A new consultation paper issued in April 2021 by Hong Kong Exchanges and Clearing Ltd (HKEX) makes a number of proposals to enhance board independence, promote board refreshment and succession planning, and strengthen the role of the nomination committee.

Ensuring board independence is a key aim of listing regimes around the world and Hong Kong is no exception. The Listing Rules in Hong Kong seek to ensure that independent views and input are available to boards. To this end, the listing requirements currently focus on ensuring that independent non-executive directors (INEDs) are genuinely independent, and that there is a balanced composition of executive and non-executive directors, including INEDs, on the board.

These requirements are under constant review. The criteria that The Stock Exchange of Hong Kong Ltd (the Exchange) takes into account when assessing the independence of INEDs, for example, were revised in 2019. A raft of consultation proposals were implemented in January that year extending cooling-off periods for issuers’ former professional advisers or interested parties before they can become independent directors, including immediate family members in the independence assessment, and requiring disclosure of an INED’s cross-directorships or significant links with other directors in issuers’ corporate governance reports.

In April this year, HKEX issued a new consultation paper proposing, among other things, further revisions to Hong Kong’s listing regime relevant to board independence. 

Key proposals

The latest HKEX consultation – Review of Corporate Governance Code and Related Listing Rules – proposes a number of significant changes to enhance the effectiveness of the Corporate Governance Code (the Code) and the Listing Rules (see ‘Other consultation proposals’). 

A key focus of the consultation, however, is to improve board independence. The consultation points out that INEDs play an important role in corporate governance – assisting with the management of conflicts of interest, the oversight of internal controls and risk management, and providing an independent perspective in the board’s decision-making. 

In this respect, the consultation proposes to:

  • create a new Code Provision (CP) to require issuers to have a policy to ensure that independent views are available to the board and to review the policy’s effectiveness annually
  • revise an existing CP to require independent shareholders’ approval for the re-election of an INED who has served more than nine years (Long-Serving INED), and to require additional disclosures of the factors considered in recommending the INED for re-election
  • create a new CP requiring appointment of a new INED at the next annual general meeting (AGM), if all INEDs on the board are Long-Serving INEDs, and to disclose the length of tenure of the Long-Serving INEDs on a named basis, and
  • upgrade an existing CP to a Listing Rule requiring issuers to have a nomination committee chaired by an INED and comprising a majority of INEDs.

The question of tenure

The most practical impact of the above proposals will likely be felt in the area of board refreshment. Currently, under the Code, issuers are required on a comply-or-explain basis to make a separate shareholders’ resolution for the further appointment of a Long-Serving INED, and papers to shareholders accompanying that resolution should include reasons why the board believes the Long-Serving INED is still independent and should be re-elected.

The consultation points out that, as of December 2020, 1,513 INED directorships (17.8%) were held by Long-Serving INEDs. Around one-third (30.6%) of issuers listed on the Exchange have Long-Serving INEDs. Furthermore, there were 153 issuers (6.0%) without any INEDs who had served less than nine years.

The consultation acknowledges that Long-Serving INEDs’ knowledge of, and familiarity with, issuers’ affairs may have benefits for companies, but it questions whether they can remain capable of bringing fresh perspectives and independent judgement to boards where they have served for more than nine years. ‘Where an INED serves on a board for a prolonged period, this will increase the risk of becoming too reliant on one individual and their complacencies given their familiarity with management,’ the consultation states.  

The consultation also points out that the guidance on INEDs issued by the Hong Kong Monetary Authority questions the independence of an INED who has served on a board for nine years. The HKSAR Government also has a guideline for not appointing non-official members serving more than six years in the same capacity with the same body to ensure a healthy turnover of members of advisory and statutory bodies.

‘Periodic board refreshment can foster the sharing of diverse perspectives in the boardroom, as well as the generation of new ideas and business strategies. Accountability can be enhanced by frequent review and refreshment of membership of the board,’ the consultation states.

To promote board refreshment and succession planning, the consultation proposes to revise the existing CP A.4.3 (New CP B.2.3.) to require the re-election of a Long-Serving INED to be subject to independent shareholders’ approval. Furthermore, additional disclosure is required regarding the factors considered, the process, and the board or nomination committee’s discussions of why a Long-Serving INED is still independent and should be re-elected. 

In circumstances where all the INEDs on the board are Long-Serving INEDs, the consultation proposes to introduce a new CP (CP B.2.4.) requiring issuers to appoint a new INED at the next AGM, and to disclose the length of the tenure of the Long-Serving INEDs on the board on a named basis in the shareholders’ circular.

Other requirements and recommendations

To emphasise the importance of the oversight of board refreshment and succession planning provided by the board’s nomination committee, the consultation also proposes to upgrade the existing CP A.5.1. to a Listing Rule (MB Rule 3.27A /GEM Rule 5.36A) requiring issuers to establish a nomination committee chaired by an INED and comprising a majority of INEDs. HKEX will provide further guidance on this.

The consultation also addresses the issue of whether providing INEDs with equity-based remuneration will compromise their objectivity. It points out that the UK and Australia have recommendations (or comply-or-explain restrictions) regarding providing INEDs with equity-based remuneration such as share options or grants. To ensure INEDs in Hong Kong maintain their objectivity and independence, the consultation proposes to introduce a new Recommended Best Practice (RBP E.1.9.) that an issuer generally should not grant equity-based remuneration share options or grants with performance-related elements to INEDs as this may lead to bias in their decision-making and compromise their objectivity and independence.

The consultation also encourages issuers to consider appointing a lead or senior INED. It acknowledges that there are views on both sides of this debate. The possible benefits of appointing a lead or senior INED include facilitating communication between the issuer and its investors, and enhancing INEDs’ accountability. On the other hand, there are also concerns about the creation of a hierarchy amongst INEDs and the possible difficulties issuers might have in finding candidates willing to take up such a position. HKEX will give further guidance on this issue. 

The Consultation Paper – Review of Corporate Governance Code and Related Listing Rules – is available on the HKEX website: www.hkex.com.hk. The Consultation ends 18 June 2021.

The Guidance Note Relating to Independent Non-Executive Directors: Selective Roles, Responsibilities and Liabilities, published in January 2021
by The Hong Kong Institute of Chartered Secretaries (the Institute), is available on the Institute’s website: www.hkics.org.


SIDEBAR: Other consultation proposals

In addition to the proposals relating to board independence reviewed in this article, the latest HKEX consultation makes a broad range of proposals designed to enhance the Corporate Governance Code (the Code) and Listing Rules. These include proposals to: 

Corporate culture   

  • create new Code Provisions (CPs) – subject to comply-or-explain – to require issuers to align the company’s culture with its purpose, values and strategy, and 
  • require issuers to have anti-corruption and whistleblowing policies


  • create new Mandatory Disclosure Requirements (MDRs) to make it clear that a single gender board is not considered a diverse board (see ‘Note’ below)
  • introduce mandatory numerical targets and timelines for achieving gender diversity at both board level and across the workforce, and  
  • create a new CP requiring boards to review the progress of their diversity policies annually

Communication with shareholders 

  • make mandatory the disclosure of issuers’ shareholder communication policies and to review their effectiveness annually


  • set out the relationship between corporate governance and environmental, social and governance (ESG) in the introductory section of the Code
  • include ESG risks in the context of risk management under the Code
    (New Principle D.2, CP D.2.2 and CP D.2.3), and 
  • align publication timeframe of ESG reports with that of annual reports

Code structure

  • rename the Code as the Corporate Governance Code (currently its official name is Corporate Governance Code and Corporate Governance Report), and 
  • rearrange its structure to enhance its flow and readability, for example moving the MDRs previously set out in the Corporate Governance Report section upfront (see ‘Note’ below).

Note: Appendix 14 of the Listing Rules, currently has two parts: 

  1. the Corporate Governance Code, comprising 16 Principles, 78 Code Provisions and 10 Recommended Best Practices, and 
  2. the Corporate Governance Report, comprising 32 Mandatory Disclosure Requirements (MDRs) and six Recommended Disclosures (RDs) to be made in issuers’ corporate governance reports.