Development of Corporate Governance Practice in Hong Kong

Listed companies in Hong Kong are required to prepare a Corporate Governance Report in their annual reports, and if any, in their summary financial report too. Any failure to do so will be regarded as a breach of the Exchange Listing Rules. The report is to be prepared by the board of directors and must include information on: -

• Corporate governance practices;

• Directors' securities transactions;

• Board of directors;

• Chairman and Chief Executive;

• Non-executive directors;

• Board committees;

• Auditor's remuneration;

• Company Secretary;

• Shareholders' rights;

• Investor relations; and

• Risk management and internal control.

Development in Hong Kong

It all started in January 2004, when the Hong Kong Exchanges and Clearing Limited (HKEX) published a consultation paper on the drafting of the Corporate Governance Practices and Corporate Governance Report. The paper set out two main parts - the 'comply or explain' code provisions and the recommended best practices, which became effective on 1 January 2005 with one exception.

The exception was provided for delaying the disclosure requirements regarding internal controls which was later implemented for accounting periods after 1 July 2005. In December 2010, the HKEX published the second paper on this matter containing proposals to amend the Corporate Governance Code (as renamed) and the Rules pertaining to corporate governance. The paper included (i) the structure and composition of the board, (ii) the roles of non-executive directors, and (iii) board committees to deal with audit, remuneration matters and nomination matters. With increasing emphasis on corporate governance, the 2010 consultation paper sought to "upgrade" a number of code provisions and recommended best practices into the Listing Rules. For example the HKEX proposed that independent non-executive directors should form at least one-third of an issuer’s board and issuers should establish a remuneration committee. Furthermore, the principles for company secretary were added to the Corporate Governance Code and the majority of the recommended best practices were upgraded to code provisions.

The HKEX concluded the consultation in October 2011 and the amendments to the Corporate Governance Code became effective on 1 April 2012. In September 2012, the HKEX published the third paper seeking comments on its proposed amendment to board diversity. The consultation concluded in December 2012 and the amendments introduced code provisions requiring issuers to formulate policy on board diversity, which should be disclosed in its Corporate Governance Report along with any measurable objectives for implementing the policy and progress on achieving those objectives. The amendments to the Corporate Governance Code became effective on 1 September 2013.

In December 2014, the HKEX published the fourth paper concluding its review on risk management and internal control. The main changes to the Corporate Governance Code included codification of risk management where appropriate, definitions on the roles and responsibilities of the board and management, as well as confirmation on the board's ongoing responsibility on risk management and internal control. The Corporate Governance Code and Corporate Governance Report was amended accordingly and became effective for listed issuers for accounting periods after 1 January 2016.

In November 2017, the HKEX published the fifth paper for its new measures to enhance (i) the transparency and accountability of the board, (ii) the transparency of independent non-executive directors and their relationships with issuers, (iii) the criteria for assessing independence of potential independent non-executive director candidates, (iv) the board diversity including gender diversity, and (v) transparency on dividend policy. Collectively, these measures took effect on 1 January 2019.

Our thoughts:

The first Corporate Governance Code was implemented on 1 January 2005 and was revised in 2012, 2013, 2016 and 2019 to keep up with best practice. It is essentially a set of non-statutory document issued under the Listing Rules in Appendix 14.

We think that the code will continue to be revised over the coming years. For corporate governance professionals seeking reference on best practice, s/he should bear in mind that while the code in Hong Kong draws inspiration from the UK Corporate Governance Code, unlike the United Kingdom, Hong Kong adopts a hybrid approach (rule-based and principle-based approach) for corporate governance.

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