Enhanced corporate governance and ESG among listed companies and IPO applicants expected to be launched from 1 Jan 2022

20 August 2021 | PDF Version

On 16 April 2021, The Stock Exchange of Hong Kong Limited (“SEHK”) published a consultation paper, proposing to revise the Corporate Governance Code (“CG Code”) and relating Listing Rules to promote good corporate governance of the listed issuers. The proposal covers, among others, culture of issuers, independence of directors, board (gender) diversity and environmental, social and governance (“ESG”).

The consultation highlighted the importance for IPO applicants to include corporate governance considerations in their planning. The board of an IPO applicant is expected to be collectively responsible for ensuring the necessary governance mechanisms are built into the listing process. Upon the proposal on board diversity under the consultation becoming effective, IPO applicants will no longer be expected to have single gender boards. The Exchange will review the corporate governance and ESG disclosures in prospectuses to provide further guidance to IPO applicants later this year. IPO applicants may also refer to Practitioners Insights as published by SEHK in December 2020, for corporate governance and ESG insights and experiences shared by market practitioners when preparing for an IPO.

The consultation period ended on 18 June 2021. Subject to responses to the consultation, the proposals to the Listing Rules and CG Code are intended to be implemented commencing on or after 1 January 2022, except for those on long serving independent non-executive directors (“INED”), which SEHK intends to allow a three-year transition period such that the changes are expected to come into effect for financial year commencing on or after 1 January 2023.

The key proposed changes are set out below:

Proposals Remarks and observations 
I. Corporate Governance
Corporate Culture
Culture New code provision (“CP”) to require a listed issuer’s board to align the company’s culture with its purpose, value and strategy. SEHK will provide further guidance to explain board’s role in “culture”; key elements of a sound culture; and recommended disclosure. SEHK pointed out four common key elements in a sound culture: tone from the top, accountability, open and effective communication, and incentives to support company’s culture at all levels.
and whistleblowing
New CP to require establishment of an anti- corruption policy.

Upgrade from recommended best practice (“RBP”) to CP to require establishment of a whistleblowing policy.
SEHK will provide guidance on the elements to consider when formulating anti-corruption policy and whistleblowing policy, including the personnel or committee responsible for implementing such policies.

Under the ESG Reporting Guide (“ESG Guide”), issuers are required to disclose such policies or information on a “comply or explain” basis. Noting that there are overlapping requirements and information required for both the Corporate Governance Report (“CG Report”) and ESG Report, we are of the view that guidance from SEHK on how issuers could integrate their corporate governance compliance with ESG management approach and strategy going forward would be desirable.
Director’s independence
INEDs New CP to require disclosure of a policy to ensure independent views and input are available to the board, with an annual review of the implementation and effectiveness of such policy.

Revised CP to require (i) re-election of an INED serving more than 9 years (“Long Serving INED”) to be subject to independent shareholders’ approval, and (ii) additional disclosure to explain the factors considered, process and discussion of the board (or the nomination committee) in determining that such INED is still independent and should be re-elected.

New CP to require issuer to appoint a new INED at the forthcoming AGM where all the INEDS on the board are Long Serving INEDs, and disclose in the shareholders’ circular the length of tenure of the Long Serving INEDs on the board on a named basis.

New RBP that an issuer generally should not grant equity-based remuneration (e.g. share options or grants) with performance-related elements to INEDs.
The consultation does not elaborate on the meaning of independent shareholders’ approval nor does it specify who shall abstain from voting on a relevant resolution. It is therefore unclear whether the meaning of “independent shareholders" set out in the note to Rule 13.39 will be adopted (i.e. any shareholders other than controlling shareholders of the issuer and their associates or, where there are no controlling shareholders, any shareholders other than directors (excluding INEDs) and the chief executive of the issuer and their respective associates), such that the controlling shareholders or, without which, any shareholders who are directors (including the Long Serving INED, but excluding the other INEDs) and the chief executives, and their respective associates, cannot vote.
Board diversity
New mandatory disclosure requirement (“MDR”) to require all issuers to set and disclose in the CG Report numerical targets and timelines for achieving gender diversity at both (i) board level; and (ii) across the workforce (including senior management).

New CP to require the board to review annually the implementation and effectiveness of its board diversity policy.

Revised note to a listing rule to highlight that diversity is not considered to be achieved for single gender board.
If the proposals are implemented, it is proposed that existing issuers with single gender boards shall have a three-year transition period to appoint at least one director of the absent gender on the board, while IPO applicants are not expected to have single gender boards.

SEHK plans to display board diversity related information (including director’s age, gender and directorships) on its website.
Nomination committee
Chairman Upgrade a CP to a new rule to require issuers to establish a nomination committee chaired by an INED and comprising a majority of INEDs. SEHK will provide further guidance on the expected disclosures regarding INED nomination and appointment.
Communication with shareholders
Upgrade a CP to a MDR to require disclosure in the CG Report of the issuer’s shareholder communication policy (including channels for shareholders to communicate their views as well as steps taken to solicit and understand shareholders’ views); and a statement of issuer’s review of the effectiveness of the policy on an annual basis. SEHK will provide guidance on areas where company may provide more discussion or information for shareholders, including the company’s business strategies going forward, commercial rationale behind commercial transactions, director’s appointment process and succession planning, etc.
at general
A new rule requirement to require disclosure of directors’ attendance at general meetings in the poll results announcements. Timely attendance record may be useful for shareholders and investors to better assess directors’ commitment in the issuer’s affairs. For this purpose, SEHK will also provide guidance on the expected disclosure regarding audit committee (“AC”)’s work done in discharging its responsibility including how the AC reviews and monitors financial reporting, external auditor, internal audit and internal controls.
Term of non-executive directors (NEDs) Deleting the CP to require issuers to appoint NEDs for a specific term. NEDs will continue to be subject to retirement by rotation and shareholders’ approval for re-election at least once every three years.
II. Environmental, Social and Governance (ESG)
Linkage between CG Code and ESG New introductory paragraph in CG Code to set out the relationship between CG and ESG, and include ESG risks in the context of risk management under the CG Code. This proposal highlights the importance of having an effective governance structure so as to allow issuers to have a better understanding and evaluate and manage risks and opportunities.
ESG Reports Revised Rule and ESG Guide to require publication of ESG reports at the same time as publication of annual reports. Listed issuers are suggested to assign sufficient time and resources for the preparation of both reports simultaneously. If this proposal is adopted, it will take effect for issuers' financial year commencing on or after 1 January 2022.

Given the growing global trend and efforts in promoting corporate governance, SEHK has been committed to enhancing corporate governance amongst listed issuers and aligning Hong Kong with international standards and practices. Directors' independence and accountability, as well as board diversity will remain the focus of SEHK. In light of the continued global focus on the disclosure of ESG, SEHK has also expressed its intention to provide further guidance so as to encourage issuers to adopt the Recommendations of the Task Force on Climate-related Financial Disclosures when disclosing climate change-related information in compliance with the ESG Guide.

Listed issuers and IPO applicants are reminded to keep an eye on any new update on corporate governance requirements and ensure good governance is in place to comply with the Listing Rules and CG Code, and most importantly, to enable shareholders to effectively assess the company's governance practices and the board's activities and contributions in this regard.

Disclaimer: This article is provided for reference purposes only and are not intended, nor should they be used, as a substitute for professional advice or judgment or to provide legal advice with respect to specific circumstances. If you require any legal advice or other expert assistance, please consult a competent professional adviser.

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Michelle Chung

Partner, Stephenson Harwood


Michelle is experienced in advising on a wide range of corporate finance matters including initial public offerings, spin-offs, transfer of listing from GEM to Main Board, takeovers and general offers, reverse takeovers, privatisation and delisting, secondary fund raisings (such as placings, rights issues, open offers) and issue of debt securities.

She assists listed clients with on-going regulatory compliance, particularly in relation to the Listing Rules, the Securities and Futures Ordinance, the Takeovers Code and the Companies Ordinance.

She also advises clients on a wide range of corporate matters, including mergers and acquisitions, joint ventures, private equity investments, corporate restructuring, legal due diligence, share option and share incentive scheme, as well as general commercial matters.


Sinnie Fung

Associate, Stephenson Harwood


Sinnie has experience in advising clients in corporate finance transactions, mergers and acquisitions, commercial agreements, regulatory and compliance, and general corporate matters. Sinnie has acted for both issuers and sponsors in initial public offerings in Hong Kong.

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