Jul 18 Legal Update
Revised HKEX Corporate Governance Code
HKEX published its consultation conclusions on “Review of the Corporate Governance Code And Related Listing Rules”, and a “Guidance for Boards and Directors”. (Click: full report, press release; Directors’ Guide).
The “over-boarding” provisions have attracted most media attention. However, it is only one aspect of HKEX’s overall focus to strengthen the accountability of the board and the nomination committee on director election (including independent directors or “INEDs”). Independence criteria, board diversity, and the general rigour in the nomination process are strengthened. Dividend policy transparency is also enhanced.
The new rules will be effective from 1 Jan, 2019. Technically, these are to be achieved by revising the CG Code, or upgrading some Code Provisions (“CP”) into Listing Rules (“Rules”).
Relevant guidance contained in the Directors’ Guide (which is not part of the Listing Rules), are summarised below. In addition, it covers directors’ duties, risk management / internal controls, company secretaries’ roles (for external service providers in particular), and special considerations for weighted voting rights issuers.
What you should know:
- INEDs (over-boarding and time commitment) (paras 34-51 of report)
— (Revise CP A.5.5) For electing INED who holds his 7th (or more) listed company directorship, the company circular to shareholders should give reasons why he would still be able to devote sufficient time to the board
— Directors’ Guide: factors to assess if a nominee may be over-boarded (para 2.17)
- INEDs (enhanced independence criteria) (paras 78-121)
— Cooling off periods:
(i) (Revise Rule 3.13(3)) For former professional advisors – extend from 1 to 2 years
(ii) (Revise CP C.3.2) For a former partner of auditor to become its audit committee member – extend from 1 to 2 years
(iii) (Revise Rule 3.13(4)) Material interests in its business activities in the past year: introduce 1-year cooling off period
— (New) Add a note under the independence criteria rule, that these criteria “should apply” to an INED’s “immediate family” (i.e. spouse, his (or spouse’s) child or step-child, natural or adopted, under 18) in assessing independence
— (New “Recommended Best Practice”) Disclose in corporate governance report (“CG Report”), an INED’s cross directorships or significant links with other directors
- Board diversity (paras 53-68 of report)
— Upgrade CP (A.5.6) to a Rule, requiring issuers to have a diversity policy and disclose the policy / a summary in the CG Report
— (Revise CP A.5.5) More disclosure, in circular to shareholders accompanying the resolution to elect the director:
(i) The process used for identifying the nominee
(ii) The perspectives, skills and experience he is expected to bring to the board
(iii) How he would contribute to diversity of the board
- (New) Disclose nomination policy in CG Report, which should set out the board’s consideration of Code Principle (A.3) (i.e. a board should have a balance of skills, experience, and diversity of perspectives) (paras 122-129)
— Directors’ Guide: considerations in developing a nomination policy (para 3.9) and a diversity policy (para 4.9). “Board skills matrix” (para 4.10-2) is also referenced as a tool to assess diversity
- (Revise CP A.2.7) INEDs should meet annually with the Chairman, in the absence of the other directors, giving feedback (paras 138-143)
- (New) Disclose dividend policy in the annual report (paras 144-149)
What you should do/watch out for:
— Immediate action: inform your directors on the rule changes, and forward to them the Directors’ Guide
— Assess impact on your board, nomination committee, board policies/processes(e.g. nomination policy and process, diversity policy), disclosure (annual report/CG report, AGM circular on director election)
- Nomination Committee: rule changes will result in greater demand on it and the board, for ensuring the balance of skills of directors, enhanced independence criteria, and diversity
- INEDs: assess impact of rule changes on you
Also in this issue