The Stock Exchange of Hong Kong Ltd. (HKEX) has announced significant amendments to its Rules Governing the Listing of Securities (Listing Rules). These changes, finalized after a rigorous consultation process in June 2024, aim to enhance corporate governance within listed companies. Effective from July 1, 2025, with varied transitional periods for different measures, these new regulations reflect a commitment to improving board effectiveness, director independence, diversity, risk management, and capital management.
Lead Independent Non-Executive Director (INED)
One of the pivotal amendments introduced by HKEX is the requirement for companies to appoint a Lead Independent Non-Executive Director (INED) if the board chairman is not an INED. This role is classified as a Recommended Best Practice (RBP) and is designed to facilitate communication among INEDs, between INEDs and the rest of the board, and act as a communication channel with shareholders. By ensuring that independent voices are consistently heard in board discussions, this measure aims to bolster the overall governance structure of listed companies.
The Lead INED will have several key responsibilities, including leading meetings of the INEDs, providing feedback to the board chairman and CEO, and ensuring that independent directors contribute meaningfully to the company’s governance. This role is critical in maintaining a balance of power and ensuring that decisions made by the board are well-rounded and take into account diverse perspectives. By creating a structured channel for INEDs to share their insights, HKEX aims to enhance the effectiveness and independence of the board.
Shareholder Engagement
To promote transparency and accountability, the new amendments require companies to disclose details of their board’s engagement with shareholders during the reporting period. This includes information on the nature, number, and frequency of engagements, the groups of involved shareholders, and the company representatives involved in these discussions. Companies must also outline their approach to following up on the outcomes of these engagements. Classified as both a Code Provision (CP) and a Mandatory Disclosure Requirement (MDR), this measure encourages a proactive approach to shareholder communication.
By providing detailed disclosures about board engagements with shareholders, companies can demonstrate their commitment to addressing shareholder concerns and enhancing corporate governance. This level of transparency is intended to build trust between companies and their shareholders, ensuring that the concerns of stakeholders are effectively addressed and that the company’s governance practices are in line with shareholder expectations. Moreover, this requirement helps in assessing the board’s responsiveness and accountability.
Mandatory Director Training
Recognizing the importance of continuous professional development, HKEX has introduced mandatory CPD training for all directors, with no specified minimum-hours requirement. Directors must partake in annual training covering essential topics such as board roles and responsibilities, corporate governance, regulatory updates, risk management, and industry-specific developments. This measure, classified as a rule, is aimed at ensuring that directors are well-equipped to fulfill their duties effectively.
For first-time directors, there are additional requirements: they must complete 24 hours of CPD within 18 months of their appointment, though this requirement is reduced to 12 hours if they have served as a director on non-HKEX listed companies within the past three years. Companies are required to disclose the CPD hours attended by each director, the modes of CPD, topics covered, and details of the providers. This classification as an MDR underscores the emphasis on transparency and accountability in corporate governance.
Board Performance Review
To ensure continuous improvement in board effectiveness, companies are now required to conduct and disclose details of a board performance review at least every two years. This measure is classified as a CP, providing a structured approach to evaluating the board’s performance and identifying areas for improvement. The board performance review will assess various aspects of the board’s functioning, including its composition, processes, and decision-making capabilities.
By regularly reviewing and disclosing the board’s performance, companies can demonstrate their commitment to maintaining high standards of corporate governance. This measure not only ensures accountability but also provides an opportunity for boards to reflect on their practices and make necessary adjustments to enhance their effectiveness. The transparency afforded by this requirement is crucial in building trust with stakeholders and fostering a culture of continuous improvement within the organization.
Board Skills Matrix
Another significant amendment is the requirement for companies to maintain and disclose a board skills matrix. This matrix should detail the existing board skills mix, illustrating how these skills align with the company’s strategy, culture, and values, and plans for acquiring further skills. This requirement, classified as a CP, aims to ensure that the board has the necessary skills and expertise to effectively govern the company.
The board skills matrix is an essential tool for identifying any gaps in the board’s skills and developing plans to address these gaps. By disclosing the skills matrix, companies can provide transparency about the board’s capabilities and their alignment with the company’s strategic objectives. This measure underscores the importance of having a diverse and skilled board that can navigate the complexities of the business environment and drive long-term success.
INED Overboarding
To prevent directors from being overextended, HKEX has introduced a rule limiting the number of listed-company directorships an INED can hold simultaneously to six. This rule will be phased in, becoming applicable from the first Annual General Meeting (AGM) on or after July 1, 2028, for existing companies, and from July 1, 2025, for IPO applicants. By limiting the number of directorships, HKEX aims to ensure that INEDs can dedicate sufficient time and attention to their roles, enhancing their effectiveness and contribution to the board.
This measure is designed to prevent potential conflicts of interest and ensure that directors can fulfill their responsibilities effectively. By setting a cap on the number of directorships, HKEX seeks to enhance the quality of board oversight and governance. This rule also aligns with global best practices, ensuring that directors are not spread too thin and can provide meaningful input and guidance to the companies they serve.
Directors’ Time Commitment and Contribution
The nomination committee is now required to annually assess and disclose each director’s time commitment and contribution, considering other significant external commitments. This measure, classified as an MDR, aims to ensure that directors are dedicating adequate time and effort to their roles. By providing detailed disclosures about directors’ time commitments and contributions, companies can demonstrate their commitment to maintaining high standards of corporate governance.
This requirement helps shareholders assess the effectiveness of the board and its members, ensuring that directors are not overcommitted and can contribute effectively to the company’s governance. The detailed disclosures also promote transparency and accountability, allowing stakeholders to have a clear understanding of each director’s level of engagement and commitment. This measure is a crucial step in ensuring that the board is composed of directors who are fully dedicated to their roles and responsibilities.
Long-Serving INEDs
The Stock Exchange of Hong Kong Ltd. (HKEX) has announced major amendments to its Rules Governing the Listing of Securities, known as the Listing Rules. These updates, which were finalized following a thorough consultation process in June 2024, are designed to improve corporate governance practices among companies listed on the exchange.
Starting July 1, 2025, the new regulations will take effect, although various transitional periods will apply to different measures. The goal of these amendments is to enhance board effectiveness, ensure the independence of directors, promote diversity, and strengthen both risk and capital management.
In particular, the changes aim to bolster the governance framework of listed companies by introducing stricter requirements for board composition, accountability, and transparency. The rules emphasize the need for independent directors to have no conflicts of interest, ensuring they can genuinely support shareholders’ interests. Additionally, there is a strong focus on promoting greater diversity on boards, emphasizing the inclusion of individuals from different backgrounds, genders, and experiences.
Furthermore, the new regulations put a spotlight on risk management practices, requiring companies to have more robust systems to identify, assess, and mitigate risks. This includes comprehensive oversight of financial practices to ensure better capital management and overall financial health.
By implementing these changes, the HKEX demonstrates its commitment to maintaining a fair, transparent, and efficient market, ultimately fostering investor confidence and ensuring sustainable business practices among listed companies.
