One Person as a Board Member and as a Compliance Officer – The Proper Way of Applying and Conflicts of Interest

Compliance with the principles of good corporate governance shall start with the board and its responsibility to foster the long-term success of the company and secure its sustained competitiveness.

One Person as a Board Member and as a Compliance Officer – The Proper Way of Applying and Conflicts of Interest
One Person as a Board Member and as a Compliance Officer – The Proper Way of Applying and Conflicts of Interest

Sometimes, when the fintech business is just established (crypto-exchange, ICO securities platform, crowdfunding, etc.), and applied for registration of main activity with authorities, the founder can consider one (single) person combining the position of the company's board member with the position of the compliance officer (AML contact person). Please read below on how to apply a single person in two positions properly and follow the Estonian laws, and how to avoid additional requests from the regulator for this case.

Management board member service agreement

Board members of Estonian companies often act without a written agreement or inadvertently with an employment contract instead of a management board member service agreement. The § 1 (5) Employment Contracts Act expressly states that "the provisions concerning employment contract are not applied to the contract of a member of the directing body of a legal person or a director of a branch of a foreign company". The legislator, therefore, does not regard the member of the management board as a weaker party to be protected.

It is assumed that the member of the management board is a professional who is capable of negotiating an agreement and representing his or her interests.

Under the law of the Republic of Estonia, a management board member service agreement is not a separate type of agreement. The Estonian Supreme Court has stated that the legal relationship between a company and a board member is essentially comparable to any other agency agreement by which the parties undertake to perform certain tasks within a certain period and to which the provisions of the Law of Obligations Act (LOA) apply.

Pros and Cons of the management board member service agreement

While the Estonian law grants the board members broad powers and freedom of action, in the meantime, board members have no legal protection or social guarantees as provided for employees, and the law does not regulate their working conditions:

  • The law does not stipulate that the board member must be paid remuneration for the performance of his or her duties;
  • A board member may be dismissed without notice, without giving reasons, and without payment of compensation;
  • The law does not regulate working hours or rest periods for a board member, which essentially means that the board member must be on duty around the clock;
  • The board member is not entitled to holiday or severance pay in case of leaving the Company;
  • The liability of the board member is virtually unlimited (by decision of the court);
  • A board member cannot declare himself unemployed.

While according to the law, the board member is always ready to perform the duties, responsible at all times for all company activities, and expected not to get tired, rest, or get sick, in real life the capabilities of a single person have certain limits. Both companies and board members always have mutual expectations and may have different ideas about a job, achievements, KPIs, etc. To avoid unpleasant surprises in the future in the middle of the working process, it makes sense to have a written agreement that regulates the relationship between the board members and the company as comprehensively as possible. This is particularly important if the owners of the company do not sit on the board themselves. From the perspective of the board member, it is advisable to request a written agreement before taking office to provide sufficient legal protection.

What should be included in a management board member service agreement?

A management board member service agreement usually contains the same points that can be found in an employment agreement. It should be noted, however, that a company and a board member may not agree to apply provisions that are exclusively contained in the employment agreement. It makes sense to regulate the following points in the management board member service agreement:

  • Definition and explanation of duties, including the distribution of duties among the board members;
  • The conditions for the fulfillment of obligations arising from the company's Articles of Association (M&A) and the law;
  • The powers, including internal restrictions on the power of representation and the conclusion of transactions;
  • Terms of remuneration, including benefits and reimbursements for the board members (e.g. company car, cell phone allowance, etc.);
  • Working hours terms and holiday conditions;
  • A liability;
  • The conditions for early termination of the agreement and the compensation payable in the event of early termination.

In addition, it is advisable to regulate in writing the obligation to maintain business secrets and non-competition clauses. It is also important to note that the conclusion of a management board member service agreement, as well as amendments to and termination of the agreement, always require a resolution by a superior body: the resolution of the supervisory board/resolution of the shareholders. A contract with a board member may only be signed by a representative of the company appointed for this purpose.

Management board member service agreement and compliance officer employment agreement

The law does not prohibit a board member from holding another position in the same company. Thus, a board member may simultaneously have an employment relationship with the company. This is only possible on the condition that the activity performed by the board member is not related to the duties and responsibilities of a board member. That means that the management board member will, in addition to the function of the management board member, have an employment agreement relationship with the company if he or she performs other functions that do not overlap with the duties of the management board member. For example, in a crypto-exchange company, a management board member can do a compliance officer's work (if the person has the required skills and experience), in addition to his management functions. In such cases, the company enters into a management board member service agreement for the performance of the management tasks, and for the performance of duties as a compliance officer - a separate employment agreement is signed.

Conflicts of interest

A conflict of interest exists when a board member's interests (e.g. interest in business growth and expansion, the attraction of new clients, etc.) are inconsistent with —i.e., conflict with — the interests of the compliance officer (refusing of the transaction, EDD measures, etc.). While working for the company, the person's primary business loyalty must lie with the company. As a result, a person must not engage in activities outside of work that create a possible conflict of interest between the position of a board member and a compliance officer, even if both positions are held by the same person. An actual conflict of interest need not exist to constitute a violation of the company's standards of conduct. Activities that create the appearance of a conflict of interest must also be avoided.

Procedures and responsibilities for the person holding positions of the board member and the compliance officer

  • The person is required to be vigilant to identify actual or potential conflicts of interest.
  • Decisions that are conflicted should be avoided or mitigated.
  • The person should establish and administer written policies, procedures, and a code of ethics to ensure that all stakeholders in the company comply with laws and standards to mitigate conflicts.
  • The person should conduct periodic auditing of material decisions to determine if actual conflicts existed and if the decision was made consistent with these procedures.
  • The person shall conduct a conflict risk assessment.
  • Risk identification is continually ongoing.
  • Periodic review of material decisions to determine if there were material conflicts involved.
  • Risk Assessment is conducted annually.
  • Prepare an annual compliance report that assesses the company's previous and ongoing compliance in light of the changing regulatory landscape.
  • Correspondence of identified conflicts.
  • Person's opinions as to the course of conduct in light of conflict.

Business decisions and actions must be based on the best interests of the company, and must not be motivated by personal considerations or relationships. Relationships with prospective or existing clients, suppliers, contractors, members, competitors, or regulators must not affect independent and sound judgment on behalf of the company.

When in doubt, it is best to think twice and file the self-questionnaire following the procedures made. Specific attention should be paid to situations involving outside employment/activities, relationships with clients or entities applying to become a client, investments, and gifts.