In Short
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Board members oversee strategic direction: They guide the organisation’s purpose, while management handles daily operations.
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Legal duties vary by structure: Responsibilities differ based on the organisation’s legal form and registration status.
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Consequences for breaches: Violations can lead to personal liability, fines, or loss of charity registration.
Tips for Businesses
To mitigate legal risks, provide induction and ongoing training for board members, establish clear processes for financial management and conflict resolution, and ensure compliance with the ACNC Governance Standards. Additionally, consider Directors and Officers (D&O) Insurance to protect against personal liability arising from their roles.
Depending on what structure you use for your not-for-profit, a board or committee governs the organisation. The Australian Charities and Not-for-Profit Commission (ACNC) provides additional requirements for charities in the Australian Charities and Not-for-profits Commission Act 2012 (Cth). This article outlines the responsibilities attached to the board or committees in a non-profit organisation.
This Board Reporting Toolkit can help you meet your compliance needs, by explaining your obligations as a director and providing you with a series of tools and templates to ensure you can correctly undertake your key obligations.
Role of the Board or Committee
The board of a not-for-profit organisation oversees its strategic direction. While management and staff handle day-to-day operations, the board is ultimately responsible for all decisions made by the organisation.
The powers and duties of not-for-profit board members are generally informed by the law and the organisation’s constitution.
Who is Eligible to be a Board Member?
A not-for-profit organisation’s board members must satisfy eligibility requirements, which vary depending on the organisational structure.
In Australia, there are five types of non-profit legal structures:
- company limited by guarantee;
- co-operative;
- incorporated association;
- Indigenous Incorporated Association; and
- unincorporated association.
While state or territory rules for incorporated associations differ, eligibility to serve as a board member for a company limited by guarantee under the Corporations Act 2001 (Cth) includes being at least 18 years old, not having been convicted of specified offences and not being an undischarged bankrupt.
Continue reading this article below the formLegal Duties of Board Members
A legal duty refers to an action you must take because of the law. Similar responsibilities generally apply to board members across not-for-profit legal structures but will depend on the specific structure and whether or not the organisation is registered with the ACNC.
Duty to Act in Good Faith and for a Proper Purpose
The relationship between a board member and a not-for-profit is based on trust. A board member must serve the organisation’s interests rather than their own. A board member must use their powers for the organisation’s intended purpose. Directors must act in the best interests of the charity to further its charitable purpose rather than in the interests of members or other stakeholders.
Duty to Avoid Conflicts of Interest
This duty remains, but there are often specific provisions in a charity’s governing documents about how to manage conflicts of interest, given the nature of charitable work.
Duty to Act With Reasonable Care, Skill and Diligence
It is a requirement that you take your role as a board member seriously. Think about your skills and experience and use these to benefit the organisation where appropriate. It is important to ensure that sufficient time is set aside to monitor the activities and financial position of the non-profit organisation. Consider seeking professional advice so that the best possible decisions are made.
The financial affairs of the non-profit should be managed responsibly. There is an obligation to prevent trading while insolvent; you must avoid incurring debts where you suspect it is impossible to pay them back.
Duty to Prevent Insolvent Trading
This duty still applies, but there may be more flexibility for charities operating on tight budgets or relying on grants and donations.
Duty to Not Misuse Information or Your Position
As a board member, you may encounter confidential information about the organisation and its future plans. You may also be approached by a relative or friend seeking employment at your organisation. When these kinds of incidents occur, remember that the law prohibits using your position or information gained as part of your role to gain an advantage for yourself or any other person or organisation.
Duty to Keep Proper Financial Records
This duty remains, with additional reporting requirements to the Australian Charities and Not-for-profits Commission (ACNC).
Duty to Disclose and Manage Conflicts of Interest
A conflict of interest occurs when a board member encounters an actual or potential opportunity to abuse their position for personal gain. They will likely also have some financial or personal interest that gives rise to the conflict.
For example, the board might be seeking to hire a gardener. A conflict will arise if your family owns a gardening business because you want to be chosen for your organisation. In these situations, it is essential to disclose your conflict to avoid a breach of your obligations. The conflict should then be managed so you do not influence decisions on relevant subject matter.
What are the Potential Consequences?
The consequences of breaching a duty depend on the specific laws involved and the circumstances. Board members can incur personal liability if they breach their duties, meaning they will be required to pay any debts or costs from their personal assets. The board member may be subject to fines, disqualification, or imprisonment.
The organisation may be liable for an unlawful action, meaning it will have to pay a fine or face another penalty. Most breaches of the ACNC Governance Standards have consequences for the organisation. For instance, the ACNC can revoke a charity’s registration, leading to a loss of benefits such as funding.
How to Mitigate Legal Risk
One of the best things to do is implement education programs. Such training programs will ensure that board members are aware of applicable laws. For example, new board members could be enrolled in an induction program.
Second, a plan should be implemented to minimise the risks of a breach. This could include having processes to improve the responsible management of finances and keeping records of declared conflicts of interest.
Another method is to ensure that Directors and officers within the non-for-profit have Directors and Officers Insurance (D&O Insurance). D&O Insurance is a way to ensure that Directors and officers are protected from personal liability in case of legal claims against the organisation or their leadership. This type of insurance can cover legal defense costs, settlements, and judgments arising from alleged wrongful acts in their capacity as Directors or officers.
Key Takeaways
The concept of a legal duty incentivises board members to work in the best interests of the non-profit they manage. Adherence to legal duties and liabilities by individual board members is essential for effective governance and reputation management. It will contribute to the success and longevity of your organisation.
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Frequently Asked Questions
What are the consequences if a board member breaches their legal duties?
If board members breach their duties, they may face personal liability, fines, disqualification, or even imprisonment. The organisation may also be penalised, including losing its charity registration with the Australian Charities and Not-for-profits Commission (ACNC).
How can a not-for-profit organisation mitigate legal risks?
Organisations should provide education programs for board members to mitigate legal risks, implement processes to manage finances and conflicts of interest, and ensure that directors have Directors and Officers (D&O) Insurance to protect against personal liability.
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