5 Things Your Directors are Probably Getting Wrong
I’ve been involved in governance education for ten years. Teaching and participating in governance education for registered clubs and not-for-profits, these are five confusions of board members I constantly encounter.
1. The Company
Directors make decisions on behalf of the COMPANY, not the members or themselves. Directors act in the company’s best interests, even if this may not be in the director’s own interests.
In clubs and other membership-based organisations, directors are elected by members to look after the legal entity - the club. They're not elected to look after interests of specific groups of members.
Even if it is written into the constitution's objects, directors still have a duty to avoid financial jeopardy and make decisions using the business judgement rule.
Directors have no individual power. The power lies in the body of the board where the directors act collectively. Decisions are validated by the majority of the board.
Directors must exercise their powers for the purposes for which they were granted the position of director. The constitution usually specifies the limits of the directors' power as well as by their obligation to exercise their power in good faith and for a proper purpose.
Directors have Fiduciary Duties under general law in Australia. They are:
Duty to act in good faith and not to act contrary to the interest of the company
Duty not to use power for an improper purpose
Duty to avoid conflicts of interest
Duty to retain discretion.
All directors share in the decisions of the board, even if individual directors voted differently or not at all.
Accepting a position on a board subjects directors to a legal duty to exercise reasonable care and skill in ‘guiding’ the organisation. Failure to attend regular meetings, without approved leave of absence, and failure to pay attention to the ‘goings-on’ of the board, could be indicators of a breach of this duty.
Should anything go wrong in the organisation, directors could be legally responsible. It will not be a defence to say, ‘I wasn’t at the meeting when they made that decision,’ or ‘I'm just a volunteer’.
Abstaining from voting will not necessarily be sufficient for a director to discharge their duties.
Minutes are not a transcript of every word that was said during the board meeting or a record of individual directors’ contributions.
Board minutes are used to record the decisions of the board. They are used to convey board decisions to the executives who will implement the decisions and serve as reference for the board if it wishes to revisit a decision.
A ‘happy medium’ between pure minutes of resolution and minutes of narration is appropriate for contemporary governance practice.
Minutes can be used as evidence in legal proceedings, and as such care must be taken with the preparation of the board minutes.
5. There are Three Types of Income and Profit
There are three types of income;
There are three types of profit;
Directors get confused about which income they should be considering, and the effect their decisions will have have on profitability.
Earned income is the money the organisation makes every day, much like a wage is earned week by week. For clubs, earned income is gaming, bar, restaurant and functions, and any other operational income the business earns.
Portfolio income is money earned from selling an investment. It can include stocks and bonds, or real estate, or assets like a car.
Passive income is money generated from assets you own. For example, sub-letting a part of your venue to a hairdresser, or rent from an investment property.
From the Income Statement we can calculate the three types of profit.
Gross profit is basically the money earned through sales minus the cost of earning the money earned.
Sales – Cost of Goods Sold = Gross Profit
From the gross profit, operating expenses are subtracted to calculate operating profit. Operating expenses include such things as wages, administration costs, cost of any administrative buildings, and marketing.
Gross Profit – Operating Expenses = Operating Profit
Toward the bottom of the income statement are incomes and expenses not related to the organisation’s core business. For example, the sale of land, gains or losses from investments, tax, and interest expense.
Operating Profit – Additional Expenses or Extraordinary Gains or Losses
= Net Profit/Loss or Net Income
Bonus: Decisions by email
Routine operational decisions can be made using a circular resolution.
Circular resolutions are a mechanism that allows directors to pass a resolution without a meeting of directors, e.g. via email. They are commonly used for non-contentious and routine resolutions that need to be passed between board meetings, e.g. approval of an emergency repair.
Circular resolutions should not be used for dealing with urgent and controversial matters that arise of which the directors are previously unaware.
Applied Director Training | Contact Shayne Leslie | 0412 241 773
Disclaimer This is NOT legal advice. It's a brief overview and further consideration may be required in your situation.