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Boards and Their Responsibilities

"The role of a board member carries great responsibility, and with responsibility comes risk"

Being asked to become a board member for your church or a Not-For-Profit organisation can be a great honour and provides you the opportunity to work collaboratively with a group of people to see the mission of your organisation succeed.

The role of the board is to act as the rudder of the organisation, directing the course of the ministry and navigating the often complex waters of finance, legislative compliance, workplace health and safety and employment practices to name a few.

The role of a board member carries great responsibility, and with responsibility comes risk.

Therefore, understanding the role of a board, selecting the right people and understanding the risks is of utmost importance.

In this article we will address:

1. The purpose of the church Board
2. The responsibilities of church Board members
3. Considerations when choosing your church Board
4. Risks associated with being a church Board member
5. Changes and increased penalties that can be imposed against Board Members 
6. Strategies to manage your risk

The purpose of the Board (or Elders, Management Committee, Deacons)

As mentioned above, the role of a board is to direct the course of your organisation.  Boards will be responsible for:

  • Accountability - by ensuring that the church or charity they represent operates transparently, manages its finances well and meets all its legal obligations
  • Policy – by clearly setting out the purpose of your organisation, establishing the ministry’s long-term goals and how those goals will be pursued
  • Resourcing – ensuring that sufficient funds are secured to support and maintain the goals of the organisation
  • Advocacy – representing your organisation to the public, your members and other key stakeholders
  • Observing – that your organisation is being run within documented guidelines and the law

The duties and responsibilities of a board member

Often there is a misconception that because a board member may be filling the role voluntarily there is no obligation for them to comply with the legal duties of a board member.  This is false.

It does not matter how small or informal your organisation may be, how many members you have, how long you have been part of the organisation, or how much experience you may or may not have in the role, all members of the board must comply to the same legal standard.

The law states that the relationship between a board member and the organisation they represent is one of trust and therefore the role must be carried out ensuring that you comply with the following four key legal duties:

  • Duty to act in good faith, and for a proper purpose
  • Duty to act with reasonable care, skill and diligence (including the duty to prevent insolvent trading)
  • Duty not to improperly use information or position, and
  • Duty to disclose and manage conflicts of interest

It should be noted that other people who may be considered part of the “governing body” of an organisation even though they are not officially recognised as board members may also include:

  • Someone who is in position of influence within the organisation (e.g. Pastor)
  • Someone who participates in the key decision-making process for the operation of the organisation
  • Someone who has the capacity to significantly impact the organisation’s financial standing
  • Someone whose instructions or opinions board members are used to acting on

Example – Founding pastor of a church who remains heavily involved

The founding pastor of the church which was established some 20 years ago has been on the board up until his retirement 2 years ago.  Although no longer an official board member, he still regularly attends board meetings, and board members regularly seek his opinion prior to major decisions being made for the church.  In this case, he still may be considered a member of the governing body of the organisation and because board members are used to acting on his instructions or opinions, and as such, he would be expected to comply with the above-mentioned legal duties.

Let’s consider each of these legal duties in more detail.

1. Duty to act in good faith

This requires you to make decisions that are based on what is best for your organisation.  In doing so, you should ensure that you take into consideration what is best for the purpose of the organisation, it’s members, the finances and operations.

You must not base your decisions on personal preference, goals or perhaps affiliations you may have with other organisations.

In addition, you should not allow other people to dictate how you should vote on certain matters at board meetings.

To ensure that you are making your decision based on the ‘right purpose’, your board should familiarise themselves with the mission statement.  Are the decisions being made with these statements or objectives in mind?

https://nfplaw.org.au/sites/default/files/media/Duties_Guide_Cth.pdf

2. Duty to act with reasonable care, skill and diligence

All committee members must take their role and responsibilities seriously and ensure that they carry out their duties diligently.  This would include being prepared for meetings and ensuring that they have read and understood all relevant papers presented for discussion.  If there are matters which they do not understand, they should seek independent or professional advice in order to aid the decision-making process.

Board members are also legally responsible for ensuring that the finances of the organisation are properly managed, therefore it is essential that all committee members are acquainted with, and understand the financial reports presented for the organisation.  Unfortunately, in this instance, ignorance is not bliss, and the defence of “the finances are the Treasurers responsibility”, will not stand up in Court.

Naturally the degree of detail required for financial reports will vary greatly depending on the size and complexity of the organisation being represented.

If necessary, engage the services of an accountant to provide advice on the state of accounts.

3. Duty not to misuse information or position

People who are elected to sit on a board must ensure that they do so out of loyalty to and for the benefit of the organisation. 

They must not use their position on the board for personal gain by way of favours or ‘kick backs’, nor use information that may be discussed in board meetings to bring personal gain, advantage to others, or in a way that may be of detriment to the organisation.

4. Duty to disclose and manage conflicts of interest

This responsibility is very closely linked to your duty not to misuse information or position.  It should be noted that a conflict of interest is not the same as a disagreement between board members. 

A conflict of interest arises where a member uses information obtained or their position on the board for personal gain.

For example:  influencing the decision to allocate the church building maintenance contract to the building firm you own without a proper tendering process.

If you become aware of a matter which may result in a conflict of interest for you, you must disclose this to the board and then set about managing the conflict.  

This may mean excusing yourself from meetings where the matter is being discussed or not being present for the vote.  

The minutes of the meeting should clearly record that the conflict was declared and how it was managed.

5. Consequences of not complying with duties and responsibilities

If your organisation has employed good governance processes, the likelihood of any legal action being brought against your organisation may be rare.

However, there are legal consequences if it is found that a member of your board has failed to comply with their legal duties.  Penalties for breaches of duty are generally financial and may be imposed by way of a fine or paying compensation to the organisation.

Organisations who may seek to bring legal action against a board member for breach of duty may include:

  • A regulator (for example ASIC)
  • An individual or organisation to whom money is owed by the organisation
  • An administrator or liquidator who has been appointed to investigate the finances or solvency of the organisation
  • The new committee of an organisation (e.g. against a former committee member)
  • The members of the organisation (collectively, not individually)
  • An employee of the organisation (for unfair dismissal)

Considerations when choosing board members

Large group of business people waiting for a job interview in the office. Focus is on mid adult man talking to his colleague.

When looking to establish a board for your organisation, or perhaps inducting a new member to the board it is important that you ask yourself the following questions:

  1. Does this person meet our organisation’s requirements?  Are we selecting the right person?
  • do they have a good knowledge of your organisation and its mission?
  • will they have the time required to commit to the responsibility?
  • do they have a general understanding of the role of a board member?
  • will they work well with others on the committee?
  • are they reliable, and do they have good organisational skills?
  • are they able to communicate well?
  • You should also consider conducting the following screening checks:

    • Police check
    • Reference check
    • Working With Children Check (where appropriate)

    2.  Does this person meet the legal requirements for appointment to our board?

    • does your organisation have specific requirements in its rules around who can be appointed as a board member (e.g. they must be a member of your organisation, or they must be at least 18 years of age)
    • organisations who are registered with the Australian Charities and Not-for-Profits Commission (ACNC) will need to check that the appointed person meets their governance standards which precludes anyone who has been disqualified from managing a corporation under the Corporations Act, or has been disqualified by the ACNC in the past 12 months

    Depending on the legal structure of your organisation, certain roles on a board (e.g. secretary or public officer) may have certain legal requirements that they must comply with in relation to reporting responsibilities.  You should seek specific legal advice or contact your regulator to ensure you are complying in this area.

    3. Does this person understand their legal obligations and responsibilities?

    • please refer to the four key duties of a board member

    4. Have we followed proper process for the appointment of this board member?

    • have you referred to your organisation’s governance documents (or constitution) in relation to the appointment or removal of board members?
    • are you required to notify any of the regulatory authorities of the appointment?

    Other considerations

    Anyone who is appointed to sit on a board should be able to understand how to read financial reports and be able to participate effectively in discussions around the financial position of your organisation.  The board are collectively responsible for the financial management of the church or ministry, therefore understanding of its financial position cannot simply be left to the Treasurer.

    Risks of being a board member

    The role of elders, board members or directors of the church is an important one that carries a significant degree of responsibility and risk. 

    As already discussed, Directors and Officers of an organisation are expected to be aware of their obligations to comply with a range of general and specific laws such as Tax Law, Corporations Law and Employment Law.  They have a duty to ensure that they are fully informed with respect to the financial position of the organisation they represent, and exercise diligence to ensure that the organisation remains solvent. Ignorance of the law or your responsibilities is not considered a defence in the event of a claim for a wrongful act.

    It is strongly recommended that before agreeing to take on the role of a Director or Board Member, you ensure that the organisation you have been asked to represent has insurance in place to protect you.  This is generally by way of a Directors and Officers Liability policy, or perhaps Management Liability or Associations Liability Insurance.

    Recent changes to penalties which may be applied to Not-For-Profit board members

    Effective 1 July 2020, new industrial manslaughter laws have come into effect in Victoria.  These new laws apply to not-for-profit organisations such as schools and charitable organisations.

    The new legislation seeks to prevent workplace deaths and provide harsher penalties against office holders who fail to comply with their OH&S obligations.  Directors found to have failed in their duty to provide a safe workplace which results in the death of an employee or member of the public can be subject to fines of up to $16.5M (for corporations) whilst individuals can face up to 20 years in prison.

    This legislation can be applied to incidents where

    • employees, subcontractors or clients have knowingly been exposed to COVID-19 resulting in death
    • an employee or subcontractor has been exposed to asbestos and subsequently develops a terminal asbestos related disease
    • an employee commits suicide as a result of the employer’s negligent conduct

    This new legislation applies to body corporate organisations, unincorporated bodies, unincorporated associations, incorporated associations and the trustees of trusts.

    For Victorian organisations who are captured by these changes, and who would like further information, we encourage you to refer to the following article published by Moores Legal

    https://www.moores.com.au/news/nfps-face-penalty-of-up-to-16-5m-or-25-years-in-prison-for-directors-under-new-industrial-manslaughter-laws/?mc_cid=f3f7f19eec&mc_eid=22159718a6

    Protecting your board members

    Due to the importance of the role, directors and officers can be sued as individuals and therefore have their personal assets at risk. If a board member commits a wrongful act in the course of their duties, a Management Liability or Associations Liability policy can respond in the defence of claims which may be brought against the individual or the organisation as a result.

    Examples of claims:

    • Claims of unfair dismissal by an employee
    • Claims of financial mismanagement
    • Breaches of OH&S legislation

    It should be noted however that these policies are not designed to respond to a criminal act.

    Strategies to protect your organisation

    Transferring risk by purchasing appropriate insurance products is only one strategy to protect your organisation and it’s Directors.

    It is important as an organisation that you consider carefully the appointment of your board. Ensure that:

    • those tasked with positions of authority have been chosen based on the skill set they bring
    • they understand the position they represent
    • they are dedicated to the review of existing policies and procedures and where applicable, the implementation of new processes
    • they seek to promote a culture of safety in your organisation

    Your board members should be trained in their role and seek to keep abreast of legislative changes which may impact their role.

    ACS Financial have been providing Churches, Charities, Christian Schools and Not-For-Profits with access to comprehensive Insurance and Protection packages for over 25 years.  These packages can include products that will protect those who are responsible for the oversight and governance of your organisation.  If you would like further information about these products, please contact our office on 1800 646 777.

    DISCLAIMER: The information on this website reflect some of the commercial aspects and potential risks/obligations for your Church, School or Organisation. The information is given as a guide only and does not represent a definitive list or legal view in any way shape or form. You are advised to seek your own professional advice on all your individual needs.
    ACS Financial Pty Ltd (ACN 062 448 122) (AFSL 247388).

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