Master Class 1:
Governance Practices and Director Responsibilities
Prepared by: Bernadette O’Connor
Executive Director, Management Governance Australia
Introduction
The following material provides participants with an introduction to the concepts and content to be covered in Master Class 1: Governance Practices and Director Responsibilities.
Master Class 1 will explore definitions of governance, the legal status of organisations, Board processes and responsibilities and the role of the Office Bearers and Directors.
The most common legal entities when discussing governance in non-government organisations are Incorporated Associations, Companies Limited by Guarantee, Propriety Limited Companies or publically listed companies.
The key differences between these organisations lies:
a) In their legal status, that is, whether they have been formed under state law (Incorporated Associations) or commonwealth law (Companies), and
b) In the distribution of profits, that is, whether they are not for profit where surplus funds are utilised for the broader Purpose of the organisation or whether they are for profit businesses where surplus funds are distributed to shareholders.
In this paper the term company is used where there is no obvious differentiation between the responsibilities and/or accountabilities associated with an Incorporated Association, a Company Limited by Guarantee, a Propriety Limited Company or a publically listed company. Where an issue pertains particularly to the not for profit Incorporated Association sector we will use the word organisation to describe the entity.
A Company Limited by Guarantee, like an Incorporated Association, reinvests its profits, or surpluses, back into the community. Propriety Limited Companies and publically listed companies distribute profits to shareholders (of which there may be many or as few as one). Usually a publicly traded or listed company has many shareholders or investors, whilst a privately held company has relatively few shareholders.
What is Governance?
Google and you will find countless web sites, references and materials that provide definitions in relation to Governance. The following is one that I wrote a number of years ago when referring to non-government organisations: “Governance is the overarching framework by which a company is run. It defines the processes by which a company is operated, managed and held to account. Governance involves authority, accountability, leadership and control.”
Good governance is the effective use of policies and practices to guide the operation of a company. It is the fundamental means of caring for the company, its members/shareholders and its staff. Good governance requires high quality professional relationships between the Board, its Directors, Senior Staff, Members/Shareholders and Stakeholders.
The Board is the governing body for a company and acts as its highest authority. Its role is to provide leadership in the form of strategic insight, guidance and planning, and, control in the form of stewardship to ensure that the company is financially viable, accountable for its operations, legally and contractually compliant and pursuing its stated Purpose.
In safeguarding the company’s best interests a key responsibility for the Board is to ensure the company is financially viable – that is solvent. A Board also needs to understand its responsibilities with respect to risks and compliance including liabilities and potential liabilities.
Whilst the complexity of governance policy frameworks can vary from one company to another the principles of good governance, however, are the same and are essential for long term viability.
Two main components of Governance are compliance and performance.
Compliance
A company is set up to achieve certain outcomes and as such there is an expectation of accountability for its governance and operations. In pursuing its Purpose a company must comply with applicable legislation. This legislation includes requirements on all companies and businesses such as taxation, workplace health and safety and privacy legislation, as well as legislation, contractual obligations and licenses that are specific to the industry or circumstances in which the company operates.
Incorporated Associations and Companies have a Constitution that defines the processes by which each, at the member/shareholder level, is run. A Constitution is designed to protect the interests of members/shareholders and, typically, to ensure a satisfactory level of member/shareholder democracy.
The compliance requirements that must be met by Incorporated Associations and Companies include:
– Keeping a register of member/shareholder names and addresses;
– Convening Annual General Meetings;
– Keeping appropriate records and complying with company/incorporation regulatory requirements;
– Lodging the Annual Report which includes income and expenditure; assets and liabilities; mortgages, charges and securities affecting the company’s property; details of any trusts for which the company is trustee and details of any trusts in which funds and assets have been placed.
A focus on compliance does not protect a company in every situation. No legislation is intended to protect individuals in cases of negligent, reckless or fraudulent decision making.
Performance
Every company is formed for a Purpose. Performance determines the extent to which that Purpose is being met. Performance can be measured through monitoring, evaluating, reporting and feedback against planned results.
A critical area with respect to Governance performance is oversight of the company’s financial situation.
Board Responsibilities
The Board must act in the best interests of the company as a whole. In order to do this the Board should understand the business of the company, have the information that it needs to make sound decisions and understand any personal or professional interests individual Directors hold that may conflict with the interests of the company and potentially impede decision-making.
The Board is accountable to its members/shareholders, stakeholders and legal bodies. It is responsible for recruiting and providing direction to the CEO.
The Board needs to ensure that proper financial, contractual and compliance records are kept and that the company is able to trade as a viable business, i.e. pay its debts as they fall due.
A robust framework of governance policies and procedures enables a Board to communicate coherent aims and goals (mission, vision and values), outline decision-making processes (including the role of Board Committees), provide guidance with respect to the behavior of the Board and individual Directors (Code of Conduct), systematically oversee compliance through maintenance of a Risk Management Register and implement consistent performance monitoring processes.
The execution of sound processes enables the Board to focus its time and energy on providing leadership, strategic direction and a vision for the future of the company.
Decision-making is one of the most important and consistent functions of a Board. The consideration of issues from the diverse points of view and perspectives of Directors, accompanied by collective responsibility, is considered to increase the potential for positive outcomes for the company.
The decision-making process generally requires an analysis of the situation, issue or opportunity, an understanding of the existing or potential impact on the company of the situation, an examination of alternatives, exploration of the financial implications of the preferred options and a selection of the best alternative.
All decisions made by the Board should be documented.
The use of Board Committees (e.g. Governance Committee or Finance Committee) provides Directors with allocated time to consider issues of importance appropriately. Committee proposals or recommendations have no status unless ratified by the Board.
Directors need to exercise care, skill and diligence, especially when making decisions and monitoring performance. They need to understand their role and responsibilities as a Director, be committed to the company, understand financial reports and the Board’s legal obligations, be aware of the business of the company and act honestly and ethically.
Board Meetings
The purpose of Board Meetings is to regularly monitor the health and performance of the company, identify strategic issues, make decisions and ensure these decisions are executed.
Guiding principles for Board meetings include:
• A clear Agenda, prepared in consultation with the Chair and circulated prior to the meeting;
• Background papers on Agenda items, in particular for issues that may require a decision;
• A declaration of interest from Directors in relation to any or all of the Agenda items;
• An open discussion style that ensures that all Directors are able to contribute to the debate and encourages consensus decision making;
• The adoption of formal meeting procedure when consensus decision making will not provide a decision, or when issues associated with Director contribution need to be resolved;
• Clear direction on further information to be provided, and by whom, if a decision cannot be made, and a documented process for making the decision if it is to be made between formal Board meetings;
• Minutes of the meeting (distributed to all Directors following the meeting) that are a clear, concise and correct record of all motions or decisions with documentation including voting numbers if put to a formal vote;
• Availability of the constitution, by-laws, standing orders, official minutes and Board correspondence at each meeting.
Annual General Meeting
All Incorporated Associations and Companies are required by legislation to conduct an Annual General Meeting (AGM). The AGM presents the members/shareholders with the financial accounts (usually audited). It is used to conduct elections to the Board as well as provide transparent reporting to the members/shareholders on the operating state and viability of the company.
The Constitution will provide guidance on the timing and communication requirements with respect to the AGM, as well as process relating to Director elections.
The Role of the Chair
The Chair’s role is vital to effective governance of the company. The Chair should act impartially, rule on points of procedure, preside over Board voting where required, ensure the Agenda is covered within the time frame allocated, conduct an orderly meeting and be the point of communication between the Board and the CEO.
A challenge for the Chair is to allow sufficient exploration of the issues for discussion and decision-making. The Chair needs to monitor the discussion and to ensure that all Directors have the opportunity to contribute to discussion as appropriate.
Whilst the processes and the people involved in decision-making at the Board level are vital, the environment in which they work (the Board culture) is equally important. The Chair’s approach to the role is pivotal to the culture of the Board.
The Role of the Treasurer
The Treasurer provides the Board with accurate and timely reports on the financial performance of the company. The Treasurer must be confident that monies received and paid out are recorded and receipted accurately. The Treasurer moves the adoption of financial statements by the Board and ensures that they are submitted for independent audit annually.
Board Director Succession Planning
As the highest authority of the company the Board needs to be confident that it holds in its Directors the right mix of skills and knowledge relevant to the company. Paying attention to succession planning is vital to the ongoing success of a company.
The terms of office for Directors can be limited to allow for planned regeneration. The injection of new Directors can guard against any loss of momentum or loss of focus and can introduce fresh skills, knowledge, styles and perspective.
A matrix of the skills, knowledge and attributes of incumbent Directors can assist in identifying gaps at the Board level. A performance evaluation process is often used to determine the extent to which the Board is fulfilling its Purpose and many Board’s use mentoring to ensure that leadership within the Board is developed.
When recruiting a new Director it is useful to have an information pack available that includes an outline of the role, the requirements on Directors, a copy of the Constitution, a summary of the company’s work and a copy of the last Annual Report.