CGj highlights the key updates in the recently published consultation conclusions on the proposed amendments to the Corporate Governance Code and related Listing Rules from The Stock Exchange of Hong Kong Limited (the Exchange).

On 14 June 2024, the Exchange published a public consultation paper, titled Review of [the] Corporate Governance Code and Related Listing Rules, seeking views and comments on proposed changes to the Corporate Governance Code (CG Code) and related Listing Rules, designed to enhance board effectiveness, strengthen board independence, create more diverse boardrooms, and strengthen risk management and internal controls.

Its conclusions to that consultation paper (Consultation Conclusions) were published on 19 December 2024. Having carefully considered 261 responses from a broad range of respondents, the Exchange has announced that it will adopt the consultation proposals with certain modifications and clarifications. ‘We believe the enhancements set out in this paper strike an appropriate balance between advancing good corporate governance practices in Hong Kong as an international financial centre and addressing the practical concerns of listed issuers,’ the Exchange said.

Key updates in the Consultation Conclusions include changes to the proposed implementation timeline for the CG Code amendments, the tenure of long-serving independent non-executive directors (INEDs), director training and the designation of lead INEDs. The pivotal amendments, as well as some of the important differences between the original proposal and the final Consultation Conclusions, are highlighted below.

Implementation date

The Exchange had initially proposed that the revised CG Code and related Listing Rules would come into effect on 1 January 2025. After considering the market feedback, the Exchange has now settled on a revised implementation date of 1 July 2025.

The Exchange explained that the ‘extended implementation timeline and other modifications to our original proposals strike a proper balance between progressing governance standards and giving issuers the flexibility to advance practices at an appropriate pace’.

The new requirements will come into effect on 1 July 2025, and will apply to corporate governance reports and annual reports for financial years commencing on or after 1 July 2025.

Long-serving INEDs

The Exchange had initially proposed that INEDs serving more than nine years would no longer be considered independent. It also proposed a hard cap on the tenure of long-serving INEDs, with a two-year cooling-off period and a three-year transition period.

In the Consultation Conclusions, the Exchange has settled on a new phased implementation over an extended six-year transition period and lengthening the cooling-off period to three years, with details as follows:

• phase one: a three-year transition period starting from 1 July 2025, with compliance required by the first annual general meeting (AGM) held on or after 1 July 2028 – an issuer must not have any long-serving INEDs representing a majority of the INEDs on their board, and
• phase two: a six-year transition period starting from 1 July 2025, with compliance required by the first AGM held on or after 1 July 2031 – an issuer must not have any long-serving INEDs on their board.

The Consultation Conclusions also stated that where an INED temporarily ceases to be an INED for less than three years, and is subsequently reappointed as an INED of the same issuer, this period must be included in the calculation of the nine-year tenure.

Director training

The Exchange had initially proposed mandatory director training for all directors of listed issuers each year on specified topics, with first-time directors required to complete a minimum of 24 training hours within 18 months of their appointment. Under the proposal, first-time directors are considered to be directors who are appointed as a director of an issuer listed on the Exchange for the first time, or have not served as a director of an issuer listed on the Exchange for a period of three years or more prior to their appointment.

In the Consultation Conclusions, the Exchange has reduced the minimum training hours to 12 hours for first-time directors with experience in issuers listed on an exchange other than the Main Board or GEM of the Exchange within three years prior to their appointment.

Previous training received by a first-time director can also be counted towards the minimum training hours, as stated in the Consultation Conclusions. A first-time director will need to complete the remaining balance of minimum training hours upon their appointment to a Hong Kong listed issuer, provided that the subsequent appointment is within three years of the conclusion of their first appointment.

Lead INED

The Exchange had initially proposed to require listed issuers without an independent board chair to designate one INED as a lead INED. After considering all responses, the Exchange has decided that the designation of a lead INED should be voluntary and should be implemented as a recommended best practice, rather than a Code Provision.

The Exchange has now said that the transition should allow more time for the expectation gap between listed issuers and investors to close, as well as for listed issuers to build their capacity to accommodate the lead INED concept.

The Exchange will publish an updated guidance in the first half of 2025 to assist listed issuers to comply with the new requirements. CGj will review the updated guidance as soon as practicable once it is ready.

The consultation conclusions are available on the website of Hong Kong Exchanges and Clearing Limited (HKEX): www.hkex.com.hk.