Background

In June 2024, the Hong Kong Stock Exchange (the “HKEX” or “Exchange”) released a consultation paper outlining proposed amendments to the Corporate Governance Code and related Listing Rules. The consultation period concluded on 16 August 2024, and on 19 December 2024, the HKEX published its conclusions. This article summarises the main revisions to the Corporate Governance Code.

Revisions to the Corporate Governance Code and Listing Rules

(a) Enhancing Board Effectiveness

The Exchange will not codify the requirement for appointing an independent non-executive director (“INED”) as “Lead INED”. Instead, the proposal for appointing a Lead INED where the chairman is not an INED will be introduced as a recommended best practice in the Corporate Governance Code. The adoption of any recommended best practice by an issuer is voluntary in nature. The Lead INED is not expected to manage day-to-day operations or explain company performance to shareholders or investors. In contrast, the Exchange reported that investors would expect a Lead INED to engage in a meaningful discussion with shareholders on matters such as strategy, governance and capital management, without disclosing material, non-public information.

Separately, in recognition of the importance of shareholders’ access to the board of directors, the Exchange has included an additional requirement in the conclusions requiring issuers to disclose engagement with their shareholders in their Corporate Governance Reports. The required disclosures include:

• the nature and frequency of such engagements;
• the groups of shareholders and representatives of the issuer who are involved; and
• the issuer’s approach to the follow up of these engagements.

Additional guidance on the role and functions of the Lead INED will be provided by the Exchange at a later stage.

(b) Mandatory Director Training

New provisions in the Listing Rules require:

• All existing directors to participate in mandatory continuous professional development training on designated topics[1] during each financial year (no specified minimum number of training hours).
• First-time Directors (i.e. those who have (i) never served as a director of a listed issuer or (ii) have not served as directors of a listed issuer within a period of three years prior to their appointment) must complete 24 hours of continuous professional development training within 18 months of their appointment.
• If a First-time Director has served as a director of an issuer listed on an exchange other than the Main Board or GEM within three years prior to their appointment, they will only be required to complete 12 hours of training.

Please note that the Exchange has removed the proposed “reset mechanism”, which is a proposal to reset the mandatory First-time Director training if such a director has resigned prior to completing the minimum training hours. This was considered an unnecessary burden for First-time Directors and thus removed.

Additionally, amendments to the Corporate Governance Code will require issuers to confirm that directors have participated in specified training and disclose the following details for each director, including:

• Training hours;
• Format or mode of training (e.g., external or internal provider or self-study);
• Training topics; and
• Names of external training providers.

(c) Board Performance Evaluation

Currently, regular evaluation of board performance is a “recommended best practice” under the Corporate Governance Code. The HKEX will elevate this requirement to a code provision, mandating that boards conduct performance evaluations at least every two years based on a “comply or explain” basis. The focus of the evaluation will be on the overall performance of the board, and whether its performance, together with the board’s skills, expertise and qualifications (as identified by the board skill matrix) are aligned with the issuer’s broader business and strategic goals. Issuers will have the discretion to determine the format of the evaluation, including whether the evaluation is conducted internally or externally; however, they must disclose the scope, process, and results of the performance evaluations in their annual corporate governance reports.

The HKEX will issue further guidance on the expected scope and level of detail for disclosure of a board performance review.

(d) Board Skills Matrix

A new code provision will be introduced to require issuers to establish a board skills matrix and disclose:

• The current skill set of the board;
• How directors’ skills, experience, and diversity align with the company’s objectives, values, strategies, and desired culture; and
• Details and plans for acquiring additional skills.

The Nomination Committee will be responsible for assisting the board in maintaining a board skills matrix, and HKEX will provide suggestions as to the format, scope and level of detail for maintaining an effective board skills matrix and making meaningful disclosure.

(e) Limit on INED’s Multiple Appointments

New provisions in the Listing Rules will limit INEDs to serving as directors in a maximum of six Hong Kong-listed issuers (an INED who serves as a director of more than six Hong Kong-listed issuers is an “Overboarding INED”). This rule will have a three-year transition period and an Overboarding INED must comply with the new requirement by the conclusion of the earliest annual general meeting held on or after 1 July 2028. During the transition period, if the board proposes to elect an individual who is an Overboarding INED, it must explain in the shareholder circular why the board believes such an individual can devote sufficient time to the board. The new provision will apply to listing applicants whose A1 submissions will be filed on or after 1 July 2025.

(f) Annual Assessment of Directors’ Time Commitment and Contribution

The Exchange will introduce a new mandatory disclosure requirement with respect to the annual assessment by the nomination committee on each director’s time commitment and contributions to the board. Such an assessment would consider the effectiveness of a director’s ability in the discharge of his or her responsibility taking into account their qualifications, experience, number of directorships held at listed issuers, time commitments in other significant external roles (such as full-time positions outside their directorships, consultant roles or public duties), and other factors related to their personality, character, independence, and experience.

The Exchange has also reminded that the nomination committee’s assessment should be a holistic one which should cover areas including the nature of a director’s involvement on the board and the commitment required from a director to perform his or her responsibilities effectively, and not simply focus on the number of hours spent by a director.

The Exchange has also clarified that while each director should be assessed, it is not expected that disclosure in the corporate governance report will be made on an individual named basis. The Exchange will provide further guidance on this.

(g) Independence of INEDs

New provisions in the Listing Rules will not allow an issuer’s board to include an INED who has served (as INED) for nine years or more. An INED who has been serving nine years or more (“Long Serving INED”) will no longer be considered an independent director. Following this nine-year term, an INED must not serve as an INED for the same issuer for at least three years (increased from the originally proposed period of two years). During this “cooling-off period”, they cannot serve as directors for the issuer or its holding companies or subsidiaries.

Given these proposed amendments, issuers should proactively consider and gradually implement future appointments for INEDs. It is important to note that the Listing Rules require listed issuers to have at least three INEDs, with their number not being less than one-third of total directors. Additionally, at least one INED must possess appropriate professional qualifications or relevant financial management experience.

The new requirements will be implemented in two phases:

• Phase one will apply to an issuer that has a majority of its INEDs being Long Serving INEDs, where such an issuer must not have Long Serving INEDs representing a majority of INEDs at the conclusion of the first general meeting held on or after 1 July 2028.
• Phase two will apply to all issuers, that an issuer’s board must not include any Long Serving INEDs at the conclusion of its first annual general meeting held on or after 1 July 2031.

Going forward, it will be a mandatory disclosure requirement to disclose the length of tenure and current period of appointment for each named director.

(h) Board and Employee Diversity

To enhance diversity among boards and employees, several amendments are proposed:

• New code provision requiring at least one director of a different gender to be on the nomination committee.
• Elevating current requirements for annual reviews of board diversity policies from a code provision to a mandatory disclosure requirement.
• New Listing Rules requiring issuers must have and must disclose diversity policies with respect to its board members and its workforce (including senior management).
•  Revised mandatory disclosure requirements requiring issuers to disclose separately gender ratios for (i) senior management, and (ii) the workforce (excluding senior management). This has revised the previous requirement which allowed the disclosure of gender ratio of the workforce, including senior management, as a group.
• Incorporating existing guidelines regarding temporary deviations from gender diversity requirements into Listing Rules – if a listed issuer is unable to meet the requirement to have directors of different genders on the board at any time (e.g., after the only female director resigns), it must immediately announce this fact, its details and reasons, and appoint appropriate directors within three months.

(i) Risk Management and Internal Controls

Boards must review the effectiveness of risk management and internal control systems at least annually. Several code provisions will be elevated to mandatory disclosure requirements in corporate governance reports, and issuers will be required to provide more detailed disclosures including:

• Main features of risk management and internal control systems (including any significant changes);
• Process used for reviewing these systems;
• Confirmation from the board regarding the appropriateness and effectiveness of these systems along with supporting information (including confirmations from management, relevant board committees responsible for risk management and internal controls, other internal departments, independent auditors, or external providers); and
• Details of any significant control failures or weaknesses identified during reviews that have been reported but not resolved along with any remedial measures taken or proposed.

(j) Dividends

It is currently a code provision that requires issuers to establish a dividend payment policy and disclose it in their annual reports. This requirement will be elevated to a mandatory disclosure requirement; issuers with established dividend policies must disclose:

• The purpose or objectives of that policy;
• Key factors considered by the board when deciding whether to declare, recommend or pay any dividends; and
• Confirmation that all dividend decisions made by the board during the reporting period comply with the issuer’s dividend policy (or explain any deviations).

Implementation Date

The revised provisions of the Corporate Governance Code and related Listing Rules are set to take effect on 1 July 2025. These changes will apply to corporate governance reports and annual reports for financial years commencing on or after that date.

For the new rules regarding the maximum tenure of INEDs and restrictions on multiple directorships, there will be a three-year transition period. Issuers and INEDs are reminded to ensure compliance by the conclusion of the first annual general meeting of an issuer following 1 July 2028.

Additionally, amendments concerning Long Serving INEDs will be implemented in two phases over a six-year transition period. The first phase requires that no issuer can have a board of directors, where the majority of its INEDs are Long Serving INEDs, by the conclusion of its first annual general meeting held on or after 1 July 2028. The second phase mandates that by the first annual general meeting held on or after 1 July 2031, no Long Serving INEDs may serve on the board of directors of any issuer.

[1] The continuous professional development must at least cover each of the following topics; (1) the roles, functions and responsibilities of the board, its committees and its directors, and board effectiveness; (2) issuers’ obligations and directors’ duties under Hong Kong law and the Listing Rules, and key legal and regulatory developments (including Listing Rule updates) relevant to the discharge of such obligations and duties; (3) corporate governance and ESG matters (including developments on 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.