Hong Kong exchange sketches proposal for corporate governance facelift (Westlaw Business)

January 18, 2011

Hong Kong By Helen H. Chan, Westlaw Business

Regulators of the Hong Kong’s bourse have embarked on a mission to make over the city’s policies on corporate governance. Citing the still-felt effects of the global financial crisis, the Hong Kong Exchange and Clearing Limited (HKEx) previously acknowledged the need to further clarify and refine Hong Kong’s corporate governance framework for listed issuers in the jurisdiction. Putting its observations into action, the regulator recently commenced a public consultation, soliciting market opinion on proposed amendments to Hong Kong’s Code on Corporate Governance Practices and the Rules Governing the Listings of Securities.

Of note, the Rules apply to all publicly listed companies in Hong Kong, regardless of domicile. In contrast to the Rules, which have full legal effect, the Code is a non-statutory guideline. Categorized into two levels of recommendations, code provisions and recommended best practices, the Code contains principles of good corporate governance practice; compliance is voluntary.

Overall, the reforms seek to increase transparency in the disclosures of listed issuers in Hong Kong. With a view to encouraging management accountability, the reforms proposed by the HKEx center around duties of directors and the role of other governance guiding figures such as in-house counsel and company secretaries. Of note, a portion of the reforms address the duties and responsibilities of independent non-executive directors, a role that has traditionally received less attention from Hong Kong lawmakers.

(To see the proposal, please click here: http://www.hkex.com.hk/eng/newsconsul/hkexnews/2010/101217news.htm)


Presently in Hong Kong, directors have a legal obligation to uphold duties of care and good faith. Similar to other jurisdictions such as the United States and United Kingdom, directors should avoid conflicts of interest and fully disclose contracts with the issuing company. In the consultation, the HKEx has highlighted market concern over whether directors, particularly independent non-executive directors, are able to uphold their fiduciary duties.

According to issues raised by the HKEx in its consultation paper, a number of directors take on multiple directorships, which can “compromise their ability to devote sufficient time and energy to their duties.” Independent non-executive directors in particular may also take on other directorships and professional commitments. For example, the president of the Lingnan University of Hong Kong and a founding member of the Hong Kong University of Science and Technology is also currently an independent non-executive director of cosmetic retailing conglomerate SaSa International.

Similarly, the chairman of the board of directors of Zoomlion, Hong Kong’s last IPO of 2010 also chairs the boards of various Zoomlion subsidiaries headquartered in Hong Kong and cities in mainland China. According to offering documents submitted by Zoomlion to the HKEx, the chairman is also an active public civil servant in the PRC’s National People’s Congress, as well as an associate professor at two universities in China.

To address concerns over directors’ duties and time commitments, the HKEx may, upon market consultation, consider a legal cap on the number of directorships a director can concurrently hold. Hong Kong’s bourse regulator further added that “in a number of disciplinary cases, an obvious lack of attention given by independent non-executive directors to their duties” was a contributing factor to non-compliance. In comparison, independent directors can hold up to a maximum of five concurrent independent directorships of listed companies in mainland China under PRC law.

Aside from regulating directors’ duties, the HKEx is also considering requiring independent non-executive directors to comprise one third of a listed company’s board. Currently, 21 percent of listed issuers in Hong Kong do not meet this requirement.


In addition to shining the responsibility spotlight on executive and non-executive directors, the HKEx has suggested a number of legislative changes be made to regulations governing the formation of the board committees specifically to deal with remuneration. Independent non-executive directors should comprise a majority of the remuneration committee to minimize conflicts of interest in board members approving their own remuneration. Material disagreements between the committee and the board should be disclosed to shareholders in the company’s corporate governance report.

Recognizing the role of company secretaries in facilitating good corporate governance practices, the HKEx has proposed to create a section in the Rules outlining the role and responsibilities of company secretaries. The proposed duties will include advising the board on governance related matters and facilitating the professional development of the board of directors of an issuing company. Consistent with governance codes in Singapore, Australia and the United Kingdom, the HKEx may advise that the appointment and removal of company secretaries be a board decision.

Overall, the new amendments set forth by the HKEx allocate increased responsibility to non-executive directors. Directors, executive and non-executive alike, are a focal point of the potential legislative changes with fiduciary duties, time commitment and conflicts of interest all areas of proposed reform.

As a part of the consultation process, the HKEx has invited written contributions from institutional market participants and regulatory bodies before March 18, 2011. At the end of the consultation the HKEx, in cooperation with the Securities and Futures Commission will consider and implement legislative amendments.

This article was first published by Westlaw Business Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Westlaw Business Currents online at http://currents.westlawbusiness.com.

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