Roles and Responsibilities of 21st Century Board

Adrian Fong, Chinese University of Hong Kong

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Electronic copy available at: http://ssrn.com/abstract=2166786

1.

Introduction and Research Objectives

One of the main difficulties with practising corporate governance1 in Hong Kong is the fact that
boards have a difficult time understanding their roles and duties.2 A survey found, in 1998, that
many directors in Hong Kong did not understand their duties.3
With each passing financial crisis and corporate scandal, the board has become an increasing
essential body with new directives and obligations it needs to fulfil. This has translated into new
legal roles, responsibilities and obligations. But more than that, constantly evolving corporate
governance practices the Hong Kong Stock Exchange (Exchange) implemented the new
Corporate Governance Code in 2012 have also introduced another set of roles and
responsibilities for the board. As such, the board of directors, especially those in Hong Kong, can
no longer be incognizant of their duties.4
The future success of Hong Kong as a global economic and financial centre depends on the
continued success of its companies. This can only happen if the board is at the forefront in
practising corporate governance by understanding and fulfilling its roles and responsibilities.
In light of the boards increasing importance to corporate governance, this study aims to explore
and consolidate the roles and responsibilities of the 21st century board of directors. It begins by
briefly noting the historical and legal framework of the board, explores contemporary issues and
responsibilities regarding corporate governance, and then considers the future direction of the
responsibilities of board. Through this study, Hong Kong boards should have a clear and
comprehensive framework of their roles and responsibilities in the 21st century. Observing
existing problems, this study also seeks to recommend different practices which will enable
boards to practise corporate governance more effectively.

The definition of corporate governance follows the popular one established in the Cadbury report as the system by
which companies are directed and controlled. See GJ Rossouw, A van der Watt & D P Malan, Corporate
governance in South Africa, Journal of Business Ethics, vol. 37, no. 3, 2002, pp. 289.
2
G Jones, Corporate governance and compliance in Hong Kong, LexisNexis, Hong Kong, 2012, p. 255.
Surprisingly, the Companies Ordinance in Hong Kong is silent on the general role of a director; instead, the
Ordinance lays out a list of legal responsibilities where the board has a role to play (such as the approval of the
company balance sheet). This has made it somewhat difficult for directors to ascertain their specific role in a
company.
3
A Majid, CK Low & K Arjunan, Company Directors Perceptions of Their Responsibilities and Duties: A Hong
Kong Survey, Hong Kong Law Journal, vol.28, no. 1, 1998, pp. 24-25.
4
S Ho, Corporate Governance in Hong Kong: Key Problems and Prospects, 2nd end, School of Accountancy, Hong
Kong, 2003, p. 32. Corporate Governance is the foundation of our capital market and one of the key elements in
maintaining investor confidence [H]ong Kongs success as an international financial centre to a considerable
extent hinges on the concerted efforts we have made in the past to enhance our corporate governance regime
[T]he Governments policy direction is clear we must maintain our market quality and continue to enhance our
corporate governance. See F Ma, Corporate Governance in Hong Kong, Government of Hong Kong, 2005,
retrieved 10 July 2012, www.info.gov.hk/gia/general/200508/25/P200508250121.htm. See also, A Young,
'Reforming directors' duties in Hong Kong: the journey, stakeholders and oversights', International Company and
Commercial Law Review, vol. 23, no. 4, 2012, pp. 142: corporate governance law reform in Hong Kong should be
of interest to international investors.

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Electronic copy available at: http://ssrn.com/abstract=2166786

2.

Historical and Legal Framework

2.1. Historical Framework

The most basic and fundamental duty of a director, and collectively of the board, is its fiduciary
duty to the company.5 This duty is one that is long-established and was best expressed in the case
of Dorchester Finance Co Ltd v Stebbing6 where it was noted that a director must act in good
faith with honesty in the interests of the company, while exercising a reasonable care and a
degree of skill as may reasonably be expected from a person with his knowledge and
experience.7 This basic duty may be further subdivided into different branches and has been
summarized by the Companies Registry.8
The detailed roles and duties of the directors have evolved through precedential case law,
reports, historical changes, and, in some cases, by political and economic necessity.9 However,
the basic fiduciary duty remains the same for the directors.
Enron as a Failure of the Board
The United States Senate launched a subcommittee hearing and investigations into the Enron
board after the scandal. Amongst other reported findings, the Senate noted that the board
members failed in their most basic fiduciary duty to the company.10 The board had noticed
numerous questionable activities by the management but chose to ignore them to the detriment of
the shareholders.11 These facts leave no doubt that a failure by the board into its most basic and
fiduciary duty can result in the failure of a company.

See Percival v Wright [1902] 2 Ch 421 (HC). The basic legal duties of directors are to act in good faith in the
interests of the company and for a proper purpose and to exercise care and skill. Committee on Corporate
Governance, Hampel Report, 1998.
6
Dorchester Finance Co Ltd and another v Stebbing and others [1989] BCLC 498, [501].
7
In Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, Romer J formulated these three propositions by which
to measure a company directors skill and care. In doing so, he established the superstructure of the modern law in
this sphere. S Chan, Directors duties in Hong Kong: Codify or Not?, Hong Kong Institute of Accredited
Accounting Technicians,2009, retrieved 11 July 2012, www.hkiaat.org/images/uploads/articles/Director.pdf.
8
Companies Registry, A guide on directors duties, Companies Registry, 2009, retrieved 10 June 2012,
www.cr.gov.hk/en/publications/docs/director_guide-e.pdf. These principles were well-established in mid-1900s
through a number of cases in England, and transplanted into Hong Kong. See Re Smith and Fawcett Ltd [1942] Ch
304 (CA), which established, amongst others, the discretion of directors, and Re Lands Allotment Co [1894] 1 Ch
616 (CA) which dealt with the role of directors as trustees of the assets of the company.
9
Corporate governance, although conceptually known, was not a popular phrase until the late 1900s when growing
scandals in the corporate world led to a call for reform in the corporate governance structure in order to restore
investor confidence. The wave of committees (from UK: Cadbury and Hampel Reports; South Africa: King Reports,
Sarbanes-Oxley Act) reviewed industry practices and noted the importance of corporate governance, in relation to
the board of directors, to business prosperity and accountability. As of now, after the financial crisis, another wave
of reports (Walker Report & King Report III) are starting to transform corporate governance again.
10
Permanent Subcommittee on Investigations, The Role of the Board of Directors in Enrons Collapse, U.S.
Government Printing Office, 2002, retrieved 8 June 2012, www.gpo.gov/fdsys/pkg/CPRT107SPRT80393/pdf/CPRT-107SPRT80393.pdf.
11
Ibid.

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2.2. Statutory Framework and Compliance

Legislation, such as the Companies Ordinance in Hong Kong (and the Sarbanes-Oxley Act in the
United States, which reverberated internationally), have become the main driving force for the
increase in responsibilities of the board of directors. One such obligation now enshrined in
legislation is the duty of the board to approve and sign off on the balance sheet. 12 There is an
obligation to follow all legislation; severe criminal and civil penalties can arise if this is not
followed.
The Star Bio-Tech Case
Brightline Futures Company (Brightline) was a substantial shareholder of Star Bio-Tech
Limited. As a substantial shareholder, it had the obligation to report its changes of interests in the
shares of Star Bio-Tech. Failure to do so cost Brightline and Cai, its director, fines to the
Securities and Futures Commission.13
The HSBC Case
Recently, HSBC was hit with a number of charges including lax anti-money laundering controls,
mis-selling financial products, and possible global interest rate-rigging.14 These charges led to
HSBC making provisions for billions of dollars to cover fines and other costs.15
All boards should be reminded that the company has a basic obligation to follow the legal duties
imposed upon it by law. Thus, the board has the responsibility of ensuing and setting up a culture
where laws and regulatory rules are followed. A Chartered Secretary or a lawyer should be
present to serve as a guide to the board on their legal responsibilities where uncertainties arise.
Chartered Secretaries also assist keeping the board up-to-date on corporate governance
practices.16

3.

Corporate Governance: Crucial Responsibilities of the 21 st Century

Board

A board of directors which only conforms to legal obligations is a 20th century board in that it
represents the past complying with the lowest common denominator of corporate governance

12

Companies Ordinance 1997, section 129B.

Securities and Futures Commission, SFC Successfully Prosecutes Brightline Futures Company Limited and Mr
Cai Yuan for Contravening the Securities (Disclosure of Interests) Ordinance, 2001, retrieved 21 June 2012,
www.sfc.hk/sfcPressRelease/EN/sfcOpenDocServlet?docno=01PR24.
14
S Slater & M Scuffham, HSBC takes $2 billion hit for U.S., UK scandals, Reuters UK, retrieved 31 July 2012,
http://uk.reuters.com/article/2012/07/31/uk-hsbc-earnings-idUKBRE86T07O20120731.
15
Ibid.
16
The importance of a company secretary, mandated by Companies Ordinance, was noted in the Cadbury report,
and most recently in OECD 2011 Report (Reform Priorities in Asia: Taking Corporate Governance to a Higher
Level). Indeed, the new Exchange Listing Rules now mandate the use of a suitable candidate, such as a Chartered
Secretary, for each issuer alongside directions for yearly professional training.
13

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practices.17 A board which views its role as a negative role where its members strive only to
do no harm is not practicing true corporate governance. Indeed, the era of the boardroom
where chairman could speak a few slow words [directors] would agree to everythingsign
somethingand the board meeting would be over is long gone as the board has gained new
importance since the 1800s.18 The board is no longer a rubber stamp for policies.19
Instead, corporate governance, which is the responsibility of the entire board, is a positive duty to
direct and control the company. This point is above contention and essential to understanding the
21st century board.20
The responsibilities of the 21st century board regarding corporate governance can be divided into
the following: monitoring and oversight of the company, accountability to shareholders, board
evaluations, and nominating directors and senior management.

3.1. Monitoring and Oversight of the Company

The board has the responsibility of monitoring the company and ensuring that the necessary
controls over the activities of the company and the management are in place and working. 21 This
role means that board has a continuing duty to oversee the company and its supervisory
processes.22
Sino-Forest Corporation
Sino-Forest is a company listed in Canada that sold forestry-related products. Amongst its assets,
it claimed to have vast holdings of forestry land in China. However, subsequent investigations
discovered that these assets were overstated or nonexistent, causing the Ontario Securities
Commission to file fraud charges in May 2012 against the Sino-Forest and its executives, most
notably Allan Chan.23
The perpetuation of such a large-scale fraud escaped the vision of the board of directors (many
whom reside in Hong Kong). In a report by an independent committee made up of Sino-Forests
17

While these duties should not be codified into company law for all boards, Hong Kong boards should nonetheless
follow these for the benefit of themselves, the company, the shareholder, and for the furtherance of Hong Kongs
company. These principles also apply to small-and-medium enterprises (SME), although some recommendations
will have to be adapted based upon the individual circumstances of an organization (for example, some companies
may only have one director, who is also the founder).
18
R Monks & N Millow, Corporate Governance, 5th edn, John Wiley & Sons, West Sussex, 2011, p. 252.
19
S Bainbridge, Corporate governance after the financial crisis, Oxford University Press, New York, 2012, p. 44.
20
S Arcot & V Bruno, In Letter but not in Spirit: An Analysis of Corporate Governance in the UK, p. 5, 2006,
retrieved 15 July 2012, http://www2.lse.ac.uk/fmg/research/RICAFE/pdf/RICAFE2-WP31-Arcot.pdf;
See also P Macavoy & I Millstein, 'The Active Board of Directors and its Effect on the Performance of the Large
Publicly Traded Corporation ', Journal of Applied Corporate Finance, vol. 11, no. 4, 199, pp. 8-20.
21
Cadbury, s. 2.5.
22
B Manning, 'The business judgement rule and the directors duty of attention: time for reality ', Business Law
Review, vol. 39, 1984, pp. 1494.
23
V Lu, Sino-Forest probe continues though company may not defend itself at OSC hearing, Toronto Star,2012,
retrieved 6 July 2012, www.thestar.com/business/article/1225411--sino-forest-probe-sifting-through-millions-ofdocuments-mostly-in-chinese.

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board of directors after the discovery, it noted various challenges in producing an accurate report
of the business. Amongst these challenges was the complexity and lack of visibility of the
companys structure and the non-cooperation by the companys executives towards the
investigation.24 The committee said in January that a full account of the companys activities
and business ties may never be possible.25
Recommendations:

Continuing duty to understand - The board should always make sure it has a full
understanding of the business structure and model in order to govern and monitor it
effectively.
Where it does not, the board must take proactive measures to gain a full understanding of
the business. This is especially necessary if the board feels the management is
unforthcoming with the information, a sign of possible impropriety.

Monitoring the company - The job of monitoring the board has largely fallen to the
standard audit committee in recent years. Yet monitoring involves the efforts of the entire
board. An internal report into the WorldCom scandal, involving CEO Bernard Ebbers, on
the board states that While [the] board did not appear to know about the company's
accounting fraud, it was so passive that it had little chance of discovering it.26
It is recommended that the boards also take time to visit personally major assets, factories,
auditors and call business partners to truly understand the state of the company. It cannot
fall to the board to gain information only from the management of the company. All these
steps are corporate governance practices applied not by sitting in a boardroom receiving
information from the management, but through active governance essential to monitoring
the company.
Where the board feels like the management is engaged in illegality, it is also recommended
that it takes immediate action, even to point of removing the management.27

Review of internal controls - The Turnbull Report and the OECD White Paper on
Corporate Governance in Asia recommend that the board of directors develop and maintain
adequate internal controls.28 This would include measures to help ensure the quality of

24

The Independent Committee of the Board Of Directors of Sino-Forest Corporation, Final Report, Sino-Forest
Corporation, 2012, retrieved 3 June 2012, www.sinoforest.com/Uploads/SFC%20%20Final%20IC%20Report%20Redacted%20-%20Jan31%202012.pdf.
25
C Donville and L Hill, Sino-Forest Engaged in Fraudulent Scheme, OSC Alleges, Bloomberg, 2012, retrieved
28 July 2012, www.bloomberg.com/news/2012-05-22/sino-forest-disclosure-grossly-misleading-osc-says.html,
emphasis added.
26
J Hopkins, Report: WorldCom board passive, USA Today, 2003, retrieved 19 June 2012,
www.usatoday.com/money/industries/telecom/2003-06-09-board_x.htm.
27
A Naciri, Internal and external aspects of corporate governance, Routledge, New York, 2010, p. 60; S Green,
Sarbanes-Oxley: and the board of directors, J. Wiley & Sons, Hoboken, 2005, p. 48-49
28
M Page & L F Spira, The Turnbull Report Internal Control and Risk Management Executive Summary, Institute
of Chartered Accountants of Scotland, retrieved 15 July 2012, http://icas.org.uk/home/technical-and-

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internal and external reporting by developing systems to generate relevant and reliable
information about the company.29 The Exchange has recently recommended the board take
a lead role in developing provisions for the reporting of financial impropriety and whistleblowing.30
But more than that, this study recommends the boards create an internal controls
committee. Boards must lead the way in setting up systems to monitor the compliance by
the company with legal standards and regulatory requirements.31 Heading the committee
would be an independent non-executive director with experience in monitoring and
establishing internal control procedures. Such a committee would help prevent problems
such as those suffered by HSBC.
Internal controls cover such important responsibilities as risk management, effectiveness of
compliance and the ability of the company to deal with sudden circumstances.32 The board
needs to focus its efforts on pre-empting potential problems a much more cost-effective
and efficient solution than that of fixing up problems and restoring trust in a company.

3.2. Accountability to Shareholders

The board has a responsibility to its shareholders, which elects the directors. One of the boards
responsibilities is to report to the shareholders on the performance of their duties.33 Although
boards are required by law to create an accurate report at the end of the financial year to
shareholders,34 it is important that boards continue to strive to ensure reporting practices and
financial statements are transparent and accountable.
Corporate governance reports required by the Exchange are often only nominally and
technically completed, without much detail as to the actions of the board. The board, both in
public and private companies, needs to make sure shareholders are able to use the reports to
figure out the current financial condition of the company.

3.3. Boards Responsibility to Evaluate

Northern Rock

research/research-centre/research-publications/the-turnbull-report--internal-control-and-risk-management-executive-summary/. OECD, White Paper on Corporate Governance in Asia, priority 4, 2003, retrieved 3 July
2012, www.oecd.org/dataoecd/48/55/25778905.pdf.
29
The Institute of Chartered Accountants in England and Wales, Internal Control: Guidance for Directors on the
Combined Code, provision 16-19, European Corporate Governance Institute, 1999, retrieved 15 July 2012,
www.ecgi.org/codes/documents/turnbul.pdf.
30
Hong Kong Stock Exchange, Appendix 14, 2012, C.3.8., retrieved 8 June 2012,
www.hkex.com.hk/eng/rulesreg/listrules/mbrules/documents/appendix_14.pdf.
31
M Lipton, The Future of the Board of Directors, Harvard Law School Forum on Corporate Governance and
Financial Regulation, 2010, retrieved 23 July 2003, http://blogs.law.harvard.edu/corpgov/2010/07/06/the-future-ofthe-board-of-directors/.
32
Hong Kong Stock Exchange, Appendix 14, C 2.3.
33
Cadbury, s. 3.4, emphasis added.
34
Companies Ordinance 1997, section 129D.

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Northern Rock plc, a bank in the United Kingdom, practised a reckless strategy approved by its
board of directors which failed to consider potential risks. In 2007 the bank collapsed because of
its lack of liquidity, and the Treasury Committee of the United Kingdom House of Commons set
out to examine what had happened.
Northern Rock completed a board evaluation before the crisis hit:
The Chief Executive and all of the Non- Executive Directors were appraised by the
Chairman whilst the appraisal of the each of the Executive Directors was completed
by the Chief Executive. [After talking with the entire board, except the Chairman]
[the] Senior Independent Director conducted the appraisal of the Chairman.35
The annual statement did not state the results of the evaluation, except to say that the company
was functioning effectively.36
Contrast that image with a review of the company by the Treasury Committee which noted
several failures of corporate governance. Amongst them, it noted that the board did not have
significant levels of banking expertise. The chairman of the board, Matt Ridley, was an academic
while Adam Applegarth, board member and CEO, was not a qualified banker. Reviewers later
asked why none of the non-executive directors seems to have made the simple inquiry as to why
a modest mortgage bankwas playing at the casino end of the capital markets.37
Board evaluations
Board evaluations are well-planned assessments of the board that evaluate the unique culture,
dialogue, and needs of the board in hopes of revealing strengths and the issues that hinder
optimal board performance.38 Although it might be said that evaluations are for the sole purpose
of making sure the board are performing adequately, at the heart of the evaluation should be a
desire for the board to seek areas of improvement. Board evaluations have been recently added
to the Corporate Governance Code as a Recommended Best Practice.39
Recommendations:

Assessments of the board and senior management - It is easy to equate board evaluations
with the idea of directors being judged. Yet board evaluations are not tests to grade
performance.
35

Northern Rock plc, Annual Report and Accounts 2006, 2006, p. 16, retrieved 3 July 2012,
http://companyinfo.northernrock.co.uk/downloads/results/res2006PR_AnnualReportAndAccounts.pdf, emphasis
added.
36
Ibid.
37
W Sun, J Stewart & David Pollard, Corporate governance and the global financial crisis: international
perspectives, Cambridge University Press, New York, 2011, p. 63.
38
Cornerstone of the Board the New Governance Committee, Getting the Most from Board Evaluations, Spencer
Stuart, retrieved 12 July 2012, http://content.spencerstuart.com/sswebsite/pdf/lib/CornerstoneGettingtheMostBdEval%203_04.pdf.
39
The Exchange recently proposed the addition of regular evaluations of the entire board and of individual directors
to the Corporate Governance Code. However, the provision, a recommended best practice regarding the evaluation
of individual directors, was rejected by a majority of issuers. Hong Kong Exchanges and Clearing Limited,
Consultation Paper on Review of the Code on Corporate Governance Practices and Associated Listing Rules, at
para. 191, 2011, retrieved 8 July 2012, www.hkex.com.hk/eng/newsconsul/mktconsul/documents/cp2010124.pdf .

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It is recommended that board evaluations be established for the purpose of assessing areas
of possible improvement by measuring the board in relation to the corporate strategies or
the vision set out by the board.40 A successful board evaluation is not one that points out
non-performing directors or management and then seeks to remove them. It suggests
perhaps how the board can better serve its shareholders and management. It seeks to
develop the board by pointing out certain issues or possible conflicts and then strives to let
the board find a way to overcome the situation.41

An add value process - A continual issue with existing board evaluations is that they are
often treated as exercises which simply must be done to maintain compliance with rules,
instead of used as a tool of corporate governance.
It is recommended that boards treat such evaluations as not merely another step in
corporate governance, but as a way to add value into the company. 42 The evaluation is to
be taken seriously, with directors and management open about critiquing and stating the
deficiencies of expertise or problems on the board.

Use of third-party evaluators - Directors and senior management are naturally hesitant to
critique others in front of the chairperson or other directors, a phenomenon most likely
present in Northern Rock. It is recommended that a third party takes control of the
interview process and report these findings to the Chairperson or committee in charge of
the evaluation process (i.e. the nomination committee).43
Third-party evaluators (such as other distinguished directors, Chartered Secretaries, or
business leaders) permit directors to be candid about other directors and management,
allowing them to freely speak about possible failures of the board. Ultimately, this is for
the benefit of the board and the company.
Sometimes, such as at Northern Rock, boards tend to evaluate themselves very well. It is
recommended that the third party evaluator spend some time attending board meetings to
try to see the self-evaluations are justified. 44 They would look for evidence of board

40

See Cornerstone of the Board the New Governance Committee, Getting the Most from Board Evaluations.
Ibid.
42
In one case study example, the CFO during a board evaluation remarked that the board was The Board is ok;
they dont get in my way. But Id kill for someone to ask me a question about global corporate finance in a board
meeting that made me really think. After learning about this, action was taken and the board pre-reading
information was changed dramatically. Two years later, the same CFO interviewed during the board evaluation said:
This board is night and day from the board we had 2 years ago. Theyre fantastic a true corporate assetI ask
only one thing from this years board evaluation 45 minutes on the agenda when I can just have open discussion
with the board from time to time on key strategic issues. See B Behan, Best Practices in Board Evaluation and
Director Evaluation, Slideshare, 2009, retrieved 1 August 2012, http://www.slideshare.net/BoardAdvisor/bestpractices-in-board-evaluation-and-director-evaluation.
43
R Charam, Boards that deliver, Jossey-Bass, San Francisco, 2005, p. 43.
44
S Bowman, The Problem with Board Evaluations, Conscious Governance, 2008, retrieved 19 July 2012,
www.conscious-governance.com/Nonprofit-Executive-Articles/Steven-Bowman/the-problem-with-boardevaluations.html.
41

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processes, board compliance and corporate governance practices.45 The third-party

evaluator could then report on whether or not the boards self-evaluation is justified, and if
not, where it can improve. In this way, third-party evaluators also provide an objective
view of the board.

Individual Evaluations Recently, the Exchange suggested provisions in the Corporate

Governance Code regarding the practice of evaluations for individual directors. This was
rejected by a majority of issuers and ultimately not adopted.46
This study continues to recommend the practice of individualized evaluations for directors
and C-level executives by third-party evaluators. It allows directors to comment on the
performance of their peers, such as mentioning that an independent director rarely
challenges the management.47 By doing so, it is hoped that directors can have unfiltered
advice on where to improve.

Evaluation-Cycle - It is recommended that the board follow a structure of:

(i) questionnaires
(ii) interviews
(iii) third-party reviews
(iv) a formal review of the results along with the creation of recommendations
(v) application of the recommendations, and
(vi) follow-up on the recommendations.
The unique nature of each board may give rise to different techniques for the optimal
evaluation. Boards should experiment with different methods to see which one allows for
the most accurate evaluation of the board.

Company Evaluations
Company evaluations remain possible future innovations which boards should attempt to do.
Company evaluations are similar to board evaluations, except in scope. Company evaluations
appraise both the board and the company. They cover the dynamics of the corporation, take into
account the strategic objectives and evaluate the company in relation to its potential.
It is recommended that boards, which are uniquely situated to lead this directive, establish
company evaluations with an independent non-executive chairing and a third-party evaluating.
The company evaluation would then review and evaluate the companys performance in relation
to its strategic objectives laid out by the board in order to assess areas of weakness and plans for
future improvement. Doing so allows the company to know where it must improve to add
value.
45

Ibid.
Hong Kong Exchanges and Clearing Limited, Consultation Paper on Review of the Code on Corporate
Governance Practices and Associated Listing Rules.
47
W Sun, J Stewart & David Pollard, p. 63. A Au, S Boren & E Angelis, Improving board effectiveness: Five
principles for getting the most out of a board assessment, Spencer Stuart, 2012, retrieved 6 July 2012,
www.spencerstuart.com/research/articles/1568/.
46

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3.4. Role of the Board in Choosing the Board and Senior Management
The historical practice where the board and senior management were made up of friends of the
existing networks of the chairman48 is no longer a reality for many large companies. The use
of a nomination committee has introduced some consistency and independence into the process.
Nevertheless, private and smaller companies, especially family-dominated ones,49 have yet to
make the shift, damaging its potential. The ability for the board to choose the best directors and
senior management to lead the company is essential in the 21st century.
Recommendations:

Nomination committee - The Corporate Governance Code now mandates the use of a
nomination committee.50 However, many private and SME companies still do not use a
nomination committee.51
It is recommended that all boards establish a nomination committee in order to find the
correct directors and executives who will add value to their board and company. In doing
so, it is also recommended that nominating committees of listed companies be transparent
to the board and shareholders, through the annual report, about their procedure for
choosing directors and reasons for choosing those specific directors and management.52

Direction of the company - The general direction of the company is an important point to
factor in when choosing directors and management. For example, if the company looks to
be heading into a mergers and acquisition period, it may be necessary to get lawyers or
businesspeople familiar with the situation. A board whose long-term strategy is to merge
the company with other businesses might consider hiring a CEO with that particular
business experience.

Skill diversity - An important part of choosing the right director consists of knowing where
the current board lacks skills. This is best done through board evaluations overseen by a
nomination committee which creates performance appraisals to see where the board lacks
expertise.53

48

A Kakabadse & N Kakabadse, Global boards: one desire, many realities, Palgrave Macmillan, New York, 2009,
p. 228.
49
A Lau, J Nowland & A Young, In search of good governance for Asian family listed companies: a case study on
Hong Kong', Company Lawyer, vol. 28, no. 10, 2007, pp. 306-311.
50
It found in 2009 that 63% did not have a nomination committee. Hong Kong Exchanges and Clearing Limited,
Consultation Paper on Review of the Code on Corporate Governance Practices and Associated Listing Rules, para.
124.
51
A Lau, J Nowland & A Young, pp. 306.
52
Methods for selecting candidates should be disclosed in the annual report along with reasons why the chosen
director or management fits those criteria.
53
South African Institute of Chartered Accountants, Summary of Report on Governance for South Africa 2009
(King iii), principle 1.23, 2009, retrieved 4 July 2012, www.auditor.co.za/Portals/23/king%20111%20saica.pdf.

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It is recommended that the evaluation is to be taken seriously, with candidates and

evaluators open about critiquing and stating their deficiencies of expertise. The modernday board and management is one that has the necessary skills and talents needed (whether
accountancy, legal, business or entrepreneurial) to help the company succeed. Choosing
board members may also involve looking into the services, such as established networks,
that directors can provide to the company.54 Although boards operate as a group of
directors collectively, effective good corporate governance in the 21st century requires the
board to specialize and diversify.55

Diversity candidates - Norways policy of mandating a minimum number of women on the

board of directors56 has opened the discussion57 of whether or not other jurisdictions, such
as Hong Kong, should start making companies diversify their corporate boards.58
Instead of seeking women for the sake of placing women on the board, it is recommended
that companies, and their nomination committees, ensure that comprehensive diversity59 is
present on the board. They must make sure they are taking into account the range and
diversity of talents and skills. It was found that the women who replaced the men after
Norway mandated that 40% of the board should be women were generally more qualified
and had a greater diversity of skills then than men they replaced.60
Hong Kong boards cannot allow that to happen. They must make sure their procedures for
choosing new directors includes diversity as an important element and that they do not
exclude women and other minorities. Standard Chartered published, in March 2012, a
report on women on boards of the Hang Seng Index noting few women were in the
boardrooms. Only 9% of directors were women; only one company had a female CEO and
a female chair. 41.7% of boards had no females.61 As was stated by a HKICS study, Hong

54

Bainbridge, p. 49.
I Kesner, 'Directors' Characteristics and Committee Membership: An Investigation of Type, Occupation, Tenure,
and Gender', The Academy of Management Journal, vol. 31, no. 1, 1988, pp. 67: Specialization by members, for
example, leads to greater efficiency, expediency, and flexibility.
56
P Hamill, A Ward & J Wylie, 'Stronger Boards: Are Women the Answer?' Accountancy Ireland, vol. 43, no. 5,
2011, pp. 26-29.
57
Amongst others, R Adams & D Ferrera, "Women in the Boardroom and their Impact on Governance and
Performance", Journal of Financial Economics, vol. 94, no. 2, 2009, pp. 291-309.
58
Deloitte, Women in the Board: a global perspective, p. 12, 2011, retrieved 3 July 2012,
www.deloitte.com/assets/DcomGlobal/Local%20Assets/Documents/Enterprise%20Risk%20Services/dttl_CorpGov_WomenInTheBoardroom_2202
12.pdf.
59
A Durbin, Optimizing Board Effectiveness with Gender Diversity: Are Quotas the Answer? International Finance
Corporation, retrieved 29 June 2012,
www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/PSO21_Gender/$FILE/IFC_PSO_21_72311.pdf.
60
P Hamill, A Ward & J Wylie, pp. 26-29. Evidence would suggest, however, that most of the women in the newly
appointed positions had significantly higher educational and business qualifications than the males which they
replaced and sit next to on the boards.
61
A Banerji & K Vernon, Standard Chartered Women on Boards: Hang Seng Index 2012, Community Business,
2012, retrieved 8 June 2012, www.communitybusiness.org/images/cb/publications/2012/WOB_Eng_2012.pdf.
55

Page 12 of 24

Kongs [companies] are denying themselves the benefits of the views and contributions
that could be made by one half of the Hong Kong society.62
In an era of globalization, international directors are also becoming essential, even for local
companies, to help bring diversity of experience. This is especially applicable if the
international director has previous business experience in the same sector. 63 It is
recommended, where possible, that companies have an international element in their board
composition.

CEO and succession Beyond choosing the CEO, boards should always have a succession
plan ready for senior management in case of emergencies. Ultimately, the dynamics of
each company make each succession-plan a unique exercise. Nevertheless, it is
recommended that the nomination committee take a lead role in the process of successionplanning.

5.

Future Direction of the Board: Its Role and the Add Value Proposition

An incidental effect of the wave of corporate governance reports stressing the boards role in
monitoring the company has left many directors with the view that corporate governance is
simply monitoring the company.64 A survey of British directors showed that they were becoming
more risk-adverse with too much focus on compliance.65 Yet the 21st century board the board
that Hong Kong needs is no longer simply to prevent misdeeds; the board needs to figure out
how to transform its role into one that adds value to the company.
This doctrine, henceforth stated as the add value proposition, is one that believes that the board
has a more important role to play in the company.66 The 21st century board is one that makes the
company better by enhancing its value and developing the company. 67 This study has already
mentioned several practices that add value; the following recommendations suggest additional
value-adding practices.
Recommendations for add value practices:

62

Hong Kong Institute of Company Secretaries, The Duties and Responsibilities of Independent Non-Executive
Directors of Hong Kong Listed Companies, p. 22, 2003, retrieved 17 June 2012,
www.hkics.org.hk/media/publication/attachment/1966_INED%20%28Sept%202003%29.pdf.
63
C Mallin, International corporate governance: a case study approach, Edward Elgar Pub, Cheltenham, 2006, p.
305.
64
The Companies Ordinance left directors with many administrative and compliance duties. M Bruce, Rights and
duties of directors, 11th edn, Bloomsbury Professional, Haywards Heath, 2011, p. 8.
65
The growing burden of regulation is stifling growth and innovation among the United Kingdom's biggest
businesses, according to research commissioned by City law firm EvershedsThe equity analysts felt that board
directors are increasingly risk-averse, focusing too much on compliance and red tape and not enough on business
growth. See 'Regulation makes directors too cautious says Eversheds survey', Company Lawyer, vol. 27, no. 3,
2006, pp. 92.
66
The idea of a progressive board is a central element in Charam, Boards that deliver.
67
K Andrews, 'Rigid Rules Will not Make Good Boards ', Harvard Business Review, vol. 60, no. 6, 1982, pp. 34-47.
This concept was briefly mentioned in preceding paragraphs but explored more fully in-depth here.

Page 13 of 24

Dialogue between the management and the board - The boards value to the company is
based on the boards ability to test and help management. The board, essential a team,68
must work effectively as a group under the chairman to provide leadership and advice to
the management.69
It is recommended that the board and management evaluate their group dynamics and
dialogue through board evaluations. Both parties must ensure there is mutual dialogue
between both parties; management should be providing accurate, timely and necessary
information on the status of the company; the board should reciprocate with performance
of its duties and the practice of corporate governance.

Focusing on substantive issues (strategy) - It is important for boards to not get invested in
minute details of the company.70 Instead, it is recommended that boards focus on
substantive issues: finding the right long-term strategy; monitoring health, performance
and risk; choosing the right CEO; creating a plan of succession; and developing an
appropriate method for CEO compensation.71
In particular, strategy is an important avenue which the board needs to explore because of
its essential role in adding value to a company. Companies rise and fall on their strategy.
Strategic planning involves both the board and the management; it requires that both
parties be actively engaged in the process of mapping out a plan for the company, the
board in deciding the strategy and the management in applying and reporting on its success
in practice.72
Board Strategy in Hong Kong
The change from the boards role as one of purely oversight to also being involved in
strategy has reached the largest companies.73 Hang Seng, in 2007, published its annual
report without specifically listing strategy as one of the boards responsibilities.74 In 2011,
the boards responsibility for strategy was placed first.75 In Caf de Corals annual reports,

68

S Murphy & M McIntyre, Board of director performance: a group dynamics perspective, Corporate
Governance, vol. 7, no. 2, 2007, pp.209 224.
69
Ibid.
70
Charam, p. 61.
71
Ibid., p. 74.
72
The boards strategic role can include responsibilities such as: ordering strategic reviews, endorsing or refusing
managements strategic plans, deciding on mergers and acquisitions, disposing of major assets, and raising capital.
D Nordberg, Corporate governance: principles and issues, SAGE, London, 2011, p. 127.
73
A Chen, J Osofsky & E Stephenson, Making the board more strategic: a McKinsey Global Survey, University of
Laval, 2008, retrieved 23 July 2012,
https://www.cas.ulaval.ca/files/content/sites/cas/files/documents/Centre_documentation/TOP10/Mckinsey_BoardSt
rategic.pdf.
74
Hang Seng Bank, Annual Report 2007, 2008, retrieved 3 July 2012,
www.hangseng.com/hsb/eng/abo/ir/air/ar2007/pdf/ar2007e.pdf.
75
Hang Seng Bank, Annual Report 2011, p. 19, 2012, retrieved 23 July 2012,
http://www.hangseng.com/cms/fin/file/statement/ar_2011_full_en.pdf.

Page 14 of 24

it was noted that the board led the strategic direction of the company and the management
was only responsible for executing that strategy.76
Recommendations:
Strategy as a responsibility - As a representative of the company and its shareholders,
the board is responsible for the decisions and strategies used, which will in turn
represent either the success or the failure of the company. As such, the board should
feel compelled to contribute to the strategy process, especially regarding long-term
strategy.77
It is recommended that the board review its procedures to make sure it has a say in
the strategy process. The management must recognize that the board is a source of
direction, accountability and leadership within the company.78 When the board can
give advice to a company, point out potential problems that a strategy might face and
give constructive criticism, this adds value to the company.

Being active When a strategy is presented, the board should be asking the right
questions in part and giving the right answers in part.79 In a sense, this cannot be
codified or placed on a to-do list for the board because of the unique nature of each
company. But it involves the active use of the knowledge, expertise and experience
of the directors to ask and probe the strategy in order to refine it and test it against
possibilities.

Strategic system - It is recommended that the board use the strategic direction system:
(i) information gathering, (ii) strategy creation, (iii) assessment of risks, (iv) setting
out the strategy, (v) evaluating performance relative to the strategy and (vi)
developing the strategy to meet changing circumstances.80

76

The extract from Caf de Corals annual reports, shows a board that has not abdicated its responsibility towards
strategy. overall strategy and direction for the Group, overseeing the Groups businesses and providing
leadership in strategic issuesWhen the Board delegates aspects of its management and administration functions to
management, clear directions are given as to the limits of the authority... See Caf de Coral, Annual Report 2011,
Caf de Coral Holdings Limited, 2012, retrieved 17 July 2012, www.cafedecoral.com/web/download/are2011.pdf.
77
A correct attitude was displayed by one director when he noted that the director dares to ask questions because
he knows that he is responsible. I am responsible, therefore I have the right to be informed. See O Roche,
Corporate governance & organization life cycle: the changing role and composition of the board of directors,
Cambria Press, Amherst, 2009, p. 237.
78
As a CEO noted of a board of directors: I saw them as a great resource, because directors have done [all this
before]. Charam, p. 118.
79
B Garratt, Thin on top: why corporate governance matters and how to measure and improve board performance,
Nicholas Brealey Pub, London, 2003, p. 35.
80
B Garratt, p. 188. See E Lukac & D Frazier, 'Linking strategy to value', Journal of Business Strategy, vol. 33, no.
4, 2012, pp. 49 57 which also describes the ways to add value to a company: defining strategy, mapping strategic
initiatives to value and strategic support. Boards and directors should ensure that (i) strategy is dynamic and
relevant to the circumstances; (ii) structures are flexible to respond to and exploit change; (iii) systems are adaptable
but robust; and (iv) their performance is measured and strategic course correction made in real time. See V
Ramakrishnan, 'High performing boards: going beyond compliance', Journal of Business Strategy, vol. 33, no. 2,
2012, pp. 38 - 48.

Page 15 of 24

One example an area where long-term strategy is needed is the boards role in
developing a scheme to help choose and cultivate the next CEO of the company.

Strategic direction committee - Despite the importance of strategy to a companys

success, it is surprising to note how many boards still do not have a strategy
committee.81
It is recommended that boards create a specific committee to help oversee the
strategic decision making, and this committee would then report to the board. The
committees directive would include taking in current trends, creating a long-term
strategy and overseeing its implementation in the short term. The head of the
committee should be experienced in formulating or leading a strategy session.

Risk management as part of strategy - Given risk managements important role in a

strategy, it is imperative that boards ultimately direct the risk strategy and appetite
of the company.82

Using independence to add value - the Exchange recently amended its Listing Rules,
effective 31 December 2012, to mandate that one-third of the board be independent nonexecutive directors (INED).83 However, INEDs84 are not a panacea for solving all the ills
of a corporation.85
A distinct issue with INEDs are that some of them are independent in name only
following the legal requirements for independence86 and may be unwilling to criticize the
chairperson or the CEO. While executive directors may have elements of independence,
INEDs have a unique capacity and ability to add value to the company. True independence
is a state of mind87 and willingness to challenge the status quo.
It is recommended that INEDs ensure they practise true independence as this adds value to
the board and company; ideas and strategies may be re-evaluated and adjusted when
questions and critiques are posed by the INEDs.88

81

O Bordean, A Borza & V Maier, 'The Involvement of Boards in Strategy Implementation', Review of International
Comparative Management, vol. 12, no. 5, 2011, pp. 990.
82
South African Institute of Chartered Accountants, princ. 4.4-4.5.
83
While mandating a certain number of INEDs appears to be a good way to guarantee independence, the existence
of INEDs on the board does not automatically mean the existence of independence on the board. Shareholders
should be wary about equating the two.
84
Generally, boards are divided into three types of directors: executive directors (individuals who also participate in
the management of the company like the CEO/CFO), NEDs (individuals who are brought from the outside but have
a direct interest in the company), and INEDs (individuals brought from the outside who have no direct interest in the
company beyond their directors fee).
85
Bainbridge, p. 78.
86
Hong Kong Stock Exchange, Main Board Listing Rules.
87
Hong Kong Institute of Directors, Guide for Independent Non-Executive Directors, 2010, retrieved 3 June 2012,
http://www.hkiod.com/document/INEDguide/Guide_INED_E_small.pdf.
88
INEDs in Hong Kong, and around the world, tend to be business professionals who have more than one
directorship in the field. As such, they do not devote their entire time to the management of one company. Multiple

Page 16 of 24

Leadership in establishing 21st century practices Corporate governance now entails a

wide range of responsibilities for companies beyond the traditional framework. 21st century
practices include corporate social responsibility, respect for human rights, and
environmental awareness and social awareness.89
The board of the 21st century must take a lead role in establishing these practices. It is
recommended that at least one board meeting a year is devoted to exploring possible new
methods to practise 21st century corporate governance. By implementing corporate
governance practices before they become the norm, the board has a chance to be ahead of
the curve, thus adding value to the company. It is hoped that boards will be able to preempt corporate governance norms and become leaders in developing new practices for
their company.90

6.

Conclusion

The 21st century board is not something that can be legislated.91 It remains a mixture of codes
and best practices principles which must be voluntarily done by each board. But when it
succeeds, it makes the company more competitive, prevents mismanagement and protects
shareholders. Every CEO, director, shareholder, and the broader community should want and
demand a board which practises the highest level of corporate governance.
This study started out by covering the historical and contemporary roles of the board of directors.
Such roles include monitoring and oversight of the company, board evaluations and choosing
new directors. But this study, above all, tries to emphasize the future direction of the board the
add value proposition. This movement was suggested in the Hampel Report: the emphasis on
accountability has tended to obscure a boards first responsibility to enhance the prosperity of
the business over time,92 and was noted again by Ram Charan: boards arestill not living up
to their potential of providing truly good governance that is, governance that doesnt just
prevent misdeeds but actually improves the corporation.93
While the above does not purport to fully list out every role and responsibility of the board, it
does map out contemporary issues and recommendations that should be put into place. Every
Hong Kong companys competitor is now not only the competitor down the street but the
company half-way across the world. If the boards are not practicing the highest level of corporate
governance here, then another competitor who is will succeed.

directorships allow the company to gain the best experience. However, it dilutes the time able to be spent on one
company. INEDs must make sure they have enough time to direct vision, oversee management, and acquire
sufficient knowledge about the company and be prepared to spend time to review such knowledge.
89
M Lipton, The Future of the Board of Directors.
90
Recently, the Hong Kong Stock Exchange published a Consultation Paper on the Environmental, Social and
Governance Reporting Guide. The purpose was to seek views on a proposed ESG Guide for companies.
91
SH Goo & A Carver, Corporate governance : the Hong Kong debate, Sweet & Maxwell Asia, Hong Kong, 2003,
p. 168-169.
92
Committee on Corporate Governance, Hampel Report, princ. 1.2.
93
Charam, p. ix.

Page 17 of 24

This study aims to spark a discussion amongst the boards of each company into how they can
add value to their company as part of their duties, while fulfilling their other roles and
responsibilities.94 Recommendations can only be broad-based since each board is uniquely
different in culture and structure and will need to adapt recommendations to their own distinctive
company. Yet all boards in the 21st century are connected by a single thread the need for them
to pursue corporate governance at the highest level.

94

Such a role is no longer simply a task of a director, but a duty a duty to the stockholders and other interested
parties to direct and supervise the company and the executive management. B Tricker, Essential director, Profile
Books, London, 2003, p. 2-3.

Page 18 of 24

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