Board or Committee?

Today I was asked when does a committee become a board? I answered that usually when an unincorporated body, perhaps a partnership or a club, decides to become a company or an incorporated nonprofit organisation then the committee is now a board of directors. No matter what they are called, directors, commissioners, trustees - however a trustee relationship is another thing again with even more onerous obligations - the group of people who manage or appoint the management to an organisation that is formed under the state Associations Incorporation Act or federal Corporations Act are its directors.

It is always a good idea for a prospective director to do proper due diligence on the organisation, its other directors and management. The new appointee should expect a letter of appointment setting out their duties, responsibilities and obligations as well as rights as a director and member of the board, in addition to undertaking an adequate form of induction as to how to carry out their new function as a board member. Remember that the organisation has systems and process, delegations to the general manager or a chief executive, retained board rights, perhaps subcommittees and be bound by relevant laws in addition to those relevant for all boards. The acts concerning occupation health and safety, the Trade Practices Act and the Corporations Act are relevant to directors in virtually any sphere. How about directors of nonprofit organisations?

There is in fact very little difference insofar as directors are bound to act in good faith and with due diligence, for a proper purpose and in the interests of the members, without personal gain from inside information and while avoiding real, and declaring perceived, conflicts of interest. That seems a lot of responsibilities; how about rights? Directors have the right to view minutes of board meetings for which they were directors, whether present or not; and each director is entitled to seek independent legal advice. The scale and access to such rights should usually be clearly set out in the letter of appointment. Directors usually cannot be dismissed except by a general meeting; they can of course resign. What about when the directors are acting in a volunteer capacity as appointees of other member organisations?

As before, nothing really changes. Directors are bound to act in the best interest of all members and not just the organisations that appointed them to the board. Usually the only directors that can be dismissed other than by an AGM are executive directors who are usually dismissed from the board when they contract if employment is terminated. For appointees from member organisations the appointment and replacement of directors should be clearly spelled out. What if an individual director chooses to act in the best interests of the organisation that appointed him instead of in the best interests of all of the member organisations?

The entity that appointed the person as director can be taken to be a shadow director that is directing the organisation of which it is a member. The director can personally be liable to civil sanctions for not acting in good faith for all the members. The appointed director and the shadow director, being the organisation that appointed him, may be liable for obligations entered into by the organisation for which they are acting as directors. For example, if the organisation becomes insolvent at a time when it can no longer reasonably meet its debt obligations because one or other of the members withdrew guarantees to meet those debts then the shadow directors can find themselves obligated if their actions, seeking to benefit the organisation that appointed them rather than the members as a whole, brought about this situation.

The question of who is the party to take the action against the directors is generally answered as the company itself being the proper plaintiff. The sands continue to drift towards more traditional civil action as if a tort against the responsible directors for failing in their duty of care, essentially being negligent as opposed to being diligent, rather than the gnashing of teeth needed to direct the company to take, in practice to fund, action against its own directors.