July 1, 2025, will mark a significant overhaul in the corporate governance landscape for listed companies in Hong Kong. The Hong Kong Exchanges and Clearing Limited (HKEx) has rolled out extensive amendments to the Corporate Governance Code and related listing rules. This article will delve into how these changes impact various aspects of corporate governance, focusing on board effectiveness, independence and diversity, risk management, and capital management policies.
Enhancing Board Effectiveness
Lead Independent Non-Executive Director Role
One notable amendment to HKEx’s requirements spotlights the role of the Lead Independent Non-Executive Director (Lead INED). Although not mandated, companies with non-independent board chairs are encouraged to appoint a Lead INED to bolster communication between the board and shareholders. This initiative aims to enhance the overall functionality of the board. The Lead INED’s responsibilities include providing a crucial link for shareholders and acting as a counterbalance to the board chair, ensuring that shareholder interests are aptly represented. Furthermore, the company’s corporate governance report must reflect this designation, highlighting the importance of transparency and accountability in board operations.
Moreover, the inclusion of a Lead INED is seen as a step toward reducing conflicts of interest and promoting objective decision-making. This role carries fiduciary duties and liability, emphasizing the need for individuals in this position to be well-versed in corporate governance. This measure, although optional, underlines the HKEx’s commitment to encouraging meaningful board engagement and effectiveness. By fostering better communication channels within the board, companies are poised to achieve more robust governance practices, resulting in better outcomes for shareholders and other stakeholders involved.
Mandatory Continuous Professional Development
HKEx’s new rules mandate continuous professional development for all directors. This requirement ensures that directors stay abreast of essential topics such as their roles and responsibilities, company obligations, corporate governance, and industry updates. First-time directors have an added obligation of completing 24 hours of training within their first 18 months. The training encompasses various crucial areas, including Hong Kong law, HKEx listing rules, and environmental, social, and governance (ESG) matters. This approach aims to create an informed board that can navigate the evolving corporate landscape confidently.
The continuous professional development initiative extends beyond basic training, encouraging directors to engage in ongoing learning and knowledge enhancement. The corporate governance report must disclose training hours, topics covered, and training methods, fostering a culture of accountability and growth. This emphasis on professional development is expected to lead to better-informed decision-making and governance practices that align with global standards. By prioritizing education and skill development, HKEx ensures that board members are equipped to address contemporary challenges and uphold high governance standards.
Strengthening Board Independence and Diversity
Limiting Tenure of Independent Non-Executive Directors
To ensure renewed perspectives, HKEx has imposed a tenure limit for Independent Non-Executive Directors (INEDs). An INED will not be considered independent after nine years of service, with a transition period spread out until 2031. This measure aims to foster a dynamic and unbiased board environment. The phased approach grants companies sufficient time to adjust, with clear benchmarks: by the first annual general meeting in 2028, long-serving INEDs must not make up the majority; by 2031, no long-serving INEDs should remain.
This tenure limitation is set to infuse boards with fresh viewpoints and mitigate issues of entrenched interests. It addresses concerns about prolonged tenures potentially compromising independence. The “cooling-off” period after nine years ensures a clear break before potential reappointment as an INED, reinforcing the HKEx’s commitment to maintaining high integrity in board composition. By implementing this rule, HKEx promotes a healthy turnover of board members, which is crucial for maintaining transparency, innovative thinking, and the overall effectiveness of governance structures.
Promoting Board Diversity
Board diversity receives significant attention in the updated guidelines. Companies must now implement and disclose their board diversity policies and review the progress annually. A key element includes the gender diversity requirement, stipulating the inclusion of directors from different genders on the nomination committee. This move underscores the importance of varied perspectives in boardrooms, enhancing decision-making processes and fostering inclusive corporate cultures.
The disclosure of diversity policies and their annual reviews ensures that companies are not only setting diversity goals but also actively pursuing them. This requirement aligns with global best practices and reinforces Hong Kong’s position as a forward-thinking financial hub. By mandating gender diversity on nomination committees, HKEx aims to pave the way for more equitable representation in leadership roles, thereby challenging traditional norms and promoting a more progressive corporate environment. The annual review process further holds companies accountable, compelling them to measure and report their progress transparently.
Enhancing Risk Management and Internal Controls
Annual Review Requirements
Boards are now mandated to conduct and disclose annual reviews of their company’s risk management and internal control systems. This review must cover all material controls, ensuring comprehensive oversight. The annual review, which includes financial, compliance, and operational controls, does not need to be externally conducted but must be thorough and tailored to the company’s specific needs. This requirement underscores the importance of continuous monitoring and enhancement of control systems to safeguard against potential risks.
Moreover, the annual review process is designed to provide stakeholders with assurance regarding the robustness of the company’s risk management framework. By mandating detailed disclosures, HKEx aims to elevate transparency and accountability within listed companies. The focus on material controls ensures that companies address all critical areas that could impact their operations. This measure not only strengthens internal governance practices but also enhances investor confidence by demonstrating a commitment to proactive risk management and internal control enhancement.
Board Responsibility Statement
The amended rules require companies to disclose a board statement detailing their responsibility for risk management and internal controls. This statement must confirm the systems’ appropriateness and effectiveness, enhancing transparency and accountability. The disclosure should include information on risk management policies, significant changes, internal audit functions, responsibilities of internal and external auditors, review processes, scope, results, and any significant failings or weaknesses identified, along with remedial actions taken. This level of detail provides clear insights into how companies manage and mitigate risks.
The board responsibility statement serves as a critical communication tool between the company and its investors, illustrating the board’s commitment to maintaining robust governance practices. By explicitly stating their oversight role, boards are held accountable for ensuring that risk management and internal control systems are not only adequate but also functioning effectively. This requirement is expected to foster a culture of diligence and continual improvement within organizations, ultimately leading to stronger, more resilient governance structures capable of navigating an increasingly complex business environment.
Optimizing Capital Management Policies
Dividend Policy Disclosure
Companies with a dividend policy are required to disclose the details and confirm alignment with policy decisions. This disclosure aims to enhance investor understanding and trust in the company’s capital management strategies. If a company does not have a dividend policy, it must disclose this fact and provide reasons for its absence. This level of transparency is intended to offer investors a clear picture of the company’s approach to managing capital and distributing profits. The disclosure should explain the rationale behind each dividend decision and the measures taken to optimize investor returns.
The HKEx’s emphasis on detailed dividend policy disclosure is designed to encourage companies to adopt systematic and transparent capital management practices. By clarifying how dividend decisions align with stated policies, companies can foster greater investor trust and confidence. In cases where dividend rates vary or no dividends are paid, companies must provide comprehensive explanations, including any planned measures to enhance shareholder value. This approach ensures that investors are well-informed and can make more educated decisions regarding their investments.
Communication of Variations in Dividend Payments
In instances where dividend rates vary or no dividends are paid, companies must explain these changes and outline measures to improve investor returns. This transparency is crucial for investor confidence and satisfaction. Clear communication about the reasons behind variations in dividend payments, along with the steps the company intends to take to enhance returns, helps maintain a transparent relationship with investors. It also highlights the company’s commitment to effective capital management and shareholder value creation.
By mandating detailed explanations and proactive measures, HKEx aims to ensure that companies are held accountable for their capital management decisions. This requirement promotes a culture of openness and strategic planning within organizations. Companies must articulate how they intend to address any shortfalls in dividend payments and improve overall investor returns, fostering a sense of trust and reassurance among shareholders. This level of transparency is expected to lead to more informed investment decisions and ultimately contribute to a more stable and reliable market environment.
Future Impact
On July 1, 2025, the corporate governance landscape for listed companies in Hong Kong will experience a significant overhaul. This change comes as the Hong Kong Exchanges and Clearing Limited (HKEx) introduces substantial amendments to the Corporate Governance Code and related listing rules. This article will explore in detail the impact of these changes on key aspects of corporate governance. Specific focus areas include the effectiveness of boards, maintaining independence and diversity, managing risk, and adhering to new capital management policies. These amendments aim to strengthen the overall governance framework of listed companies, ensuring they meet higher standards of accountability and transparency. By enhancing these areas, the HKEx aims to bring Hong Kong’s corporate practices in line with international standards, fostering greater investor confidence and ultimately contributing to the market’s robustness. These changes are crucial for improving corporate responsibility and aligning with global best practices in corporate governance.
