Proposed enhancements to the corporate governance code

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-April 2021, it released a consultation paper proposing various enhancements to the Corporate Governance Code and Corporate Governance Report contained in Appendix 14 to the Listing Rules (the Code). The main changes relate to corporate culture, board independence, diversity, and communication with shareholders.

The deadline for responding to the consultation is 18 June 2021. If the proposals are adopted, it will come into effect for issuers with financial years commencing on or after 1 January 2022 (except for the proposals relating to independent non-executive directors (the INEDs) that have served for more than nine years on the board (the Long Serving INEDs), which will come into effect for financial years commencing on or after 1 January 2023).

The main proposals in the consultation paper are set out below.

Corporate culture

• A new Code Provision (the CP) will be included to require an issuer's board to align the company's culture with its purpose, values and strategy.
• A new CP will be included to require an anticorruption policy.
• The current Recommended Best Practice (the RBP) requiring a whistleblowing policy will be upgraded to a CP.

A healthy culture plays a crucial role in good corporate governance – not only should the board adhere to it in the boardroom, it should also promote the culture throughout the company's business. The strategy used to achieve the company's purpose should reflect the company's culture and values, so these matters should not be developed in isolation.

The 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).

Although the Exchange recognises that each company will have their unique culture, it has identified some common elements in sound culture:

1. an effective board should set the tone from the top regarding company culture, including promoting, monitoring and assessing the culture, and making sure its culture is embedded throughout the organisation;
2. the board should conduct regular reviews to ensure that the culture is aligned with the company's purpose and values, is able to deliver long term sustainable growth, and that all employees understand the core values of the company's culture;
3. good company culture should also encourage open communication so that a range of views can be voiced out; and
4. the company's financial and non-financial incentives should support the company's culture at all levels.

The Exchange has also proposed new CPs requiring anti-corruption and whistleblowing policies as it believes these elements are crucial in establishing a healthy corporate culture. Issuers will be expected to include a statement reflecting their commitment, the scope of the policy, the committees or persons responsible for implementing the policies and the reporting channels.

Board independence

• The existing CP regarding Long Serving INEDs will be revised to require their re-election to be subject to independent shareholders' approval.
• A new CP will be included, requiring issuers to appoint a new INED at the forthcoming annual general meeting if all INEDs are Long Serving INEDs.

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 proposed to (i) tighten an existing CP so that their re-election will be subject to independent shareholders' approval and additional disclosures and (ii) introduce a new CP that will apply if all INEDs are Long Serving INEDs – such issuers will be required to appoint a new INED at the forthcoming AGM, and the length of tenure of the Long Serving INEDs is required to be disclosed in the circular.

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

• A new CP will be included, requiring disclosure of a policy to ensure independent views and input are available to the board, and an annual review of the effectiveness of the policy.
• A new RBP will be included, recommending that issuers should not generally grant equity based remuneration (e.g. share options) 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 proposals to further strengthen board independence. This indicates the Exchange's strong focus on board independence, as these new proposals have arrived shortly after the enhanced independence criteria that came into effect in early 2019.

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 both board level and across the workforce.
• A new CP will be included to require the board to review the diversity policy annually.

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, and the above proposals aim to tackle this long standing problem.

After the revised Listing Rules become effective, it is proposed that existing issuers with single gender boards will have a three year transition period to appoint at least one director of the absent gender. IPO applicants are not expected to have single gender boards.

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 also included some suggestions on how to improve communication with shareholders: (i) issuers are encouraged, depending on their circumstances, to consider appointing a lead or senior INED, who may act as an intermediary between shareholders and directors; (ii) appointing a qualified senior investor relations officer who has access to the board; (iii) periodic meetings with stakeholders; (iv) enhancing disclosures regarding the work of INEDs in the annual report; and (v) disclosing a summary evaluating the board's performance in the annual report.

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 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.
• Rearrangement of the Code: The Exchange plans to regroup certain topics and rearrange the sequence of the Code to make it clearer and more concise. This means that the numbering for all the provisions of the Code will change.

The above proposals, which enhances 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 persons set out below.