Key Developments to the Corporate Governance Code
The Hong Kong Stock Exchange launched its review of the Corporate Governance Code and related Listing Rules (“LR”) in November 2017 with a view to improve transparency of Independent Non-Executive Directors’ (“INED”) relationship with the issuers and increase accountability of the board and nomination committee in the appointment of INEDs. The proposed amendments to the Corporate Governance Code and relevant LRs recently come into effect on 1 January 2019.
1.INED’s Overboarding and Time Commitment
Prior to the amendments, INEDs could be part of as many boards as they wish, however, a growing concern was that INEDs who were part of too many boards were unable to commit sufficient time to their duties in each respective board. In order to place a check on this practice, the issuer is now under a duty to explain why it considers the proposed INED, who would be holding his or her seventh or more listed company directorship, to be able to devote sufficient time to that board.
2. Factors Affecting the Independence of INEDs
As the name would suggest, it is crucial for an INED to remain independent during their directorship. There are several factors that affect the independence of an INED, including INEDs who (1) were former professional advisors to the issuer, (2) have a material interest in the business’ activities, (3) who have family ties with the issuer and (4) hold cross directorships.
To mitigate the aforementioned factors, the relevant LRs have been amended to introduce a one year cooling off period for appointing an INED who has a material interest in the issuer’s principal business activities and extended the cooling off period for appointing former professional advisors to two years. Moreover, new notes to the relevant LRs have been included to require INEDs to identify if any of their immediate family members have connections with the issuer and to disclose any cross directorships in order to assess the independence of the INED.
To cement the requirement to have a board diversity policy, it is now mandatory, in contrast to the previous “comply or explain” requirement, for the issuer to have a board diversity policy and disclose the same in the corporate governance report. The change has been effected by amending and upgrading the relevant Code Provision (“CP”) to a LR, which also requires the issuer to disclose how a proposed INED may contribute to the board in terms of perspective, skills and experience.
4.Dividend Policy and Nomination Policy
Previously, there was no requirement for issuers to disclose their dividend policy. After the amendments, issuers are now required to disclose their dividend policies in their annual reports.
Similarly, there is also a requirement to disclose the policy for nomination of directors, including the nomination procedure and criteria for selection and recommendations of candidates, in the issuers corporate governance report.
5.Directors’ Attendance at General Meetings
Under the previous CP A.2.7, the chairman should at least hold an annual meeting with the NEDs (including INEDs) without the executive directors present. In some cases, a meeting of INEDs including NEDs may not serve the purpose of meeting without the management. After the amendment, however, the chairman is required to hold annual meetings with the INEDs exclusively.
The relevant amendments to the Corporate Governance Code are set out in Appendix 14 and Appendix 15 of the Main Board and GEM Listing Rules respectively. The Hong Kong Stock Exchange also published ‘Guidance for Boards and Directors’, which offers practical advice to boards and directors regarding their roles and responsibilities. The supplementary publication covers a broad range of topics including directors’ duties, board committees’ role and functions, board diversity policy and company secretary’s role and function.
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