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HKEX consultation: Corporate Governance Code

 
HKEX published a consultation paper on “Review of the Corporate Governance Code And Related Listing Rules”.  (Click: full report, press release). Its focus is on independent directors (“INEDs”), including greater transparency and accountability in the nomination process, strengthening the independence criteria, and promoting board diversity. Transparency in listed company dividend policy is also proposed.  Technically, these are to be achieved by revising the CG Code, or upgrading some Code Provisions (“CP”) into Listing Rules (“Rules”).

What you should know:

• INEDs (over-boarding and time commitment) (paras 27-39 of report)
  — (Revise CP A.5.5) For electing INED who holds his 7th (or more) listed company directorship, the circular to shareholders should give reasons why he would still be able to devote sufficient time to the board

  — HKEX will issue Guidance setting out some considerations in assessing whether a nominee may be over-boarded

• Board diversity (paras 40-56)
  — Upgrade CP (A.5.6) to a Rule, requiring issuers to have a diversity policy and disclose the policy / a summary in the corporate governance report (“CG Report”)

  — (Revise CP A.5.5) Disclose, 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

• INEDs (factors affecting independence) (paras 57-86)
  — Cooling off periods:
  (i) (Revise Rule 3.13(3)) For former professional advisors – extend from 1 to 3 years
  (ii) (Revise CP C.3.2) For a former partner of auditor to become its audit committee member – extend from 1 to 3 years
  (iii) (Revise Rule 3.13(4)) material interests in its business activities in the past year: introduce 1-year cooling off period

  — (New “Recommended Best Practice”) disclose in CG report, an INED’s cross directorships or significant links with other directors

  — (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) 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 87-92)

• (Revise CP A.2.7) INEDs should meet annually with the Chairman, in the absence of the other directors, giving feedback (paras 100-106)

• (New) disclose dividend policy in the annual report (paras 107-113)

• (New) whether should allow “implied consent”, via an issuer’s articles of association, for electronic dissemination of corporate communications to shareholders (paras 114-120)
  — Currently, issuers have to send hard copy requests for consent to shareholders
  — Its implementation would require amendments of the Hong Kong Companies Ordinance

• For a feel as to the extent of the proposed amendments, read Appendix 1 (P. 22) of the report setting out the revised CG Code, CG Report, and other Listing Rules

What you should do/watch out for:

• Important to note the trend of corporate governance developments, with INEDs being a focus

• The proposals are not drastic. e.g. The “over-boarding” proposal is along the direction of voting policies of proxy advisors (e.g. ISS/Glass Lewis) followed by many institutional investors

• Corporate governance conscious companies can consider refining your board processes now (e.g. nomination process, and disclosure (annual report/CG report, AGM circular as regards election of directors), in light of the proposals)

Also in this issue

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