Raising the Bar for Corporate Governance: The Implications of HKEX’s Proposed Amendments to the Corporate Governance Code

On 14 June 2024, the Stock Exchange of Hong Kong Limited (“HKEX”) published a consultation paper seeking market feedback on a series of proposed enhancements to the Corporate Governance Code (the “CG Code”) and the related Rules Governing the Listing of Securities on the HKEX (“Listing Rules”). These changes are aimed to address gaps in governance practices and to improve the corporate governance of listed companies in Hong Kong.

The consultation attracted responses from a wide range of stakeholders, including listed issuers, professional bodies, market practitioners, and institutional investors. The reforms, as finalised in December 2024, largely reflect the proposals made in the consultation paper, with particular focus on board effectiveness, board independence, diversity, risk management and internal control and capital management. The new rules will come into effect on 1 July 2025, with transitional arrangements introduced for certain measures, further details of which are set out below.

The key reforms to the CG Code are summarised below:

A. Enhancing Board Effectiveness

Designation of a Lead Independent Non-Executive Director (“INED”)

Implemented as a recommended best practice (“RBP”) in the CG Code, where the chairman of the board is not an INED, the issuer will be required to appoint a Lead INED which will serve as a communication link with shareholders and promote dialogue among (i) INEDs; and (ii) INEDs and the other board members.

Issuers must also comply with enhanced disclosure requirements on shareholder engagement under the mandatory disclosure requirement (“MDR”) and code provision (“CP”) in the CG Code. The information to be disclosed includes (i) the nature and number/frequency of these engagements; (ii) the groups of shareholders and company representatives involved; and (iii) the issuer's method for following up on the outcomes of these engagements.

Mandatory Director Training

The new rules set out mandatory training requirements for all directors under the Listing Rules. First-time directors must complete at least 12 hours (for those who have been a director of a non-HKEX listed company within 3 years prior to their appointment) or 24 hours of training within 18 months of their appointment. The training topics shall cover all the following areas: 

1. The roles, functions, and responsibilities of the board, its committees, and directors, as well as the effectiveness of the board;
2. Issuers' obligations and directors' duties under Hong Kong law and the Listing Rules, along with key legal and regulatory developments (including updates to the Listing Rules) pertinent to fulfilling those obligations and duties;
3. Corporate governance and ESG issues (including developments related to sustainability or climate-related risks and opportunities relevant to the issuer and its business);
4. Risk management and internal controls; and
5. Updates on industry-specific developments, business trends, and strategies relevant to the issuer.

Enhanced disclosure on mandatory training undertaken by directors will be required as an MDR in the CG Code. For each director, issuers must disclose: (i) the total number of hours of training attended; (ii) the format and mode of training; and (iii) for each mode of training, the number of hours attended, the topics covered and details of the relevant providers including names and types.

Regular Board Performance Evaluations and Board Skills Matrix

Upgraded to a CP under the CG Code, issuers should conduct board performance evaluations at least every two years and disclose key findings in the CG Report including the existing board’s skill mix, detailing how the skills, experience and diversity of the board align with the purpose, values, strategy and desired culture of the issuer and the issuer’s future plans to acquire further skills.

B. Strengthening INED Independence, Managing Overboarding and Monitoring Director’s Commitment

Cap on INED Tenure

Directors who have been serving as an INED for nine years or more will no longer be considered independent and can only continue serving as a director if re-designated to a non-executive director or become an INED again after a three-year cooling off period.

This new rule will be introduced through phased implementation with transitional periods as follows:

1. iissuers to comply with this rule by the first AGM after 1 July 2028 for the majority of INEDs on the issuer’s board; and
2. iiissuers to comply with this rule by the first AGM after 1 July 2031 for all INEDs on the issuer’s board.

Overboarding Restrictions and Director’s Commitment

INEDs are permitted to hold a maximum of six directorships concurrently. This new rule will come into force in the first AGM held on or after 1 July 2028, allowing for a three-year transition period. For IPO applicants, this rule will apply to submissions made on or after 1 July 2025.

Furthermore, issuers must comply with the MDR on the annual assessment by the nomination committee and disclose its assessment of each director’s time commitment and contribution to the board, factoring in the directors’ other concurrent external commitments as well as other factors such as their characters and experience.

C. Promoting Diversity and Inclusion

Gender Diversity in Nomination Committees

Codified as a CP in the CG Code, issuers must include at least one director of a different gender on their nomination committees.

Diversity Policy

Issuers must adopt and disclose its workforce diversity policy in the CG Report. In addition, the requirement for annual reviews of the board diversity policy will be elevated to an MDR under the CG Code and issuers will need to disclose the results of its annual review of the implementation of the board diversity policy including (i) the progress towards the issuer’s objectives; and (ii) how the issuer arrived at its conclusions.

Further, if the issuer fails to meet the board's gender diversity requirement, it must promptly announce the details and reasons for deviation and strive to appoint suitable members within three months. Separate disclosure in the CG Report of gender ratios for senior management and the workforce will become an MDR under the CG Code.

D. Enhancing Risk Management and Internal Controls

The issuer’s board is responsible for ensuring that the issuers have established and have been maintaining appropriate and effective risk management and internal control systems. Boards must conduct and disclose details of annual reviews of their risk management and internal control systems as an MDR under the CG Code.

E. Enhancing Transparency Dividend Policy

Issuers which have a dividend policy will be required to disclose details of such policy and confirm that dividend decisions made by the board are aligned with it. Issuers lacking a dividend policy must indicate such fact and explain the reason for the absence of such policy. Additionally, issuers must provide reasons for any changes in the dividend rates compared to the previous corresponding period or provide a reason as to why no dividend is paid, along with the steps they plan to take to improve investor returns.

Conclusion

HKEX’s proposed amendments to the CG Code will take effect on 1 July 2025. While there are transitional arrangements in place for certain enhancements, listed issuers and IPO applicants are nonetheless encouraged to familiarise themselves with the implications of these proposed amendments to avoid last minute changes and ensure compliance with the new requirements.

If you have any questions or would like further details on the above issues, please contact our Corporate team.

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