Response to the Consultation Paper on Enhancing the Corporate Governance Code Issued by the Stock Exchange
August 14, 2024
Response to the Consultation Paper on Enhancing the Corporate Governance Code Issued by the Stock Exchange
In response to the consultation paper concerning enhancements to the Corporate Governance Code published by the Stock Exchange, the Hong Kong Securities and Futures Professionals Association presents the following insights:
Question 1: Do you agree with our proposal to introduce a new CP requiring issuers without an independent board chair to designate one INED as a Lead INED to enhance engagement with investors and shareholders? Please provide reasons for your views.
Response 1: We agree. We believe that companies should integrate this culture into their operations, aligning their values and strategies with shareholder interests. A robust corporate culture is intrinsically linked to the successful execution of the company’s strategies and values.
To enable the chief independent non-executive director to fulfill their responsibilities effectively, particularly in opposing board resolutions and advocating for independent shareholders, we propose enhancing their role and authority in the new code provision. This should include clarifying their specific powers within the organizational structure and internal policies of listed companies. For instance: responsibilities for overseeing and evaluating the performance of the chairman and CEO; authority to request reevaluation or postpone decisions in critical situations, such as major transactions or conflicts of interest; potential veto power over certain decisions; requirements to provide an independent annual report to shareholders on board independence, effectiveness, and evaluations of management performance and corporate governance practices; and ensuring that the method of appointment grants independent shareholders greater choice to ensure this role effectively represents the interests of all shareholders.
Question 2: Regarding continuous professional development for directors, do you agree with our proposals to:
(a) Make continuous professional development mandatory for all existing directors, without specifying a minimum number of training hours?
(b) Require First-time Directors to complete a minimum of 24 hours of training within 18 months following their appointment?
(c) Define “First-time Directors” to mean directors who (i) are appointed as a director of an issuer listed on the Exchange for the first time; or (ii) 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?
(d) Specify the specific topics that must be covered under the continuous professional development requirement?
Please provide reasons for your views.
Response 2:
(a) We agree;
In the fast-changing financial and technological environment, directors must be well-versed in contemporary professional knowledge, including but not limited to listing rules, corporate laws, relevant regulations, and financial auditing. Continuously updating their knowledge and skills is essential for maintaining professional competence. We believe that methodically maintaining and enhancing the professional knowledge and skills of directors enables them to execute their responsibilities effectively, ensuring that directors of Hong Kong's listed companies meet high standards and contribute to preserving and enhancing Hong Kong's international reputation.
(b) We concur that new directors should complete required training within the stipulated timeframe;
New directors must assure general investors that they possess sufficient technical knowledge, professional skills, and ethical standards to perform their duties effectively and fairly. Completing the requisite training within the designated period instills confidence in investors regarding the director's competence. Training content should encompass, but not be limited to: i) applicable monitoring standards, legal requirements, and regulatory standards; ii) general legal principles; iii) risk management and monitoring strategies; iv) financial reporting and quantitative analysis; v) professional ethics and standards of conduct; vi) business management and oversight, etc.
(c) We agree;
To ensure that appointed directors are updated with the latest market insights and professional knowledge, new directors and those who have not served as directors for three years or more should assure investors that they possess up-to-date market information and legal regulations upon their appointment. However, training requirements for new directors and those with prior experience should differ, as candidates with previous experience have distinct relevant knowledge compared to those without. Therefore, we recommend that mandatory training content reflect the diverse backgrounds of both groups.
(d) We agree; for the reasons stated above, according to code provisions C.1 on director responsibilities and C.1.2 on the functions of non-executive directors, directors should possess adequate technical knowledge, professional skills, and a certain level of ethics to carry out their functions effectively and fairly. Necessary training content should include, but not be limited to: i) applicable monitoring standards, legal requirements, and regulatory standards; ii) general legal principles; iii) risk management and monitoring strategies; iv) financial reporting and quantitative analysis; v) professional ethics and standards of conduct; vi) business management and oversight, etc.
Question 3: Do you agree with the proposed consequential changes to Principle C.1 and CP C.1.1 of the CG Code? Please provide reasons for your views.
Response 3: We agree; directors should remain informed about the latest regulatory developments.
There was no consensus regarding the time required for training and implementation, with some suggesting a balance between administrative costs and burdens on issuers.
Question 4: Do you agree with our proposal to upgrade the current RBP to a CP requiring issuers to conduct regular board performance reviews at least every two years and make disclosure as set out in CP B.1.4? Please provide reasons for your views.
Response 4: We agree; this arrangement enhances corporate information transparency, allowing investors to understand board performance and corporate governance details. For listed issuers, disclosure aids the board in reflecting on the evaluation process and results, thereby identifying and addressing management shortcomings, thus enhancing overall management quality.
However, relevant amendments must balance the increased administrative costs and burdens on listed issuers. Without clear reference guidelines, some issuers may overly focus on compliance at the expense of other business and strategic developments due to concerns over insufficient disclosures and potential negative public perception.
Question 5: Do you agree with our proposal to introduce a new CP requiring issuers to maintain a board skills matrix and make disclosure set out in CP B.1.5? Please provide reasons for your views.
Response 5: We could not reach a consensus; we recommend introducing this as a best practice. We acknowledge that disclosing factors such as directors' skills, experience, and diversity can align with the company’s developmental values and strategies, enabling investors to better understand their roles and responsibilities in corporate decisions. Some believe that if mandated as code provisions, this could complicate the search for suitable candidates for listed issuers and that excessive detail may hinder non-professional investors from comprehending and utilizing this information, potentially complicating decision-making.
Question 6: In relation to our proposal to introduce a “hard cap” of six listed issuer directorships that INEDs may hold, do you agree:
(a) With the hard cap to ensure that INEDs are able to devote sufficient time to carry out the work of the listed issuers?
(b) With the proposed three-year transition period to implement the hard cap?
Please provide reasons for your views.
Response 6:
(a) We agree;
If independent non-executive directors are burdened with too many commitments, it may raise concerns among investors regarding their ability to fulfill their roles adequately. Similar arrangements in other professional organizations can bolster investor confidence.
(b) We agree;
A two-year cooling-off period provides an opportunity to reassess independent directorships. However, it is important to consider a balanced and comprehensive evaluation of various factors rather than focusing solely on time.
Question 7: Do you agree with the proposal to introduce a new MDR to require the nomination committee to annually assess and disclose its assessment of each director’s time commitment and contribution to the board? Please provide reasons for your views.
Response 7: We could not reach a consensus;
Some support the proposal, while others express concern that it may impose additional administrative burdens on issuers, as preparing and conducting such evaluations demands significant time and resources. Additionally, listed issuers already need to prepare detailed ESG reports alongside financial statements; adding this requirement may substantially increase their administrative and financial burdens. There are concerns that the evaluation process may overly emphasize quantitative performance metrics while overlooking qualitative contributions by directors.
Question 8: In relation to our proposal to introduce a “hard cap” of nine years on the tenure of INEDs, beyond which an INED will no longer be considered to be independent, do you agree:
(a) With the proposed hard cap to strengthen board independence?
(b) That a person can be re-considered as an INED of the same issuer after a two-year cooling-off period?
(c) With the proposed three-year transition period in respect of the implementation of the hard cap?
Please provide reasons for your views.
Response 8:
(a) We agree;
Introducing this regulation can fortify board independence. Regularly introducing new independent directors can infuse fresh perspectives and ideas into the board, assisting in avoiding entrenched thinking. Lengthy tenures may lead independent directors to form overly close relationships with management; thus, limiting tenure helps sustain independence and enhances oversight of management.
Nonetheless, specific industries may necessitate independent directors with specialized knowledge, potentially complicating the search for suitable candidates for issuers.
(b) We agree;
A cooling-off period permits former directors to be reconsidered for independence, albeit a comprehensive evaluation of various factors should be undertaken rather than focusing solely on time.
(c) Consensus was reached;
Some question whether it is prudent to increase issuers' legal and compliance costs in the current unstable capital market environment, where fundraising capabilities are limited.
Question 9: Do you agree with the proposal to require all issuers to disclose the length of tenure of each director in the CG Report? Please provide reasons for your views.
Response 9: We agree. Disclosing directors' tenures aids shareholders and investors in understanding the stability and experience of the directors, as well as their familiarity with company affairs. Furthermore, such disclosure assists investors in evaluating the independence of directors.
Question 10: Do you agree with our proposal to introduce a CP requiring issuers to have at least one director of a different gender on the nomination committee? Please provide reasons for your views.
Response 10: We recognize that gender diversity is essential for board diversity.
Other factors contributing to diversity, such as age, cultural background, educational background, and professional experience, should also be considered. A diverse array of perspectives is crucial for the quality of decision-making on an issuer's board; thus, a strong diversity policy enhances the board's decision-making capacity and mitigates the risk of groupthink. The diversity policy should take all these backgrounds into account comprehensively.
Question 11: Do you agree with our proposal to introduce a Listing Rule to require issuers to have and disclose a diversity policy for their workforce (including senior management)? Please provide reasons for your views.
Response 11: We could not reach a consensus;
Some support the proposal, but others express concerns that this may impose additional administrative burdens on issuers, as preparing and conducting related reports demands considerable time and resources. Furthermore, listed issuers are already responsible for preparing detailed ESG reports in addition to financial statements; introducing this requirement may significantly increase their administrative and financial burdens. There are also worries that the evaluation process may focus too heavily on quantitative performance indicators while disregarding qualitative contributions.
Question 12: Do you agree with our proposal to upgrade from a CP to a MDR the requirement on the annual review of the implementation of an issuer’s board diversity policy? Please provide reasons for your views.
Response 12: We could not reach a consensus;
We agree that issuers should undertake an annual review of their board diversity policies. However, for some small and medium-sized issuers, developing and maintaining detailed diversity policies may impose additional financial and administrative burdens. Moreover, collecting and disclosing diversity data regarding employees (such as race, gender, religion, etc.) may involve sensitive privacy concerns and data processing challenges. Additionally, varying understandings and acceptance of diversity across different regions and cultures may complicate the development of differentiated diversity policies for globally operating issuers.
Question 13: Do you agree with our proposal to require as a revised MDR separate disclosure of the gender ratio of: (i) senior management; and (ii) the workforce (excluding senior management) in the CG Report? Please provide reasons for your views.
Response 13: We could not reach a consensus;
Some support the proposal, while others argue that differing regional and cultural understandings of diversity may hinder global issuers from formulating tailored diversity policies in various regions. Furthermore, cultural backgrounds may shape different expectations regarding women's roles in the workplace. Other factors contributing to diversity, beyond gender, should also encompass age, cultural background, educational background, professional experience, and additional dimensions.
Question 14: Do you agree with our proposal to codify the arrangements during temporary deviations from the requirement for issuers to have directors of different genders on the board as set out in draft MB Rule 13.92(2) in Appendix I? Please provide reasons for your views.
Response 14: We could not reach a consensus;
We encourage issuers to actively consider the requirement for diversity policies that encompass directors of different genders. Concurrently, it is essential to balance the corporate characteristics, talent needs, and other factors, as gender representation may be skewed towards one gender in certain specific industries. Other factors contributing to diversity, beyond gender, should also encompass age, cultural background, educational background, professional experience, and more.
Question 15: Do you agree with our proposal to:
(a) emphasise in Principle D.2 the board’s responsibility for the issuer’s risk management and internal controls and for the (at least) annual reviews of the effectiveness of the risk management and internal control systems; and
(b) upgrade the requirement to conduct (at least) annual reviews of the effectiveness of the issuer’s risk management and internal control systems to mandatory and require the disclosures set out in MDR paragraph H?
Please provide reasons for your views.
Response 15:
(a) We agree;
This can reinforce the board's accountability for the issuer's risk management and internal controls. An annual review of these systems ensures they are responsive to current market conditions and the company's operational needs.
(b) Some agree;
For smaller issuers, ensuring adequate resources (including funding and personnel) to support these activities may be challenging. These compliance and operational costs may impose an administrative and financial burden. Mandatory annual reviews could complicate operational processes, especially for issuers already encountering industry-specific or market challenges. Excessively frequent reviews may not necessarily enhance risk management. Overly frequent regulatory demands may divert management’s focus. The exchange should consider both regulatory perspectives and the financial and administrative resources of issuers, especially regarding compliance costs, to balance interests.
Question 16: Do you agree with our proposal to refine the existing CPs in section D.2 of the CG Code setting out the scope of the (at least) annual reviews of the risk management and internal control systems? Please provide reasons for your views.
Response 16: Some agree;
As previously mentioned, additional compliance and operational costs may impose an administrative and financial burden on smaller issuers. Mandatory annual reviews may complicate operations, particularly for those facing industry-specific or market obstacles.
Question 17: Do you agree with our proposal to introduce a new MDR requiring specific disclosure of the issuer’s policy on payment of dividends and the board’s dividend decisions during the reporting period? Please provide reasons for your views.
Response 17: Some agree;
However, publicly disclosing dividend policies may hinder the company's ability to adjust its financial strategies when necessary, particularly during economic uncertainties or when substantial capital investments are required. Additionally, excessive transparency regarding dividends may lead market participants to speculate about the company’s financial trajectory, potentially causing stock price fluctuations. Meeting various regulatory disclosure standards may elevate legal and compliance costs. It is also necessary to evaluate whether it is appropriate to increase issuers' legal and compliance costs in the current volatile capital market, where fundraising capabilities are constrained.
Question 18: Do you agree with our proposal to introduce a Listing Rule requirement for issuers to set a record date to determine the identity of security holders eligible to attend and vote at a general meeting or to receive entitlements? Please provide reasons for your views.
Response 18: We agree;
Setting a record date is a crucial step to ensure that the appropriate security holders can participate in shareholder meetings, vote, and receive benefits.
Question 19: Do you agree with our proposal to codify our recommended disclosures in respect of issuers’ modified auditors’ opinions into the Listing Rules? Please provide reasons for your views.
Response 19: We agree;
Detailed descriptions of specific issues leading to non-unqualified opinions, including the potential impact on financial statements, such as affected financial data and ratios, should be clearly addressed. Furthermore, the implications of related issues on the issuer’s financial stability, operational status, and future prospects should be outlined to assist investors in understanding the severity and nature of these issues.
Question 20: Do you agree with our proposal to clarify our expectation of the provision of monthly updates in CP D.1.2 and the note thereto? Please provide reasons for your views.
Response 20: Some agree;
The proposed content involves sensitive company information, as monthly updates would encompass management accounts and related information. This may necessitate professional expertise for review and may involve business confidentiality. Non-executive directors should not overly engage in management's operational decisions based on unverified financial data. We suggest reassessing the proposed content.
Question 21: Do you agree with our proposal to align requirements for the nomination committee, the audit committee and the remuneration committee on establishing written terms of reference for the committee and the arrangements during temporary deviations from requirements as set out in draft Main Board Listing Rules 3.23, 3.27, 3.27B, 3.27C and 8A.28A in Appendix I? Please provide reasons for your views.
Response 21: We agree;
This approach helps unify the regulations governing the nomination committee with those of the existing audit committee and remuneration committee.
Question 22: Do you agree with the proposed implementation date of financial years commencing on or after 1 January 2025, with transitional arrangements151 as set out in paragraphs 182 to 183 of the Consultation Paper? Please provide reasons for your views.
Response 22: We could not reach a consensus;
Some question the appropriateness of increasing issuers' legal and compliance costs in the current unstable capital market environment, where fundraising capabilities are limited.
For any inquiries regarding this letter, please do not hesitate to reach out to me (phone: / email: ) or Mr. Chan Chun-wing (phone: / email: ).
Best regards,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association