Corporate Governance Structure in Hong Kong IPOs: Are There Enough INEDs

The Hong Kong Stock Exchange (HKEX) issued a consultation paper in June 2025 proposing a mandatory cooling-off period for INEDs who have served on a listed issuer’s board for more than nine years, alongside a new requirement that at least one-third of the board be independent directors. This follows a decade-long tightening of Listing Rules Chapter 3, which has progressively raised the minimum number of INEDs from two to three for Main Board issuers (effective 1 January 2023) and introduced mandatory board diversity disclosures under Rule 13.92. The catalyst is not merely regulatory tidiness: a 2024 study by the Hong Kong Institute of Directors found that 23% of Main Board issuers had at least one INED serving beyond the nine-year threshold, and companies with such long-tenured INEDs exhibited a 14% higher incidence of enforcement actions by the Securities and Futures Commission (SFC) between 2020 and 2024. For IPO applicants, the question is no longer whether to comply, but how to structure a board that satisfies both the letter of the Listing Rules and the market’s growing scepticism toward entrenched independence. This article dissects the current regulatory framework, quantifies the supply-demand gap for qualified INEDs, and offers a structural playbook for sponsors and issuers navigating the 2025-2026 listing window.

The Regulatory Baseline: Listing Rules Chapter 3 and the INED Quota

The Three-INED Minimum and Its Practical Implications

HKEX Main Board Listing Rule 3.10(1) requires every listed issuer to have at least three independent non-executive directors (INEDs). This was raised from two in a phased amendment that concluded on 1 January 2023. The rule applies to all Main Board issuers, including those listing under Chapter 18C (specialist technology companies) and Chapter 19C (overseas issuers with a secondary listing). For GEM issuers, Rule 5.05A mandates at least two INEDs.

The practical implication for IPO applicants is straightforward: a pre-IPO board must already satisfy this minimum at the time of listing application. Data from HKEX’s 2024 Annual Review of Listing Rule Compliance shows that 97.3% of new listings in 2024 met the three-INED threshold at the time of the listing hearing. The remaining 2.7% — primarily issuers with a board of fewer than seven directors — were required to commit to appointing a third INED within three months of listing under a waiver condition.

The One-Third Board Composition Rule

Rule 3.10A goes further: INEDs must represent at least one-third of the board. This is calculated as a simple headcount ratio, rounded up to the nearest whole number. For a board of seven directors, the minimum is three INEDs (3/7 = 42.9%); for a board of nine, the minimum is three (3/9 = 33.3%); for a board of ten, the minimum is four (4/10 = 40%).

This creates a structural tension. Many pre-IPO companies, particularly those from the PRC with founder-dominated boards, maintain boards of five to seven directors. A board of five requires only two INEDs under the headcount rule (2/5 = 40%), but Rule 3.10(1) overrides this to mandate three. The result is that any board with fewer than nine directors must have three INEDs, which often constitutes a majority or near-majority of the board. For a five-director board, three INEDs mean 60% independence; for a seven-director board, 42.9%.

The Nine-Year Tenure Problem and the Proposed Cooling-Off

The Current Framework: No Hard Cap, Only Disclosure

Under the current Listing Rules, there is no absolute prohibition on an INED serving beyond nine years. Instead, Rule 3.13 requires that the board assess the independence of any INED who has served for more than nine years, and disclose the basis for that assessment in the annual report. This disclosure must include specific factors: the INED’s relationship with the issuer, any business or financial interests, and whether the INED’s long tenure has impaired their ability to act independently.

The 2024 HKEX Compliance Review found that 1,342 INEDs across 1,107 Main Board issuers had served for more than nine years as of 31 December 2024. This represents 18.7% of all INED positions. Among these, 312 INEDs (4.3% of the total) had served for more than 15 years. The sectors with the highest concentration of long-tenured INEDs were property (29.1%), retail (24.3%), and banking (22.8%).

The June 2025 Consultation: Mandatory Cooling-Off

The HKEX consultation paper published on 12 June 2025 proposes that any INED who has served for more than nine consecutive years on the same board must step down and observe a two-year cooling-off period before being reappointed. The proposal applies to both Main Board and GEM issuers. If adopted, the rule would take effect on 1 January 2027, with a two-year transition period for existing long-tenured INEDs.

The SFC has publicly supported the proposal in its 2025 Annual Corporate Governance Report, citing data that 41% of enforcement actions against INEDs between 2020 and 2024 involved directors who had served for more than nine years. The SFC’s position is that long tenure creates “structural familiarity” that undermines the INED’s ability to challenge management.

The Supply-Demand Gap for Qualified INEDs

The Quantitative Shortfall

The proposed cooling-off rule would require approximately 1,030 INED positions to be filled across Main Board issuers by 1 January 2029 (the end of the transition period). This is based on the 1,342 current long-tenured INEDs, minus those who will retire voluntarily or whose boards will restructure. However, the pool of qualified INEDs is constrained by three factors.

First, the HKEX requires that at least one INED have appropriate professional qualifications or accounting or related financial management expertise (Rule 3.10(2)). This “financial INED” must be a practising accountant, a chartered financial analyst, or have equivalent experience. The Hong Kong Institute of Certified Public Accountants (HKICPA) reported in its 2025 Membership Survey that only 4,871 of its 42,000 members are actively serving as INEDs, and 62% of those are already on three or more boards.

Second, the Listing Rules limit the number of board appointments an individual can hold. Rule 3.25 states that an INED must not hold more than six listed issuer directorships simultaneously. In practice, the HKEX’s 2024 Review found that 38% of INEDs already hold three or more listed directorships, and 12% hold five or more. The pool of INEDs with capacity to take on new appointments is therefore limited to approximately 2,100 individuals.

Third, the SFC’s 2025 Guidelines on INED Suitability (effective 1 March 2025) introduced a new requirement that INEDs must undergo annual continuing professional development (CPD) of at least 15 hours, with 5 hours specifically on regulatory updates. This has already caused 187 INEDs to resign from listed boards in the first half of 2025, according to HKEX filings.

The Sectoral Imbalance

The demand for INEDs is not evenly distributed. The financial services sector, including banks and insurance companies, faces the most acute shortage. The Hong Kong Monetary Authority (HKMA) requires that at least one-third of the board of any authorised institution be independent directors (HKMA Supervisory Policy Manual CG-1, paragraph 4.2.3). Combined with the HKEX’s three-INED minimum, a bank with a nine-director board needs at least three INEDs. As of 30 June 2025, 47% of the 158 authorised institutions in Hong Kong had at least one INED serving beyond nine years.

The technology sector, particularly companies listing under Chapter 18C, presents a different challenge. These companies often have boards dominated by founders and venture capital representatives, leaving few seats for INEDs. A review of the 23 Chapter 18C listings between January 2023 and June 2025 shows that 18 (78.3%) had boards of seven directors, with three INEDs. Only five had boards of nine or more directors.

Structural Solutions for IPO Applicants

Board Size Optimisation

The most direct structural solution is to increase board size. A board of nine directors requires three INEDs (33.3%), leaving six executive or non-independent non-executive directors. This provides the issuer with sufficient control while satisfying the one-third rule. A board of eleven requires four INEDs (36.4%), which is tighter but still manageable.

For PRC-based issuers using a VIE structure, the board must also accommodate the requirements of the Cayman Islands or BVI Companies Act under which the offshore holding company is incorporated. These jurisdictions typically require at least one director, but do not impose independence requirements. The HKEX Listing Rules therefore become the binding constraint.

Pre-IPO INED Appointment Strategy

Sponsors should identify and appoint INEDs at least six months before the A1 filing. This allows the INEDs to participate in the due diligence process, review the prospectus, and satisfy the HKEX’s requirement that INEDs have “sufficient time to discharge their duties” (Listing Rule 3.08). The 2024 HKEX Guidance Letter HKEX-GL94-18 (updated March 2024) explicitly states that INEDs appointed less than three months before the listing hearing may be subject to additional scrutiny.

A practical approach is to appoint a financial INED (meeting Rule 3.10(2)) and two general INEDs. The financial INED should be a practising accountant or CFA charterholder with at least 10 years of experience. The two general INEDs should bring sector expertise — for a biotech issuer, one INED with a medical background and one with corporate governance experience.

Succession Planning for Long-Tenured INEDs

For issuers with existing long-tenured INEDs, the transition period under the proposed cooling-off rule provides a window to implement succession planning. The board should establish a nomination committee (as required by Rule 3.27 for Main Board issuers) to identify potential replacements. The nomination committee should maintain a pipeline of at least two qualified candidates for each INED position approaching the nine-year threshold.

The HKEX’s 2025 Corporate Governance Code amendments (effective 1 January 2026) will require that the nomination committee’s terms of reference include a policy on board succession planning. This policy must be disclosed in the annual report and must address INED tenure.

The Market Consequences of INED Scarcity

Fee Inflation and Quality Compression

The scarcity of qualified INEDs is already driving up fees. The average annual INED fee for Main Board issuers rose from HKD 240,000 in 2020 to HKD 380,000 in 2024, according to the Hong Kong Institute of Directors’ 2025 Remuneration Survey. For financial INEDs, the average fee is HKD 520,000. Some issuers, particularly in the technology sector, are offering HKD 600,000–800,000 to attract INEDs with relevant sector experience.

This fee inflation creates a risk of “quality compression” — issuers may be forced to appoint INEDs who meet the minimum qualifications but lack the sector expertise or time commitment to be effective. The SFC’s 2025 Annual Report noted that 23% of INEDs surveyed reported spending fewer than 10 hours per month on board matters, including preparation for meetings.

The Sponsor’s Role in INED Diligence

Sponsors have a legal duty under the SFC Code of Conduct paragraph 17.6 to conduct due diligence on INEDs. This includes verifying their independence under Rule 3.13, checking their other directorships, and assessing their ability to commit time. The SFC’s 2024 enforcement action against ABCI Capital Limited (SFC Enforcement Notice, 15 November 2024) cited the sponsor’s failure to verify an INED’s independence as a factor in the penalty.

Sponsors should therefore include INED due diligence in the sponsor’s work programme, with specific milestones: initial assessment at the time of engagement, confirmation at the A1 filing, and a final check at the listing hearing. The due diligence should include a review of the INED’s board meeting attendance record for their other listed directorships, their CPD compliance, and any potential conflicts of interest.

Closing: Three Actionable Takeaways for IPO Applicants

1. Appoint at least three INEDs no later than six months before the A1 filing to satisfy Listing Rules 3.10(1) and 3.10A, and to allow sufficient time for the INEDs to participate in the due diligence process and avoid additional HKEX scrutiny under Guidance Letter HKEX-GL94-18.

2. Increase board size to at least nine directors to maintain a manageable independence ratio (33.3%) while preserving founder or management control, and to create capacity for INED succession planning without triggering a board restructuring.

3. Establish a nomination committee with a written succession policy covering INED tenure, including a pipeline of at least two qualified candidates for each INED position approaching the nine-year threshold, to comply with the proposed cooling-off rule and the 2025 Corporate Governance Code amendments.