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In Hong Kong, independent non-executive directors (INEDs) have an increasingly important role to play in corporate governance. Previously, it was commonly accepted that an INED only has a role in overseeing the chief executive and senior management. Many such directors were seen to be simply rubber-stamping the decisions made by executive directors on the board.

Nowadays, shareholders rely on INEDs to bring independent judgment and constructive suggestions to important decisions that a board must make and to speak up when conflicts of interest arise within the board. These directors are also required to be proactive in monitoring the company¡¯s internal controls and will be criticised for simply relying on representations by senior management. The expectation of them is that they should utilise their expertise in ensuring effective governance by the board. In summary, the function and role that INEDs play have evolved and changed with time.

The Rules Governing the Listing of Securities (Listing Rules) on the Stock Exchange of Hong Kong (SEHK) require the board of directors of every listed company to be comprised of at least three independent non-executive directors. The INEDs must represent at least one-third of the board. Therefore, these independent directors can indeed make a difference to corporate governance if they discharge their functions properly and effectively.

Although the roles and functions of an INED are different from those of an executive director, they are subject to the same legal duty and held under the same standards as executive directors under the regulatory regime of Hong Kong. For instance, the Listing Rules require every director, in the performance of their duties, to:

• Act honestly and in good faith in the interests of the company as a whole;
• Act for a proper purpose;
• Be answerable for the application or misapplication of the company¡¯s assets;
• Avoid actual and potential conflicts of interest and duty;
• Disclose fully and fairly their interests in contracts with the company in which they act as director; and
• Apply such degree of skill, care and diligence as may reasonably be expected of a person of their knowledge and experience and holding their office within the company.

With reference to the above-mentioned rules, one can see that no differentiation is made between executive directors and non-executive directors.

The Hong Kong courts have also accepted that executive directors and non-executive directors are subject to the same duties. In Law Wai Duen v Boldwin Construction Company Ltd and Chan Shiu Chick & Others (2001), the Court of Appeal commented, in the context of a private company, that executive and non-executive directors have the same responsibility in law as to the management of a company¡¯s business. The court further noted that the law does not have any regard for whether a director holds an executive position within the company.

It should be commonly agreed that the most important function that an INED would need to discharge is to exercise independent judgment and to bring about objective scrutiny to the decisions made by executive directors on behalf of the shareholders of the company. The Listing Rules set out a range of factors to assist listed companies in determining whether an INED is independent, namely whether the INED:

1. Holds more than a certain percentage of shares in the company;
2. Receives shares or interest in the securities of the company or its subsidiaries;
3. Was a director or shareholder of a company which currently provides or has provided services to the company within two years prior to their date of proposed appointment;
4. Currently, or within one year immediately prior to the date of their proposed appointment, has or had a material interest in any principal business activity of, or is or was involved in any material business dealings with, the company or its associated companies;
5. Is on the board to protect the interests of another company whose interests are not the same as those of the shareholders as a whole;
6. Is or was connected with a director, the chief executive or a substantial shareholder of the company within two years immediately prior to the date of their proposed appointment;
7. Is, or at any time during the two years immediately prior to the date of their proposed appointment, has been, an executive or a director (other than an INED) of the company or its associated companies; and
8. Is financially dependent on the company or its associated companies.

It is important to note that the above-mentioned list is not meant to be exhaustive.

Given the increasing attention paid to INEDs in recent years, it is not surprising that the SEHK published a consultation paper on proposed amendments to its Corporate Governance Code and related Listing Rules in June 2024, whereby many key proposals were made in relation to INEDs. At around the same time, the SEHK has also introduced a new webpage, INED Corner, to provide guidance to such directors on their roles and responsibilities and to assist them in discharging their duties.

On 19 December 2024, the Consultation Conclusions on the Review of the Corporate Governance Code and related Listing Rules (Consultation Conclusions) were published. The proposals in the Consultation Conclusions are intended to further enhance the function and role of INEDs on the board. They can no longer sit back and play the passive role of overseeing the board or simply rubber-stamping the decisions made by senior management. Instead, INEDs are expected to constructively monitor the board and to devote sufficient time to their role.

Meanwhile, shareholders of listed companies can also look forward to more active INED engagement on the board and board refreshment. Following implementation, it is expected that the new proposals concerning INEDs will bring about more effective corporate governance regarding listed companies in Hong Kong.

Valarie Fung is a consultant at YYC Legal