On 10th December 2021, the Stock Exchange of Hong Kong Ltd (“SEHK”) issued its conclusions to a “Consultation Paper on Review of Corporate Governance Code and Related Listing Rules” (published in April 2021). As a result, with effect from 1 January 2022, listed issuers and IPO applicants are required to comply with new requirements relating to Board composition in terms of gender diversity as well as in relation to ESG. These changes have been incorporated into a new Corporate Governance Code
The SEHK has emphasized the need to change corporate culture and that “delivering effective corporate governance practices and ESG measures is more than a box-ticking exercise. The change needs to begin with a shift of mindset at the top of the organisations.”
In 2020, only 12.7% of women were represented on the Boards of Hong Kong listed companies. The SEHK has recognised the need for better representation in order to broaden the perspective, experience and skills-set in the board room. Nevertheless, the SEHK has stated that “gender diversity is a good starting point …….Issuers are encouraged to include a broader spectrum of diversity perspectives within their policies, recruitment approach and in their corporate reporting as appropriate”.
Accordingly, the following changes have been effected:
To phase out and ban single gender boards
Mandatory Disclosure Requirements
Issuers must include in their Corporate Governance reports the following information:
Issuers to annually review their Board diversity policy
The SEHK’s “Corporate Governance Guide for Boards and Directors” sets out a skills matrix to assist issuers in assessing whether their Board composition reflects the necessary balance of skills, experience and diversity. There is a requirement on the Board to review the implementation and effectiveness of its diversity policy annually.
Applications for listing must include directors’ gender information
A Board’s diversity-related information is now published on the Hong Kong Exchanges and Clearing Market’s (HKEX) website. The requirement to publicise such information is with a view to incentivising and encouraging issuers to promote diversity in the boardroom and also provide transparency on this issue to its investors and potential investors.
The SEHK’s views on the link between ESG and good corporate governance are expressed in their statement that “Corporate governance and ESG are complementary, with corporate governance inextricably linked to good governance of environmental and social issues. Issuers should identify risks which may have a material impact to the business and operations, evaluate and take appropriate steps to manage such risks. The board should consider ESG risks in the same way as other risks.”
Boards are required to evaluate and determine the nature and extent of ESG risks and to ensure that there is an effective risk management and internal control system. The ESG Reporting Guide as set out in Appendix 27 to the Listing Rules provides a framework on how to approach ESG issues which are or may be material to them.
In terms of ESG reporting, issuers are now required to publish ESG reports at the same time as the publication of their annual report as of 1st January 2022.
The SEHK also refers to climate-related risks and the adoption of the TCFD’s recommendations as a major priority on the global agenda. In this regard, issuers and IPO applicants should also refer to the SEHK’s “Corporate Governance and ESG (Climate Disclosures) Guidance” published on 5 November 2021. The Guidance (on the HKEX website) assists companies in assessing their response to climate change and their initiatives in reducing carbon emissions as well as guidance on Climate-Related Financial Disclosures (and aligns with TCFD reporting on climate change).