Hong Kong Exchanges and Clearing Limited (HKEX) is currently facing significant pushback regarding its proposal to implement limitations on the number and tenure of independent non-executive directors (INEDs). This controversy arises amidst the backdrop of severe economic challenges that many companies are facing, which has raised concerns among various stakeholders including directors, companies, and institutional investors.
Allan Zeman, founder and chairman of Lan Kwai Fong Holdings and a serving INED himself, remarked that it is ill-timed to introduce any regulations pertaining to independent non-executive directors during such a tumultuous economic period. He emphasized that many businesses are currently focusing on mere survival following a surge in company bankruptcies, asserting that there should not be an obligation for companies to replace their independent directors during such a critical time.
In June of this year, HKEX proposed a range of reforms aimed at enhancing corporate governance, including a stipulation that would restrict an independent non-executive director from serving on more than six boards and limiting their tenure to a maximum of nine years per board. While newly listed companies would be required to adhere to this rule by January 2025, existing companies would have a three-year grace period to comply, as highlighted by data from HKEX showing that current regulations are exceeded by twenty-three INEDs across 181 Hong Kong companies.
Zeman acknowledged the importance of good corporate governance; however, he contended that imposing strict caps on the number and tenure of INEDs is not the appropriate solution. He questioned the rationale behind preventing a knowledgeable INED from continuing to offer their expertise merely due to a predetermined tenure limit. He further pointed out that there is a shortage of qualified INEDs in Hong Kong, which would lead to increased costs for companies seeking to attract new talent post-implementation of these proposals.
Carlson Tong Ka-shing, the chairman of HKEX, expressed the exchange’s commitment to maintaining high standards of corporate governance, citing its vital role in safeguarding Hong Kong’s status as a premier international financial hub. He conveyed HKEX’s intention to closely engage with all stakeholders to ensure that the rules established are relevant and beneficial to the sustainability and attractiveness of the markets.
A leading property development company in Hong Kong also articulated its discontent in a submission to HKEX, cautioning against unnecessary complications in the requirements for appointing INEDs and avoiding overregulation that could impose undue burdens on businesses. The developer further noted that the proposed nine-year tenure requirement is just one aspect of assessing a director’s independence.
Additionally, the Hong Kong Chamber of Listed Companies has voiced its strong opposition to these reforms. However, some professional associations, including the Hong Kong Investment Funds Association and the Institute of Securities Dealers, have shown support for the HKEX’s proposals. The Asian Corporate Governance Association (ACGA), predominantly funded by sizable institutional investors, has backed the reforms but has recommended even more substantial measures to enhance the independence of directors and bolster investor confidence.
The proposals made by HKEX are notably less stringent than those in neighboring markets, such as Malaysia’s limit of five boards per INED, Taiwan’s cap of four, and mainland China’s three. The ACGA has advocated in favor of the nine-year tenure cap but has rejected the idea of a cooling-off period, which would allow INEDs to return to the same company after a two-year hiatus, citing concerns regarding the efficacy and impartiality of INEDs within Hong Kong’s close-knit business environment.
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