Table of Contents
Accountability is the obligation to explain, justify, and take responsibility for one’s actions. The two key elements of accountability are answerability and enforcement. In the context of Australian corporate governance, company shareholders entrust the board of directors to govern on their behalf. Hence, boards are primarily accountable to the company’s shareholders. However, boards can also be accountable to government bodies and regulators, financial institutions, clients, and customers. You can maintain board accountabilities by ensuring directors are answerable to others (particularly shareholders) for their decisions and performance and by the existence of enforcement mechanisms both at law and in a company’s constitution or shareholders agreement.
If you are a company director, it is important that you not only understand your rights and responsibilities but how others can hold you accountable for your actions. This article will explain in detail the concept of board accountabilities.
Corporate Personality and the Board of Directors
A company is a separate legal entity. This means it can:
- own property;
- enter into contracts; and
- be sued in its own right, separate from any of its individual shareholders, directors or employees.
This concept of corporate personality is one of the single most important features of a company and a key reason why they are a useful and popular way of structuring a business. Nevertheless, a company obviously cannot make decisions itself – the practical reality is that a board of directors will govern a company, whereby they collectively consider and make decisions on the company’s behalf.
The Corporations Act 2001 (Cth) (the Act) and common law (case law) bind several duties to directors. While a detailed look at these duties is beyond the scope of this article (you can learn more by downloading LegalVision’s Directors Duties Guide), the key directors duties are as follows. You must:
- act in good faith and in the best interests of the company;
- exercise care and diligence;
- avoid and disclose conflicts of interest;
- not abuse a corporate opportunity for personal gain;
- not improperly use your position or information;
- keep proper accounts and records; and
- not engage in insolvent trading.
Call 1300 544 755 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
Keeping Proper Accounts and Records
Meeting Minutes and Board Resolutions
Your board of directors will often meet to consider and make decisions on behalf of a company. When this occurs, ensure that someone is recording detailed meeting minutes. Likewise, save a copy of these records in an organised manner. For smaller private companies, company directors will often sign written resolutions as an alternative to holding actual meetings. If this is the case, these board resolutions should be clear, detailed and securely stored.
Recording board decision making processes like this is one of the key ways of maintaining your board accountabilities. This way, if a particular decision is later questioned or comes under scrutiny, directors can point to the considerations they made to arrive at their decision or precautions they took to avoid certain risks.
Curtis Investments Pty Ltd proposes to raise capital by issuing shares to Valerie. James, one of the three company directors, is Valerie’s father. On the board resolution signed by the directors to authorise the issue of shares, it is noted that James has a personal interest in the matter being discussed and that the board acknowledges this and allows him to vote on the matter.
Written Financial Records
Besides meeting minutes and board resolutions, the obligation to keep good records also extends to written financial records. Ensure these records accurately record and explain a company’s transactions, financial position and performance and enable your company to prepare financial statements accurately. Financial records may include:
- books of prime entry; and
- working papers.
Keeping accurate financial records is particularly important in the context of maintaining the duty to prevent insolvent trading. If a company maintains accurate financial records, the board can be confident of the company’s solvency before they agree to certain expenses or investments.
Board Accountabilities to Shareholders
As already mentioned, the board of directors of a company is primarily accountable to the company’s shareholders (or ‘members’). The board is answerable to shareholders at shareholder meetings, where shareholders have the right to ask questions of the board and vote on certain decisions. Shareholder information rights help shareholders monitor the performance and decision-making of the directors.
Shareholder rights in public companies are codified in the Corporations Act. However, there is much more flexibility around the rights of shareholders for small private companies, as they can vary certain rules in the Act (known as ‘replaceable rules’) in their constitution.
For example, while the law requires a public company to have an annual general meeting (AGM), a small private company only has to if its constitution requires it. Similarly, usually, the shareholders of a company can appoint or remove any director by voting at general meetings. However, a small private company’s corporate documents may give certain shareholders (such as founders or lead investors) an entrenched right to appoint a director, meaning only the appointing shareholder can remove that director.
Nonetheless, there are still certain shareholder rights for small private companies enshrined in the Corporations Act that the constitution cannot replace. For example, shareholders:
- may inspect the minutes of members resolutions and meetings free of charge;
- with at least 5% of the votes may call and hold a members meeting, or require the directors to call and hold one; and
- with at least 5% of the votes may give the company a direction to prepare a financial report and a directors’ report.
These shareholder rights ensure that the board remains answerable to the shareholders even in small private companies. Furthermore, a company’s constitution or shareholders agreement may impose other obligations on directors beyond the Corporations Act.
Board Accountabilities to Government Agencies and the Court
The board is also accountable to certain government agencies such as ASIC, APRA and the ATO. For example, the ATO can hold company directors personally liable for tax debts that the company owers under their Director Penalty Regime. This includes situations where the company has not met its Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations.
Courts can also hold boards accountable where they breach other statutory obligations, such as workplace health and safety (WHS) legislation. For example, under Australia’s WHS legislation, company directors can be personally liable for breaches involving recklessness to risk an individual’s death, serious injury, or illness.
Accountability means nothing without enforcement mechanisms to hold someone accountable for their actions. In a corporate context, there is a range of remedies available to shareholders to hold company directors accountable for their actions, both in law and in the company’s corporate documents.
If a director has lost the confidence of the company’s shareholders, they may simply vote to remove that director. This will be an effective enforcement mechanism for directors of public companies and most private companies. However, as discussed, small private companies may deviate from the replaceable rules of the Corporations Act. They may change the way directors are appointed or removed, for example, granting certain shareholders an entrenched right to appoint a director.
However, even in small private companies, shareholders can bring legal proceedings in the company’s name against the directors of the company with the permission of the court. If a court finds a company director in breach of their directors duties, they may:
- be guilty of a criminal offence carrying a maximum penalty of $200,000, or imprisonment for up to five years, or both;
- have contravened a civil penalty provision (and the court may order a director to pay to the Commonwealth up to $200,000);
- be personally liable to compensate the company or others for any loss or damage they suffer; or
- be prohibited from managing a company.
A company’s board of directors is primarily accountable to the shareholders. However, they are also accountable to government agencies and the Courts in certain situations. Company directors are bound by directors duties, along with any additional obligations set out in the company’s constitution or shareholders agreement. Also, directors can be held accountably by:
- having their decisions scrutinised;
- being removed from office; or
- in extreme cases, being sued and held personally liable.
If you need help understanding how board accountabilities impact the operation of your company, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Since company shareholders entrust the board of directors to govern on their behalf, boards are primarily accountable to their shareholders. However, boards can also be accountable to government bodies and regulators, financial institutions, clients, and customers.
If a court finds a company director in breach of their director duties, they may be guilty of a criminal offence carrying a maximum penalty of $200,000, or imprisonment for up to five years, or both. Likewise, a court may hold that a director has contravened a civil penalty provision, carrying fines of up to $200,000. A director can also be personally liable to compensate the company or others for any loss or damage they suffer. Also, a court can prohibit them from managing a company.
We appreciate your feedback – your submission has been successfully received.