Hong Kong Exchanges and Clearing Limited (HKEx) published a consultation paper today (Friday) on proposed changes to the Code on Corporate Governance Practices (the Code) and certain Listing Rules relating to corporate governance.

“This consultation paper is part of our ongoing initiative to promote the development of higher corporate governance standards. Our proposed changes are also generally in line with international best practice,” said Mark Dickens, HKEx’s Head of Listing.  “We also propose revising some Listing Rules that may be impractical or burdensome to the market or may not meet their intended corporate governance purpose.”

The Code was introduced in January 2005.  Since then, market conditions locally and overseas have changed, and HKEx believes an update to the Code and the related Rules is warranted.

Under the proposals, some Code Provisions (CPs) have been promoted to Rules because of their importance and many Recommended Best Practices (RPBs) have been upgraded to CPs.  While issuers are required to abide by the Rules, they continue to have the flexibility to comply with the CPs.  If issuers decide not to adopt a CP, they must explain the reasons for the decision in their corporate governance report.  For RBPs, issuers are encouraged, but not required, to state whether they have adopted them.

In summary, the review and proposed rule amendments include measures to:

·        improve transparency by bolstering requirements for disclosure and communication with stakeholders;

·        enhance the quality of directors and company secretaries by requiring training;

·        require greater involvement in issuers’ board committees by independent non-executive directors (INEDs);

·        recognise company secretaries’ contribution to corporate governance and define their role and function; and

·        place emphasis on the leadership role of the chairman of the board in corporate governance matters.

Some of the proposals are highlighted below:

Directors’ duties and time commitments
To strengthen the accountability of directors, HKEx proposes to expand the Rules on directors’ duties, provide guidance to directors, and revise the Code to recommend greater disclosure of time commitments by directors, particularly INEDs.  HKEx also seeks market views on whether HKEx should introduce a Rule or a CP to limit the number of INED positions an individual may hold and if so, determine the maximum number.  If there is strong support for such an approach, HKEx will conduct a further consultation on this specific topic before making any Rule change.


Independent non-executive directors
HKEx believes that increasing the number of INEDs will promote better corporate governance and proposes to introduce a Rule that INEDs should constitute one third of an issuer’s board.  Since 21 per cent of issuers do not currently meet this proposed requirement, HKEx proposes a transitional period with full compliance mandatory by 31 December 2012.


Board committees

Remuneration committee: HKEx proposes a rule to require issuers to set up a remuneration committee.  The committee’s chairman and a majority of the members must be INEDs.  The board should either delegate to the committee authority to determine the remuneration of executive directors and senior management, or retain that authority, with the committee taking an advisory role.

Nomination committee: HKEx proposes to upgrade the current RBPs relating to the committee’s establishment, composition and terms of reference to CPs.

Corporate governance committee: HKEx proposes to introduce new CPs that set out the duties and composition of a corporate governance committee.  The Exchange also believes the corporate governance committee should be an RBP because some issuers may have resource constraints and would prefer an existing board committee to carry out the functions of a corporate governance committee.

Audit committee: HKEx proposes to revise the relevant CP so that instead of once a year, the audit committee should meet at least twice a year with the issuer’s external auditor.  HKEx also proposes a new RBP stating that the audit committee should establish a “whistleblowing” policy enabling employees and those who deal with the issuer to raise concerns.

Chairman and CEO
HKEx proposes to revise the Code by upgrading existing RBPs to CPs to emphasise the chairman’s role and responsibility in leading the issuer’s corporate governance efforts.  HKEx also proposes rules requiring that a chief executive officer (CEO) who is not a director must disclose his or her appointment, resignation, re-designation, retirement or removal.  The remuneration of a CEO (if he or she is not a director) should also be disclosed.

Other proposed changes cover areas including, among others, directors’ training, communication with shareholders, company secretary and board evaluation.

The consultation paper can be downloaded from the HKEx website.  Interested parties are encouraged to respond to the consultation paper by completing and submitting the questionnaire.

The deadline for replies to the consultation paper is 18 March 2011.

Ends