How to meet your legal responsibilities as a director

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How to meet your legal responsibilities as a director

Directors have many responsibilities that come with their governance role. Many directors coming on to a board for the first time are not aware of their obligations.

Directors are expected to understand the organisation’s financial affairs, inform themselves of their duties as a director, understand the business of the organisation and monitor management to ensure that the organisation is being properly run.

The board bears ultimate legal responsibility for the organisation so it must make sure the organisation is run according to its constitution and the relevant state and national laws.

The Board as a whole carries liability in most circumstances. But an individual director can, in some circumstances, be liable, depending on the type of organisation.

For example, if your organisation is not incorporated, individual directors may be liable for any criminal or serious misconduct, or if legal action is taken against that organisation. If your organisation is incorporated, the Australian Charities and Not-for-Profits Commission Act 2012 provides that directors may be personally liable for deliberate actions or omissions that breach the Act if they have acted dishonestly, with gross negligence or recklessly. Legal obligations and liabilities rest with those who were directors at the time an issue or event occurred.

These same director obligations and liabilities apply to trustees of a trust.

The legal duties of directors are:

  1. To act in good faith and for a proper purpose
  2. To act with reasonable care, skill and diligence
  3. To not improperly use information or position
  4. To prevent insolvent trading
  5. To disclose and manage conflicts of interests
  6. Comply with the Associations Incorporations Act, or other relevant legislation

Here’s a step by step guide on how to do meet these legal duties:

Act in good faith in the interests of the organisation as a whole and for a proper purpose

Become familiar with your organisation’s constitution. The constitution will set out the purpose of the organisation, and the rules by which it should be run.

Make decisions based on what is best for the organisation - not for your personal interest or gain or only for some parts of the membership. You are not there to represent a group of members, or a particular lobby group. Do not allow your actions as a director to be influenced by relationships or other factors that are not specifically relevant to your organisation.

Make decisions that support and help achieve the purpose of the organisation, as it is written in the constitution, strategic plan or other key endorsed documents.

Apply the ‘how will it look later?’ test to your decisions. If someone else later were to analyse a decision that you helped make, would it be regarded as best serving the interests of the organisation? Would they be satisfied that there was no conflict of interest?

Act with reasonable care, skill and diligence

Attend meetings, read the meeting papers, keep yourself informed and ready to discuss and make decisions. If you do not have time to read and understand your board papers prior to the meeting, or if you cannot regularly attend meetings, you should not accept a director role. If you are already in the role, you should resign.

Ask questions, seek more information and speak up if you don’t fully understand something.

Follow-up and report on any action items that are assigned to you.

Make decisions thoughtfully. Keep seeking clarification if you do not understand something or if you feel uncomfortable about making a decision. It is likely that if you have issues, or don’t understand, other directors will also be concerned.

Be aware of events or activities happening in your organisation. Be sure that risks are minimised and that there is a strong focus on ensuring the health and safety of your staff, volunteers and clients.

Be aware of, and understand, your organisation’s financial situation at all times.

Take special care when considering large contracts, or committing expenditure that might exceed the organisation’s capacity or place its assets or cash reserves at risk.

Do not improperly use information or your position

Ensure all directors sign a confidentiality agreement, agreeing that they will comply with the Commonwealth Privacy Act 1998 and Tasmanian Personal Information and Protection Act 2004, by not storing, sharing, publishing or disclosing information gained through their role, inappropriately, for personal or commercial gain, or to the detriment of the organisation or of others.

Do not trade while insolvent

Trading insolvent means that your organisation is unable to pay its bills as they fall due. You have a legal responsibility to prevent the organisation from trading insolvent. You must ensure that your organisation does not incur debts that it will be unable to pay – particularly if is already having difficulty paying existing bills or commitments. Your board must act immediately and seek professional advice if there is a concern that your organisation cannot meet its financial obligations. It should formally instruct the executive officer to cease any future expenditure until the issue is resolved. You must act - don’t just hope it will get better. Agree as a board on a plan of action.

Disclose and manage conflicts of interest

A conflict of interest is a situation where a director has multiple interests which could undermine the impartiality of their decision making. Conflicts of interest are common and they not in themselves unlawful.

It is important to make sure your Board has high standards of transparency and vigilance because real or perceived conflicts of interests can damage the reputation of your organisation.

You are required to disclose real or potential conflicts relating to your personal interests and the interests of your organisation.

Be open and honest – if you aren’t sure if something is a conflict of interest, err on the side of disclosure rather than holding back, even if the conflict of interest is only a potential one.

Your organisation should keep a register of conflicts of interests where directors or members of committees record all their relevant personal interests, and those of close family.  (A conflict of interest is a situation where a position is in apposition to derive personal benefit from the decisions they make or the things they do in their official role.)

Directors must not participate in decision-making about an issue where they have a conflict of interest or even a potential one. You should not participate in discussions, or a vote, if there is any situation where your board is considering a matter that may relate to you, or your direct family’s, personal or commercial situation.

Make sure the minutes record the declaration and management of the conflict of interest, eg Joe Bloggs advised of a conflict of interest and left the room between 12:05pm and 12:20pm while this issue was discussed and decisions were made.

Where there are repeated or serious conflicts, it may be preferable for that director to resign from the board.