Updates to Hong Kong’s Corporate Governance Code

Corporate governance is the framework of rules, policies and practices that guide how a company is directed and controlled. For listed companies, strong corporate governance is not just a regulatory requirement but a critical factor in ensuring long-term sustainability, investor confidence and operational efficiency.

The Stock Exchange of Hong Kong (SEHK) has recently updated and amended the Corporate Governance Code (CG Code) and the related Rules Governing the Listing of Securities (Listing Rules). The changes take effect on 1 July 2025, and will apply to corporate governance reports and annual reports for financial years starting from 1 July 2025. Transitional arrangements for the caps on overboarding and the tenure of an independent non-executive director (INED) are given below. These changes aim to enhance transparency, accountability and sustainability among listed companies in Hong Kong. The amendments align with global best practices and respond to investor demands for stronger governance frameworks.

The following section highlights several key changes to the CG Code and the related Listing Rules:

Board accountability

Lead INED: Under the CG Code’s recommended best practice, where the chairman of the board is not an INED, the listed issuer will be required to designate an INED as a lead INED (Lead INED) to serve as an intermediary for the other directors and shareholders, and act as an alternative communication channel in case of inadequate communication with the chairman and management. Disclosure of the Lead INED’s role (if one is designated) is mandatory. The Lead INED, along with all other directors, will have the same fiduciary duties and the same level of liability. The implementation of a Lead INED will strengthen and facilitate communication between directors, and among directors and investors.

Engagement with shareholders: Issuers must enhance disclosures on the board’s engagement with shareholders in its CG report, such as the nature and frequency of engagement, the shareholders and company’s representatives involved and follow-up approaches.

Mandatory director training: Directors of Hong Kong-listed issuers will be required to receive annual continuous professional development training on topics such as directors’ responsibilities and issuers’ obligations, key legal and regulatory developments, corporate governance, environmental, social and governance (ESG), risk management and internal controls, and industry-specific developments and updates. The issuer will need to disclose in its CG report each director’s number of hours of training (without any minimum number of training hours); the topics; the means of training (i.e., physical or online); and the name of the training provider. First-time directors who have not served as directors of Hong Kong-listed issuers for the three years before their appointment must complete at least 24 hours of training within 18 months. Those with relevant prior experience will need to complete 12 hours of training within 18 months of their appointment.

Board performance review: Hong Kong-listed issuers should conduct a formal evaluation of board performance every two years. They must disclose key findings in the CG report. Issuers must also disclose:

1. 1. The board’s existing skills matrix;
   2. How the combination of skills, experience and diversity of directors serves the company’s purposes, values, strategy and desired culture; and
   3. Details and plans to acquire further skills. It is not sufficient to simply list the directors’ qualifications and experience. The performance review and skills matrix will help the board identify any gaps in skills or expertise, and ensure the board’s composition aligns with evolving business challenges.

Overboarding INEDS: Each INED can only serve as a director for up to six Hong Kong-listed companies concurrently (this hard cap will apply to existing listed companies from the first annual general meeting held on or after 1 July 2028). The nomination committee must assess and disclose in the CG report each director’s time commitment and contribution annually. This limit ensures INEDs can dedicate sufficient time to each board role, and directors must demonstrate meaningful engagement with each company’s affairs.

INED tenure: Any INED serving for nine consecutive years will automatically lose their independent status. The strict nine-year cap on INED tenure ensures the board will be regularly exposed to fresh perspectives, and reinforces INEDs’ roles as an objective check-and-balance mechanism. To continue board service, the INED must either be re-designated as a non-executive director (NED), or step down and undergo a three-year cooling-off period before potentially returning as an INED. This allows experienced directors to remain as NEDs while maintaining board knowledge and the three-year cooling-off period is intended to preserve true independence for those returning as INEDs. The CG report must include the tenure length of each director. By the first annual general meeting held on or after 1 July 2028, Hong Kong-listed issuers must ensure that long-serving INEDs do not constitute the majority of the INEDs on its board. By the first annual general meeting held on or after 1 July 2031, it must no longer have any long-serving INEDs.

Diversity and inclusion

Gender diversity: Hong Kong-listed issuers will be required to include at least one director of a different gender in the nomination committee. As the nomination committee plays a pivotal role in shaping board composition, a gender-diverse nomination committee is more likely to consider a broader range of candidates for board appointments and drive meaningful progress towards overall board diversity.

Diversity policy: The board is required to annually review the implementation of its board diversity policy. In addition, a diversity policy must also be adopted and implemented for the issuer’s workforce (including senior management). The gender ratio of senior management and of the workforce shall be separately disclosed in the CG report.

Risk management

Risk management and internal controls: The board must conduct annual reviews of its risk management and internal control systems. The review should cover all material controls, including financial, operational and compliance. The annual review need not be conducted externally and can be done in a format that fits the issuer’s circumstances.

The issuer will be required to make detailed disclosures in its CG report, including:

1. 1. A board statement acknowledging its responsibility for its risk management and internal control systems and a statement confirming these systems are appropriate and effective;
   2. The main features of the risk management and internal control systems in place (including the process used to identify, evaluate and manage significant risks, and the procedures for ensuring timely and accurate disclosures);
   3. Significant changes in the assessment of risks, and the risk management and internal control systems;
   4. Whether it has an internal audit function;
   5. The responsibilities of internal departments and external providers for the review;
   6. The review process of the risk management and internal control systems, and the frequency of reviews;
   7. The scope of the review; and
   8. The results and details of any significant control failings or weaknesses identified during the review and/or previously reported but remain unresolved, and any remedial steps taken or proposed.

The abovementioned disclosures must include confirmation from the board, the relevant board committee(s), other internal control departments, the issuer’s independent auditors, and/or other external service providers that the issuer’s risk management and internal control systems are appropriate and effective.

Shareholder engagement

Dividend policy: Issuers with a dividend policy must disclose details of such policy in the CG report. Issuers must confirm that dividend decisions made by the board are aligned with the dividend policy. Issuers without a dividend policy must declare this fact and explain the reasons for its absence. Additionally, where a dividend is declared during the year, the issuer should disclose the reasons for any material variation in the dividend rate compared to that for the previous corresponding period. If the board decides not to declare any dividend, the issuer should disclose the reasons and how it plans to improve investor returns in the future.

In conclusion, the SEHK’s updated corporate governance rules signal a shift towards greater accountability, sustainability and investor protection. While the changes may increase short-term compliance burdens, they position Hong Kong as a leading market for responsible and transparent corporate governance. Listed issuers should take the opportunity to leverage these regulatory changes to strengthen their corporate governance frameworks to drive sustainable and long-term growth.

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