Staying out of Jail

Your fiduciary responsibilities as a director

For SME’s the focus of your Board should not be compliance and risk management – however, you cannot avoid your legal responsibilities in this area.

Many people ask me what are your basic legal responsibilities in this area and what are the major gotcha’s.  So here is my interpretation of your basic responsibilities – with a MEGA big disclaimer – I am no lawyer. If you what the definitive advice on this contact the experts such as the institute of directors (IOD)   www.iod.org.nz http://firstboards.iod.org.nz/home

Basic legal responsibilities as a director:

  • The company does not “trade recklessly” i.e operates a “a going concern” (is solvent) – i.e  You as a board do not agree, cause or allow to carry on business in a manner likely to create a substantial risk of serious loss to the companies creditors.
  • You act in good faith and belief that you are acting in the “best” interests of the company
  • You operate with the skill, care and diligence of a reasonable director in the circumstances – ignorance is no excuse!

Some gotchas:

  • Abstaining or voting against a decision does not absolve your responsibility as a board member. The board is jointly responsible for all decisions
  • Absence equally does not excuse your responsibility.
  • Risk and audit committees can not decide – they can only recommend t o the board
  • Make sure you have adequate information to make decisions and if in doubt seek external advice.
  • Trading outside the banking covenant’s
  • If you act like a director you may be “deemed “ by the courts to be a director

 

What is the difference between an Advisory Group and a Board?

 

–       Advisory group: is a group of people who provide advice and have no decision making power.

–       Board: is a decision making committee appointed by the shareholders and holds ultimate responsibility for the legal requirements of a company:

  • Board of Directors Section 128(1) of the Companies Act 1993 states that “The business and affairs of a company must be managed by, or under the direction of or supervision of, the board of the company”.  A board is composed of directors elected by shareholders.

Professional directors will not accept directorships without performing due diligence on the company first.

Due to fiduciary responsibilities many advisors will offer to become Advisory board members on a trial basis before you establish your first board.

For business owners establishing an advisory group gives you the chance to learn what it is like to work with a team of professional advisers before handing over the reigns and control to an external board

My closing comment:

For Business Owners: “Make sure your board members are aware of their responsibilities – get them to attend the week-long IOD Companies director course. But most importantly make sure their legal responsibilities are not a permanent stuck hand brake on your business.”

For Directors: “As a director develop you own personal risk mitigation plan (more on this later) then get on with adding value to the company”

Other blog posts by Mark on Governance – Advisory Groups etc for SME’s

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