Amendments to the Corporate Governance Code and Listing Rules in Hong Kong
We published a newsletter regarding Amendments to the Corporate Governance Code and Listing Rules in Hong Kong. To view the PDF version, please click following link.
→Amendments to the Corporate Governance Code and Listing Rules in Hong Kong
Amendments to the Corporate Governance Code and Listing Rules in Hong Kong
One Asia Lawyers Compliance Newsletter
On 10th December 2021, the Stock Exchange of Hong Kong Limited (“HKEx”) published conclusions to its consultation on the Review of the Corporate Governance Code (“CG Code”) and
Related Listing Rules.[1] Following the publication, amendments have been made to the CG Code and Listing Rules to enhance corporate governance and diversity practices among listed issuers in Hong Kong. The amendments took effect on 1st January 2022, and the requirements under the new CG Code apply to corporate governance reports for the financial year commencing on or after 1 January 2022. HKEx has also published a new set of guidance, the Corporate Governance Guide for Boards and Directors (“CG Guide”), which is to be read alongside the amended CG Code to assist issuers’ compliance with the new requirements.
New Requirements regarding Anti-corruption and Whistleblowing Policies
All listed issuers must now have anti-corruption and whistleblowing policies in place.[2] Under the new Code Provision D.2.6 of the CG Code, issuers must establish whistleblowing policies for employees and those who deal with the issuer (e.g. customers and suppliers) to raise concerns, in confidence and anonymity about possible improprieties in any matter related to the issuer. Under the new Code Provision D.2.7 of the CG Code, issuers must establish policies and systems that promote and support anti-corruption laws and regulations.
The supplementary CG Guide includes a whole section on anti-corruption and whistleblowing policies. It provides guidance on the purpose and scope of these policies, as well as a list of the types of information that may be included in these policies. To name a few examples, the CG Guide suggests including information about reporting channels and handling of reports for whistleblowing policies, and to include a statement of top-level commitment and guidelines on handling conflicts of interest for anti-corruption policies.[3]
Other Key Amendments
The amended CG Code and Listing Rules have also introduced the following requirements for issuers. These topics are also covered by the CG Guide mentioned above.
1. Company culture
The board should establish the issuer’s purpose, values and strategy, and satisfy itself that the these and the issuer’s culture are aligned.[4] The requirements to establish anti-corruption and whistleblowing policies are also part of this category related to company culture.
2. Board independence
An issuer should establish mechanism(s) to ensure that independent views and input are available to the board, and disclose such mechanism(s) in its Corporate Governance Report. The board should review the implementation and effectiveness of such mechanism(s) on an annual basis.[5]
There are also some changes regarding requirements for independent non-executive directors (“INEDs”) serving more than nine years (“Long Serving INEDs”), as below.
・The papers to shareholders accompanying the resolution for the further appointment of a Long Serving INED should include additional disclosures on the factors considered, the process and the discussion of the board (or nomination committee) in arriving at the determination that the Long Serving INED is still independent and should be re-elected.[6] ・Where all INEDs on board are Long Serving INEDs, the issuer should:
(a) disclose the length of tenure of each existing INED on a named basis in the circular to shareholders and/or explanatory statement accompanying the notice of the annual general meeting; and (b) appoint a new INED on the board at the forthcoming annual general meeting.[7]
There is also a new Recommended Best Practice which suggests that issuers generally should not grant equity-based remuneration (e.g. share options or grants) with performance-related elements to INEDs.[8]
3. Diversity
HKEx will no longer consider diversity to be achieved by a single gender board. The following requirements now apply:
・As a transitional arrangement, issuers with a single gender board will have to appoint at a least a director of a different gender on the board no later than 31 December 2024.[9] ・Single gender board issuers who have made a commitment in the listing document with objectives set for implementing gender diversity should appoint a director of a different gender in accordance with such commitment.[10] ・IPO applicants must identify at least a director of a different gender, whose appointment should be effective upon listing, at the time of Form A1 submission[11] filed on or after 1 July 2022.[12]
In addition to this, all listed issuers must now set and disclose numerical targets and timelines for achieving gender diversity at board level. For the workforce level, issuers must disclose and explain gender ratio in the workforce (including senior management), any plans or measurable objectives the issuer has set for achieving gender diversity and any mitigating factors or circumstances which make achieving gender diversity across the workforce (including senior management) more challenging or less relevant.[13]
Every board must also now review the implementation and effectiveness of the issuer’s policy on board diversity on an annual basis.[14]
4. Communications with shareholders
There is a new mandatory disclosure requirement for issuers to disclose their shareholders’ communication policies, which should include channels for two-way communication.[15] These policies must be reviewed annually to ensure their effectiveness.[16]
5. Environmental, social and governance (ESG)
Amendments have been made to the CG Code and Listing Rules to elaborate the linkage between corporate governance and ESG, as well as highlight ESG risks in the context of risk management.[17]
In addition to this, issuers must now publish their ESG reports at the same time as publication of their annual reports.[18]
[1] The Corporate Governance Code is set out in Appendix 14 to the Main Board Listing Rules and Appendix 15 to the GEM Listing Rules.
[2] Previously, whistleblowing policies were only suggested as Recommended Best Practice (C.3.8).
[3] Pages 13-16 of the Corporate Governance Guide.
[4] Code Provision A.1.1 of the Corporate Governance Code.
[5] Code Provision B.1.4 of the Corporate Governance Code.
[6] Code Provision B.2.3 of the Corporate Governance Code.
[7] Code Provision B.2.4 of the Corporate Governance Code.
[8] Recommended Best Practice E.1.9 of the Corporate Governance Code.
[9] Rule 13.92 of the Main Board Listing Rules / Rule 17.104 of the GEM Listing Rules.
Single gender board issuers are expected to consider appointing a director of a different gender as soon as any existing director is due for retirement under the rotation requirement and should not wait for the expiry of the transition period (paragraph 86, page 18 of the Consultation Conclusions on Review of Corporate Governance Code & Related Listing Rules, and Housekeeping Rule Amendments).
[10] Paragraph 87, page 18 of the Consultation Conclusions on Review of the Corporate Governance Code and Related Listing Rules, and Housekeeping Rule Amendments.
[11] Form A1 is a listing application form.
[12] Paragraph 88, page 18 of the Consultation Conclusions on Review of Corporate Governance Code & Related Listing Rules, and Housekeeping Rule Amendments.
[13] Paragraph J of the Mandatory Disclosure Requirements of the Corporate Governance Code.
[14] Code Provision B.1.3 of the Corporate Governance Code.
[15] Paragraph L(b) of the Mandatory Disclosure Requirements of the Corporate Governance Code.
[16] Paragraph L(c) of the Mandatory Disclosure Requirements of the Corporate Governance Code.
[17] New introductory paragraph to the CG Code, and amendments to Principle D.2, Code Provisions D.2.2 and D.2.3.
[18] Rule 13.91(5)(d) of the Main Board Listing Rules / Rule 17.103(5)(d) of the GEM Listing Rules, paragraph 4(2)(d) of the ESG Guide.
