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Composition of the board and director independence

Composition of the Board

Composition of the Board

Boards of directors cannot function effectively if they do not have the "right people" as members and the "right chairman" as leader. Moreover, they must also be supported by the "right" attitudes on the part of management, the external auditor and other advisors.

According to Chapter 3 of the Hong Kong Listing Rule, every board of directors should at least has three independent non-executive directors and at least one of the independent non-executive directors must have appropriate professional qualifications or accounting or related financial management expertise.  The Code on Corporate Governance Practices issued by the Hong Kong Stock Exchange also recommends that the board should include a balanced composition of executive and non-executive directors (including independent non-executive directors).

Before establishment of the board and appointment of the directors, there are some important issues for boards to consider. These include:

  • The skills and competencies required by the board as a whole. The skills one board requires may not be the same as those of another, given the different circumstances, industry and other factors affecting the company.
  • The skills and competencies of each current director. While an individual director is unlikely to have all of the required competencies, collectively the board should have all of the skills it needs among its directors. When seeking new directors, boards should look to augment or strengthen the competencies they require. Also important are the personality and other qualities of the directors, since they will influence the way in which the board members interact.
  • The size of the board, with a view to effective decision-making.

Director's Independence

According to the listing rule in Hong Kong, the board of directors of listed company should at least have three independent non-executive directors.  When accessing the independence of directors, the listed company should determine whether the director:

  • holds more than 1% of the total issued share capital of the listed company
  • has received an interest in any securities of the listed company
  • is a director, partner or principal of a professional adviser which currently provides or has within one year immediately prior to appointment provided services to the listed company
  • has material interest in any principal business of or is involved in any material business dealings with the listed company
  • is on the board specifically to protect the interests of an entity whose interests are not the same as those of the shareholders as a whole
  • is or was connected with a director, the chief executive or a substantial shareholder of the listed company
  • is or has at any time during the two years immediately prior to appointment bee, an executive or director of the listed company; and
  • is financially dependent on the listed company.

For the detail requirements of director's independence, please refer to Chapter 3 of the Hong Kong Listing Rule.

The purpose for the inclusion of non-executive directors is for the independent and objective perspective they can bring to board deliberations.  Non-executive directors can make vital contribution as part of the checks and balance mechanisms to ensure that executive directors do not treat the company as their private possession.

It is important to note that it is the responsibility of the board of directors to make the judgment as to whether or not any relationship that exists between the director and the company could reasonably interfere with the exercise of independent judgment.

Some argue that the independence requirement imposes an unduly heavy burden on some smaller public companies. On the other hand, the advantages that result from having independent directors far outweigh any perceived inconvenience.

Learn more

  • Diversifying American Board
    Insights on board diversity
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