Exchange’s Corporate Governance Reforms

Background

The Exchange continuously seeks to uphold high quality corporate governance standards for listed issuers. The current round of enhancements, following the consultation, will be effective on 1 July 2025, and will apply to the issuers’ corporate governance report (“CG Report”) and annual reports for financial years commencing on or after that date, with transitional arrangements for the caps on “overboarding” and the tenure of independent non-executive director (“INED”). The new amendments align with existing practices in other jurisdictions such as the United Kingdom, Australia and Singapore.  

The enhancements focus on five key areas, namely: (i) board effectiveness; (ii) board independence; (iii) board and workforce diversity; (iv) risk management and internal controls; and (v) capital management.

Below are the main requirements for each key area:

Board Effectiveness

• Designation of Lead INED

• As a new Recommended Best Practice (“RBP”)[1], listed issuers whose board chair is not an INED will be recommended to designate one INED as a lead INED, whose primary responsibility is to facilitate and strengthen communication among INEDs and between INEDs, the board, and shareholders.
• As a new Code Provision (“CP”)[2], listed issuers will be required to provide enhanced disclosure in the CG Report regarding information on engagement conducted with shareholders by the board (in particular, the INEDs) during the reporting period. Furthermore, the disclosure of details of such shareholder engagement conducted under this new CP will be introduced as a new Mandatory Disclosure Requirement (“MDR”)[3] of the CG Report.

• Overboarding INED and directors’ time commitment – The Listing Rules will be amended to impose a hard cap of six directorships[4] on the number of Hong Kong listed issuer directorships that an INED of a listed issuer may hold. There will be a three-year transition period, with strict compliance required by the first annual general meeting (“AGM”) of such listed issuer held on or after 1 July 2028. Furthermore, from 1 July 2025 onwards, IPO applicants will not be permitted to have overboarding INED(s) on the board upon listing.

• Annual assessment of directors’ time commitment and contribution – The new MDR requires disclosures of the nomination committee’s annual assessment of each director’s time commitment and contribution to the board, considering, amongst other factors, their directorships for listed issuers and significant external commitments.

• Mandatory director training

• To ensure incumbent directors are familiar with their duties under the Listing Rules, the Exchange will introduce a new Listing Rule requiring existing directors of issuers listed on the Exchange[5] to participate in mandatory continuous professional development. The Exchange has not introduced a minimum training hours requirement for existing directors, but has set out the topics which the annual training must at least cover. However, first-time directors will be required to complete a minimum of 24 training hours within 18 months following their appointment, and if they have previous listed company directorship experience within 3 years on exchanges other than Hong Kong, the minimum requirement may be reduced to 12 hours.
• The Exchange will also impose an obligation on enhanced disclosure of director training in the CG Report as a revised MDR. Listed issuers must disclose the different modes of training undertaken by their directors. 

• Board performance review – The requirement relating to regular evaluations of board performance, which was a RBP, will be upgraded to a CP. Listed issuers will be required to carry out a board performance review at least every two years and disclose the results in the CG Report.

• Disclosure of board skills matrix – As a new CP, listed issuers will be required to disclose a board skills matrix showcasing information on the existing skills mix of their board of directors, as well as how these skills, experience and diversity align with the listed issuer’s purpose, values, strategy and desired culture, and plans for acquiring further skills.

Board Independence

• Independence of INEDs

• New Listing Rules will be introduced regarding the independence of INEDs with a two-phase implementation over a transition period of six years for long serving INEDs with over a nine-year tenure. During the phase one period and compliance by the first AGM held on or after 1 July 2028, listed issuers must not have long serving INEDs representing a majority of the INEDs on the board. During the phase two period and compliance by the first AGM held on or after 1 July 2031, listed issuers must not have any long serving INED on the board. Furthermore, the Exchange will introduce a three-year cooling-off period in the sense that the long-serving INEDs will be able to serve again after three years. As a revised MDR, enhanced disclosure on the length of tenure of each director will be required in the CG Report.

Board and Workforce Diversity

• Board and workforce diversity

• A new Listing Rule will be introduced to require listed issuers to have and disclose a diversity policy for their workforce (including senior management).
• Under new and revised MDRs, listed issuers will be required to disclose their annual review of the implementation of the board diversity policy and the gender ratio of senior management and the workforce (excluding senior management), respectively.
• As a new CP, listed issuers will be required to have at least one director of a different gender on the nomination committee.

Risk Management and Internal Controls

• Risk management and internal controls – The requirement on enhanced disclosures in the CG Report on the review conducted (at least annually) by the board of the effectiveness of the listed issuer’s and its subsidiaries’ risk management and internal control systems (“RMIC Systems”) will be upgraded to a MDR. The disclosure should include supporting information for the board’s conclusion that the RMIC Systems are effective and adequate and details of the review findings.

Capital Management

• Capital management – As a new MDR, listed issuers will be required to disclose specific information regarding their dividend policy and the dividend decisions made by the board during the reporting period in the CG Report. Where listed issuers do not have a dividend policy, disclosure of such fact and an explanation thereof will be required.

Looking Forward – What does this mean for listed companies?

The above changes signify a comprehensive review and enhancement of key governance areas, providing clearer regulatory expectations. The Exchange’s commitment to refining corporate governance practices for Hong Kong listed issuers underscores its dedication to fostering a transparent and attractive international capital market for global investors. With these amendments, listed issuers on the Exchange are poised to navigate a more robust regulatory environment. Listed issuers are encouraged to stay vigilant regarding any further changes to the regulatory framework in the capital market, implement appropriate mechanism to comply with the changes, and seek independent professional advice when necessary.

The Exchange will publish updated guidance in the first half of 2025 to assist the listed issuers’ compliance with the amended rules. For detailed information on the changes, the full conclusion on the review of CG code and related Listing Rules can be found here.

[1]  The RBPs are of voluntary nature and are intended for guidance to the listed issuers only.

[2]  For all CPs, compliance is required on a “comply or explain” basis.

[3]  All the information set out as MDR must be contained in the CG Report of the listed issuers. Any failure to do so will be regarded as a breach of the Listing Rules.

[4]  The cap on overboarding does not apply to secondary listed overseas issuers.

[5]  The mandatory director training requirements do not apply to secondary listed overseas issuers.