Boardroom Best Practices

Is your board prepared for the HKEx governance changes?

The Stock Exchange of Hong Kong Limited (HKEx) ” recognises that is good for the long-term success and sustainability of its business “. To this end, in 2017 it consulted on a proposed change to the Corporate Governance Code.

In July 2018, it published two documents “Codifying its proposals: Consultation Conclusions” on the Review of the Corporate Governance Code and Related Listing Rules (‘the Conclusions’) and Guidance for Boards and Directors (‘the Guidance’).

The measures outlined in the Conclusions come into effect on 1 January 2019; Those in the Guidance have come into effect on 1 July 2019. They are summarized below, to help you and your organization to be ready, and to be compliant with, the new requirements.

The Conclusions

The HKEx’s initial consultation paper solicited responses to the proposed changes to the Corporate Governance Code and Corporate Governance Report of the listing rules. It also suggests amendments to the listing rules to improve corporate governance, especially around independent non-executive directors (INEDs), diversity and transparency.

The Provisions (CPs), Listing Rules (LRs), Mandatory Disclosure Requirements (MDRs) and Recommended Best Practices (LRs) RBPs), including:

  • Overboarding and time commitments: To ensure INEDs want to have sufficient time to discharge their duties.
  • Diversity policies: Requiring issuers to have and disclose in their corporate governance report, a diversity policy for board appointments.
  • INED elections: Requiring boards to disclose more information about INED nominees.
  • Cooling-off periods: For former professional advisers, audit partners and in respect of material interests in business activities.
  • Cross directorships or links with other directors: Confirming the independence of a director.
  • Family ties: Confirming the independence of a director.
  • Nomination policy: Requiring disclosure of the issuer’s nomination policy in its Corporate Governance Report.
  • Meeting attendance: Encouraging directors to attend general meetings
  • Annual meetings with INEDs: Requiring INEDs to meet with the Chairman, without other directors being present, at least annually.
  • Dividend policy: Requiring issuers to have and disclose in their annual report, a policy on dividend payments.
  • Implied consent: Confirming issuers can not assume shareholders’ consent for electronic distribution of corporate communications.

The Corporate Governance Code and Corporate Governance Report contains two types of recommendations: code provisions and recommended best practices .

Issuers are expected to comply with code provisions, but may deviate from them – subject to ‘comply or explain’ requirements. That is, they must state in their interim reports, summary interim reports, corporate governance reports and summary financial reports.

Recommended best practices, however, are for guidance purposes only and are not subject to mandatory disclosure requirements. Issuers are encouraged, but not required, to state their compliance and explain any deviations.

The Guidance

The Guidance on their roles is more effective by providing practical advice on their roles and responsibilities. It also details the company’s secretary’s role and function; it is essential for organization to understand this role correctly, especially in cases where it has been outsourced to an external provider. Finally, it recommends successful listing applicants appoint INEDs at least two months prior to listing.

The Guidance is not formally part of the listing rules, nor does it vary any rules, or absolve issuers and directors of their responsibility to exercise their own judgment in all matters.

What must you do?

If you are a director of a listed company, or you are likely to become one, you should familiarize yourself with the guidance.

Further, listed companies may need to update their compliance with the new requirements, including:

  • Improving independence criteria when assessing INED candidates (eg by extending cooling-off periods, ensuring independence from the listed company or connected persons, confirming at INED holding six or more directorships wants to be able to devote enough time to the company; contribute to the board’s diversity).
  • Creating and disclosing a diversity policy to govern board appointments (if none exists).
  • Ensuring the Chairman meets at least once a year with the company’s INEDs – without any other directors being present.
  • Ensuring no former partners of the firm’s auditing firm is a member of the audit committee for two years after leaving the firm, or if they have a financial interest in the listed company.
  • Disclosing the dividend policy in the annual report.
  • Including a summary of the nomination committee’s work in the corporate governance report.

If you are interested in INED of a listed company, you should note the enhanced independence criteria. If you are interested in becoming a listed company, you should be at least two months before listing.

Taken together, the Conclusions and the Guidance wants help listed companies, and their directors, perform better. Adopting a secure, modern and comprehensive software platform can help to improve transparency, diversity and independence, so organizations and individuals can embed the new requirements into their culture and reap the rewards.

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