Setting the rules
Companies come in different shapes and sizes, and rules will vary somewhat, depending upon circumstances. Where shareholders are involved, as is mostly the case, it is they who own the company. The task of oversight and direction of the company is legally passed to the Board of Directors via the Corporations Act 2001, which provides clear direction on the required conduct of company boards and directors.
The Act also specifies 39 of its clauses as replaceable rules. This allows for a board’s constitution, and/or a shareholder’s agreement to define their own rules in those specific areas.
For example, a constitution may specify the minimum number of directors’ meetings that members are required to attend, although boards may approve absence, perhaps for reasons of travel or ill health. During the recent pandemic, rules have been adjusted to allow for remote attendance via video conferencing and the like.
A Board of Directors is responsible for the oversight and direction of a company and the monitoring of its performance, whereas the day-to-day operations are carried out by the CEO and the company’s management team.
Step up, or step down
The directors will act collectively as a board, yet each individual director is charged with upholding statutory and common law duties, specifically to:
- act in good faith in the best interests of the company
- act with reasonable care and due diligence in the performance of their duties
- avoid conflicts of interest, and to faithfully report these if they are apparent or suspected
- not use company information or their position of authority and knowledge to improperly advantage themselves or anyone else, or to disadvantage the company
Directors are expected to make every reasonable effort to inform themselves of all matters before the board in order to make a sound business judgment. A judgment that turns out to be in error is accepted, provided the director applied themselves to the task. This acceptance doesn’t occur where a director simply failed to apply themselves to the matter at hand.
Be it resolved
Boards will make various determinations on the conduct of company business. After due consideration a resolution will be passed, and this will then be the official determination of the board collectively. All directors are required to comply, regardless of their individual views.
Generally, such resolutions will then be implemented by company management, however, there may well be times when the resolution requires board action.
One such example may be a decision to have directors produce a short-list of potential new CEOs. A board member who is of the adamant opinion that a new CEO is not needed and that the whole thing is a waste of time, is not excused from the requirement to comply with the resolution. Compliance is required, not optional.
Who do you call?
Boards that are aware of failure to comply, whether it is failure to comply with meeting attendance as required by the constitution, or failure to comply with board resolutions, are required to report these matters to ASIC.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has telegraphed an increasingly toughened stance on corporate governance.
Directors who breach their duties can and will be made liable for consequences including:
- Fines
- Compensation
- Disqualification
In the worst cases where deliberate fraud is found, criminal charges may be laid.
Being a company director brings with it a degree of well-deserved accolade and title – it also demands serious application and hard work. Company law – know your obligations.