The Stock Exchange has issued its consultation conclusions on proposed amendments to the corporate governance regime for listed issuers and their directors. Market feedback was supportive and the Stock Exchange will proceed with its proposed rule changes, with some modifications and clarifications, which will come into effect from 1 January 2019.

The changes enhance the nomination and election process for independent non-executive directors (INEDs) and the independence criteria they must meet, and improve the transparency of INEDs’ relationships with issuers. Greater focus is being placed on board diversity by upgrading the existing Corporate Governance Code requirement for a board diversity policy to a mandatory Listing Rule requirement. There will also be greater transparency on a company’s dividend policy through a Code Provision requiring the policy to be disclosed in the company’s annual report.

Simultaneously, the Stock Exchange published its Guidance for Boards and Directors, which contains practical advice designed to help directors perform their roles and responsibilities more effectively. This guidance does not form part of the Listing Rules but provides useful guidance for directors on the applicable rules.

Key changes to the Listing Rules

INED independence – The requirements for assessing the independence of INEDs are to be tightened from 1 January 2019. For former professional advisers to listed issuers, the “cooling-off” period during which such person will not be considered independent will be extended from one year to two years (LR 3.13(3)). Following market feedback, this is a shortened period compared to the three year cooling off period proposed in the consultation paper. A one year cooling-off period will also apply for persons who have had a material interest in any principal activity of the listed issuer (LR 3.13(4)). A consequential amendment will also be made to the cooling off period for a former partner of the listed issuer’s audit firm from one year to two years to qualify for appointment to the audit committee (C.3.2).

Additionally, a new note will be added to Rule 3.13 requiring that the position of an INED’s immediate family members (as defined in the Listing Rules) will need to be taken into account in assessing a director’s independence.

Additional disclosure on INEDs – Aimed at tackling current market concerns about “overboarding” of INEDs, Code Provision A.5.5 will be amended to enhance the expected disclosure in circulars to shareholders in respect of INED appointments which currently requires the reasons for electing an INED and views on independence to be disclosed. The amendments extend the circular disclosure to also include the following information:

the process used to identify the INED;

the perspectives, skills and experience the INED can bring to the board;

  • how the INED contributes to board diversity; and
  • if the proposed INED will hold seven or more listed company directorships, why the board believes the INED will be able to devote sufficient time to this board.

A new Recommended Best Practice (A.3.3) will also be added which recommends that a board should state its reasons for determining that a director is independent, where cross-directorships exist with other directors through involvement in other companies or bodies.

Board diversity policy – The existing Code Provision (A.5.6) requiring listed companies to have a diversity policy and to disclose it (or a summary) in their corporate governance report will be upgraded to a new Listing Rule (Rule 13.92). A consequential change will also be made to the mandatory disclosure requirements in the corporate governance report (MDR L(d)(ii)) to reflect the revised diversity policy requirements.

MDR L(d)(ii) will also be amended to require the nomination policy to be disclosed as part of the mandatory disclosure requirements in the corporate governance report.

Attendance at directors’ meetings – The existing Code Provision (A.2.7) will be amended to require INEDs only to meet with the Chairman annually. The existing requirement is for annual meetings between the Chairman and the non-executive directors (including INEDs).

This change has been implemented to address the concern that non-executive directors are often family members connected to management who could unduly influence the meeting.

Additionally, Code Provision A.6.7 will be amended to clarify that non-executive directors (including INEDs) should generally attend general meetings to gain and develop and balanced understanding of the views of shareholders. The minor alteration made to the drafting of the Code Provision clarifies the existing inconsistencies in the market’s interpretation.

Dividend policy – A new Code Provision (E.1.5) will be added requiring listed issuers to have a dividend policy and to disclose this in their annual reports. Companies are currently required to disclose their dividend policies at the time of listing but not subsequently.

Guidance for Boards and Directors

The Stock Exchange guidance is aimed at providing practical advice to boards and directors on their roles and responsibilities. It covers:

  • Directors’ duties and board effectiveness – highlighting the key Listing Rules and Corporate Governance Code provisions relevant to a director’s role, with a section focused on INED’s time commitment. The guidance also recommends that, for new listing applicants, INEDs are appointed at least two months prior to listing to enable the INEDs to have sufficient time to gain an understanding of the applicant’s affairs;
  • Board committees’ role and functions – focusing on the core committees (nomination, audit and remuneration) and providing guidance on considerations in formulating a nomination policy;
  • Board diversity and policy – highlighting gender diversity and providing encouraged guidance for formulating a diversity policy;
  • Risk management and internal control – providing guidance on the board and management’s roles, risk management policies and procedures and risk identification;
  • Company secretary – setting out an oversight of the company secretary’s role and function and guidance on the use of external service providers; and
  • Corporate governance of WVR issuers – highlighting the additional regulatory requirements for companies with weighted voting rights.


The Stock Exchange has largely adopted the proposals in its consultation paper with only minor amendments following strong market support for the proposals. These developments bring Hong Kong in line with standards in other international jurisdictions and help address market concerns, particularly in respect of the role of INEDs and the practice of INEDs sitting on multiple boards.

For more see Conventus Law.