Latest Updates to Hong Kong Corporate Governance Practices

In Hong Kong, we have entered an era of Corporate Governance where it is believed that balancing short-term performance with sustainability, transparency and good governance can lead to long-term success for both issuers and investors. Listed issuers are expected to uphold good corporate governance (“CG”) whilst generating sustainable shareholder value and meeting their obligations.

In the past few years, the improvement of CG and Environmental, Social and Governance (“ESG”) standards has been a key focus area of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The Stock Exchange seeks to promote the corporate governance standards of listed issuers and to enhance the quality of their boards of directors. The various enhancements are also efforts of the Stock Exchange to align the ESG reporting framework with the Task Force on Climate-Related Financial Disclosures recommendations, including the climate related disclosures, which will be mandatory across relevant sectors no later than 2025.

The Stock Exchange recently published conclusions to its consultation on Review of the Corporate Governance Code (the “CG Code”) and Related Rules Governing the Listing of Securities on the Stock Exchange and the Rules Governing the Listing of Securities on GEM (collectively, the “Listing Rules”) (the “CG Consultation Conclusions")[i].The new measures aimed at further enhancing corporate governance standards among listed issuers in Hong Kong, specifically in the areas of corporate culture, director independence, diversity, and in ESG disclosures and standards.

Amended CG Code and Listing Rules

Listed issuers are now required to:

Culture: A company’s culture should align with its purpose, values and strategy, and have anti-corruption and whistleblowing policies.

Board independence and refreshment

Require disclosure of a policy to ensure independent views are available to the board and an annual review on its effectiveness
For independent non-executive directors (“INEDs”) serving more than nine years (“Long Serving INEDs”):
- Independent shareholders’ approval for re-election of Long Servicing INED;
- A new INED should be appointed if all INEDs on board are Long Serving INEDs;
- Disclosure on the length of tenure of the Long Serving INEDs on a named basis in the shareholders’ circular;
- Additional disclosures on factors considered, process and the board’s discussion on why the Long Serving INED is still independent and should be re-elected;
- No equity-based remuneration with performance-related elements to INEDs.

Diversity

A single gender board is not considered to be a diverse board and not allowed.
- Existing listed issuers
  - Listed issuers will have a three-year transitional period to comply (i.e. appointing a director of a different gender no later than 31 December 2024);
  - During such transitional period, numerical targets and timelines must be set for achieving gender diversity at board level, and annual review of board diversity policy
  - Listed issuers with commitment in listing document should appoint a director of a different gender in accordance with such commitment; and
  - Directors’ gender information to be included in forms to be submitted to the Stock Exchange.
- New IPO applicants
  - IPO applicants with A1 submission filed on or after 1 July 2022 shall identify at least a director of a different gender.
Gender diversity targets at board level and across workforce.
- Disclosure must also be made on gender ratios in the workforce (including senior management), plans or measurable objectives the listed issuer has set for achieving gender diversity.

Nomination Committee: Nomination committee is now made mandatory, to be chaired either by the board chairman or an INED and comprising a majority of INEDs.

Communications with shareholders: Mandatory disclosure on shareholders communication policy, and annual review of its effectiveness.

ESG report: ESG reports must be published at the same time as annual reports (i.e. within 4 months after year end date).

Other amendments: Other disclosure-based amendments including but not limited to disclosure of directors’ attendance in the poll results announcements etc.

When are the amended Listing Rules effective?

The amended Listing Rules and amended CG Code came into effect on 1 January 2022, and the requirements under the amended CG Code will apply to CG reports for financial year commencing on or after 1 January 2022.

The requirement to appoint a new INED where all the INEDs on board are Long Serving INEDs will be implemented for the financial year commencing on or after 1 January 2023.

New Corporate Governance Guide for Directors

The Stock Exchange also publishes a new set of Corporate Governance Guide for Boards and Directors (the “New Corporate Governance Guide”) to assist listed issuers’ compliance with the new requirements. The New Corporate Governance Guide facilitates the board’s understanding and compliance with the amended CG Code.

What does this mean to you?

Culture – The Board of Directors to review and monitor the company’s culture and ensure that it is appropriate for the context in which the listed issuers are operating and that there is alignment between the purpose, values, strategy and business models.
Internal Policies and Committees - Listed issuers shall review their existing internal policies and ensure all mandatory policies (e.g. anti-corruption policy and whistleblowing policy) and mandatory committees (e.g. nomination committee) are prepared and set up.
New Listing Applicants - New listing applicants shall ensure the gender diversity is complied with for their board and with other corporate governance code and ESG requirements disclosures and build the necessary mechanisms into their listing process.

The enhancements to the CG Code are intended to facilitate listed issuers to achieving good corporate governance. Whilst complying with the relevant rules and regulations, listed issuers are reminded to adopt alternative means or measures that are more appropriate in their own circumstances.

Contact us

Our team is working with multiple listed issuers and new IPO applicants on compliance with the new CG requirements.

Please contact us if you have any questions.

Any reference to “Hong Kong” or “Hong Kong SAR” shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.