HKEx Issues Conclusions on Proposed Corporate Governance Code Amendments

The Hong Kong Stock Exchange concluded its consultation on proposed amendments to the Corporate Governance Code and related Listing Rules. All proposals were adopted with certain modifications and clarifications and will go into effect on July 1, 2025.

The LawFlash summarizes key features of the conclusions on the amendments to the Corporate Governance Code (CG Code) published by the HKEx.

BOARD EFFECTIVENESS IMPROVEMENT

The Hong Kong Stock Exchange (HKEx) adopted the following proposals to balance the skills, experience, and diversity of perspectives of the board of directors of listed issuers:

• Designation of a Lead Independent Non-Executive Director (Lead INED): The designation of a Lead INED will be implemented as a recommended best practice under the CG Code, as the HKEx considered that a Lead INED can positively facilitate INED discussions on the board and enable stakeholders to better understand INEDs’ contributions, which would also help instill investors with greater confidence in the governance of an issuer.
• Mandatory director training: The HKEx requires all directors of listed issuers to participate in mandatory continuous professional development as follows: (1) a minimum mandatory training of 24 hours on specified topics must be completed within 18 months of the date of appointment of “First-time Directors,” i.e., directors who are appointed as a director of an issuer listed on the HKEx for the first time or have not served as a director of an issuer listed on the HKEx or other exchanges for a period of three years or more prior to their appointment; (2) a minimum mandatory training of 12 hours for “First-time Directors with listed issuer directorship experience on other exchanges within three years prior to their appointment”; and (3) mandatory training on specified topics for all existing directors of listed issuers. The HKEx did not specify the format of the mandatory director training to provide flexibility to directors and issuers to make appropriate arrangements that suit their own requirements.
• Board performance review: With a view to facilitating the boards to assess whether their skills and qualifications are aligned with the issuer’s long-term business goals and strategy and to providing transparency to investors, the HKEx requires issuers to conduct regular board performance reviews at least every two years with specific disclosure in the corporate governance report, as a code provision.
• Board skills matrix: To enhance board effectiveness, the HKEx has introduced a new code provision requiring issuers to maintain a board skills matrix and to make specific disclosure of it in their corporate governance report, including their professional expertise and working experience.
• Caps on overboarding INED: The HKEx introduced a “hard cap” of six Hong-Kong-listed issuer directorships that an INED of a listed issuer or an initial public offering (IPO) applicant may hold. The HKEx allows a three-year transition period commencing on July 1, 2025, with compliance required by the first annual general meeting (AGM) held on or after July 1, 2028 by any issuer that an overboarding INED serves. However, IPO applicants will not be permitted to have overboarding INEDs immediately starting from July 1, 2025 onwards. In this connection, IPO applicants that already submitted a listing application with the HKEx and have yet to comply their listing should proceed with caution with their appointment of INEDs to ensure that they do not run afoul of the new “hard cap” introduced by the HKEx.

STRENGTHENING BOARD INDEPENDENCE

It is believed that a tenure limit is a pragmatic measure to promote board refreshment and foster greater diversity of perspectives in the boardroom. Thus, the HKEx has imposed a “hard cap” of nine years on the tenure of INEDs (beyond which an INED would no longer be considered independent). However, the HKEx also allows a three-year cooling-off period for a person to be reconsidered as an INED of the same issuer.

The HKEx introduced a two-phase implementation over a transition period of six years:

• Phase one (three-year transition period starting from July 1, 2025; with compliance required by the first AGM held on or after July 1, 2028): An issuer must not have long-serving INEDs representing a majority of the INEDs on their board.
• Phase two (six-year transition period starting from July 1, 2025; with compliance required by the first AGM held on or after July 1, 2031): An issuer must not have any long serving INED on their board.

It is important to note that unlike the caps on overboarding INED, the above transition period is applicable to both issuers and IPO applicants. The HKEx made no distinction in this regard.   

PROMOTING DIVERSITY

To promote greater diversity in the boardroom and help issuers expand their talent pools, the HKEx introduced a new code provision requiring issuers to have at least one director of different gender on the nomination committee. This represents a further step to promote gender diversity, after the HKEx mandated that single-gender board is no longer acceptable for all issuers from December 31, 2024.

The HKEx also introduced a new requirement under the Listing Rules requiring issuers to establish a workforce diversity policy to foster a stronger culture of inclusion and support the development of a diverse pipeline for succession.

The requirement for annual reviews of the board diversity policy has been upgraded to a mandatory disclosure requirement under the corporate governance code to ensure that the issuer’s board diversity policy remains appropriate and effective. In other words, issuers may no longer adopt the “comply or explain” approach that is currently applicable to such annual reviews.  

RISK MANAGEMENT AND INTERNAL CONTROLS

The HKEx has adopted a mandatory disclosure requirement for boards of listed issuers to review the effectiveness of their risk management and internal control systems at least annually due to the rapid change in risk profile and challenges faced by the businesses. 

CAPITAL MANAGEMENT

The HKEx has adopted a new mandatory disclosure requirement for issuers to make specific disclosure of their dividend policy and the board’s dividend decisions in the corporate governance report. An explanation will be required if an issuer does not have a dividend policy.

CONCLUSION

The recent enhancements demonstrate the HKEx's commitment to fostering good corporate governance among issuers. These new requirements aim to introduce fresh and diverse perspectives to the boardroom, enhancing overall board effectiveness, independence, and diversity. The extended implementation data and further modifications provide issuers with the flexibility to advance their corporate governance practices.

As the new enhancements will take effect on July 1, 2025, listed issuers and IPO applicants should plan ahead to avoid significant abrupt changes and effectively utilize the transitional period, where applicable, to align with the new requirements.