The Stock Exchange’s latest revisions to the Corporate Governance Code and associated listing rules seek to ensure that company secretaries play an effective role in ensuring good corporate governance standards among Hong Kong’s listed companies. This second part of our review of the Exchange’s code and rule revisions, focuses on the changes affecting corporate governance, directors and board committees, and assesses their likely impact on the work of company secretaries in Hong Kong.

Company secretaries in Hong Kong have welcomed the Stock Exchange’s latest changes to Hong Kong’s Corporate Governance Code and associated listing rules. The changes directly target the effectiveness of the company secretarial role in supporting good governance practices among Hong Kong’s listed companies. The changes confirm:

  • a clear definition of the company secretary’s role in board support
  • that the selection, appointment, or dismissal of the company secretary should be the subject of a board decision and that the board’s decision to appoint or dismiss the company secretary should be made at a physical board meeting rather than by written resolution
  • that the company secretary should report to the chairman and/ or chief executive, and
  • minimum standards on company secretaries’ qualifications, experience and training.

These code and rule changes were covered in the first part of this article (see ‘Governance needs you’, CSj, January 2012, pages 10–15). This month we take a look at some of the other changes brought in by the Exchange, in particular those relating to corporate governance, directors and board committees, and examine their likely impact on the work of company secretaries in Hong Kong.

Do it yourself corporate governance

The original review of Hong Kong’s Corporate Governance Code and associated listing rules was completed by the Exchange in December 2010. The Exchange’s proposed code and rule revisions were subject to a public consultation which ended on 18 March 2011. The conclusions to the consultation, published in October 2011 (and available on the Exchange’s website: www.hkex., emphasise the need for listed companies to forge their own approaches to corporate governance issues. The conclusions point out that the Exchange’s latest changes are mostly additional or revised code provisions (CPs) of the Corporate Governance Code.

The Exchange points out that CPs are not listing rules. Listing rule requirements are mandatory for all listed companies and breaches may lead to sanctions. CPs, by contrast, give listed companies the flexibility to either adopt the provision, or if they do not adopt it, to explain the reasons for their decision in the Corporate Governance Report. This is known as the ‘comply or explain’ principle. If the issuer does not comply with a CP, it is not a breach of the listing rules and there is no sanction.

The Exchange indicated in its consultation conclusions that some respondents to the consultation did not seem to fully understand the ‘comply or explain’ principle. Some appeared to think of CPs and recommended best practices (RBPs) as mandatory requirements. ‘We do not expect issuers to treat CPs and RBPs as listing rules,’ the conclusions state. ‘The main rationale for adopting CPs and RBPs instead of listing rules is that it is not possible to define good corporate governance in all circumstances. The best approach for one issuer may not be suitable for another. We believe every issuer should carefully consider the corporate governance practice that best suits it and explain this choice in its Corporate Governance Report.’

The principles-based approach certainly provides flexibility for listed companies in Hong Kong, but it also means that listed companies cannot simply rely on the rulebook to tell them how to achieve good governance. They need to consider which approach is most suited to their own circumstances and this is likely to increase their reliance on effective corporate governance advice at the board level.

Directors are responsible for good governance

While company secretaries have a critical role in facilitating good governance via their board support role, the ultimate responsibility for good governance rests with the board. ‘Prime responsibility for good corporate governance of a company rests with directors,’ said Mark Dickens, HKEx’s Head of Listing, at the launch of the Exchange’s latest amendments to the Corporate Governance Code and associated listing rules. Many of the changes are aimed at ensuring that directors are fully aware of their duties under the law and the listing rules, take an active interest in the issuer’s affairs and obtain a general understanding of its business.

Emphasising directors’ duties

The Exchange has expanded listing rule 3.08 to emphasise directors’ duties. The rule now requires directors to take an active interest in the issuer’s affairs, obtain a general understanding of its business and follow up anything untoward that comes to their attention. A substantial majority of respondents supported these proposals. Some respondents had concerns about the delegation of directors’ duties. The Exchange agreed with these concerns and revised the listing rule to clarify that directors may delegate their functions but that doing so does not absolve them from the required levels of skill, care and diligence. The new rule also cautions that directors failing to discharge their duties and responsibilities may be disciplined by the Exchange and may attract civil and/ or criminal liabilities.

 Ensuring directors spend sufficient time on the listed company’s affairs

The Exchange has introduced a new principle in the Corporate Governance Code stating that the board should regularly review directors’ performance of their responsibilities to the issuer and whether they are spending sufficient time performing them. It has also added a CP to the Code stating that directors should inform the issuer of any change to their significant commitments in a timely manner.

These changes fall short of the Exchange’s original proposals – it originally wanted CPs stating that:

  • directors should limit their other professional commitments and should acknowledge to the issuer that they will have sufficient time to meet their obligations to the issuer
  • non-executive directors (NEDs) should confirm annually to the nomination committee they have spent sufficient time on the issuer’s business, and
  • the wording of letters of appointment for NEDs should set out the time commitment expected of them.

In addition the nomination committee’s duties were to be expanded to regularly review the time required from directors in the performance of their responsibilities, whether they are spending sufficient time performing them and to review NEDs’ annual confirmations that they have spent sufficient time on the issuer’s business. A majority of respondents, mostly listed companies, did not support these proposals. Respondents who opposed these proposals said they were overprescriptive. Many believed it would be difficult to judge how much time directors needed to perform their responsibilities. It would also be difficult to review whether they were spending sufficient time performing them. Accordingly, the Exchange has scaled back the measures aimed at ensuring directors spend sufficient time on listed company affairs.

Highlighting the importance of directors’ training

The Exchange has revised and upgraded the existing RBP on directors’ training to a CP. It has also introduced a note to the CP stating that directors should provide records of their training to issuers. Listed companies must disclose in their Corporate Governance Reports how directors have complied with this CP on training. The Exchange’s original proposal that a director should complete eight hours of training every financial year did not receive majority support of respondents to the consultation. While a majority of respondents were in favour of directors attending training, many argued that the optimal length of training would vary by director, type of company and the company’s operations in any given year. The Exchange therefore opted not to specify the amount of training a director should complete.

Ensuring independent perspectives on the board

The Exchange has introduced a listing rule that at least one-third of an issuer’s board should be independent non-executive directors (INEDs). Listed companies must comply with the rule by 31 December 2012. The Exchange also introduced a listing rule to allow an issuer a threemonth period to appoint a sufficient number of INEDs to comply with the onethird rule in the event that changes to board personnel result in non-compliance.

Despite the speculation in the media that this proposal would be deeply unpopular with listed companies due to the additional compliance burden it would represent, a substantial majority of respondents supported this proposal. At the time the proposal was made, approximately 20% of listed companies did not have INEDs constituting one-third of their boards. However, approximately 80% of these issuers only need to appoint one additional INED to comply with the requirement. Issuers could also, of course, reduce the number of executive directors on their board to meet the requirement. The Exchange believes the new listing rule will not impose an undue burden on issuers and is consistent with requirements in other major jurisdictions, including mainland China.

Respondents to the consultation did express concerns about INEDs’ independence, however, and the Exchange has brought in some changes aimed at safeguarding INEDs’ independence. For example, it has upgraded to a CP the existing RBP recommending shareholders vote on a separate resolution to retain an INED who has served on the board for more than nine years. Also, an issuer should include the reasons why the board considers the INED to be independent in the circular nominating him/ her for election. About half of respondents to the consultation supported this proposal. However, while nearly all market practitioners and a majority of professional bodies supported the proposal, over half (58%) of listed companies opposed the proposal, arguing that the issue was best left as an RBP and that long service did not necessarily imply lack of independence. The Exchange nevertheless decided to adopt this proposal.

The Exchange has, however, dropped another consultation proposal aimed at improving the effectiveness of INEDs on boards – namely to limit the number of INED positions an individual may hold. This proposal was widely opposed by respondents to the consultation.

Enhancing the effectiveness of board committees

The Exchange has introduced new code and listing rule changes designed to enhance effectiveness of board committees, in particular the remuneration, nomination and audit committees. It also proposed, but had to scale back, measures aimed at encouraging listed companies to set up a corporate governance committee.

Remuneration committee

The Exchange has introduced new listing rules to enhance the remuneration committee’s role, these include requiring:

  • issuers to establish a remuneration committee with a majority of INED members
  • an INED as chairman of the remuneration committee
  • written terms of reference for the remuneration committee, and
  • an issuer that fails to comply with these listing rules to immediately announce its reasons for not doing so and any other relevant details. The issuer will have a three-month period to rectify its non-compliance.

It has also amended relevant CPs of the Code to require, among other things, that listed companies:

  • state that the professional advice made available to the remuneration committee should be independent
  • accommodate a model where the remuneration committee performs an advisory role to the board, with the board retaining the final authority to approve executive directors’ and senior management’s remuneration, and
  • make the remuneration committee’s terms of reference available on both the issuer’s and the HKEx websites.

Only one proposal relating to the remuneration committee was dropped, namely the proposal to upgrade to a CP the RBP on disclosure of board disagreements with the remuneration committee. This remains an RBP.

Nomination committee

The Exchange has also upgraded existing RBPs to CPs (with some amendments) to enhance the nomination committee’s role. These CPs state that an issuer should:

  • establish a nomination committee with a majority of INEDs, chaired by an INED or the board chairman
  • establish a nomination committee with written terms of reference that performs the duties described
  • include, as one of the nomination committee’s duties, a review of the structure, size and composition of the board at least annually to complement the issuer’s corporate strategy
  • make the nomination committee’s terms of reference available on both the issuer’s and the HKEx websites • ensure the nomination committee has sufficient resources, and
  • enable the nomination committee to seek independent professional advice at the issuer’s expense.

Audit committee

The Exchange has added a new RBP to the Code recommending that the audit committee should establish a whistleblowing policy and system. It has also upgraded CPs stating that an audit committee’s terms of reference should include arrangements for employees to raise concerns about financial reporting improprieties, and that an audit committee should meet the external auditor at least twice a year.

Corporate governance committee

The Exchange did not receive majority support for its proposals designed to encourage the setting up of corporate governance committees. Respondents opposed to the proposals stated that corporate governance is the responsibility of the whole board and it should not be delegated to a committee. Accordingly, the Exchange has scaled back its proposed measures, adding a CP that the board should be responsible for performing the corporate governance duties set out in the terms of reference (it has also added a new CP setting out the terms of reference for the board’s corporate governance functions). The Code also states that the board may delegate these responsibilities to a committee or committees.

Board evaluation

The Exchange proposed adding an RBP that listed companies should conduct a regular evaluation of its own, and individual directors’, performance. A majority of market practitioners and professional bodies were in favour of this proposal but a significant majority of issuers opposed it. Opponents believed that board evaluation would become a mere box-ticking exercise. Many respondents said they would support the proposal if the Exchange recommended board evaluation without evaluation of individual directors. Noting these concerns, the Exchange has limited the RBP to recommending evaluation of the board and not individual directors.

Other proposals

The Exchange has:

  • amended the listing rules to remove the 5% exemption from voting by a director on a board resolution in which he has an interest
  • upgraded all the RBPs in A.2 of the Code (which covers the roles and responsibilities of the chairman) to CPs with minor amendments
  • clarified that issuers should avoid ‘bundling’ resolutions at meetings and, where they are bundled, explain the reasons and material implications in the notice of meeting
  • amended the listing rules to allow a chairman at a general meeting to exempt certain prescribed procedural and administrative matters from a vote by poll
  • introduced a new listing rule to require shareholders’ approval at a general meeting of any proposal to appoint or remove an auditor before the term of his/ her office
  • introduced a CP stating that the issuer’s management should ensure the external auditors attend the AGM to answer questions about the conduct of the audit; the preparation and content of the auditors’ report; accounting policies; and auditor independence.
  • introduced a CP stating that issuers should establish a shareholder communication policy, and
  • upgraded to a CP the current RBP stating that the chairman should at least annually hold meetings with the NEDs, including INEDs, without executive directors being present.


The consultation conclusions, published in October 2011, are available on the Exchange’s website: See ‘Governance needs you’, CSj, January 2012, pages 10–15, for the first part of this article covering the revisions to the Code and associated listing rules relating to company secretaries.