Corporate Governance Best Practices for Hong Kong Companies: Listed and Private

Introduction: Why Corporate Governance Matters

Corporate governance — the system of rules, practices, and processes by which a company is directed and controlled — is fundamental to the trust that shareholders, investors, lenders, employees, and regulators place in a company. Good governance aligns the interests of management with those of shareholders, ensures accountability, reduces the risk of fraud and mismanagement, and ultimately drives long-term value creation.

For listed companies in Hong Kong, compliance with the HKEX Corporate Governance Code (CG Code) is a listing obligation. For private companies, good governance — while not mandated by a specific code — is increasingly expected by institutional investors, private equity sponsors, and sophisticated lenders as a condition of investment or credit.

The Legal Framework

Corporate governance in Hong Kong is shaped by a layered framework:

• Companies Ordinance (Cap. 622): Sets out directors' duties, shareholders' rights, disclosure obligations, and the basic governance structure of all Hong Kong companies.
• HKEX Main Board Listing Rules and GEM Listing Rules: Impose detailed governance requirements on listed companies, including the CG Code, continuing disclosure obligations, and connected transaction rules.
• Securities and Futures Ordinance (Cap. 571): Governs insider dealing, market misconduct, and disclosure of interests.
• SFC Codes and Guidelines: Include the Code on Corporate Governance Practices and guidance on specific governance topics.

The Board of Directors

Composition

The board of directors is the primary governance body of a Hong Kong company. Under the CG Code (applicable to listed companies), the board should have a balance of executive and non-executive directors (NEDs), with at least three independent non-executive directors (INEDs). INEDs must satisfy the independence criteria set out in the Listing Rules: they must have no material relationship with the company, its management, or its substantial shareholders.

For listed companies with a controlling shareholder, INEDs play a particularly critical role in protecting the interests of minority shareholders. The SFC and HKEX have taken enforcement action against companies where INEDs failed to exercise independent judgment or rubber-stamped management decisions.

Chairman and CEO Separation

The CG Code requires that the roles of chairman and chief executive officer (CEO) should be held by different individuals, with a clear division of responsibilities. The chairman is responsible for leading the board; the CEO is responsible for managing the business. Where these roles are combined, the company must explain why and what compensating measures are in place.

Diversity

HKEX introduced mandatory gender diversity requirements for listed company boards in 2024. Single-gender boards are no longer permitted. The board diversity policy must be disclosed, and companies must report against their diversity objectives annually. Diversity in the broader sense — professional background, industry experience, age, and cultural background — is also encouraged under the CG Code.

Board Committees

All listed companies must establish three board committees:

Audit Committee: Must consist entirely of NEDs, with a majority of INEDs. The Audit Committee oversees financial reporting, the relationship with the external auditor, and internal control and risk management. It reviews the annual and interim financial statements and makes recommendations to the board on audit matters. The Audit Committee should include at least one member with appropriate professional qualifications or financial management expertise.

Remuneration Committee: Must consist of a majority of INEDs. It reviews and approves the remuneration of executive directors and senior management. Its terms of reference should include reviewing remuneration policy and making recommendations to the board. Excessive or poorly structured executive remuneration — including excessive short-term cash bonuses without long-term performance conditions — is a governance red flag.

Nomination Committee: Must consist of a majority of INEDs. It reviews the structure, size, and composition of the board; identifies suitable candidates for directorships; and makes recommendations to the board on appointment, re-appointment, and succession planning.

Directors' Duties

Directors of Hong Kong companies owe both statutory and common law duties to the company:

• Duty to act in good faith in the best interests of the company: Directors must act for the benefit of the company as a whole, not for personal gain or the benefit of any shareholder, group of shareholders, or third party.
• Duty to act for a proper purpose: Directors' powers must be exercised for the purposes for which they were conferred.
• Duty to avoid conflicts of interest: Directors must disclose any interest in a contract or transaction with the company.
• Duty of care and skill: Directors must exercise the degree of care and skill reasonably expected of a person with their knowledge and experience. Professional directors (e.g., executives with specialist qualifications) are held to a higher standard.

Breach of directors' duties can give rise to civil liability to the company (and, in some cases, to individual shareholders), disqualification from acting as a director, and — in cases of fraud or dishonesty — criminal liability.

Internal Controls and Risk Management

The CG Code requires listed company boards to conduct an annual review of the effectiveness of the company's risk management and internal control systems, and to report on this review to shareholders. The review should cover all material controls including financial controls, operational controls, and compliance controls.

Key elements of a sound internal control framework include:

• A documented risk register identifying material risks and the controls designed to mitigate them
• An independent internal audit function reporting to the Audit Committee
• A whistleblowing policy and secure reporting channel
• Clear delegation of authority limits and segregation of duties
• Regular internal control reviews and follow-up on identified deficiencies

HKEX has placed increasing emphasis on internal controls in recent years, particularly following a number of high-profile accounting scandals involving Hong Kong-listed companies with operations in mainland China.

Financial Reporting and Disclosure

Listed companies must publish annual results within three months of their financial year end, interim results within two months of the interim period end, and quarterly business updates where applicable. Financial statements must be prepared in accordance with Hong Kong Financial Reporting Standards (HKFRS) or IFRS.

Continuing disclosure obligations require listed companies to promptly disclose all material information that is or is reasonably expected to have a material effect on the price of their listed securities. “Inside information” — specific, non-public information that is likely to have a material price impact — must be disclosed to the public as soon as reasonably practicable.

Connected Transactions

One of the most important governance areas for Hong Kong listed companies — particularly those with controlling shareholders or related-party transactions with PRC affiliates — is the connected transaction regime. Transactions between a listed company and its “connected persons” (directors, substantial shareholders, and their associates) are subject to disclosure, INED approval, and in some cases shareholder approval requirements.

The rationale is to prevent self-dealing and the tunnelling of value from listed companies to controlling shareholders through non-arm's-length transactions. HKEX and the SFC have significantly strengthened connected transaction enforcement in recent years.

Governance for Private Companies

While private companies are not subject to the CG Code, institutional investors and PE sponsors increasingly expect governance standards analogous to those for listed companies. Key governance expectations in the private company context include:

• A board of sufficient size and with relevant expertise
• Minority investor rights (information rights, consent rights for significant decisions) reflected in the shareholders' agreement
• An independent audit by a reputable accounting firm
• A conflict of interest policy and a related party transaction approval process
• A documented internal control framework and, for larger companies, an internal audit function
• A whistleblowing policy

Early adoption of strong governance practices by private companies significantly reduces the compliance burden and reputational risk associated with a future HKEX IPO.

ESG Reporting

HKEX requires listed issuers to publish annual ESG (Environmental, Social and Governance) reports. ESG reporting obligations have been progressively strengthened since 2015: mandatory disclosures on emissions, energy consumption, and social KPIs are now required, along with a board statement on ESG governance, management approach, and targets. HKEX is aligned with the International Sustainability Standards Board (ISSB) IFRS S1 and S2 standards and is expected to mandate climate-related disclosures in line with ISSB requirements.

For companies with private equity or institutional investors, ESG performance is increasingly material to valuation and exit planning. Investors are requiring ESG due diligence in M&A transactions and monitoring ESG KPIs in portfolio companies.

Conclusion

Good corporate governance is not merely a compliance exercise — it is a competitive advantage. Companies with strong boards, robust internal controls, transparent reporting, and sound ESG practices attract better investors, access capital at lower cost, and are better positioned to manage crises and capture opportunities.

For listed companies, governance failures attract regulatory sanction and reputational damage that can be devastating. For private companies seeking to grow and ultimately exit through a trade sale or IPO, investing in governance infrastructure early pays dividends many times over.

Alan Wong LLP advises listed and private companies on corporate governance, board advisory, connected transactions, and regulatory compliance in Hong Kong. Contact our Corporate & Commercial team to discuss your governance needs.