Hong Kong: Hong Kong Listed Companies to Observe Much Stricter Corporate Governance Practices in Line With Global Trends

Last Updated: 28 January 2005

The Hong Kong Stock Exchange announced on 19 November 2004 certain amendments to the Listing Rules of both the Main Board and the GEM Board to introduce a revised Code on Corporate Governance Practices (the "Code") and Rules on the Corporate Governance Report (the "Rules").

In the Main Board Rules, the Code replaces the Code of Best Practice in Appendix 14, and the Rules are inserted as a new Appendix 23. In the GEM Rules, the Code is inserted as new Appendix 15 and replaces existing GEM Rules 5.35 to 5.45. The Rules are inserted into the GEM Rules as a new Appendix 16.

The Code sets out the principles of good corporate governance and two levels of recommendations, namely Code Provisions and Recommended Best Practices. Listed companies are expected to comply with, but may choose to deviate from, the Code Provisions and are encouraged to comply with the Recommended Best Practices which are provided for guidance only. All listed companies must state in their interim/half-year reports and annual reports whether they have complied with the Code Provisions for the relevant accounting period.

The amendments, with one exception and subject to transitional arrangements, will come into effect for accounting periods commencing on or after 1 January 2005.

All the major amendments are summarized in the tables below.

Appendix 14 of the Main Board Rules and Appendix 15 of the GEM Rules

A. Directors

A.1 The Board

  • Board meetings should be held at least four times a year at approximately quarterly intervals. (A.1.1)
  • Notice of at least 14 days should be given of a regular board meeting. (A.1.3)
  • Draft and final versions of minutes of board meetings should be sent to all directors within a reasonable time. (A.1.6)
  • If a substantial shareholder or a director has a conflict of interest in a matter to be considered by the board, a board meeting should be held. Independent non-executive directors should be present at such board meeting. (A.1.8)

A.2 Chairman and Chief Executive Officer

  • The roles of chairman and chief executive officer should be separate and should not be performed by the same individual.
  • Issuers must disclose in their Corporate Governance Report the identity of the chairman and the chief executive officer and whether these two roles are segregated. (A.2.1)

A.3 Board Composition

  • The independent non-executive directors should be expressly identified as such in all corporate communications that disclose the names of directors of the issuer. (A.3.1)

A.4 Appointments, re-election and removal

  • Every director should be subject to retirement by rotation at least once every three years. (A.4.2)

A.5 Responsibilities of directors

  • The functions of non-executive directors should include:
  1. participating in board meetings to bring an independent judgement to bear on issues of strategy, policy, performance, accountability, resources, key appointments and standards of conduct;
  2. taking the lead where potential conflicts of interests arise;
  3. serving on the audit, remuneration, nomination and other governance committees, if invited;
  4. scrutinising the issuer’s performance in achieving agreed corporate goals and objectives, and monitoring the reporting of performance. (A.5.2)

A.6 Supply of and access to information

  • In respect of regular board meetings, an agenda and accompanying board papers should be sent to all directors at least 3 days before the intended date of a board or board committee meeting. (A.6.1)

B. Remuneration of Directors and Senior Management

B.1 The level and make-up of remuneration and disclosure

  • A majority of the members of the remuneration committee should be independent non-executive directors. (B.1.1)
  • Directors’ fees and any other reimbursement or emolument payable to a director must be disclosed in full in the annual reports and accounts of the issuer on an individual and named basis.

Appendix 23 of the Main Board Rules

(a) Corporate governance practice

  • A narrative statement of how the listed issuer has applied the principles in the Code.
  • A statement as to whether the listed issuer has complied with the provisions of the Code.
  • Details of any deviation from the provisions of the Code during the financial year (including considered reasons for such deviations).

(b) Director’s securities transactions

  • Whether the listed issuer has adopted a code of conduct regarding directors’ securities transactions on terms no less exacting than the required standard set out in the Model Code set out in Appendix 10.
  • Whether the directors of the listed issuer have complied with the required standard set out in the Model Code.
  • Details of any non-compliance and an explanation of the remedial steps taken by the listed issuer to address such non-compliance.

(c) Board of directors

  • Composition of the board.
  • Number of board meetings held during the financial year.
  • Individual attendance of each director, on a named basis, at the board meetings.
  • A statement of how the board operates.
  • Details of non-compliance with rules 3.10(1) and (2) and an explanation of the remedial steps taken relating to appointment of a sufficient number of independent non-executive directors.
  • Reasons why the listed issuer considers an independent non- executive director to be independent.
  • Relationship among members of the board.

(d) Chairman and Chief Executive Officer

  • Identity of the chairman and chief executive officer.
  • Whether the roles of the chairman and chief executive officer are segregated.

(e) Non-executive directors

  • The term of appointment of non-executive directors.

(f) Remuneration of directors

  • The role and function of the remuneration committee (if any) or the reason(s) for not having a remuneration committee.
  • The composition of the remuneration committee (if any).
  • The number of meetings held by the remuneration committee during the year and the record of individual attendance of members on a named basis.
  • A summary of the work performed by the remuneration committee.

(g) Nomination of directors

  • The role and function of the nomination committee (if any).
  • The composition of the nomination committee.
  • The nomination procedures and the process and criteria adopted by the nomination committee or the board of directors (if there is no nomination committee) to select and recommend candidates for directorship during the year.
  • A summary of the work performed by the nomination committee.
  • The number of meetings held by the nomination committee during the year and the record of individual attendance of members on a named basis.

(h) Auditors’ remuneration

  • An analysis of remuneration in respect of audit and non-audit services provided by the auditors.

(i) Audit committee

  • Its role, function and composition of the audit committee members.
  • The number of audit committee meetings held during the year and record of individual attendance of members on a named basis.
  • A report on the work performed by the audit committee during the year in discharging its responsibilities.
  • Details of non-compliance with rule 3.21 (if any) and an explanation of the remedial steps taken by the listed issuer to address such non-compliance.


  • An acknowledgement from the directors of their responsibility for preparing the accounts and a statement by the auditors about their reporting responsibilities. (C.1.2 of the Code)
  • Report on material uncertainties relating to events or conditions that may cast significant doubt upon the listed issuer’s ability to continue as a going concern. (C.1.2 of the Code)
  • A statement that the board has conducted a review of the effectiveness of the system of internal control. (C.2.1 of the Code)
  • A statement from the audit committee explaining its recommendation and the reason(s) why the board has taken a different view from that of the audit committee regarding the selection, appointment, resignation or dismissal of the external auditors. (C.3.5 of the Code)

Lawyers in our Corporate Finance and Securities departments advise on a wide range of compliance issues and transactional matters for Hong Kong listed companies. Please contact us if you need a full version of the above amendments or have any question relating to the above.

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.

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