China: Lifting Standards in Listed Companies: The Hong Kong Stock Exchange publishes its consultation conclusions on the Corporate Governance Code

Last Updated: 17 August 2012
Article by Jill Wong

The Hong Kong Stock Exchange ("HKEx") recently published its Consultation Conclusions on its review of the Corporate Governance Code ("Code") and associated Listing Rules (together, the "Conclusions"), ploughing ahead with its proposals to lift standards of governance in Hong Kong listed companies (each an "Issuer"). As was not totally unexpected, HKEx toned down some of its more controversial proposals, but it is clearly determined to improve corporate governance in listed companies by pushing ahead with the adoption of many of its original proposal.

The Conclusions followed a Consultation Paper released by HKEx in December 2010, which attracted a large number of submissions/comments from industry players.The Conclusions can be found here.

HKEx will introduce amendments to the Main Board and GEM Listing Rules, and also amend the existing Corporate Governance Code.1A complete copy of the amendments to Main Board Rules and the Code can be found here.

What are the significant changes?

The table at the end of this alert summarises the major changes and their implementation dates. Most of them will be implemented by January or April 2012.Our comments on some of these changes appear below.

Directors must take an active interest in an Issuer's affairs and to be provided with management updates

The current Rule 3.08 will be expanded to state that a director has a duty to take an active interest in the affairs of the Issuer, to obtain a general understanding of its business and is obliged to investigate anything untoward.The amendment to this Rule specifically notes that attendance at formal meetings alone does not satisfy directors' duties.

Directors should not be surprised; this reflects the current expectations of courts, regulators and investors, and is part of the trend towards greater accountability.The Australian case of Centro is a further demonstration of current expectations of competence and accountability, as directors there were found to have breached their duties of care and diligence for failing to read and understand financial reports. Please see our client alerts on Centro at 1 September 2011 and 30 June 2011, as well as our client alerts on Fortescue at 8 March 2011 and James Hardie at 13 May 2011, all of which comment on recent landmark pronouncements on directors' duties and liabilities that are likely to be referred to by Hong Kong regulators and stakeholders when determining the standards to which directors' duties in Issuers in Hong Kong should be judged.

A related change to the Code, which will assist directors to effectively perform their duties, will oblige an Issuer to provide monthly management updates to directors.These updates may not necessarily be in the form of management accounts, but must be sufficient to give directors a balanced and understandable assessment of the Issuer's performance, position and prospects.

As additional measures to be implemented by amendments to the Code, HKEx will now expect the board ("Board") of directors of an Issuer to review whether directors are spending sufficient time on the Issuer's affairs, and directors must inform the Board of any significant change to their time commitments to the Issuer.HKEx will not proceed with a proposal to oblige directors to obtain a minimum of 8 hours of training in a financial year but will instead expect the Issuer to disclose how directors complied with their training obligations.

Removal of the 5% exemption for voting by a director on a matter in which they have a personal interest

Previously, a director with 5% or less interest in a company's issued shares or voting rights would be allowed to vote on a transaction between the Issuer and that company, on the basis that 5% interest was de minimis. This threshold will now be removed.2 Going forward, directors will need to make a more considered assessment of whether a transaction is "material" (HKEx has declined to define "materiality"). 

Expanding the role of Independent Non-Executive Directors ("INEDs") and introducing further measures to ensure their independence

Rule 3.10A will be amended so that at least one-third of the Board need to be INEDs. This emphasises HKEx's intention to foster strong INED representation on the Board; according to HKEx, this will not impose an undue burden on Issuers as 80% of them need only to appoint one additional INED to meet the requirement. Alternatively, an Issuer could reduce the number of directors.The Rule, unlike the other changes, will become effective 31 December 2012 to allow Issuers time to comply.

Further changes demonstrate the growing importance of INEDs in good corporate governance - according to a new Code provision upgraded from existing Recommended Best Practices, an INED who has served for more than nine years will need shareholders' approval to continue to serve, and the Issuer will need to explain the reasons for the INED's re-election and his independence in any circular for the INED's re-election. Moreover, under the new Rule 3.25, the chairman of the Remuneration Committee of an Issuer will, in the future, need to be chaired by an INED.

Measures focusing on an Issuer's auditor and company secretary

Any appointment or removal of an auditor before the end of the auditor's term will require shareholders' approval at a general meeting. To increase transparency, and so shareholders understand why an auditor is being removed, an Issuer proposing to remove an auditor will need to send a circular to shareholders and the auditor will be allowed to make representations to shareholders.

For compliance with a new Code provision, an Issuer will also have to ensure that auditors attend the Annual General Meeting; this should not be an onerous obligation as most auditors do attend AGMs as a matter of practice.

Under a new Code provision, a company secretary's selection, appointment or dismissal must be discussed at a physical Board meeting, again to ensure these events receive appropriate Board attention. There will also be new rules setting out qualifications and experience for company secretaries, as well as a new section in the Code describing their roles and responsibilities.  In particular, a company secretary will need to complete 15 hours of professional training service each financial year to comply with a new Rule.

Emphasising the roles of Board committees

HKEx will also introduce new measures so that Board committees are more effective. For example, an Issuer must establish a remuneration committee with a majority of INEDs, the chairman must be an INED, and there must be written terms of reference for the committee. A nomination committee is also expected to be established, with a majority of INEDs and written terms of reference, although HKEx will allow the chairman to be either the Board chairman or an INED. HKEx will leave it up to Issuers whether to establish a corporate governance committee or the Board can elect to retain these responsibilities themselves.

Key dates

The changes come into effect on the following dates:

  • 31 January 2012 - most of the Rule amendments.
  • 1 April 2012 - the Code and the new Rules.
  • 31 December 2012 - Rule regarding independent non-executive directors.

What do Issuers need to do?

  • By January 2011
    • Review and, if necessary, update training for Directors so that they properly understand the scope of their duties, that is, to take an active interest in, and understand the business of, the Issuer.  For example, they could be provided with a management overview of the business, operations, and informed of internal procedures to escalate issues or problems;
    • Review the qualifications of the company secretary;
    • Take internal steps to ensure Directors understand, and voting at board meetings reflect, the removal of the 5% threshold; and
    • Put in place compliance procedures for timely notification of change of directors and their information.
  • By April 2012
    • Establish procedures to keep track of Directors' activities : attendance at board meetings, training, and time of service of INEDs i.e. time spent on corporate governance;
    • Establish remuneration and nomination committees; or where you already have them, review their terms of reference (as well as those of the audit committee);
    • Establish an internal system to provide monthly management updates to Directors; and
    • Establish policies and procedures around communication with shareholders.
  • By December 2012
    • Ensure at least one-third of the Board consists of INEDs.

What do Directors of Issuers need to do?

  • Ask the Issuer what it is doing to comply with the new rules; and
  • Refresh your knowledge of directors' duties.
Subject and Relevant Rules/Code Summary of the Proposals Adopted? Implementation Date
Directors' duties
Main Board Rule (MB R) 3.08,
GEM Rule (GEM R) 5.01
Directors to take an active interest in the issuer's affairs and obtain a general understanding of its business and follow up on anything untoward. 1 January 2012
Disclosure of chief executive's remuneration
MB R 13.51, GEM R 17.50
Issuer to disclose the remuneration of a chief executive who is not a director. 1 January 2012
Company secretary's qualifications, experience and training
MB Rs 3.28, 3.29, and 19A.16, GEM Rs 5.14, 5.15 and 25.11
Specifying the academic or professional qualifications that the Exchange would consider acceptable.
The requirement for a company secretary to be ordinarily resident in Hong Kong will be removed.
Company secretaries will require 15 hours' professional training in a financial year (there will be a transitional period for implementation.
1 January 2012
Removing 5% threshold for voting on a resolution in which a director has an interest
MB R 13.44, GEM R 17.48A
The 5% exemption for voting by a director on a board resolution in which he has an interest, will be removed. 1 January 2012
Notifying directorship change and disclosure of directors' information (including the chief executive)
MB R 13.51, GEM R 17.50, new CP A.3.2
Issuer to:
  1. disclose information on the retirement or removal of a director or supervisor;
  2. disclose information on the appointment, resignation, re-designation, retirement or removal of a chief executive;
  3. disclose a director's information on all civil judgments of fraud, breach of duty, or other misconduct involving dishonesty; and
  4. clarify that the sanctions referred to in Rule 13.51B(3)(c) are those made against the issuer.
1 January 2012
Shareholders' approval to appoint and remove an auditor
MB R 13.88, GEM R 17.100
Shareholders' approval to be required at a general meeting of any proposal to appoint or remove an auditor before the term of his office. The Rule requires the issuer to send a circular containing any written representation from the auditor to shareholders and the auditor to be allowed to make written and/or verbal representations at the general meeting. 1 January 2012
Directors' time commitments Code3: A.1 Principle, new CP A.6.6 The board to regularly review the contribution by a director in the performance of his responsibilities to the issuer, and whether he is spending sufficient time. Directors should inform the issuer of any change to their significant commitments in a timely manner. 1 April 2012
Directors' training
New CP A.6.5, and new mandatory disclosure requirement under Paragraph I(i) of the Code
Issuer to disclose in its Corporate Governance Report how directors complied with training. 1 April 2012
An INED who has served nine years
New CP A.4.3
Shareholders should vote to retain an INED who has served on the board for more than nine years. Also, an issuer should include the reasons why the board considers the INED independent in the circular nominating him for election. 1 April 2012
A. Remuneration committee
MB Rs 3.25 to 3.27, GEM Rs 5.34 to 5.36, new CPs B.1.1 to B.1.4 and RBPs B.1.6 to B.1.8, new mandatory disclosure requirement under Paragraph L(d)(i) of the Code
Issuer to establish a remuneration committee with a majority of INED members; an INED as chairman of remuneration committee and written terms of reference for the remuneration committee. 1 April 2012
B. Nomination committee New CPs A.5.1 to A.5.5, new mandatory disclosure requirement under Paragraph L(d)(ii) of the Code Issuer to establish a nomination committee with a majority of INEDs; chaired by an INED or the board chairman; establish a nomination committee with written terms of reference and include, as one of the nomination committee's duties, a review of the structure, size and composition of the board at least annually to complement the issuer's corporate strategy. 1 April 2012
C. Corporate governance functions New CPs D.3.1 and D.3.2, new mandatory disclosure requirement under Paragraph L(d)(iii) of the Code The board to be responsible for corporate governance, and to disclose the corporate governance policy and duties performed in the Corporate Governance Report. 1 April 2012
D. Audit committee New CPs C.3.7 and C.3.3(e)(i), and RBP C.3.8. New mandatory disclosure requirement under Paragraph L(d)(iv) of the Code
An audit committee's terms of reference should include arrangements for employees to raise concerns about financial reporting improprieties.
An audit committee should meet the external auditor at least twice a year.
1 April 2012
Disclosure of senior management remuneration by band New CP B.1.5 Senior management remuneration should be disclosed by band. 1 April 2012
Directors' attendance at board meetings New CP A.1.7, new mandatory disclosure requirement under Paragraph I(c) of the Code An issuer may count attendance by electronic means (including telephonic or video-conferencing) as attendance at a physical board meeting (subject to other applicable law). 1 April 2012
Providing monthly information to board members to enable them to discharge their duties New CP C.1.2 Management should provide monthly updates to board members giving a balanced and understandable assessment of the issuer's performance, position and prospects in sufficient detail. 1 April 2012
Directors' attendance at meetings
New CPs A.6.7 and A.6.8, new mandatory disclosure requirement under Paragraph (I)(c) of the Code
New CP E.1.2
Non-executive directors, including INEDs, should attend board, committee and general meetings and contribute to the issuer's strategy and policies.
Issuer to disclose details of the attendance at general meetings of each director by name in its Corporate Governance Report.
1 April 2012
Auditor's attendance at AGMs
New CP E.1.2
Issuer to ensure that the external auditors attend the AGM to answer questions about the conduct of the audit, the preparation and content of the auditors' report, accounting policies and auditor independence. 1 April 2012
Shareholders' rights
New mandatory disclosure requirements under Paragraph O of the Code
An issuer must disclose the following "shareholder rights" information in its Corporate Governance Report:
  1. the way in which shareholders can convene an extraordinary general meeting;
  2. the procedures for sending enquiries to the board; and
  3. the procedures for making proposals at shareholders' meetings.
1 April 2012
Establishing a communication policy
New CP E.1.4
Issuer to establish a shareholder communication policy. 1 April 2012
Publishing constitutional documents on website
MB R 13.90, GEM R 17.101
Issuer to publish an updated and consolidated version of its constitutional documents on its own website and the HKEx website. 1 April 2012
Publishing procedures for election of directors
MB R 13.51D, GEM R 17.50C
Issuer to publish on its website the procedures shareholders can use to propose a person for election as a director. 1 April 2012
New section in Code on Company Secretary
New Section F of the Code
  1. The company secretary should be an employee of the issuer;
  2. the selection, appointment, or dismissal of the company secretary should be a board decision;
  3. the company secretary should report to the board chairman and/or the chief executive; and
  4. all directors should have access to the advice and services of the company secretary.
1 April 2012
INEDs to form one-third of board
MB Rs 3.10A and 3.11, GEM Rs 5.05A and 5.06
At least one-third of an issuer's board should be independent non-executive directors (INEDs). In addition, an issuer will have a three-month period to appoint a sufficient number of INEDs to comply with the one-third Rule after failing to meet the requirement. By 31 December 2012


1 Compliance with Listing Rules is mandatory for all issuers; whereas compliance with the Code is not. However, the "comply or explain" principle continues to apply to the Code provisions, so when an issuer does not comply with the Code provisions, they must explain why with considered reasons.

2 By an amendment to Rule 13.44.

3 Although the wording of the Main Board Code (Appendix 14) and the GEM Code (Appendix 15) are not identical, the paragraph numberings in both Codes are the same.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions