The Stock Exchange of Hong Kong Limited (“SEHK“) has amended its Listing Rules, including the Corporate Governance Code (“CG Code”), to enhance the corporate governance framework and promote good governance among issuers. The amendments follow a consultation period and the conclusions drawn in the published Consultation Conclusions.
The amendments emphasize the importance of good corporate governance as part of any Environmental, Social and Governance (ESG) program, among other things, and highlight the requirement for issuers to establish and maintain appropriate and effective risk management and internal control systems. Of note is that whistleblowing and anti-corruption (ABC) policies and systems is now a CG Code provision, rather than only a recommended best practice. It is important for all issuers – and those preparing to list – to ensure compliance with the amendments, most of which came into effect on 1 January 2022.
The amendments cover a number of aspects of good corporate governance, including:
1. Establishing good corporate culture
- The board should ensure alignment between the company’s culture and its purpose, values and strategy. This includes acting with integrity, leading by example and instilling values of acting lawfully, ethically and responsibly.
- Issuers should implement a whistleblowing policy and system for employees and those who deal with the issuer (e.g., customers and suppliers) to raise concerns of impropriety, in confidence and anonymity, with the audit committee or other appropriately designated committee.
- Issuers should establish policies and systems that promote and support anti-corruption laws and regulations.
2. Diversified board composition
- The SEHK has made it clear that the Exchange will not consider diversity to be achieved for a single gender board. Issuers with a single gender board have a 3-year transition period in which to comply, meaning that issuers must appoint a director of a different gender no later than 31 December 2024.
- Issuers are required to disclose and explain their board diversity policies and progress, including sharing a number of metrics such as how and when gender diversity will be achieved, the numerical targets and timelines proposed, and measures the company has adopted to develop a pipeline of potential successors to the board.
3. Improved communications with shareholders
- It is now a mandatory disclosure requirement for issuers to disclose the shareholders’ communication policy (or its summary) and annually review the policy’s implementation and effectiveness.
4. Evaluation of ESG risk and ESG reporting
- The board is responsible for evaluating and determining material risks relating to ESG, along with ensuring the issuer establishes and maintains appropriate and effective risk management and internal control systems. These risks and controls are to be evaluated annually.
- Issuers are to publish ESG reports at the same time as the annual reports. This has the effect of shortening the timeframe for reporting. More information is found in the ESG Reporting Guide at Appendix 27 of the Listing Rules.
The complete set of amendments to the CG Code is published on the SEHK website here. The SEHK has also published new guidance (Corporate Governance Guide for Boards and Directors) to assist with compliance with the new requirements.
A strong ethical culture and compliance program are at the heart of good corporate governance. Issuers should take steps to review and enhance their compliance program:
- Reviewing the existing set of policies and procedures, particularly in relation to corporate governance, anti-corruption and whistle-blowing. The program must adequately address the risks and ensure the required procedure for escalating improprieties is in place.
- Evaluating the company’s ESG risk and compliance. The focus on ESG programs from all facets will only increase, making it important to ensure that your company is aware of and taking measures to comply with any of its ESG obligations.
- Validating ESG and corporate social responsibility statements. With the increase in “greenwashing” claims – and the ESG reporting obligations – it is important that regular and robust validation investigations are conducted into the steps taken to meet any goals or targets to ensure that the statements are accurate and supported.
If you would like clear, practical guidance on designing, establishing and maintaining a robust compliance program, please refer to Baker McKenzie’s 5 Essential Elements Of Corporate Compliance.