By the time this article is being read, the election process will be well underway. In my previous article on governance, I spoke about what the board does and its composition. In this article I would like to talk about a few more things that may help to solidify this.
The Corporations Act 2001 (the Act) has several clauses which deal with the duties and obligations of directors. This extends to employees as well, so all our staff members are equally bound by these provisions. The requirements themselves are fairly broad in nature and are subject to a fairly simple concept – when discharging your obligations as a director or officer of the company, would a reasonable person think that your actions meet the spirit of the law. Of course, if push came to shove then a judge would put some more rigour around this but for the sake of simplicity and tractability let’s stick with this principle for now.
The Act contains a section entitled “General duties” and these include the requirement to exercise powers with a degree of care and diligence, to act in good faith, not to abuse the position of being a director and not to misuse information that you have access to as a director. This is all good and well but what does it mean?
A director must take several steps to ensure they are meeting the requirement to exercise care and diligence. This may mean taking the time to read reports, analyse and assess the information contained therein and satisfy themselves that the information is true and correct. To this end, they must probe and query things to ensure that decisions are being made with the fullest information available at the time. It is not enough to simply trust another person’s opinion, the director in question must make their own mind up on the matter at hand.
Several lawsuits over the years have tested this. Perhaps the most well known in recent times (well, a little over decade ago now) is the Centro case. This case revolved around the omission of several items in the accounts of the company (again, a simplification for the sake of this article). The board had approved the accounts and so were held to account for its contents, or lack thereof. The directors involved in the case argued that they should not be held to account as the management team and the auditors had also missed the omission, however, the courts took a dim view of this argument.
The statement from the court said, “Directors cannot substitute reliance upon the advice of management for their own attention and examination of an important matter that falls specifically within the Board’s responsibilities as with the reporting obligations. The Act places upon the Board and each director the specific task of approving the financial statements. Consequently, each member of the board was charged with the responsibility of attending to and focusing on these accounts and, under these circumstances, could not delegate or ‘abdicate’ that responsibility to others.”
In other words, the directors did not exercise the care and diligence expected of them. They failed to ask the proper questions and obtain a full set of information before signing off on the accounts.
The Act also requires directors to act in good faith. In plain terms this means to act honestly and to not set out to deceive. It is also tightly linked to the requirement to act in the best interests of the company at all times.
In practice this means that a decision made by directors must be made with good intentions, be done in a manner that is honest and be for the benefit of the company. The difficulty here is where some interests are misaligned with a broader set of shareholders.
Where a decision needs to be made or a position needs to be taken on a particular topic, directors have to weigh up their responsibilities. For RAAus, the law actually prevents us from doing certain things.
If we made a decision that was detrimental to the organisation then things can get very ugly for the board. The Act states very clearly that if a decision is taken that is reckless or dishonest and is not in the best interests of the organisation then that would constitute a criminal offence.
At an organisational level this means that if we become aware of something that could adversely affect RAAus and fail to act on it, or we choose to lie about it, then some serious consequences may be in store for us. This includes failing to address organisational risks, manage finances appropriately, adhere to the various laws and regulations that govern us (both aviation and non-aviation related rulesets) and so forth.
Of course, it is not all doom and gloom for directors, there are protections. There is a thing called the business judgement rule for example. This means that if a director informed themselves properly, made an honest judgment and believed that they were acting in the best interests of the organisation then they would have a defence. Of course, that would also mean having to argue that defence!
Once again, I look at our organisation and think about our responsibilities. We are small in terms of revenue but the individual responsibilities of directors are no less significant. No directors, as individuals or as a cohort, can act against the interests of the organisation, the law does not permit it. It may be convoluted but it is just another protection for members’ rights. As we go through another election cycle and appoint directors to the board, it is worth thinking about how those people you appoint will discharge their obligations under the law. It is also worth thinking about what actions can be taken if they fail to do so. The power is always vested in the hands of members…
