The practice of being a director: 6 key responsibilities

Disclaimer: The views expressed in this article are my own and reflect how I, Alice Tay, personally fulfil my obligations as a director on the boards I have sat on and currently sit on. For detailed advice, you must consult a lawyer with expertise in governance.

Definition: A director is anyone responsible for the management of an organisation.

Having been a lawyer advising on governance and now sitting in the board room, I admit that on occasions I would not have followed the advice I would have given myself. Lawyers are by nature, conservative and our advice is guided by legislation and the common law and the precedents arising from them. We strive for best practice and the least risk adverse outcome. This is balanced by a director who must make the decisions in the best interests of the organisation they know intimately.

Simply put, a director has a duty to make decisions in the best interests of the organisation by acting in good faith for the purpose of the organisation and with care skill and diligence. 

How should a director operate?

For me, these are the things I do.

This can be a confusing area for those not legally trained. If you are a company, you are governed by the Corporations Act. A charity (of any structure) registered by the Australian Charities and Not for Profit Commission (ACNC) is bound by the ACNC Governance standards. If you are an association and not a charity, you are bound by your state legislation.

Some people contend that the governance standards are lower if you are not a charity or association. I do not abide by this.

I use the provisions of the Corporations Act to guide me. I do this simply because as a lawyer, I am familiar with them. Secondly, there have been many decisions interpreting the provisions so there is more guidance on statutory interpretation, Thirdly, it is best to hold myself to the highest standard I can. 

6 responsibilities of being a director

Being a director, I must do the following:

Act with care and diligence

In doing this, I balance the foreseeable risk of harm against the potential benefits that may be acquired. This imposes on me a duty to understand all aspects of the organisation, from the operations (nose in, fingers out), competitors, future scan, finance, and human resources to risk.

I often see directors who participate in their expert subject matter and offer no comment or indicate a view on other areas (especially finance, risk and technology). Under the Corporations Act, whilst decisions are made together, each director bears personal responsibility. A 'not within my expertise' is not a defence to any action. The Corporations Act recognises that a director may take advice which I strongly encourage all boards to do.

I make a conscious effort to understand other similar operators (local, nationally and internationally) industry challenges, government policies, potential legislation and stakeholder needs and views. I also participate in any further education I can and keep myself informed on any emerging trends. I subscribe to many publications. Every few years I would attend a governance seminar. It is important to appreciate that you cannot be held liable because a bad decision was made as long as you have acted in good faith, exercised care and diligence, considered the issues and sought advice where appropriate. This does not excuse you (personally) from 'going with the flow' and being an inactive participant in the decision-making.

Act in good faith in the best interests of the company and for a proper purpose

I have been told many times that for a for-profit company, the most important consideration is the return to shareholders. For industry associations, it is the members. For not-for-profit organisations, it is easier as the purpose for which the organisation was established is clearly articulated. These views are not wholly correct. To enable an organisation to have sustainability and longevity a director needs to consider issues like ESG, customers, stakeholders and importantly employees.

Use information and/or position properly

Many years ago, a particular firm achieved prominence in an area as one of its people was appointed to the board of an influential organisation. The perception was that this firm would have 'inside' information that would assist their clients. I made it a rule (when in practice) not to advise any clients within the industry I had any influence on. This was to prevent any allegations of impropriety.

Manage conflicts of interest

Conflicts of interest, whether real or perceived, are not a prohibition. It is important that there is full disclosure and managed appropriately. Recently, I was on an evaluation panel for an expression of interest in the provision of certain services. After the list was shortlisted, it was discovered that I had a potential conflict of interest with one of the applications. In addition to disclosure, I chaired the panel instead of evaluating and voting. I was careful not to show familiarity or favour in any of my interactions. In addition, I had a probity adviser with me at every stage.

Ideally there should be written rules setting out how conflict is to be managed. For example, in a construction organisation, the rules provided that a director was allowed to tender for work and, if successful, to contract with the organisation. There were workarounds organised should a director indicate interest (prior to the tender being released).

Do not trade insolvent

This to me, is the most important and least understood provision. Every director must understand finances and not just what trading insolvent means. You need to declare each year that the company is able to pay its debts and is solvent for the next 12 months. This is the situation at the time the declaration is made, which may be a few months after the financial statements are done. This declaration is made by each and every director and not just the director who signed the declaration.

To emphasise further the importance of understanding finances and continuously monitoring them (not left to the accountant on the board and the CFO) is that a director is personally liable where a company incurs a debt, and the company is insolvent at that time or becomes insolvent as a result of the debt and at that time there were reasonable grounds for suspecting that the company is insolvent or would become insolvent’. There is no 'I am not an accountant' or 'I relied on the accountant' defence.

Even if you subscribe to the 'I have a lower governance standard' school, there are other statutory provisions that put a personal liability on a director. This was brought home to me recently when during a discussion on cyber and data security, a comment was made that a director was personally liable for $7000 if there was a cyber breach and personal information was lost. This then put the matter of cyber and data security on the 'urgent must do now' list as no director wants to be personally liable. (This is not correct information, as a director is not personally liable for cyber attacks, but it sure got their attention).

Understand and comply with statutory personal liabilities

Further statutory personal liabilities can be found in the following circumstances.

• Pay as you go withholding (PAYGW)
• Goods and services (GST)
• Super guarantee charge (SGC)

Workplace health and safety: as a director you must 'exercise diligence' or 'reasonable care' to ensure that the organisation is complying with its obligations including ensuring that there are resources and processes to eliminate or minimise risks and safety. This requires you to know about new legislative requirements and be able to interrogate management on their compliance. For example, currently, many organisations are working on the positive duty for employers to eliminate unlawful sexual discrimination and psychosocial hazards. Is yours?

Environmental law: some legislation makes directors personally liable for breaches where a director has not taken reasonable steps to prevent them.

Serving on a board as a director

Accepting an invitation to serve on a board needs to be considered carefully. It is not a matter of turning up a few times a year and sharing your knowledge (which can be outdated especially if you do no further education). A board position is not to pad out your resume or a glorified part-time position to big note with your friends. It carries a huge responsibility and requires continuous learning and hard work. Ownership Matters, in its annual analysis of ASX listed companies this year, bemoaned the fact that whilst there was a 10% increase, too many directors did not own ordinary shares in the companies they govern and therefore did not share their shareholder's pain. If you have an interest (in whatever form) in the purpose of the organisation, its success becomes real to you. Disability organisations are a good example of this, where directors are personally affected by personal or family situations. And, I should have mentioned this at the start, you must be prepared to be sued for breaching your duties as a director, for nothing sharpens the mind and the urgency in decision-making and accountability when there is a large monetary penalty.