PRC: Key Employment Updates In New Listed Company Governance Rules

Effective 1 January 2026, the newly revised Code of Corporate Governance for Listed Companies ("Governance Code") has officially come into force. Formulated by the China Securities Regulatory Commission ("CSRC"), the Governance Code applies to share-limited companies established under the Company Law, whose stocks are listed and traded on domestic exchanges in China. The latest changes focus on rules for appointing and removing directors and senior management, along with mechanisms for compensation and incentives. This update highlights the key employment-related revisions in the Governance Code.

Qualification Requirements

The revised Governance Code sets out specific qualification requirements for directors and senior management of listed companies, and clearly lists out the scenarios where individuals are not allowed to serve as directors and senior management of such companies:

1. Circumstances specified in Article 178 of the Company Law prohibiting individuals from serving as directors or senior management, for example:
   • if the individual has no civil capacity or limited civil capacity;
   • if the individual has been sentenced to a criminal penalty for corruption, bribery, embezzlement, misappropriation of property or disruption of the socialist market economic order, or has been deprived of their political rights for a crime and the term of execution has not expired for five years, and if the person is given a suspended sentence, the period of probation has not expired for two years;
   • if the individual was a director, factory director or manager of a company or enterprise undergoing insolvent liquidation and bearing personal responsibility for the insolvency of the company or enterprise, and not more than three years have elapsed since the date of completion of the insolvent liquidation of the company or enterprise;
   • if the individual was the legal representative of a company or enterprise whose business license has been revoked or ordered to close due to illegal activities and bearing personal responsibility, and not more than three years have elapse since the date on which the company or enterprise had its business license revoked or was ordered to close; and
   • if the individual has been classified by the People's Court as a dishonest judgment debtor because they have incurred debts of a large amount that have not been settled by the due date;
2. Those subject to CSRC-imposed market bans from serving as directors or senior management, with the ban period not yet expired;
3. Those publicly recognized by the stock exchange as unsuitable for such roles, with the restriction period not yet expired;
4. Other circumstances as required by laws and regulations.

The Governance Code also requires that if a director or senior management falls into any of the above provisions during their term, they must immediately cease performing their duties and resign. If they fail to do so, the board must promptly remove them from their position once it is aware of, or ought reasonably to be aware of, the circumstance.

Post-Departure Responsibility

Previously, the Governance Code only required contracts between listed companies and directors to specify each party's rights and duties, the director's term of service, responsibility for breaches, and compensation for early contract termination. The revised Governance Code now also requires these contracts to clearly outline the directors' obligations and accountability after their departure.

Under the new Governance Code, a director's responsibilities for actions performed during their tenure do not end or become void upon departure. Any unfulfilled commitments at the time of a director's departure must continue to be performed. Listed companies are also required to assess whether departing directors have outstanding obligations, unfulfilled commitments, or suspected legal or regulatory violations.

Similarly, for senior management the Governance Code previously only required listed companies to clearly outline the rights and obligations of both parties in employment contracts with senior management. Under the revised Governance Code, the employment contracts must also set out senior management's responsibilities in the event that they violate laws, regulations, or the company's articles of association, as well as their obligations after leaving the company and procedures for accountability and compensation.

Compensation and Incentives

Another major highlight of the latest amendments to the Governance Code is the introduction of specific limits on compensation and incentives for directors and senior management. This change addresses market concerns about unreasonably high remuneration for directors and executives of publicly listed companies.

Compensation System and Structure. Listed companies are required to establish a comprehensive compensation management system. The pay structure for directors and senior management should include base salary, performance-based pay, and medium/long-term incentives, with performance pay accounting for at least 50% of the combined base and performance pay. Compensation levels must be aligned with company and individual performance, and support the company's sustainable development.

Performance-Based Pay Tied to Business Performance. The revised Governance Code stipulates that if a listed company's performance deteriorates (ie, moves from profit to loss, or increase in losses) but average performance pay for directors and senior management does not decrease accordingly, the company must disclose the reasons for the lack of, or disproportionate adjustment. However, limited exceptions and flexibility are provided to companies with clear business cycles, R&D-focused firms listed during loss periods, and rare technical talents.

Deferred Performance Payments. The revised Governance Code requires listed companies to defer payment of a portion of directors' and senior management's performance-based pay until after annual reports and performance evaluations are disclosed. Listed companies are also encouraged to tailor deferred pay arrangements to their industry and business models, specifying applicable scenarios, personnel, deferral rates, and implementation plans.

Clawback of Compensation and Incentives. Under the revised Governance Code, listed companies are required to reassess and recover any excess performance pay and medium/long-term incentives paid to directors and senior management in the event that the company is required to restate its financial reports due to material misstatements or fraud. Where directors or senior management are at fault for misconduct such as breach of obligations, financial fraud, misuse of funds, or providing illegal guarantees that cause losses to the company, the company should reduce or cease payment of any outstanding performance and incentive compensation, as well as fully or partially claw back payments that were already made to such directors or senior management for the relevant period.

Key Takeaways

Listed companies in China should proactively review and update their frameworks and practices relating to the appointment, removal and management of compensation and incentives to ensure alignment with the revised Governance Code and other relevant governance regulations. In addition, employers should also ensure that any related employment management, remuneration payment, recruitment and termination must comply with applicable PRC employment laws.

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.