Issue of multiple directorships has recently came to public concern. It becomes more and more common that directors in listed companies retaining multiple directorships and even some legislators are involved. This situation is popular in Hong Kong and Singapore, however, many directors in United States are usually involved in one company only. There are serval problems in exercising multiple directorships to listed companies. First, director may not meet his function diligently.
With regard to the Non-statutory Guidelines on Directors Duties Principle 4 , a director of a company must exercise the care, skill and diligence that would be exercised by a reasonable person with the knowledge, skill and experience reasonably expected of a director in his position. It doubts that one can dedicate enough time to read documents and attend meetings for each company if he has multiple directorships.
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If he made any decisions that harm the company given that he did not read sufficient information and understnad the situation of the company, he is not act due care and skill as a director.
The Guidelines Principle 11 also sated that a director of a company must take all reasonable steps to ensure that proper books of account are kept so as to give a true and fair view of the state of affairs of the company and explain its transactions. As many companies follow similar accounting schedules, most common are setting year-end date as 30 April or 31 December, during the end of the accounting period, they have to review all the financail statements of the listed companies they directed in order to ensure there are no fraud.
It doubts that they can review all the financail statements if he has directored over 20 listed companies. If there are frauds and mistakes in financial statements, it would affect the investors and shareholders who rely on the annual reports of the companies to make investment decisions. Furthemore, directors may have conflicts of interests when he exercises multi corporate directorships. As more director roles will increase opportunity of represetning compainces which are related.
In Bristol and West Building Society v Mothew (1998), the court explained that one of the fiduciary duties of directors is not to allow any conflict between their duties as directors and their personal interests. If the contract in which he has a personal interest adverse to that of company is voidable by the company and the profits made may be recovered by the company. In Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co (1914) UK, defendant had a benefical inrerest in a company which sold shares to the company which he was a director, H took part in the decision to make the purchase.
So, if the director of one company has business or transactions to other company that he has directorship, it will have higher chance for conflict of interests or transferring benefits between companies. Regarding to the legislators being multiple corporate directors, now seven legislators have hold total of 63 paid board positions. According to Cheung (2012), it will be difficult for the legislators to deal with livelihood issues if the they keep in touch with and work for the corporations. If legislators are the companies’ directors, public will have a perception that they spoke for the buiness sectors rather than citizen.
Moreover, it may prevent the functioning of Legislative Council (Legco), according to the editoiral of ming pao (2011), at least five Legco members have omitted to register such interests. Although these are not serious omissions, we can see that some legislators are not serious about registering their interests and have neglected that they have not followed the guidelines. It is important for them to disclose all their intersts including shareholdings, paid directorships, property and election donations of their directorships.
By now the listed companies in Hong Kong need to have at least a third of independent directors who do not have business relationship with the company and do not manage the operation of the company. Before, companies are required to have at least three independent directors, but no restrictions on the ratio. It is believed that this new rule is to match the international practices such as United States and UK and protect shareholders’ interest. This new listing rules will make it difficult to find independent directors because not so much people are interested in the low remuneration role.
It may indicate that some firms need to cut the size of the board. In conclusion, one especially a legislator should not take up too many directorships in order to advoid conflict of interest and act due deligent. The legislaors cannot avoid disclosing their interest to Legco. It is suggested that Legco should amend its Guidelines on Registration of Interests to require legislators not only register the remunerated directorships but also unmunerated so as to protect the shareholders and the companys’ interest.