BACKGROUND

With an emphasis to enhance the corporate governance ("CG") practices and reporting by listed companies, instil changes in the mindset of an issuer’s board, and ensure the CG framework in Hong Kong aligns with stakeholder expectations and international best practice, The Stock Exchange of Hong Kong Limited ("HKEx") published a consultation paper in April 2021 to its proposed changes to the Corporate Governance Code ("CG Code") and the relevant Listing Rules.

On 10 December 2021, the HKEx published the conclusions to its consultation, "Review of Corporate Governance Code & Related Listing Rules, and Housekeep Rule Amendments" ("Consultation Conclusions"), setting out the major changes to the Listing Rules and new code provision ("CP") in CG Code that will become effective on 1 January 2022. The HKEx also established a new set of CG guide for Boards and Directors ("CG Guidance") to assist issuers' compliance with the CG requirements.

SUMMARY OF THE KEY CHANGES

1. Company's culture

A new CP A.1.1 will be introduced to require an issuer's board to align the company's culture with its purpose, values and strategy. The intention is to highlight the board's role in developing a sound culture that supports the business conduct and strategies. A list of self-check questions and suggested disclosures are provided in the CG Guidance.

It was noted that anti-corruption and whistleblowing are core to maintaining high ethical standards and good CG within the company. As a result, CPs D.2.6 and D.2.7 will be adopted to require establishment of anti-corruption and whistleblowing policies in the company, which may be established as standalone policies or included in the relevant provisions in the code of conduct or other policies of the company.

2. Board independence and refreshment

The proposal to introduce a CP requiring disclosure of a policy to ensure independent views and input are available to the board will be adopted. The new CP (B.1.4) aims to urge issuers to have mechanisms in place to ensure an element of independence on the board.

The mechanisms do not necessarily have to be set out as standalone policies. They may be covered in the following aspects of the company's CG framework:

1. Independent non-executive director's ("INED") recruitment process.
2. Number of INEDs and their time contribution.
3. Assessment or evaluation of INEDs' contribution.
4. Other channels where independent views are available (e.g. directors' access to external independent professional advice).

In respect of INEDs serving more than nine years ("Long Serving INEDs"), the new CP (B.2.4) requires issuers to appoint a new INED at the forthcoming annual general meeting and disclose the length of the tenure of the Long Serving INEDs in the shareholders' circular. Additional disclosures should also be made on factors considered, process and the board's discussion on the Long Serving INED's independence and the reason why he/she should be re-elected.

A recommended best practice ("RBP") was also added to recommend that issuers should not grant equity-based remunerated with performance related elements to the INEDs (RBP E.1.9).

3. Board diversity

The Listing Rules will be amended to state that diversity will not be considered as achieved for a single gender board. The three-year transition period for existing single gender board issuers is maintained but these issuers are expected to consider appointing a director of a different gender when an existing director is due for retirement. In respect of IPO applicants with a single gender board, a 6-month transition period is in place to accommodate those who have already filed a listing application. For A1 submissions filed on or after 1 July 2022, there must be a director of a different gender whose appointment should be effective upon listing.

Further, the issuers must set and disclose numerical targets and timelines for achieving gender diversity at board level, gender ratios in the workforce, and objectives for gender diversity. The board diversity policy must also be reviewed on an annual basis.

4. Nomination committee

It will be mandatory to establish a nomination committee under the new Listing Rule (MB Rule 3.27A / GEM Rule 5.36A). The aim is to enhance transparency and independence of nominating and appointing INEDs. The nomination committee may be chaired by the board chairman or an INED.

5. Communications with shareholders

The current CP (E.1.4) will be upgraded to a mandatory disclosure requirement, under which the issuers will be required to disclose their shareholder communication policy and a statement of their review of its implementation and effectiveness.

6. Others enhancements

1. Directors' attendance at general meetings: A newly added Listing Rule (MB Rule 13.39(5A) / GEM Rule 17.47(5A)) requires timely disclosure of directors' attendance at general meetings in the poll results announcement to further enhance transparency and allow shareholders/investors to assess directors' commitment to the company.
2. Removal of the specific term requirement: The current CP A.4.1 requires issuers to appoint non-executive directors for a specific term. Its intended purpose is to allow the shareholders to exercise their voting power and vote out a disapproved director.  As this can be achieved by the rotation requirement in the current CP A.4.2, the specific term requirement will be deleted from the CG Code.
3. Environmental, Social and Governance ("ESG") Report: To allow the board, shareholders and investors to assess the financial and non-financial matters comprehensively, the ESG reports must now be published at the same time as annual reports.

WHAT TO LOOK OUT FOR:

• The revised Listing Rules and the new CG Code will become effective from 1 January 2022.
• The requirements under the new CG Code will apply to CG reports for financial year commencing on or after 1 January 2022, except the requirement to appoint a new INED where all the INEDs on board are Long Serving INEDs will be implemented for the financial year commencing on or after 1 January 2023.
• Appendix 14 of the Listing Rules will be re-named to "Corporate Governance Code" rather than the current name of "Corporate Governance Code and Corporate Governance Report".

For further details, please refer to the Consultation Conclusions published on the website of the HKEx (http://www.hkex.com.hk).

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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact [email protected] if you have any questions about the article.