Focus on NFP directors duties puts onus on you (Part 1 – Introduction, Duties & Liabilities)

The Royal Commission into Institutional Responses to Child Sexual Abuse shone a light on the failure of a number of not-for-profits to properly protect children in their care.

Late last year, Commissioner Robert Fitzgerald publicly stated that through his involvement in the Commission, it became clear that three elements were vital to the proper functioning of an organisation: governanceleadership and culture.

In our view, these three elements are of particular relevance for directors. Directors bear ultimate responsibility for the governance of an organisation. They support the organisation by providing leadership, strategic vision and oversight. Well-functioning boards set the tone and culture of the organisation. All of this has a significant impact on how effective the organisation is in achieving its mission.

Because directors have such control over the proper functioning of an organisation, the law imposes a range of duties upon them. The duties are not intended to be burdensome, but require people in a position of authority, to act reasonably and responsibly, both in relation to their obligations and the obligations of the organisation.

Many of these duties are aimed at ensuring that the organisation is properly governed, with effective leadership, and with a culture of transparency and accountability.

Following the Royal Commission, it is likely that there will be increased scrutiny over whether NFP directors understand and comply with those duties, alongside existing obligations under the Australian Charities and Not-for-Profits Commission (ACNC) and its Governance Standards.

While directors should ensure they are familiar with the rules in their states, which may vary, here’s a brief summary of key duties based on standards in Victoria.

Don’t forget, if a director breaches those duties, there can be consequences for the organisation, the director personally, and – as the Royal Commission has shown – for others associated with the organisation.

Duties and liabilities of directors

The term “directors’ duties” generally refers to a number of overlapping principles imposed on directors by virtue of the position of trust and power that they hold. These principals, from a number of sources – including ACNC governance standards, common law and legislation – are summarised below.

Use of position and information:

Directors must not use their position, or information that they gain as a director, to obtain an advantage for themselves or another, or to cause detriment to the organisation.

Reasonable care, skill and diligence:

Directors must exercise their powers and discharge their duties with a reasonable degree of care, skill and diligence.

An important part of this duty involves making sure that the director has all the information required for making a decision. This includes reading board papers and any reports provided by management, being engaged in board discussions, and proactive in their role.

This duty also includes taking steps to make sure the organisation is complying with its obligations and having appropriate financial controls in place to ensure that the assets of the organisation are being used appropriately.

Good faith, best interests of the organisation and proper purpose:

Directors should act honestly, fairly and with loyalty to the organisation. When making decisions, the interests of the organisation must always be the principal consideration for the board. Additionally, directors must only exercise their powers for a proper purpose.

In the context of a charity, this involves a clear understanding of the charitable purpose of the organisation. The board should ensure that decisions are made and actions are taken in order to further that purpose.

Disclose (and manage) conflicts of interest:

Conflicts of interest often arise for directors. The mere existence of the conflict is not generally a problem. Rather it is how the conflict is dealt with that is important.

If a director identifies a conflict (or even a perceived conflict), they should disclose it to the board (and in some cases, the members) as soon as possible. The conflict should also be recorded (for example, in a conflicts of interest register).

As a general rule, directors who have a conflict in a matter being discussed by the board should not be present while the matter is being considered and should not vote on the matter.

The board minutes should reflect that the director left the room and did not vote.

Insolvency:

Directors have a duty to prevent an organisation from trading while insolvent. This requires directors to take steps to be satisfied that the organisation will be able to pay its debts when they become due. Some steps that directors can take to comply with this duty (ASIC guidelines here) are:

  • Staying informed about the financial affairs of the organisation and regularly assessing solvency.
  • If any concerns about the financial viability are identified, immediately taking positive steps to confirm the financial position of the organisation and assessing the options available to deal with any financial difficulties.
  • Obtaining appropriate advice.
  • Considering and acting appropriately on advice received in a timely manner.
  • Where directors breach this duty, they may be personally liable for some of the organisation’s debts.

To read more…

Click here for Part 2 – Tax and superannuation, Occupational Health and Safety Laws (OH&S Laws),Employment laws,  Child safety laws, Competition and Consumer Laws

Click here for Part 3 – How can directors protect themselves?

How we can help

For more information or not-for-profit legal advice, please do not hestitate to contact us.