The Stock Exchange of Hong Kong Limited (“HKEX”) has published on 27 July 2018 the Consultation Conclusions on the Review of the Corporate Governance Code and Related Listing Rules (“Consultation Conclusions”) and the Guidance for Boards and Directors (“Boards and Directors Guidance”).
The original consultation paper sought comments on proposed changes to the Corporate Governance Code and Corporate Governance Report of the listing rules (“CG Code”) as well as related amendments to the listing rules for the enhancement of the corporate governance framework.
The Consultation Conclusions stated there was strong support for the proposals and the amendments include new measures to:
- Strengthen the transparency and accountability of the board and/or nomination committee on the election of directors, including Independent Non-Executive Directors (“INEDs”)
- Improve transparency of INEDs’ relationships with issuers
- Enhance criteria for assessing the independence of potential INED candidates
- Promote board diversity, including gender diversity
- Require greater dividend policy transparency
The new measures will take effect on 1 January 2019.
Boards and Directors Guidance
The Boards and Directors Guidance is a new publication containing practical advice to boards and directors of listed companies on their roles and responsibilities to carry out their roles more effectively. It covers directors’ duties and board effectiveness, board committees, board diversity - including gender diversity - and corporate governance for weighted voting rights issuers.
There is also a section on the company secretary’s role and function, in particular when the role is outsourced to an external service provider.
In addition, the Boards and Directors Guidance recommends successful listing applicants to appoint INEDs at least two months prior to listing.
The Boards and Directors Guidance is effective from 27 July 2018 with the exception of certain provisions which are noted to be effective from 1 January 2019 (noted in the margin notes) when the amendments to the CG Code and listing rules will become effective.
It should be noted the Boards and Directors Guidance does not form part of the listing rules nor do they vary any rule requirements or absolve issuers and/or their directors of any obligations to make their own judgment.
What do the changes mean to you?
If you are a director or proposed director of an existing of a listed company, it would be helpful to take a look at the Boards and Directors Guidance as a refresher of your obligations under the listing rules.
You may also need to update the internal policies of the listed company to reflect the relevant rule changes, including the following:
- Enhanced independence criteria in assessing potential INED candidates:
- the extension of the cooling off period of one who has been a director, partner, principal or an employee of a professional adviser of the listed company from one year to two years
- has no material interest in any principal business activity or dealings of the listed company or connected persons at least one year immediately prior to appointment
- for a proposed INED who will be holding his/her seventh (or more) listed company directorship, why the board believes the individual would still be able to devote sufficient time to the board
- how the individual could contribute to the diversity of the board
- The Nomination committee shall have a policy concerning diversity on board members, summary of which would need to be disclosed in the corporate governance report
- Chairman would need to hold at least one meeting annually with the INEDs without the presence of other directors
- A former partner of the listed company’s existing auditing firm could not be a member of the audit committee two years from the date of cessation as a partner of the firm or of any financial interest in the firm
- Payment of dividend policy need to be disclosed in the annual report
- A summary of the work of the nomination committee to be included in the corporate governance report
If you are considering to become an INED of a listed company, you may wish to note the enhanced independence criteria in assessing potential INED candidates above. In addition, if you are considering to become an INED of a proposed listed company, you may want to discuss with the proposed listed company the feasibility of being appointed at least two months prior to listing.
For further details, please refer to the proposed amendments to the CG Code and related listing rules which can be found in Appendix III (for Main Board) and Appendix IV (for GEM Board) of the Consultation Conclusions, and the Boards and Directors Guidance.