Board Members’ Service Contracts: A New Era in Corporate Governance

In a move to enhance transparency and accountability, the Board may soon be able to enter into service contracts with its members outside of their normal duties. This development comes as the Companies Act requires Boards to prepare a proposal for a remuneration policy every four years, which will then be voted on at the annual general meeting.

Disclosure Requirements

Under the new regulations, Board members will be required to notify the Securities and Futures Commission (SFC) and the company of any transactions conducted on their own account or in derivatives relating to the company’s listed shares. This move is aimed at increasing transparency and preventing conflicts of interest.

Key Governance Principles

The process for meetings of the Board is governed by its own governance procedures, which must be adopted under the Companies Act.
The quorum for a meeting to be validly held requires more than half of the total number of Board members, with reasonable notice and satisfactory supporting documentation provided.

Key Duties and Liabilities

As the principal duty of the Board is to act in the best interest of the company, Board members must exercise independent judgment and avoid conflicts of interest.
The Companies Act also prohibits Board members from taking any action that would give an undue benefit to a shareholder or another party to the disadvantage of the company or another shareholder.

Challenges Ahead

In an increasingly complex business environment, Boards are facing new challenges in balancing the interests of various stakeholders, including:

Employees
Customers
Suppliers
The wider community

The Board must adopt a long-term approach to sustainable value creation, ensuring that its decisions are guided by sound corporate governance principles.

Indemnities and Insurance

While companies may not indemnify their directors for liability to the company, directors’ and officers’ liability insurance is permitted.
This provision aims to provide protection for Board members against potential liabilities while still holding them accountable for their actions.

Setting Corporate Strategy

The Board plays a critical role in setting the corporate strategy, which must be guided by its fiduciary duties to act in the best interest of the company and its shareholders. In doing so, the Board must consider the interests of various stakeholders and adopt a long-term approach to sustainable value creation.

Stakeholders’ Roles

Employee representatives have a formal role in corporate governance, with two to three members appointed by trade unions bound by collective bargaining agreements.
Other non-shareholder stakeholders do not have a formal role, but the Board must still regard its responsibilities to these stakeholders as a matter of sound corporate governance and sustainable value creation.

The company’s commitment to corporate social responsibility is governed by a patchwork of laws and regulations, including:

Environmental laws
Anti-discrimination laws
Employment protection laws

The Board must also consider ESG-related matters in setting the company’s strategy and making decisions that impact various stakeholders.