's governance framework, such as:

    1. its recruitment policy for INEDs, including the number of INEDs, their time contribution, qualifications, and assessment of their contribution; and
    2. channels to obtain independent views and advice (e.g. directors' access to external professional advice in order to perform their own duties).

    In addition, a new RBP will be included, recommending that issuers should not generally grant equity based remuneration (e.g. share options or grants) with performance related elements to INEDs, as this may cause bias in their decision making and compromise their independence.

    The Exchange has introduced the above changes to further strengthen board independence. This indicates the Exchange's strong focus on board independence, as these new changes have arrived shortly after the enhanced independence criteria that came into effect in early 2019.

    Board and gender diversity

    The Listing Rules will be amended to highlight that a single gender board is not considered to be diverse.

    A new Mandatory Disclosure Requirement (the MDR) will be included to require all issuers to set numerical targets and timelines for achieving gender diversity at board level. For the workforce level, issuers are required to disclose:

    1. gender ratios in the workforce (including senior management),
    2. any plans or measurable objectives the issuer has set for achieving gender diversity; and
    3. any mitigating factors or circumstances which make achieving gender diversity across the workforce (including senior management) more challenging or less relevant.

    In addition, a new CP will be included to require the board to review the diversity policy annually. Continuous evaluation is required as the board composition and circumstances may change over time. Please refer to the Guide for a board skill matrix which may help issuers in assessing whether their board includes the right balance of skills, experience and diversity of perspectives.

    After the revised Listing Rules become effective:

    • existing issuers with single gender boards will have a three year transition period to appoint at least one director of the absent gender (i.e. no later than 31 December 2024);
    • IPO applicants are not expected to have single gender boards. However, the Exchange will allow for a 6 month transition period (i.e. for A1 submissions filed on or after 1 July 2022, IPO applicants with a single gender board will not be accepted); and
    • issuers with a commitment in its listing document will need to appoint a director of that gender according to its commitment.

    Issuers may refer to the Guide for further guidance on developing a diversity policy.

    Diversity brings unique perspective to boards and enhances board performance and effectiveness. Although most newly listed issuers with single gender boards have committed to appointing at least one female director within three years of its IPO, there has been little improvement in terms of female representation on boards of listed issuers – as of December 2020, more than 30% of issuers have no female directors on their boards – and the above changes aim to tackle this long standing problem.

    Communication with shareholders

    The existing CP, requiring disclosure of the issuer's shareholder communication policy and annual review of its effectiveness, will be upgraded to a MDR.

    The communication policy should include channels for shareholders to communicate their views on different matters, and steps taken to solicit and understand the views of shareholders and stakeholders.

    The Exchange recognises that shareholders are often looking for a real dialogue with the listed issuer. The Guide includes some suggestions on how issuers can improve communication with shareholders, such as:

    1. appointing a qualified senior investor relations officer who has access to the board;
    2. formalising regular meetings with shareholders;
    3. improving disclosures regarding the work of INEDs in the annual report;
    4. disclosing quantitative metrics of INEDs’ engagement with independent shareholders;
    5. making themselves available for direct communication with shareholders in appropriate situations;
    6. disclosing a summary evaluating the board's performance in the annual report; and
    7. appointing a lead or senior INED, who may act as an intermediary between shareholders and directors.

    Other changes

    • Environmental, Social and Governance (ESG): ESG risks will be included under the context of risk management under the Code. The Listing Rules will be amended to require publication of ESG reports at the same time as the annual report.
    • Nomination committee: The existing CP, requiring issuers to establish a nomination committee chaired by the chairman of the board or an INED, and comprising a majority of INEDs, will be upgraded to a Listing Rule.
    • Directors' attendance at meetings: A new Listing Rule will be included to require disclosure of directors' attendance at general meetings in the poll result announcements. Subject to the issuer's constitutional documents, attendance via electronic means should be counted as attendance at a physical meeting.
    • Rearrangement of the Code: To improve readability of the Code, certain topics be regrouped and the sequence of the Code will also be rearranged. This means that the numbering for various provisions of the Code will change. Please refer to Appendix III of the consultation conclusions dated December 2021 for a table setting out the current location and new location of the various Code provisions.

    The above changes, which enhance corporate governance in Hong Kong across a wide range of areas, would be welcomed by investors.

    If you have further questions about this briefing, please reach out to your usual contact at Ashurst or the partners set out below.

    1. Click here to view a copy of our client briefing on the consultation paper. 

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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