The Hong Kong Stock Exchange (HKSE) published a consultation paper on the Corporate Governance Code (Code) on 14 June 2024. HKSE has put forward a series of revisions to the Code, committing to improve the quality of Hong Kong listed companies by enhancing corporate governance standards, and promoting the attractiveness and long-term development of the Hong Kong capital market. The revised Code will help Hong Kong listed issuers to create more diverse boards while strengthening their risk management and internal controls.
The key proposed revisions introduce the following new requirements for the internal control of Hong Kong listed issuers:
1 Improving board effectiveness
a. Additional designation of a lead independent non-executive director: A lead independent non-executive director must be designated if the board chair is not independent.
b. Directors must receive training: Directors must complete annual training on specific topics, with a minimum of 24 hours of training for first-time directors within the first 18 months of appointment. In addition, more detailed disclosure of director training must be provided in the issuer’s corporate governance report.
c. Additional board performance evaluation: Regular board performance reviews must be conducted and a board skills matrix must be disclosed in the corporate governance report.
d. Capping directors’ tenures and the number of active directorships: Independent non-executive directors can hold no more than six Hong Kong-listed issuer directorships to prevent ‘over-boarding’. At the same time, the nomination committee should annually evaluate the time spent by independent non-executive directors performing their duties and their contribution to the board of directors. HKSE will set up a three-year transition period to help Hong Kong listed companies comply with this requirement regarding ‘over-boarding’.
2 Strengthening board independence
It is explicitly stated that independent non-executive directors serving more than nine years will no longer be considered independent.
3 Promoting board and workforce diversity
a. Diversity of the nomination committee: The nomination committee must have at least one director of a different gender.
b. Regular review and disclosure of board diversity policy: The board diversity policy must be reviewed and disclosed annually.
c. Workforce diversity: Every Hong Kong listed issuer must develop and disclose a diversity policy for all employees. At the same time, the gender ratio of senior managers and all employees must be disclosed.
4 Enhancing risk management and internal controls
Hong Kong listed issuers must review the effectiveness of risk management and internal control systems at least once a year and enhance mandatory disclosure of the review process and results.
5 Enhancing capital management
Hong Kong listed issuers are required to enhance mandatory disclosures regarding their dividend policy and the board’s decisions on dividends.
The proposed amendments, if adopted, are expected to come into effect for the financial years commencing on or after 1 January 2025. The Code, if so revised, will further enhance the internal management system of Hong Kong listed issuers, promote the development of diversity in corporations, and strengthen their internal risk management systems.
Client Alert 2024-140