Liang Fengyi: Diversification is quickly becoming an important driver for enhancing the effectiveness of the boards of directors of Hong Kong-listed companies.

Ensuring a Strong Foundation for a High-Quality Stock Market" as the theme of her speech on the 14th Corporate Governance Seminar of the Hong Kong Institute of Corporate Governance. Ms. Leung Fung Yee mentioned that diversity is rapidly becoming an important driver in improving the efficiency of Hong Kong-listed company boards. Diversity regulations for boards of listed companies were implemented in September 2013 based on a "comply or explain" basis and have since achieved significant results. In 2012, the proportion of female directors on the boards of Hong Kong-listed companies slightly exceeded 10%. Since then, female participation has significantly increased, reaching 15% in 2021. With the introduction of regulations in 2022 to eliminate single-gender boards, this proportion further increased to nearly 19% by 2024. In addition, Ms. Leung pointed out that currently, the Corporate Governance Code suggests that boards confirm the effectiveness of risk management and internal control systems in their corporate governance reports. In most cases examined by the Securities and Futures Commission, directors confirm that their companies have robust internal control systems, but in reality, weaknesses are still common. Only a few directors admitted that their company's internal control measures were insufficient. In order to strengthen board accountability, the Stock Exchange recently proposed mandatory disclosure of the board's review of the effectiveness of the company's risk management and internal control systems. The full speech is as follows: Good afternoon, I am honored to be invited to this conference and today I will speak about my views on corporate governance. Some people have likened corporate governance to a cup of strong coffee that is indispensable for a day of efficient work. I will share more views on this topic and explain how various proposed measures can help listed companies strengthen governance, protect shareholder rights, and maintain global competitiveness. The complex and ever-changing business environment brings many challenges Today's business environment is full of challenges, and I believe none of us here would disagree. Macroeconomic and market volatility, as well as geopolitical tensions, dominate the headlines. Additionally, rapidly evolving technologies like artificial intelligence, coupled with the imperative of sustainability, profoundly impact businesses. Companies need to adapt to these changes, find a way forward, and position themselves in the future world. From retaining talent to creating a diverse and inclusive work environment, companies face numerous challenges. Therefore, in the current volatile and competitive business environment, building corporate resilience is crucial for a company's survival and success. Companies must not only focus on financial performance but also cultivate keen senses, foresight, and adaptability to anticipate and address new challenges and seize opportunities that arise. Focus on corporate governance For Hong Kong, maintaining good co.In order to ensure the robustness of internal monitoring measures to detect and prevent corporate misconduct, the board of directors of listed companies should be held accountable.At present, the "Corporate Governance Code" suggests that boards of directors should confirm the effectiveness of risk management and internal control systems in the corporate governance report. In most of the cases we reviewed, directors confirmed that their companies have robust internal control systems, but in reality, vulnerabilities are still common. Only a few directors admit that their company's internal control measures are inadequate. To strengthen the accountability of boards of directors, the Stock Exchange recently proposed mandatory disclosure of the review of the effectiveness of the company's risk management and internal control systems. Director Quality Now, let me talk about the issue of director quality. A competent board of directors, with their professional knowledge, integrity, and foresight, can lead a company through economic ups and downs, which is the core of good corporate governance. Therefore, directors must act in the best interests of the company and shareholders, with honesty and sincerity, while also diligently expanding the company's business to create reasonable returns for shareholders. This principle is widely regarded as the minimum standard that directors should achieve. However, in some cases, some very young and inexperienced family members or acquaintances are appointed as directors, raising major concerns about the quality and interests of directors. Well-managed companies should have proper procedures to identify, select, and appoint directors who are competent in skills, qualifications, and experience. To ensure the quality of directors, the Stock Exchange has proposed regulations requiring all directors to participate in mandatory continuing professional development training, and newly appointed directors must complete a specified number of hours of induction training. Like any other professional, company directors must continue to learn new knowledge and skills to keep up with the times. The Role of Independent Non-Executive Directors After discussing directors, let me move on to the recent hot topic of independent non-executive directors. The Stock Exchange proposed a nine-year "hard limit" on the tenure of independent non-executive directors. We have noticed that some organizations representing listed companies, including the Hong Kong Institute of Corporate Governance, believe that when considering whether individual independent non-executive directors are independent, it should depend on whether the individual has independent thinking, rather than the length of service. Of course, there are also some independent non-executive directors who have maintained a high degree of independence over many years of service. On the other hand, organizations representing investors believe that this proposal is not thorough enough. They believe that a board of directors led by independent non-executive directors who have served for many years may lead to individual members "dominating" or "group thinking" for an extended period. In addition, if the tenure of independent non-executive directors is too long, they may gradually lose their independence due to their close relationship with management. There is no absolute rule on how to define the ideal tenure, but we believe that setting a nine-year hard limit is more in line with the highest international standards. In the Asian region, Singapore and Malaysia have introduced nine-year and twelve-year limits on the tenure of independent directors, respectively, in January 2023 and January 2022. Mainland China has set a six-year limit on the tenure of independent directors of listed companies. In addition, the corporate governance codes of the UK and Australia specify that when a director's tenure on the board exceeds nine and ten years respectively, it may affect their independence. The US and UK do not set a hard limit on the tenure of independent non-executive directors, but have implemented other safeguards, such as requiring at least half of the board members to be independent non-executive directors, while Hong Kong only requires a minimum of one-third of the proportion and a minimum of three independent non-executive directors. The Hong Kong Institute of Corporate Governance proposed in its supplementary opinion that authorities can alleviate concerns through additional guidance, market education, and giving the industry more time to implement the recommendations. We are carefully considering these proposals. Next is the issue of overboarding. The last time the Stock Exchange proposed limits on the number of independent non-executive director positions that any one person can hold was ten years ago. The proposal was not adopted at the time, largely because there was feedback that a hard limit would be unfair to many directors, even penalizing those who are capable and have enough time to hold multiple company positions responsibly as independent non-executive directors. The Stock Exchange's recent proposal stipulates that independent non-executive directors can only hold positions as directors in up to six Hong Kong-listed companies, affecting only 23 directors. It is widely agreed that in an increasingly complex environment, independent non-executive directors should have enough time to deal with board affairs. Other major markets have also noted this situation and have taken measures to address the issue of overboarding directors. In order to maintain Hong Kong's top-tier regulatory system and ensure that the boards of listed companies can make quality decisions, Hong Kong should not be an exception. Diversity and Inclusion The last point is about board diversity, a topic I personally care about. It is well known that diversity is rapidly becoming a key driver of board effectiveness. The diversity requirements for boards of directors of listed companies, implemented in September 2013 based on a "comply or explain" basis, have achieved significant results so far. In 2012, the proportion of female directors on boards of Hong Kong-listed companies exceeded 10%. Since then, female participation has significantly increased, reaching 15% in 2021. With the introduction of the requirement to eliminate single-gender boards in 2022, this proportion further increased to nearly 19% in 2024. When calculating the gender diversity of company boards of directors, Hong Kong's performance is similar to other Asian markets such as mainland China, Japan, and Singapore, but lags behind the US, UK, and Australia. In this consultation, the Stock Exchange proposed further promoting diversity among board members and employees. Enhancing diversity levels is not only the primary responsibility for companies to achieve good governance but also a necessary condition to balance and make decisions more inclusive. In an increasingly complex and changing business environment, this measure will undoubtedly help companies achieve more fruitful results. Listed companies should lead by example, driving change and fully integrating diversity and inclusion at all levels of management. Conclusion A few days ago, a senior executive from a major Japanese financial group visited and shared with me their experience of corporate governance reforms over the past few years. Due to the higher standards implemented by the Tokyo Stock Exchange years ago, the group embarked on a reform path to meet the requirements. The board of directors and management went through tough reforms, and now they have reaped the rewards. In fact, many believe that in a global market where liquidity is generally lackingThe corporate governance reform in Japan, together with other macro factors, has led to a strong performance in the Japanese stock market.Of course, some people in Hong Kong believe that currently, many businesses are in a difficult situation, and it is not the best time to promote corporate governance reform. However, I believe that establishing good corporate governance is urgent, especially in times of adversity. Now let us act on our words, make a cup of beneficial coffee, so as not to further delay addressing governance issues, as drinking it later will be a bitter pill to swallow. Thank you all.