The ongoing debate regarding the proposal by Hong Kong Exchanges and Clearing (HKEX) to limit the number and tenure of independent non-executive directors (INEDs) has intensified amid significant economic challenges facing the region. Stakeholders, including directors, corporations, and institutional investors, exhibit differing views on the necessity and timing of such reforms.
Allan Zeman, the founder and chairman of Lan Kwai Fong Holdings, and a seasoned INED, expresses considerable concern over the proposed changes, stating, “The timing is wrong to make any changes to the rules for independent non-executive directors now.” He characterizes the current economic situation as the most severe he has witnessed in his fifty years in Hong Kong. Zeman argues that, given the unprecedented rate of corporate bankruptcies, businesses should prioritize survival rather than altering their governance structures.
In June, HKEX unveiled a series of proposals aimed at enhancing corporate governance, which include a mandate that INEDs cannot serve on more than six boards and can only hold positions for up to nine years on each board. Newly listed firms must adhere to these regulations starting January 2025, while existing companies have a grace period of three years. According to HKEX data, a significant number of current INEDs—approximately 1,500—have served over the proposed nine-year limit, with 23 individuals at 181 companies exceeding the six-board limit.
The consultation phase for this proposal concluded on August 16; however, HKEX is expected to take several months to evaluate the feedback received before making a final decision. While Zeman acknowledges the importance of promoting corporate governance, he asserts that imposing strict caps may not be appropriate, particularly if an INED possesses substantial expertise and consistently contributes valuable insights.
In contrast, HKEX Chairman Carlson Tong Ka-shing underscores the necessity of maintaining high standards of corporate governance to fortify Hong Kong’s reputation as a premier financial center. He expresses pride in the quality of local businesses and their commitment to best practices, reinforcing that effective governance is essential in achieving sustainable, long-term shareholder value.
A prominent Hong Kong property developer has also expressed opposition to the HKEX’s proposals, particularly concerning unnecessary regulatory burdens that could arise from stringent INED requirements. Their submission to HKEX argued for the practicality of such regulations, stating, “Regulatory requirements must be practical and practicable and not overly burdensome. Over-regulation is to be avoided.”
The proposed cap on INED tenure aligns with guidelines from the Hong Kong Monetary Authority for banking institutions. However, the developer contended that this criterion alone is insufficient for assessing a director’s independence. They also criticized the proposal requiring INEDs to assume a lead director role for investor communication, suggesting such a measure may detract from productive governance.
The Chamber of Hong Kong Listed Companies has voiced staunch opposition to the proposed regulations. In contrast, various industry organizations, including the Hong Kong Investment Funds Association and the Institute of Securities Dealers, have expressed support for the HKEX initiatives. Furthermore, the Asian Corporate Governance Association, which is predominantly funded by institutional investors managing over $40 trillion in assets, supports the proposed measures and advocates for more extensive reforms to enhance director independence and bolster investor confidence.
It is noteworthy that the proposed limits on INEDs in Hong Kong are less stringent compared to those implemented in neighboring regions, where Malaysia has set a cap of five, Taiwan at four, and mainland China at three. The ACGA supports the nine-year tenure limit; however, it opposes the notion of a cooling-off period, which would allow INEDs to return after a two-year hiatus, arguing it could weaken INED effectiveness within a tightly-knit business environment like Hong Kong.
In summary, while the pursuit of improved corporate governance is widely recognized as imperative, the context and manner in which such reforms are implemented are subjects of considerable debate, indicating that a balanced approach is necessary to navigate these challenging economic waters.
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