10 November, 2017
The Stock Exchange has issued a consultation paper which proposes amendments to the corporate governance regime for listed issuers and their directors (CG consultation paper). A majority of the proposals are aimed at independent non-executive directors (INEDs), focusing on enhancements to the nomination and election process for INEDs and the independence criteria they must meet, together with improved transparency of INEDs’ relationships with issuers. Board diversity is also targeted by the proposals. Another focus area is on greater transparency on a company’s dividend policy.
These proposals follow closely on the heels of the publication of the Stock Exchange’s most recent report analysing corporate governance disclosures by listed issuers. In the report, the Stock Exchange highlighted certain areas of corporate governance lagging behind in terms of compliance and warranting particular mention. These included nomination committees, INEDs and board diversity.
In the CG consultation paper, the Stock Exchange also noted corporate governance failings from recent investigations and disciplinary actions. The Stock Exchange is keen to avoid a “box ticking” mentality being applied to corporate governance and is seeking to ensure that Hong Kong’s regime is in line with the standards applied in other international jurisdictions. In this bulletin we summarise the key proposals in the CG consultation paper.
On the same day, the Stock Exchange also issued a consultation paper proposing changes to documentary requirements relating to listed issuers and other minor rule changes. These proposals focus on simplified administrative procedures, public disclosure of certain information currently only required to be filed with the Stock Exchange, codification of certain existing practices and other minor rule changes and housekeeping amendments.
Key proposals in the CG consultation paper
Additional disclosure on INEDs – The Stock Exchange is proposing to enhance the expected disclosure in circulars to shareholders in respect of INED appointments. Currently, the Corporate Governance Code provides as a Code Provision (CP) that certain information be included in the circular or, where it isn’t, non-compliance should be explained. The current CP disclosure requires the reasons for electing the INED and views on independence to be disclosed. The proposal is to extend the
CP to require the circular 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 holds seven or more listed company directorships, why the board believed the INED will be able to devote sufficient time to this board.
The Stock Exchange is also proposing a new Recommended Best Practice which recommends that an INED’s cross-directorships are disclosed in the listed issuer’s corporate governance report.
Further, the CG consultation paper also proposes to require the nomination policy to be disclosed as part of the mandatory disclosure requirements in the corporate governance report.
These additional disclosures are aimed at tackling current market concerns about “overboarding” of INEDs where they hold board positions in multiple listed companies. This practice may call into question whether they can devote sufficient time to each listed company and could undermine their independence. The additional disclosure also puts greater public focus on board diversity and the selection factors for INED candidates and nomination of directors generally to enhance transparency.
Tightening of rules on INED independence – The Stock Exchange is proposing to tighten the requirements for assessing the independence of INEDs. For former professional advisers to listed issuers, it is proposed to extend the “cooling-off” period during which such person will not be considered independent from one year to three years. Similarly, the Exchange proposes to introduce a one year cooling-off period for persons who have had a material interest in any principal activity of the listed issuer.
There will also be a consequential amendment to the cooling off period for a former partner of the listed issuer’s audit firm from one year to three years to qualify for appointment to the audit committee.
Additionally, the Stock Exchange is also proposing that the position of an INED’s immediate family members (as defined in the Listing Rules) should be taken into account in assessing a director’s independence.
Appointment of INEDs two months prior to listing application – Although not specifically being consulted on, the Stock Exchange has indicated in the CG consultation paper that it will be providing guidance to encourage INEDs to be appointed at least two months prior to a new listing applicant submitting its listing application. This is to enable INEDs to have sufficient time prior to the listing to gain a proper understanding of the listing applicant’s business and their responsibilities as a director.
Attendance at directors’ meetings enhanced – Currently CP A.2.7 requires at least annual meetings between the Chairman and the non-executive directors (NEDs) (including INEDs). The CG consultation paper proposes amending this requirement to require INEDs only to meet with the Chairman annually. This is to ensure that there is a meeting forum solely for INEDs to meet with the Chairman. This is to address the concern that NEDs are often family members connected to management who could unduly influence the meeting.
The CG consultation paper also proposes amending the existing CP which expects NED attendance at general meetings to clarify that non-attendance by any directors will not be seen as a deviation from compliance.
Requirements on diversity policy elevated from CP to Listing Rule – The Stock Exchange is proposing to elevate to a Listing Rule
the existing CP requiring listed companies to have a diversity policy and to disclose it (or a summary) in their corporate governance report. A consequential change is also proposed to the mandatory disclosure requirements in the corporate governance report. The Stock Exchange found in its report analysing corporate governance disclosures by listed issuers that, whilst almost all issuers said they complied with the existing CP in respect of the diversity policy, 10.2% of the reports reviewed did not contain the policies. With greater emphasis being put on board diversity internationally, the proposal to elevate this to a Listing Rule is aimed at promoting performance and transparency in this area.
Disclosure of dividend policy in annual report – The CG consultation paper proposes adding a new CP that requires 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. This change is designed to provide investors with information regarding expected distributions which will be an important factor in their investment decisions.
Implied consent for electronic delivery of corporate communications – As a separate topic, the Stock Exchange is taking the opportunity to consult on whether there is market support to allow implied consent for electronic delivery of corporate communications to shareholders. This is currently not possible for Hong Kong-incorporated companies and the Stock Exchange has indicated that no change would be made to the Listing Rules to adopt an implied consent approach until the law in Hong Kong is changed to allow this for Hong Kong-incorporated companies.
Next steps
The Stock Exchange has already had preliminary discussions with interested groups in formulating its proposals in the CG consultation paper. Both the GC consultation paper and the other consultation paper are open for public comment until 8 December 2017.
For further information, please contact:
Matt Emsley, Partner, Herbert Smith Freehills
matt.emsley@hsf.com
