Proactive Governance: Shaping Hong Kong’s Boards of Tomorrow

Insights for nominating committees on board performance, succession planning, and diversity in Hong Kong’s evolving governance landscape.

On June 14, 2024, the Hong Kong Stock Exchange (HKEx) released a consultation paper seeking views and comments on proposed changes to the Corporate Governance code and related amendments to the HKEx Listing Rules. Among the proposed changes were several specific to how boards and their nominating committees need to reevaluate their performance, succession-planning, and renewal.

Among the proposed changes are specific limits around tenure, overboarding, independence, and board diversity, including:

1. Board directors serving more than nine years will no longer be considered independent
2. Directors will be limited to a maximum of six publicly-listed boards
3. Boards must designate a lead independent director (LID) if they do not have an independent chair (comply or explain)
4. Nominating committees must be comprised of directors of different genders, with a minimum of one director of a different gender (comply or explain)

Additionally, there are other mandatory disclosure requirements on director training, the board’s annual review of its workforce diversity, and women’s representation within senior management.

To help Hong Kong’s publicly-listed boards prepare for the future, Russell Reynolds Associates compared the Hang Seng Index (HSI) to other major global indices to understand why the changes are necessary, and how publicly listed boards can better cope with what’s coming next.

Tenure caps will impact Hong Kong’s board composition

One of the proposed corporate governance updates that could significantly impact board composition in Hong Kong: the nine-year tenure cap for independent directors.

Our analysis shows that 27% of INEDs on the HSI have served for over nine years. Current rules require that independent directors constitute at least one-third of the board, meaning boards at this threshold risk non-compliance if their long-serving independent non-executive directors (INEDs) are no longer deemed independent.

In contrast, FTSE 100 boards regularly refresh their composition, with 98% of INEDs serving nine years or less (Figure 1). And while it may seem that boards on the HSI share a similar tenure distributions with those of the S&P 500, it needs to be viewed in the context that the Nasdaq and NYSE generally require boards to comprise a majority of independent directors.

Figure 1: Tenure distribution of INEDs across the S&P 500, FTSE 100, and HSI

_{Source: RRA analysis of BoardEx data, collected in September 2024. n = 4699 S&P 500 INEDs; n = 773 FTSE 100 INEDs; n = 416 HSI INEDs.}

Overboarding limits: a cause for concern?

The next proposed change—to limit the maximum number of listed boards directors can sit on to six—has attracted a fair bit of commentary and pushback amongst the community. One compelling argument is that directors have varying time commitments, and that imposing a cap like this is too simplistic. In short, many believe that decisions on director’s bandwidth should be left to the nominating committees.

In examining the S&P 500 and FTSE 100, we see that over 90% of INEDs sit on three or less public boards (Figure 2). And in Hong Kong, only four out of 82 HSI boards have directors who sit on more than six boards—and of these, three of these boards are currently at that one-third INED threshold.

Figure 2: Number of concurrent public board seats an INED has across the S&P 500, FTSE 100, and HSI

_{Source: RRA analysis of BoardEx data, collected in October 2024. n = 4699 S&P 500 INEDs; n = 773 FTSE 100 INEDs; n = 416 HSI INEDs.}

Given the increasingly complex business environment over the years, the reality is that boards today do require more of a director’s bandwidth. As such, the cap of six boards per director appears reasonable.

Hong Kong is aligning with other OECD countries in LID appointment proposal

Another significant proposal involves the designation of a lead independent director (LID) for boards whose chairs are non-independent. This move is a step to directionally align Hong Kong with many OECD countries—like the United Kingdom, Germany, Netherlands, Norway, and Sweden—where board chairs are typically independent, negating the need to appoint a separate independent director (Figure 3).

Figure 3: Percentage of boards that have an independent chair across the S&P 500, FTSE 100, and HSI

_{Source: RRA analysis of BoardEx data, collected in October 2024. n = 500 S&P 500 boards; n = 100 FTSE 100 boards; n = 82 HSI boards.}

As only 6% of HSI boards have an independent chair, it’s likely that this proposal will have a significant impact on HKEx-listed boards in general.

Proposals will further improve nominating committee diversity in Hong Kong

While there has been recent progress when it comes to board diversity, Hong Kong boards still have a long way to go before reaching gender parity.

Currently, 40% of HSI boards’ nominating committees are composed entirely of men. We also found that women directors hold only 20% of the HSI’s nominating committee seats, compared to women holding 48% in the FTSE 100 and 40% in the S&P 500 (Figure 4).

According to the Institute of Directors (IoD), markets with binding quotas have seen the most significant advancements towards gender parity over the past two decades. For instance, women’s representation in FTSE 100 increased from 12.5% in 2012 to 40% by 2022, according to the UK Government.

As such, the proposals to 1) implement a gender-diverse nominating committee on a comply or explain basis and to 2) mandate disclosures of board diversity policies present a major step towards gender parity in the HSI.

Figure 4: % of women directors holding nominating committee seats across the S&P 500, FTSE 100, and HSI

_{Source: RRA analysis of BoardEx data, collected in October 2024. n= 1600 S&P 500 nominating committee seats; n = 583 FTSE 100 nominating committee seats; n = 328 HSI nominating committee seats.}

Looking inward: HSI boards will increase focus on their effectiveness and skillsets

The final set of proposals centers on enhancing board effectiveness and upskilling.

Implementing a board skills matrix is a logical first step, as it clearly outlines the critical expertise and experiences necessary for the board’s effective functioning. This matrix not only informs shareholders and investors about potential areas where the board may need reinforcing, but also aligns with proposed mandatory director training disclosures. Furthermore, it offers valuable insights for board succession planning over the longer term.

What’s next for HKEx-listed boards?

Before the updated governance requirements are finalized, HKEx-listed boards would do well to thoughtfully review the proposed corporate governance changes and evaluate the merits of implementing the recommended practices. Beyond optics and market-signaling, these changes present a substantial opportunity for boards to proactively anticipate upcoming changes.

To that end, HKEx-listed boards should consider the following:

Authors

Alvin Chiang is a member of Russell Reynolds Associates’ Board and CEO Advisory Partners. He is based in Singapore.
Caris Wong is a member of Russell Reynolds Associates’ Consumer and Board Advisory Practice. She is based in Hong Kong
Justine Qin is a member of Russell Reynolds Associates’ Knowledge Management team in Asia Pacific. She is based in Beijing.

Acknowledgements

Laura Syn is a member of Russell Reynolds Associates’ Knowledge Management team in Asia Pacific. She is based in Hong Kong.
Chensong Li is a member of Russell Reynolds Associates’ Knowledge Management team in Asia Pacific. He is based in Shanghai.