Corporate Governance Code updates

Phillip Baldwin, Director, Asia, Independent Audit Ltd, offers a clear analysis of the key updates to Hong Kong’s Corporate Governance Code and related Listing Rules.

Via its wholly owned subsidiary, The Stock Exchange of Hong Kong Limited (the Exchange), Hong Kong Exchanges and Clearing Limited has introduced significant amendments to its Corporate Governance Code and related Listing Rules, following extensive consultation with stakeholders. This article is a review of those changes, as detailed in the December 2024 Listing Rule updates, along with a critical analysis of the potential implications of the changes.

Board performance reviews

A missed opportunity for comprehensive reform

The Exchange’s decision to upgrade the requirement for board performance reviews from a Recommended Best Practice to a Code Provision, mandating evaluations at least every two years, marks a step forward in governance reform. However, the new rule falls short of what is required to ensure dynamic and effective board oversight.

Board performance reviews are vital for assessing the collective effectiveness of the board, identifying governance gaps and aligning board composition with the issuer’s long-term strategy. While the emphasis on mandatory reviews is a requirement under the new rules – and the Exchange does acknowledge that periodic evaluations can promote transparency and investor confidence – the biennial frequency mandated by the Exchange is insufficient to keep pace with the rapidly changing corporate environment.

Annual reviews: a necessary step

Independent Audit advocates for mandatory annual board performance reviews, as opposed to the biennial requirement set by the Exchange. Board dynamics, corporate strategies and market conditions can evolve significantly within a single year, rendering a two-year evaluation cycle inadequate. Annual reviews would ensure timely identification and resolution of governance issues, fostering a culture of continual improvement and responsiveness.

In our response to the Exchange’s June 2024 consultation, my organisation recommended incorporating a requirement for periodic independent external reviews to complement internal evaluations. External assessments bring an impartial perspective, reducing the risk of reviews being treated as mere compliance exercises. Such reviews are particularly critical for ensuring transparency and accountability, as internal reviews may lack objectivity or rigour. This dual approach – annual internal reviews and less frequent external assessments – would align Hong Kong’s practices with international standards. So perhaps this is an opportunity missed by the Exchange.

Concerns over disclosure requirements

While the Exchange’s emphasis on transparency is to be applauded, the disclosure requirements linked to board performance reviews must strike a balance. Overly detailed public disclosures risk hindering honest self-assessment by boards, while insufficient disclosure undermines accountability. It would perhaps be more beneficial if disclosures focused on overarching themes, outcomes and planned actions, rather than granular details that could deter candid evaluations.

Board effectiveness and directors

In addition to board performance reviews, the Exchange has introduced several other governance reforms pertaining to board effectiveness and the role of directors.

Designation of a lead INED

The Exchange now proposes, as a Recommended Best Practice, that issuers without an independent board chair should appoint a lead independent non-executive director (INED). This measure should be welcomed, as it enhances board independence and facilitates effective shareholder engagement. However, the lead INED’s role should not undermine the collective responsibilities of other INEDs.

Also, it should be noted that listed small and medium-sized enterprises (SMEs) might find it challenging to recruit a suitable candidate to fulfil this role, given the risk-responsibility-reward ratio that goes with such a position. The Exchange might need to show some flexibility in this area and/or to further consult with SMEs to address any legitimate concerns they may have.

Mandatory continuous professional development (CPD)

The Exchange mandates director training, with 24 hours required for first-time directors within 18 months of the date of their appointment. First-time directors with experience serving as a director of an issuer listed on an exchange other than in Hong Kong within three years prior to their appointment must complete no ess than 12 hours of CPD training, also within 18 months of their appointment.

Mandatory CPD for directors should also be welcomed, but the need for flexibility should be emphasised. Tailored training programmes should address the specific needs of directors and their companies. The 24-hour requirement for first-time directors seems appropriate, provided the content is relevant and practical.

Board skills matrix

The Exchange requires issuers to maintain and disclose a board skills matrix in their corporate governance reports.

While we should all be generally supportive of this initiative, one should perhaps be wary of requiring overly detailed disclosures that may reveal sensitive information. The skills matrix should serve as a strategic tool for aligning board composition with the company’s needs, rather than as a superficial checklist.

Cap on INED tenure

The Exchange imposes a nine-year cap on the tenure of long-serving INEDs, with a three-year cooling-off period.

This is another positive measure, as it fosters board renewal and diversity. Moreover, the proposed cooling-off period of three years is deemed more appropriate than the initially suggested two years, ensuring adequate detachment from prior roles.

Cap on overboarding

The Exchange limits INEDs to six listed issuer directorships.

While most listed companies and shareholders will no doubt support this measure, which prevents overcommitment and ensures directors can dedicate adequate time and attention to each board, perhaps a detailed analysis of the problem could have given greater weight to this change, which doesn’t seem to be a major issue at present.

Gender diversity on nomination committees

The Exchange requires at least one director of a different gender on the nomination committee.

There are recognised, proven benefits to gender diversity in enhancing decision-making and promoting balanced perspectives, so this is a welcome amendment.

Enhanced risk management disclosures

The Exchange now mandates annual reviews of risk management and internal control systems, with enhanced disclosure requirements.

Emphasising that rigorous risk management is critical to board effectiveness is to be welcomed.

Annual evaluations provide a structured framework for boards to assess and improve risk oversight.

Implementation timeline

The Exchange has set an effective date of 1 July 2025, with transitional periods for specific provisions.

While the timeline is reasonable, it is tight – and the Exchange should urge issuers to begin preparations promptly to ensure smooth compliance.

Conclusion

The Exchange’s revised Corporate Governance Code and Listing Rules represents a meaningful effort to elevate corporate governance standards in Hong Kong. While I believe the changes should be generally supported, perhaps more ambitious measures in areas such as board performance reviews and external assessments should be advocated. By adopting a robust approach to governance reform, Hong Kong can strengthen its position as a leading global financial hub and regain the trust of the global community, whilst ensuring that issuers meet the evolving expectations of investors and other stakeholders.

Phillip Baldwin

Director, Asia, Independent Audit Ltd

With over 30 years in Asia and more than two decades in governance, Phillip is based in Hong Kong. As a former Chief Executive of a Hong Kong professional body, he also founded an international governance organisation representing over 80,000 professionals, addressed the WTO on governance and served on the OECD Asia Roundtable on Corporate Governance. To contact Phillip please email: phillip.baldwin@independentaudit.com.

Independent Audit Ltd helps clients enhance governance effectiveness. Services include board and committee reviews, internal and external audits, and risk governance. With offices in London, Brussels and Dublin, and with representation in Asia, the firm has served over 350 clients across Asia, MENA and Europe, including more than half of the FTSE 100 companies, as well as private companies, regulators, NFP, and sports and public-sector bodies.