ACNC Governance Standards - Duty of Board Members

The Australian Charities and Not-for-profits Commission (ACNC) has established five governance standards for charities. The last of these standards concerns the duties of board members or other responsible persons to their charities – in other words, their fiduciary duty. This is one of the highest standards of care imposed and means that board members must not put their personal interests before the interests of the charity or profit from their position, unless the charity consents.

This is the first in a series of six different articles where we will examine the significant duties of board members of registered charities.

In this article we look at the duty of board members to act with reasonable care and diligence.  In the next five articles we will deal with the duty of board members:

• to act in the best interest of the charity and for a proper purpose;
• not to improperly use information or their position;
• to manage financial affairs responsibly;
• to disclose and manage conflicts of interest; and
• not to allow a charity to operate while insolvent.

THE DUTY OF BOARD MEMBERS TO ACT WITH REASONABLE CARE AND DILIGENCE

What does this look like? To better understand what this means for board members, it is helpful to break it down into four sub-categories.
 

1.  Prepare for and attend meetings

Firstly, board members must do their best to participate. They must attend board meetings whenever they are reasonably able to do so. Beforehand, they should read and try to comprehend the materials they have been given about the topics the board will be discussing.

An example of when board members failed to do this can be found in the James Hardie litigation of 2012. In this case the Board considered a draft announcement to the ASX. Two directors were at the meeting by telephone. They had not seen copies of the draft. Nor did they ask to see a copy. Yet they voted in favour of making the announcement. The Court found that the board members appreciated that a significant announcement was to be made on the controversial subject of whether funding which had been set aside for victims of asbestosis could be guaranteed. The onus was on them to be cautious when voting on the making of the announcement – either by seeking further information or by explicitly abstaining. They gave evidence that they would not have voted for the announcement had they known its terms.

2.  Become familiar with the charity’s business

One of the other lessons emerging from the James Hardie litigation is that all board members, irrespective of their professional qualifications, are expected to keep themselves properly informed of the charity’s business and to apply sound judgment based on proper information. Therefore, a minimum degree of skill and competence is required of board members. This excludes the possibility that board members could escape liability by pleading that they have insufficient education or experience to understand the complexity of the charity’s affairs.

3.  Ask questions

It follows that if board members have any questions about any of the board’s business they should:

• seek additional information;
• obtain external advice if necessary; and
• question the CEO or other person who is putting a proposal.

4.  Make considered and independent decisions

While seeking out and accepting the advice of others can be an important step in reaching a decision, board members cannot wholly rely on the judgment of another board member. They must exercise their own judgment. A good way of gauging this is for board members to ask themselves, ‘would someone who was observing me think that I am being careful and conscientious in my duties?’

Conclusion

It is therefore important for board members and other responsible persons to prepare for and attend meetings, become familiar with the charity’s business, ask questions and make considered and independent decisions. This will help board members to uphold their fiduciary duty, and in turn, ensure that the charity complies with the fifth ACNC governance standard. In our next governance article, we will deal with the duty of board members to act in the best interest of the charity and for a proper purpose. If you would like further information please contact %8F%B0%95%BC%9C%DBT%B3%E9%D9%A5cor %8F%BA%95%BA%9B%D8%A2%8D%BD%D9%B0%B2%CB%85.