In line with the trend towards higher level of corporate governance and more accountability of listed issuers and their directors in many other countries, the Hong Kong Stock Exchange (the “Exchange”) released its Consultation Conclusions on Review of the Corporate Governance Code (“Code”) and Associated Listing Rules (the “Conclusions”) on 28 October 2011. The most recent amendments to the Code and Associated Listing Rules are in accordance with the Conclusions (the “Amendments”) and they became or will become effective in stages.
Following the UK corporate governance model, the Exchange adopts the comply or explain principle through the Code. Listed issuers are basically governed by the Rules, Code Provisions (“CPs”) and Recommended Best Practices (“RBPs”). Issuers must follow the Rules. They have the flexibility to comply with CPs and if they do not, explain the reasons for this decision in their Corporate Governance Reports. Issuers are encouraged, but not required, to state if they have adopted RBPs.
In this eNews, we summarize those major Amendments relating to directors of listed companies which became effective on or before 1 April 2012.
To clarify directors’ responsibilities, Rule 3.08 has been expanded to require directors to take an active interest in the issuer’s affairs and obtain a general understanding of its business and follow up anything untoward that comes to their attention. Directors may delegate their functions but such delegation does not absolve them from the required level of skill, care and diligence.
To avoid the directors from not devoting sufficient time to their duties to the issuer, the Code has been amended to include (a) a new Principle A.1 that the board should regularly review the time required from a director to perform his responsibilities to the issuer and whether each director is spending sufficient time performing such responsibilities and (b) a new CP A.6.6 that directors should inform the issuer’s board of any change to their significant commitments in a timely manner.
RBP A.5.5 on directors’ training has been upgraded to CP A.6.5 which allows directors to undergo whatever training they consider appropriate and the directors should provide record of training to the issuers. The issuer is required to disclose how each director complied with CP A.6.5 in the Corporate Governance Report.
INED who has served nine years
To draw shareholders’ attention to INEDs seeking re-election after they have served more than 9 years, RBP A.4.3 has been upgraded to CP A.4.3 which requires shareholders vote on a separate resolution to retain an INED who has served for more than 9 years.
Circular nominating INED for election
To improve the quality of disclosure for shareholders in circulars nominating an INED for election, RBP A.4.8 has been upgraded to CP A.5.5 which requires the issuer to explain its reasons for an INED’s election and reasons it considers the INED independent in the circular nominating the INED for election.
To safeguard the independence of the remuneration committee so that no director is involved in deciding his own remuneration and to ensure an issuer’s interests as a whole are considered when executive directors’ and senior management’s remuneration is decided, new Rules 3.25 to 3.27 have been added to require an issuer to establish a remuneration committee with a majority of INEDs, an INED as the chairman and written terms of reference and immediately announce its reasons for failing to comply with these Rules if an issuer fails to do so.
To be in line with international best practices, RBPs A.4.4 to A.4.8 have been upgraded to CPs A5.1 to A5.5 to require an issuer to establish a nomination committee with a majority of INEDs, an INED as the chairman and written terms of reference available on both the issuer’s and the Exchange’s websites and require the nomination committee to review the structure, size and composition of the board at least once a year to complement the issuer’s corporate strategy.
Removing 5% threshold for voting on a resolution in which a director has an interest
Rule 13.44 has been amended to remove the 5% exemption for transactions where a director has an interest.
Providing Monthly Management Accounts or Management Updates to the Board
To help directors to fulfill their duties and responsibilities, a new CP C.1.2 has been added to require management to provide all members of the board with monthly updates giving a balanced and understandable assessment of the issuer’s performance, position and prospects in sufficient detail to enable the board as a whole and each director to discharge their duties under Rule 3.08 and Chapter 13 of the Listing Rules.
Next day disclosure for a director exercising an option in the issuer or the issuer’s subsidiaries
Rule 13.25A has been amended so that there is no need for issuers to publish a Next Day Disclosure Form following the exercise of an option for shares in the issuer by a director of a subsidiary and the exercise of an option for shares in the issuer by a director of a subsidiary only triggers an announcement if the change in its share capital is 5% or more since its last Monthly Return.
Disclosing long term basis on which an issuer generates or preserves business value
To promote greater transparency to investors, a new CP C.1.4 has been added to require directors to explain in the Annual Report the basis on which the company generates or preserves value over the long term and the strategy for delivering the objectives of the company.
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