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Apr 21 Legal Update

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HKEX consultation on corporate governance revisions

On 16 April, 2021, HKEX published consultation paper on proposed enhancements to the Corporate Governance Code and Corporate Governance Report. Some proposals relate to further strengthening the link between corporate governance and ESG. The consultation period will close after 18 June. (Press release; full document)

HKEX intends to implement the proposals (except those relating to long-serving directors) for financial years commencing on or after 1 January 2022.

As regards proposals on independent directors (“INEDs”) serving more than 9 years, there will be a longer transitional period effective for financial years commencing on or after 1 January 2023.

In terms of the technical approach, the proposals introduce new/upgrade “Code Provisions” (“CP”; subject to “comply or explain”), “Recommended Best Practices” (“RBP”; which are voluntary). Some Code Provisions are upgraded to Listing Rules. For enhancing disclosure, there are new “Mandatory Disclosure Requirements” (“MDR”; disclosed under corporate governance reports).

It is noted that HKEX will provide additional guidance, including on new areas like culture, and key disclosure areas.

Key proposals include:

  • Corporate culture
    — (New CP) The board required to align culture with company’s purpose, values, strategy
    (i) HKEX will provide further guidance
    (ii) Common elements of a sound culture (e.g. tone from the top; periodic review by the board; linkage to financial/non-financial incentives)
    (iii) Disclosure (e.g. description of the vision, value and strategy of the company, alongside with its culture, and how all these affect the business model)
    — (New/upgraded CPs) Anti-corruption and whistleblowing policies required
  • Board independence, refreshment and succession planning
    (Key changes) long-serving INEDs
    — Independent shareholders’ approval for re-election of INED(s) serving more than 9 years
    — Additional disclosure: why such INED still independent (i.e. factors considered, process and the board/ nomination committee’s discussion in arriving at such determination)
    — If all INEDs served more than 9 years, to appoint a new INED at the forthcoming AGM; and disclose their respective length of tenure on a named basis

    — (New CP) Policy in place, to ensure independent views are available to the board, and annual review of its effectiveness
    — (Upgraded to Rule) mandatory nomination committee, chaired by an INED and comprising a majority of INEDs
    — (New Rule) disclosure of directors’ attendance at general meetings in poll results announcements
    — (New RBP) generally should not grant equity-based remuneration to INEDs, for objectivity and independence

  • Diversity
    Single gender board not considered a diverse board
    — (New MDR) set and disclose mandatory (numerical) targets and timelines for achieving gender diversity at both board and workforce  (including senior management) levels
    — (New CP) boards required to review progress of diversity policy annually
    — Transitional arrangements for single gender boards: a three-year period to appoint at least one director of the absent gender
  • Communications with shareholders
    — (Upgraded to MDR) disclosure on shareholders communication policy, and annual review of its effectiveness
    — Two-way communication: dissemination of information to shareholders; solicit feedback
    — HKEX will provide guidance on areas where the company may provide more discussions/information, in addition to “strict reporting requirements” (e.g. business strategies moving forward; remuneration structure)
  • ESG
    — New introductory paragraph added to the Code, elaborating on linkage between corporate governance and ESG
    — ESG report to be published at the same time as annual reports (i.e. within 4 months of year-end, instead of 5 months for ESG reports now)
  • Re-arrange order of the Code for a better flow
    — No substantive changes

What you should do/watch out for:

  • Note the consultation period, for making responses as appropriate
  • Update the board and relevant teams on the broad proposals, following management’s initial assessment of the impact (in light of implementation timeframe), e.g.  long-serving INEDs; corporate culture, mandatory nomination committee; publication time of ESG report, other gaps in policies/processes/disclosure
  • Detailed analysis by management for board discussions in due course (e.g., long-serving INEDs — analysis of past shareholder voting history, after excluding votes by substantial shareholder/non-independent shareholders)
  • Note enhanced disclosure in corporate governance report, consider early-adoption where appropriate



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– Achieving Excellence in a New Era of Corporate Governance (Nasdaq)

 For a holistic review of your governance practices

Are these on your board agenda?

  • Stakeholder-oriented governance?
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