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MELBOURNE SYDNEY BRISBANE

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Better BoardsConference

Melbourne 29 July 2012

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Directors’ duties are on the increase.

Who do these duties apply to? It is widely accepted that the principles behind directors’ duties, as imposed by the Corporations Act and common law, apply to all people who are on some form of governing committee.

Centro Case

Example: the Centro case. When the Federal Court handed down its decision in June 2011, it was in the context of whether or not the directors of Centro had breached their duties under the Corporations Act.

A. Duties of Board Members

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Decision

The decision was handed down that the directors – both executive and non-executive – had breached their duty of care and diligence by failing to:

(a) take all reasonable steps to focus and consider for each of themselves individually the content of the financial statements; and

(b) make enquiries of management, the board audit committee or other directors as to proposed statements in the financial statements.

It was held that directors are required to have the ability to read and understand the financial statements.

The case also held that directors are not required to have infinite knowledge or ability, and that they are entitled to:

(a) delegate to others;(b) seek help in carrying out their responsibilities; and(c) rely upon others.

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Nevertheless, there is a limit to the extent of this reliance. There are some duties which cannot be delegated because of how serious they are.

This case also had implications for audit committees. Centro had a committee of directors called the ‘board audit and risk management committee’. His Honour held that although an audit committee has an important role of oversight and monitoring, this is not to the exclusion of the role of a director to consider the financial accounts for himself or herself.

OH & S / WH & S

An example of another recent change which has an impact on the duties of board members.

The duties of board members and managers have changed. A breach of such duties has serious consequences.

Do your board members know of the new legislation (if it has commenced operation in your state)?

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Consequences

What does this mean for you?

It means that you need to keep abreast of these sorts of legal developments as they could be relevant to your boards. You are in a position to assist your boards in being legally compliant.

This is an integral part of any risk management strategy you have for your organisation.

Does OH&S feature on your board agenda at least once or twice a year, allowing you to report on your management of this risk?

Have you offered your board members the opportunity to attend seminars on the new laws?

Due Diligence duty - personal liability for officers.

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Ideally, your boards would benefit if you could:

(1) arrange for new board members to have an appropriate induction and training.

(2) identify and bring to their attention any changes in the law insofar as it applies to them (you yourselves will need to have a good understanding of their legal duties, otherwise it will be difficult for you to determine what is relevant).

(3) suggest any appropriate training your board members should undertake as a result of that legal change.

(4) prepare board papers/reports which assist the board members in meeting their obligations, i.e. papers which assist your board members in knowing what they need to know.

In the preparation of your board papers, are you bringing relevant issues to their attention?

Board papers should contain sufficient information to provide for an informed decision, but not contain so much information that the critical elements are obscure.

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(5) Directors must have appropriate skills and competence to perform the role of directors. You can assist by identifying any requisite skills which are lacking in any board member (this requires some diplomacy) – may be easier to do through a board review using a skills matrix.

(6) Are you aware of your own legal duties, especially if you yourselves are on the board? If you are on the board, you are an executive officer, which may result in you having greater duties because of your greater understanding and knowledge of the operation of your organisation.

(7) Do you ensure that matters are left on the agenda until they have been satisfactorily resolved or completed?

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(8) Conflicts of interest are something that many NFPs struggle with at board level. Do you have an effective conflicts of interest policy? Does your policy:

(a) Help identify potential conflicts of interest?

(b) Provide strategies in how to avoid them?

(c) Provide guidance in what to do when they arise?

In the Exposure Draft: Australian Charities and Not-for-Profits Commission Bill 2012 (version 1), to which all of you will be subject, once it is enacted as law, there is a chapter on Governance (ch 4). It will now probably form part of the regulations.

The Government announced in the 2011-12 Budget a number of further reviews of aspects of the regulation of the NFP sector, including a review of the governance obligations appropriate for NFP entities.

Responsible Individuals

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The proposed governance principle are grouped into the following areas:

(a) duties and minimum standards of responsible individuals, including rules for proper organisational management and running of the entity;

(b) disclosure requirements and managing conflicts of interest;

(c) risk management procedures, including external reviews and auditing requirements; and

(d) the coverage of the minimum requirements of governing rules.

This new proposed law introduces a new concept – that of the ‘responsible individual’.

Responsible individuals must exercise the same degree of care, diligence and skill (wording from the Corporations Act !!!) that a prudent individual (wording from the Trustee Act !!!) would exercise in managing the affairs of others.

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A responsible individual is:

o A director or officer of the registered entity;

o A trustee of the registered NFP entity, or a director or officer of a trustee of a registered entity;

o An individual:

• who makes, or participates in making, decisions that affect the whole or a substantial part, of the registered entity’s activities; or

• who has the capacity to significantly affect the registered entity’s financial standing;

• who in accordance with whose instructions or wishes the responsible individuals of the registered entity are accustomed to act (excluding advice given by the individual in the proper performance of functions attaching to the individual’s professional capacity or their business relationship with the registered entity on its responsible individuals); and

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o a receiver and manager, administrator, liquidator or trustee in bankruptcy of an incapacitated NFP entity.

This definition is broad enough to cover both express and implied individuals with responsibility. Implied responsibility positions may be described as either:

o shadow - in the sense that the person exercises control over the decision-making from outside; or

o de facto - in the sense that the individual takes on the job without being lawfully appointed.

How do we keep up to date with all of this? How do we minimise non-compliance?

How do you, as CEOs, keep on top of all of this?

How do you help your board effectively fulfil its obligations?

How do you keep your board members out of jail?

How do you make sure that you haven’t overlooked something?

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Solutions

Checklists (see examples)

Policies

Manuals

Membership of governance bodies, e.g. AICD or CSA

Emails from governance/legal/financial experts

Having certain staff members responsible for certain issues/risks

Attending conferences, such as this one.

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B. Changes in the Legal Landscape of the NFP Sector

Australian Charities and Not-for-profits Commission (ACNC)

ACNC will commence operation on 1 October 2012.

“The extension in the commencement of the Australian Charities and Not-for-profits Commission will not affect the:

o announced introduction of a general reporting framework; and

o establishment of a public information portal;

by 1 July 2013,

o as well as the introduction of a statutory definition of 'charity' by 1 July 2013”.

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Statutory Definition of a Charity (proposed for 2013)

o Will this affect your current endorsements as charitable institutions?

• In the short term, no.

• In the long term, hard to tell.

• However, please note that after 1 July 2013, the ACNC will review all current endorsements, so please ensure that your houses are in order.

• What does this involve? If nothing else, reviewing your charter/constitution and your activities.

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Tax concessions/endorsements

On 12 February 2012, the Minister for Social Inclusion and the Assistant Treasurer announced the membership and terms of reference of a new working group, the Not-for profit Sector Tax Concession Working Group.

The working group will consider ideas for better delivering the support currently provided through tax concessions to the not-for-profit (NFP) sector.

These include concessions for income tax, fringe benefits tax (FBT) and goods and services tax (GST), and deductible gift recipient (DGR) status.

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"The Working Group will be chaired by Linda Lavarch, the chair of the NFP Sector Reform Council, and will include a diverse range of representatives from the NFP sector and also technical experts."

The working group is expected to complete its work by December 2012.

"The NFP Sector Tax Concession Working Group will examine the current range of tax concessions and whether there are fairer, simpler and more effective ways of delivering the current envelope of support."

Some extracts from joint media release No. 007 are included below:

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C. Board Meetings in the Digital Age & the Impact of Social Media

IPads/Tablets and Board meetings

The Australian Institute of Company Directors commissioned some advice in September last year regarding the use of iPads in board meetings and we extract some of the findings below.

Recent media coverage has given rise to questions regarding the use of technology (and particularly Apple’s revolutionary iPad) by directors in board meetings.

This has led to renewed discussion on whether:

o notes and annotations made on board papers by directors constitute “records” of the organisation, and

o the organisation can claim ownership of such notes and annotations.

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Law

There is no law on this. No statutes and little, if any, common law.

Many of these issues are dealt with by the organisation itself in the constitution/charter or a policy.

However, the key matters to keep in mind are:

(a) minutes should provide an accurate record of board meetings;

(b) directors’ annotations and notes are of potential evidentiary value in future legal proceedings,

meaning that it could be in the organisation’s interests to try to preserve these annotations and notes in a central location;

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(c) directors’ annotations and notes may assist a director in proving that s/he has fulfilled the relevant directorial obligations (in particular, that the director considered and turned his/her mind to a particular issue discussed at a board meeting);

(d) as the use of technology (in particular, wireless-compatible devices) could leave commercially sensitive information susceptible to unauthorised access,

clear technology usage policies and security measures should be implemented and monitored by the organisation.

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Pros and cons of tablets

Pros Cons

Easy to use. Most people are now comfortable using this technology.

Cannot edit or produce documents on Ipads.

Small and light. Method of delivery – email or web-based portal?

Eliminates printing and couriers (saves time and money).

Issues with wireless connections/internet accessibility.

Provides you with more time to prepare board papers.

Attachments to emails disappearing.

Easier to circulate late papers. Problems tend to be last minute and outside business hours (due to board members looking at papers at last minute).

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Pros Cons

Easier to compile documents. Preferences for printed material or hard to look at large documents on Ipads.

Security (both hacking and lost Ipads).

Perception by management that last minute changes/papers are okay.

Early research is indicating that reading method on Ipads is different – more scanning, less close reading.

Templates need to be Ipad-friendly.

Issue of making annotations – can be used against a board member in legal proceedings.

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Pros Cons

A distraction at meetings?

Need to train staff to use it.

Board members losing passwords.

Lack of direction

While there are strict rules governing the records to be kept by organisations, there is no specified rule guiding directors on this issue of what additional records they must personally keep.

Therefore, directors should exercise their own discretion and judgment in deciding whether to take notes or annotate board papers, and how much detail to take down.

Otherwise, the board can make a collective decision on this issue.

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Recommendations

The main considerations are these:

o Have a clear policy on the use of technology by board members and implement security measures wherever possible.

o Have a clear policy on the issue of annotations made by directors – are they to be kept and by whom? (e.g. for future evidentiary purposes).

Ensure prompt circulation of board minutes for the board members’ approval (by no later than one month after a board meeting, and preferably earlier), and remind directors that they should raise any additional matters to be included in the minutes and not yet incorporated.

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D. Questions

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