Explainer | Corporate governance reform and the role of independent directors

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An explainer on the history of corporate governance reform and why independent directors are important

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Exchange Square in Central. Photo: SCMP/Nora Tam

Enoch Yiu

Published: 7:30am, 13 Sep 2024

Bourse operator Hong Kong Exchanges and Clearing’s latest proposals for corporate governance reform, which would add a hard cap for independent directors – mandating that they can only sit on six boards at a time and serve up to nine years each – have caused great upheaval in the city’s executive suites.

Many listed companies and tycoons oppose the plans, believing them to be micromanaging and an overreach by the exchange, but fund managers and brokers support the proposals, saying they will enhance corporate governance.

The conflict is not new as the two camps have squared off on a number of corporate governance proposals over the past three decades, ranging from quarterly reporting to the blackout period preventing insider share sales around earnings announcements and now the hard cap on independent directors.

Here is what you need to know about corporate governance reform and why it matters to Hong Kong as an international financial centre.

What is corporate governance all about?

Corporate governance refers to the way listed companies are directed and controlled from the top. The document that set the standard in terms of reform was called the Cadbury Report – issued in December 1992 – which has since been copied and borrowed from over the past 32 years.