Quick Read

The Stock Exchange of Hong Kong Limited (“SEHK”) published its “Consultation Conclusions on Review of the Corporate Governance Code and Associated Listing Rules” (“Consultation Conclusions”) on 28 October 2011 in response to the “Consultation Paper on Review of the Code on Corporate Governance Practices and Associated Listing Rules” published on 18 December 2010.  

The major purposes of the consultation were to enhance the development of a higher level of corporate governance among issuers and to provide a sound corporate governance regulatory framework appropriate for Hong Kong markets. The changes to be implemented are generally in line with international best practices.  

The Regulatory Framework

The Code on Corporate Governance Practices (to be renamed as the “Corporate Governance Code and Corporate Governance Report”) (“Code”) which specifies the relevant corporate governance provisions is incorporated in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Appendix 15 of the Rules Governing the Listing of Securities on the Growth Enterprise Market (together referred to as the “Listing Rules” or “Rules”). The Code sets out principles of good corporate governance and two levels of recommendations: (a) code provisions (“CPs”) and (b) recommended best practices (“RBPs”) and their characteristics are explained as follows:

  • Rules - where the required standard of corporate governance is mandatory for all issuers and breaches may lead to sanctions.
  • CPs - where an issuer is allowed the flexibility to either adopt or if it does not, it should explain the reasons for not doing so in its Corporate Governance Report. This is known as the “comply or explain” principle. If the issuer does not comply with the CP, it is not a breach of the Rules and there is no sanction.
  • RBPs - where the standard of corporate governance is set by specifying desirable best practices and an issuer is encouraged to comply. If it does not comply, an issuer does not need to explain.

Proposals Adopted

The proposals adopted in the Consultation Conclusions relate to a wide range of matters and are briefly summarised as follows:  

The following adopted proposals become effective on 1 January 2012:

  • Clearer guidance on directors’ duties
  • Disclosing chief executive’s remuneration who is not a director
  • Removing the 5% threshold exemption for voting by a director on a resolution in which he has an interest
  • Notifying directorship change and disclosure of directors’ information (including the chief executive) such as retirement or removal of director, supervisor or chief executive and disclosure of information relating to civil judgements of fraud, breach of duty or other misconduct involving dishonesty
  • Removing the next day disclosure requirement for a director of the issuer’s subsidiaries exercising an option for shares in the issuer
  • Shareholders’ general meetings
    • Voting by poll - exemption of certain procedural and administrative matters and disclosure requirements regarding poll results
    • Shareholders’ approval required to appoint and remove an auditor
  • New requirements for company secretary’s qualification, experience and training

The following adopted proposals become effective on 1 April 2012:

  • Sufficiency of directors’ time commitments
  • Directors’ training
  • Shareholders’ vote on separate resolution to retain an independent non-executive director (“INED”) serving more than nine years
  • New and amended Rules, CPs and RBPs to govern (a) board committees i.e. remuneration committee, nomination committee and audit committee and (b) corporate governance functions of the board
  • Disclosing senior management’s remuneration by band
  • Regular evaluation of the board’s performance
  • Directors’ attendance at board meetings can be counted by electronic means as attendance at a physical board meeting
  • Clearer guidance on the roles and responsibilities of chairman
  • Publication of a list of directors on the issuer’s website and the website of Hong Kong Exchanges and Clearing Limited (“HKEx”)
  • Provision of monthly information to board members to enable them to discharge their duties
  • Disclosing the basis on which the issuer generates or preserves business value over the longer term and the strategy for delivering the objectives of the issuer
  • Arranging appropriate insurance coverage for directors
  • Shareholders’ general meetings
    • Avoidance of “bundling” resolutions
    • Requirement for non-executive directors (including INEDs) to attend board, committee and general meetings and make contributions
    • External auditors should attend annual general meetings to answer relevant questions
  • Disclosing shareholders’ rights in the Corporate Governance Report
  • Communication with shareholders
    • Establishing a communication policy
    • Publishing updated and consolidated version of constitutional documents on the respective websites of the issuer and HKEx
    • Publishing procedures shareholders can follow to propose a person for election of directors
    • Disclosing significant changes to constitutional documents in the Corporate Governance Report
  • Introducing a new section to the Code setting out the role and responsibilities of company secretary

The following adopted proposal should be implemented by 31 December 2012:

  • INEDs to form one-third of the board

Implementation Timetable

The implementation timetable is scheduled as follows:

  • most Rule amendments become effective on 1 January 2012;
  • Code and certain Rules become effective on 1 April 2012;
  • new Rule requiring the issuer to appoint INEDs representing at least one-third of the board must be complied with by 31 December 2012; and
  • new Rule requiring company secretary training to be staggered according to the date of appointment of an individual as company secretary of an issuer.

In its first interim/half year or annual report covering a period after 1 April 2012, the issuer must explain whether it has complied with the CPs in the revised Code as well as with the former Code for that period. Issuers may adopt the revised Code before 1 April 2012.

You can download copies of a detailed summary of the proposals adopted in the Consultation Conclusions via the link below:

http://www.hkex.com.hk/eng/rulesreg/listrules/ listletter/Documents/20111028.pdf

You can download copies of a full text of the Consultation Conclusions via the link below:

http://www.hkex.com.hk/eng/newsconsul/ mktconsul/Documents/cp2010124cc.pdf