The Stock Exchange of Hong Kong Limited (“SEHK”) recently introduced a series of amendments relating to corporate governance (“CG”) requirements in order to enhance CG practices of listed issuers and to ensure that the CG framework continues to align with stakeholders’ expectations and international best practices. These amendments have significant impact on independent non-executive directors (“INEDs”) of listed issuers. The effective date of most of the amendments is 1 January 2022, except for appointment of new INED if all existing INEDs are long-serving INEDs, the implementation date shall be no later than the financial year after 1 January 2023 and for the establishment of a non single gender board, the implementation date shall be no later than 31 December 2024.
Overview of the Changes
Appendix 14 to the Rules Governing the Listing of Securities on SEHK (“Listing Rules”) (Appendix 15 to the GEM Rules) which was called the “Corporate Governance Code and Corporate Governance Report” (“Old Code”) is now renamed as “Corporate Governance Code” (“New Code”). The structure of the Appendix has been re-arranged to enhance readability. The New Code is divided into two parts : Part 1 sets out the mandatory disclosure requirements (“MDR”) and Part 2 sets out the principles of good corporate governance, code provisions (“CP”) and recommended best practices (“RBP”).
Part 1 of the New Code is to be disclosed in the CG Report of the Annual Report.
Part 2 of the New Code is to be reported in the Annual Report and Interim Report as to whether the CP have been complied with and if not, the “Considered Reasons and Explanation” for the deviation should be stated.
The RBP in Part 2 of the New Code is for guidance only. Issuers are encouraged to state on a voluntary basis in the Annual Report and Interim Report whether they have complied with them and give “considered reasons” for any deviation.
The New Code expressly provides that failure to comply with either Part 1 or Part 2 (with no “Considered Reasons and Explanation” statement provided) is a breach of the Listing Rules whilst previously under the Old Code, only failure to comply with the MDR would constitute a breach.
Part 1 and Part 2 of the New Code are for the most part evolved from the Old Code, but provisions relating to corporate culture, anti-corruption policy, board diversity, mechanism to ensure independent views to reach the board, re-election and tenure of long serving INEDs, directors’ attendance at general meeting, no equity-based remuneration for INEDs are new provisions. The whistle blowing policy connecting the CG and Environmental, Social and Governance requirements are expanded from the Old Code.
The major amendments that listed issuers and INEDs should be aware of are set out below.
1. Whistleblowing and anti-corruption policies
As SEHK considers whistleblowing and anti-corruption to be core to a healthy corporate culture, a new CP (not RBP) has been introduced to require the establishment of an anti-corruption policy and a whistleblowing policy.
2. Board diversity
Diversity will become a MDR for all issuers. Issuers need to set up a policy on board diversity and disclose in the CG Report objectives for the policy, progress on achieving those objectives, how and when gender diversity will be achieved in the board, the numerical targets, timelines and succession plan for achieving gender diversity. The issuer also needs to disclose and explain the gender ratio in the workforce (including senior management), plans or measureable objectives the issuer has set for achieving gender diversity and any mitigating factors or circumstances which would make achieving gender diversity across the workforce (including senior management) more challenging or less relevant.
SEHK will not consider diversity to be achieved in a single gender board. Issuers with a single gender board will have to appoint at least a director of a different gender to the board no later than 31 December 2024. A new IPO applicant with Form A1 filed on or after 1 July 2022 must have at least a director of a different gender.
In addition, CP requires that the board shall conduct an annual review of the implementation and effectiveness of the board’s diversity policy.
3. Investor relations
Investor relations is a MDR. Under the New Code, issuers need to disclose its shareholders’ communication policy (or a summary of the policy), which should include channels for shareholders to communicate their views and steps taken to solicit and understand the views of shareholders and stakeholders. The implementation and effectiveness of the policy are to be reviewed annually.
4. Mechanism to ensure independent views would reach the board
To improve the effectiveness of the board, a CP requiring issuers to establish mechanisms to ensure that independent view can reach the board has been added. Issuer should disclose such mechanism and review its effectiveness on an annual basis.
5. Long serving INEDs
To strengthen board independence, SEHK has revised the CP such that when an INED has served for more than nine years is to be re-elected, he or she needs to go through stricter procedures where the relevant resolution should be approved separately by shareholders and a paper explaining why the board still considers the INED as independent should be circulated to shareholders beforehand.
If all INEDs of an issuer have served for more than nine years on the board, the issuer should appoint a new INED to the board at the forthcoming annual general meeting and disclose the tenure of each INED on a named basis in the shareholders’ circular accompanying the notice of annual general meeting.
According to the New Code, non-executive directors are no longer required to be appointed for a specific term. The relevant CP has been revised.
6. Directors’ attendance at general meetings
SEHK considers directors’ attendance at the general meeting to be important in developing a good understanding between the issuers and the shareholders. A new listing rule (Listing Rule 13.39(5A)/ GEM Rule 17.47(5A)) has been added requiring the issuers to disclose the attendance in the poll results announcement.
7. Mandatory Nomination Committee
A new listing rule (Listing Rule 3.27A/ GEM Rule 5.36A) has been added requiring an issuer to establish a nomination committee chaired by the chairman of the board or an independent non-executive director, and the committee shall comprise a majority of INEDs.
8. No equity-based remuneration to INEDs
A new RBP has been added so that issuers generally should not grant equity-based remuneration (e.g. share options or grants) with performance-related elements to INEDs as this may lead to bias in their decision-making and may compromise their objectivity and independence.
The new amendments are consistent with international CG practices and should improve regulatory oversight and transparency of listed issuers in Hong Kong. They would also increase the role of INEDs in listed companies in Hong Kong as additional compliance and regulatory oversight are now required within tight timeline.
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