The Hong Kong Stock Exchange has updated its policy statement on Listing Rule enforcement, emphasising as one of its key priorities the holding accountable of individuals that are responsible for discharging duties in connection with listing matters. In addition to its previous focus on internal controls, the Stock Exchange now also includes a company’s culture and attitude to compliance and corporate governance as important concepts underling its enforcement decisions.
The policy statement contains important messages for listed company boards and senior management on the regulatory expectations for those responsible for Listing Rule compliance. Recent Stock Exchange enforcement actions have considered the conduct of the directors on the board at the time of the rule breaches and whether they applied the necessary skill, care and diligence. In 2020, the number of investigations involving directors’ duties jumped to 98 cases, from 82 in the previous year. Investigations involving inaccurate, incomplete or misleading information in corporate communications also rose (from 17 in 2019 to 21 in 2020), as did cases involving failure to comply with the procedural requirements in respect of notifiable or connected transactions (increasing from 40 investigations in 2019 to 58 in 2020).
To avoid the risk of enforcement action, it is more important than ever that listed company boards have in place, and keep under review, the necessary internal controls to ensure effective compliance with the Listing Rules. Good corporate governance and a board-driven culture of compliance are now firmly expected by the regulators.
Key enforcement priorities of the Stock Exchange as set out in the policy statement
The Stock Exchange will take into account a range of factors (including those set out in its sanctions statement discussed below) in determining the appropriate regulatory response to a breach of the Listing Rules. In the policy statement, the Stock Exchange sets out three key concepts underlying its enforcement decisions. It is important for listed companies and their directors and senior managers to be aware of these and ensure they meet the required regulatory standards and expectations:
The Stock Exchange will target those individuals who are responsible for ensuring compliance with the Listing Rules. Primary responsibility sits with the directors, but enforcement actions could also be brought against others, for instance senior management, where they cause by act or omission, or knowingly participate in a breach of the Listing Rules. Directors should note in particular the following key points:
- Directors must use their best endeavours to ensure that the listed company complies with the Listing Rules.
- Non-executive directors (including independent non-executive directors) share the responsibility for ensuring rule compliance. Like executive directors, they must take an active interest in the company’s affairs to gain a general understanding and, importantly, follow up on anything untoward that comes to their attention. They must exercise independent judgement when making decisions and are expected to give the board the benefit of their skills, expertise and varied backgrounds and qualifications.
- Delegation will often not be sufficient to discharge a person’s duties, particularly if this is relied on without question. Directors are expected to supervise and maintain continued interest in matters that have been delegated.
- Directors should seek professional advice where needed, but should apply an enquiring mind when assessing that advice. Directors are expected to use their own wisdom, experience and independent judgement.
2. Controls and culture
Listed companies are expected to implement appropriate and effective internal controls to ensure regulatory compliance. Compliance and corporate governance should be embedded in the company’s culture and evidenced at the director and senior management levels. The key points to note include:
- Risk management and internal controls should be in place to achieve rule compliance.
- The systems should be regularly reviewed to ensure they remain effective.
- Directors should receive regular briefings and professional development covering not only the business and its operations, but also their legal and regulatory responsibilities and those under the company’s business and governance policies.
- Companies must keep proper books and records as part of their control systems.
Listed companies and their directors are expected to cooperate with the Stock Exchange. This includes a requirement to provide information reasonably requested as part of an investigation into any suspected breach of the Listing Rules. The key points to note include:
- Information provided to the Stock Exchange must be complete, accurate and up-to-date.
- Any non-cooperation, failure to respond or providing misleading information will be viewed as serious misconduct and will result in the most severe sanctions being imposed.
Enforcement sanctions statement
The Stock Exchange has also updated its enforcement sanctions statement to reflect the recent rule changes to enhance its disciplinary powers and sanctions which came into effect on 3 July 2021 (see our bulletin for further details).
The enforcement sanctions statement sets out the general principles and factors that the Stock Exchange applies in determining the appropriate sanctions for Listing Rule breaches.
By way of general principles, the sanctions imposed by the Stock Exchange serve a number of purposes including to protect the public and the market, deter further breaches (or others from engaging in similar conduct) and improve corporate governance. The Stock Exchange will take into account the circumstances of the breach, the seriousness of the misconduct and any relevant mitigating or aggravating factors. Repeated misconduct is treated more severely, as are cases where there has been intentional, wilful or reckless disregard for the Listing Rules.
The enforcement sanctions statement sets out a list of factors that the Stock Exchange will consider in determining the appropriate sanction. These cover a variety of aspects including the company’s compliance history, whether the misconduct was an isolated incident, whether any steps have been taken to remedy the breaches or prevent recurrence and whether the conduct damaged (or had potential to damage) the reputation of the Stock Exchange or the integrity of the market.
There are also a number of overlapping themes with the enforcement policy which companies should take on board. These include whether reasonable reliance was placed on independent professional advice, whether there is a good culture conducive to compliance, and whether the company or relevant party fully assisted or cooperated with the Stock Exchange in the investigation.
Key takeaways for listed companies, directors and senior management
Listed companies can minimise the risk of serious enforcement action for breach of the Listing Rules by ensuring they have in place the necessary policies, systems and procedures to match the regulatory expectations and standards set out above. In particular, directors and senior management must ensure that they properly exercise their duties. They must dedicate sufficient attention to the board and exercise critical thinking and independent judgement when making decisions. Boards must embed a culture of compliance and uphold high corporate governance standards.
Early self-reporting and full cooperation with the Stock Exchange in the event of a Listing Rule breach is also key.