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Risky Business – Who suffers most when board membership becomes less attractive?

The Queensland Government has identified at least 3800 provisions for which directors and company officials can be found automatically liable, and whilst a range of proposals have been developed to cut red tape for company directors, it has been argued that these measures do not go far enough.

A recent survey by the Australian Financial Review reveals that 40% of directors are seriously considering resigning or refusing a Board position, or have already done so. This alarming statistic has serious implications for all sectors. The reasons given in the survey are as follows:

  • increasing risk of personal liability
  • increase in class actions
  • increasing number and length of Board meetings
  • red tape/green tape

These reasons are not surprising, and give weight to the regulatory reform initiatives currently being scoped and implemented across Australia. The average fee paid to Board members, which was previously dropping steadily until August last year, is again on the rise, perhaps to compensate for this increased risk and to attempt to retain board members.

But there is a sector that needs to be closely considered here – the not-for-profit sector. In contrast to private sector directors, most not-for-profit directors aren’t paid a fee for their participation. These organisations therefore do not have the ability to ‘buy out’ the risk faced by directors to try and stifle the resignations and refusals that they are facing from existing and potential new directors respectively.  There are steps that individuals can take to minimise the risk of personal liability through board membership, including:

  • Take the role and responsibility of a director seriously – ignorance is no excuse at law
  • Estate/asset protection – for example, transfer assets to a partner or a trust. This may shield assets against loss arising from personal liability but the downside may be a loss of control of the assets
  • Live and breathe the entity’s values including transparency and integrity in reporting – lead by example
  • Delegate responsibility and authority and hold people accountable for their performance

But the critical lesson here is for the not-for-profit entities themselves – how do you make board membership more attractive when you don’t have the option of paying fees to your directors? In addition to the key issues identified below, there is also insurance cover available for directors. This of course does come at a cost and affordability could be an issue in some circumstances.

The first focus area is governance – the constitution or charter must be strong, clear and closely aligned to the organisation’s purpose. Governance structures should be well-defined, including roles and responsibilities. Too often in not-for-profit organisations we see boards trying to play the role of collective CEO, whilst the CEO of the organisation is left with little or no strategic direction, and ultimately confused about what they are responsible and accountable for delivering. The governance system should also be supported by an integrated risk management framework, and a comprehensive and strong suite of internal controls.

The next area is ensuring that the mix of skills and strengths within board members is balanced. The appointment of well-qualified, experienced, independent and objective board members with a range of skills enhances the board’s decision-making capability thus reducing the potential for poor decisions and the risk of personal liability.

Finally, it’s important that the organisation has effective planning and management, such as ensuring that strategic and business plans are integrated and actively managed, clear policies and procedures are set including performance and behaviour standards, and systems and processes are implemented that support the delivery of core business outcomes.

It is important to recognise that most board members in the not-for-profit sector have taken up directorship as they are passionate about the particular cause or need that the organisation is fulfilling in the community. This can sometimes mean that board members are not adequately qualified for the role, or fully aware of the risks and responsibilities associated with board membership. This should also be addressed within the application and induction procedures.

In summary, the not-for-profit sector is most likely to suffer loss of directors due to perceived increases in risk and declines in return. The Queensland Government is currently developing a range of proposals to reduce red tape, however there are steps that not-for-profit organisations can take to make directorship more attractive to potential board members.

This blog was written by Malcolm Lawson. Malcom is a Senior Consultant with TMS Consulting and has a professional and personal interest in the nor-for-profit sector.

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