Board Members’ Service Contracts: A Growing Concern

As companies navigate the complexities of corporate governance, one area that has gained increasing attention is service contracts with Board members. These contracts, which extend beyond the scope of their Board membership, can pose significant risks and challenges for both the company and its stakeholders.

The Challenge

Under the Companies Act, Boards are required to prepare a proposal for a remuneration policy every four years, which covers senior executives’ remuneration. However, service contracts with Board members can blur the lines between their Board duties and personal interests, potentially leading to conflicts of interest.

Regulations and Guidance

In response to growing concerns, regulators have implemented measures to ensure transparency and accountability in Board dealings. For instance:

• The MAR requires persons discharging managerial responsibilities (PDMRs) and their closely associated persons (CAPs) to notify the SFSA and the company of transactions conducted on their own account or for a third party.
• However, there is a lack of clear guidance on what constitutes an acceptable service contract with Board members.

Limitations and Disclosure

According to the Companies Act, Boards are required to adopt their own governance procedures, which govern the process for meetings, including the frequency of meetings. However:

• There is no clear guidance on what constitutes an acceptable service contract with Board members.
• Regulators have imposed restrictions on PDMRs and CAPs from conducting transactions during a “closed period” of 30 calendar days before the announcement of an interim financial report or year-end report. This prohibition does not extend to service contracts with Board members.

Key Challenges

In today’s regulatory landscape, Boards face numerous challenges when it comes to service contracts with Board members, including:

• Ensuring that these contracts do not compromise the company’s interests or create conflicts of interest.
• Ensuring transparency and accountability in Board dealings, which may involve implementing measures to track and report on transactions conducted by PDMRs and CAPs.

Conclusion

In conclusion, service contracts with Board members pose significant risks and challenges for companies. To address these concerns:

• Companies are advised to establish clear guidelines on what constitutes an acceptable service contract.
• Implement robust disclosure requirements to ensure that any service contracts with Board members are transparent, fair, and in the best interest of the company.

By doing so, companies can mitigate risks and ensure good corporate governance practices.