A. Explanation

This Provision concerns the minimum proportion of Independent Directors (IDs) when the Board Chairman is not independent.

This Provision should be read in conjunction with the Listing Rules regarding the minimum number of IDs on a regular board (one where the Chairman is independent). MR 210(5)(c) and CR 406(3)(c) specify that a Board must have at least two non-executive directors who are independent and free of any material business or financial connection with the company, and that IDs must comprise at least one-third of the company’s board. (Note that there is a transition period for the requirement for IDs to comprise at least one-third of the board, to take effect only from 1 January 2022.)

While it is a best practice that the Board is chaired by an ID so that there is effective oversight of both management and the interests of the company, there may be circumstances in which the Chairman is not independent.

In such a case, the balance of power between the independent and non-independent elements on the Board is likely to be tilted. The Chairman would usually have more influence than a regular director on Board matters and processes. Hence, this Provision calls for the minimum number of IDs on the Board to increase from one-third as set out in the Listing Rules to a majority where the Chairman is non-independent – so that IDs will have a correspondingly larger voice in the boardroom. They will then be in a stronger position to safeguard the interests of the company, especially when there is a conflict of views and a majority vote is required to reach a decision.

In addition to strengthening the number of IDs, the Provisions also state that a Lead ID should be appointed to provide leadership in situations where the Chairman is conflicted, and especially when the Chairman is not independent (Provision 3.3 of the Code).

B. Practice Guidance

• Practice Guidance 2: Board Composition and Guidance.

C. Related Rules and Regulations

• MR 210(5)(c) and CR 406(3)(c): Directors and Management.
• MR 720(1) and CR 720(1): Directors and Management.
• MR 704(8) and CR 704(7): Appointment or Cessation of Service.
• MR Appendix 7.4.2 and CR Appendix 7G: Announcement of Cessation.
• MR and CR: Definitions and Interpretations (see “Immediate Family”).

D. CG Guides

• NC Guide 3.4: Board Composition [Nomination and Appointment Process].
• NC Guide Appendix 3B-6: Removal of a Board Chairman [Nomination and Appointment Process].
• NC Guide 4.2: Number of Independent Directors [Director Independence].
• NC Guide 4.6: The Lead Independent Director [Director Independence].
• NC Guide 7.2: Succession Planning for Board Chairman [Succession Planning].

E. Related Articles

• “The search for independence” by Lim Chin Hu. (446KB)
• “Whither the lead independent director” by Adrian Chan. (57KB)
• “Perspectives from thought leaders: Revisiting board composition & roles and relationships between directors inter se and with management” by JY Pillay. (368KB)
• “Proposed changes to the definition of ‘independence’ ” by Adrian Chan. (69KB)