Directors and Officers
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Directors and officers
– control the destiny of the company, not for their own benefit but rather for the benefit of all members of the enterprise.
They are the stewards of the company’s property and operations and they are accountable for that stewardship.
WHO IS A OFFICER?
An officer is defined in the Corporations Act as:
- A Director Or Secretary
- A person
- who makes, or participates in making, decisions that affect the whole, or a substantial part of the business of the company or
- who has the capacity to affect significantly the company’s financial standing or
- in accordance with whose instructions or wishes the directors are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or business relationship with the directors of the company).
CORPORATIONS LAW DUTIES
The term good faith means that directors and other officers must:
exercise their powers in the interests of the company and not misuse or abuse those powers
ensure that their personal interests and the interests of the corporation do not conflict and
not misappropriate the company’s assets or opportunities or use their position to make secret profits.
BEST INTEREST of the Company?
- Must consider the interests of existing members as a whole, and act for their benefit having regard to their future interests as well as their existing interests should balance both short-term and long-term perspectives when considering members’ interests
- and should consider the interests of creditors (in the case of insolvency)
- and may also consider the interests of other stakeholders such as employees, customers and the wider community.
PROPER PURPOSE
Proper purpose is an objective standard based on the facts in each case.
It is not sufficient that the director or officer honestly and rationally believed a decision to be in the best interests of the company if, when measured objectively, the purpose is not proper
CARE AND DILIGENCE
(s180 Corporations Act)
Section 180 of the Corporations Act provides that directors and officers must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if the reasonable person:
THE STANDARD OF CARE
In determining whether a director has breached the duty to act with care and diligence, courts have regard to the company’s circumstances and the director’s position and responsibilities within the company.
This includes specific tasks delegated and the expectations created from the way work is in fact distributed.
DILIGENCE
Directors and officers are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company. This may involve:
- ensuring a detailed understanding of the business of the company
- keeping up to date and informed about the company’s activities
- monitoring the company’s affairs and practices and
- regularly reviewing the financial statements and reports.
THE BUSINESS JUDGMENT RULE
Section 180(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
MISUSE OF POSITION AND INFORMATION
Directors, officers and employees must not:
- improperly use their positions or
- improperly use information that they have obtained because they are, or have been, a director, officer or employee to:
- gain an advantage for themselves
- or someone else or
cause detriment to the company.
INDEPENDENCE
Independent directors are defined as those non-executive directors who are independent of management and free of any interest, position or relationship that might or reasonably be perceived to influence, in a material respect, their capacity to bring an independent judgment to bear on issues before the board and to act in the best interests of the company as a whole.
AVOIDING AND MANAGING CONFLICTS OF INTEREST
Directors are prohibited from placing themselves in a position where there is an actual or potential conflict of interest between their personal interests and the duty they owe to the company.
Fiduciary duty of directors
- to act in a bona fide manner in the best interests of the company
- to exercise powers for a proper purpose
- to retain discretion
- to avoid conflicts of interest.
Wrapping up
WHAT DOES
MANAGING CONFLICTS OF INTEREST MEAN?
Disclosure and voting – Directors (but not other officers) who have a material personal interest in a matter that relates to the affairs of the company must disclose that interest to the other directors (s 191).
The notice must give full and frank details of:
- the nature and extent of the interest and
- how the interest relates to the affairs of the company.
Unless varied in the constitution, s 194 of the Corporations Act permits directors of proprietary companies who have a material personal interest in a matter and have disclosed the nature and extent of the interest before the transaction is entered into, are permitted to:
- vote on matters that relate to that interest and
- retain benefits under the transaction.
The company cannot avoid the transaction merely because of the existence of the director’s interest.
Directors of public companies who have a material personal interest in a matter being considered at a directors’ meeting:
- must not be present while the matter is being considered at the meeting and
- must not vote on the matter.
MISAPPROPRIATION
Directors and officers may not use company property (real or intellectual) for their personal benefit or for the benefit of any other person without the authority of the company.
MANAGING CONFLICTS OF INTEREST
The conflicts between personal interests and company interests are very real and may be difficult to resolve. These conflicts are usually best managed by formal, full and open disclosure but sometimes, if other measures are insufficient, it may be necessary for directors to resign their directorship to protect both themselves and the company.
RELATED PARTIES
The related party rules found in Chapter 2E (or Part 5C.7 for registered schemes) of the Corporations Act and ASIC Regulatory Guide 76 are designed to protect the interests of a public company or registered schemes’ members by requiring member approval for giving financial benefits to related parties that could endanger those interests.
the directors of the company
an entity that controls the company and its directors
spouses, de facto spouses, parents and children of the above directors
an entity controlled by any of the above unless the entity is also controlled by the company.
EXERCISING DISCRETION
Directors often rely on advice from other directors, officers, employees, experts or others to make decisions and carry out their duties to the company. This reliance is taken to be reasonable under the Corporations Act if the director believes on reasonable grounds that the person they are relying on is reliable and competent in relation to the matter, and the reliance was made in good faith and after making an independent assessment of the information or advice.
The Corporations Act permits directors to delegate their responsibilities to others, unless the constitution provides otherwise. It provides that a delegation will absolve directors from liability for breaches only if the director believed on reasonable grounds that the delegate would exercise power in conformity with duties imposed on directors of the company. If the circumstances indicate the need for inquiry, that the delegate was reliable and competent in relation to the power delegated.
EXERCISING DISCRETION
The Corporations Act permits directors to delegate their responsibilities to others, unless the constitution provides otherwise. It provides that a delegation will absolve directors from liability for breaches only if the director believed on reasonable grounds that the delegate would exercise power in conformity with duties imposed on directors of the company. If the circumstances indicate the need for inquiry, that the delegate was reliable and competent in relation to the power delegated.
AVOIDING INSOLVENT TRADING
Directors may be personally liable for a company’s debt if:
- they are a director at the time the company incurs a debt
- the company is insolvent at that time or becomes insolvent by incurring that debt or other debts at that time
- there are reasonable grounds for suspecting that the company is, or will become, insolvent
- either they are aware that there are grounds for suspecting insolvency, or a reasonable person in a like position in the company in the company’s circumstances would be aware that there are grounds for suspecting insolvency and
- they fail to prevent the company from incurring the debt.
RESTRICTING LIABILITIES
OF DIRECTORS
Generally, a company must not exempt a director, officer or auditor (whether directly or through an interposed entity) from a liability to the company incurred as a director, officer or auditor of the company. However, certain limited indemnities may be made available to directors, officers and auditors in certain circumstances.
In effect, the main types of liability for which a company may indemnify a director, officer or auditor are:
- a liability for legal costs incurred in defending legal proceedings in which the person is found not guilty and
- a liability to a third party for negligence where the person acted honestly (and otherwise in good faith).
CULTURE
A company’s culture is broadly accepted as being the sum of its shared values, principles and behaviours, or colloquially, ‘the way we do things around here’. Culture is a key determinant of good governance with the Principles and Recommendations noting that strong governance frameworks require ethical and responsible action, not simply compliance with the law.
The role of the company directors is generally seen to
- Establish an ethical framework
- Establish risk appetite and
- Set the tone from the top
- Have oversight of culture.
OTHER RESPONSIBILITIES
- Continuous disclosure for listed companies
- Workplace health and safety (WHS)
- Continuous disclosure for listed companies
- Competition and consumer protection
- Privacy
- Cyber security
- Modern slavery
- Climate change
Ashley Law-Smith
Mike Mobilia
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