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So you want to be a company Director?

An academic and student talk in the Centre for Dispute Resolution

I am often asked how one becomes a company director. In this post I would like to share my thoughts on the process generally, and on some of the benefits and challenges.

For a very long time, appointments to the boards of public companies in Australia (especially those listed on the Australian Securities Exchange) were seen as confined to members of the “old boys club”.

This was the supposed network of wealthy men with similar educational and social backgrounds who helped each other in business and personal matters. They tended to have been educated at private schools or selective state schools, continued their education at one of the eight sandstone universities, and benefitted from membership of male-only private clubs.

In 1972 Trevor Sykes established a business column in the Australian Financial Review titled Pierpont, after J Pierpont Morgan, the famous American financier. In this column he wrote about the rogues of Australian business such as Alan Bond, Robert Holmes à Court and Christopher Skase. ‘Pierpont’ was an amusing caricature of the typical board member. He was a fictional director of Blue Sky Mines NL, a company that had as its sole aim enriching itself at the expense of its current shareholders and the government of the day while the directors enjoyed time at the Croesus Club drinking Bollinger champagne and smoking Cohiba cigars.

Fortunately, times have changed. Today there is an ever growing number of women on the boards of listed Australian public companies, unlisted public companies and private companies as well as in senior management positions across business and industry. There is also much greater representation of disabled Australians and First Australians on boards and in management.

Boards in Australia have become more diverse, and becoming a board member has become accessible to a much wider range of people. But if you are considering becoming a director, what should you consider before taking the plunge and perhaps putting your hard won assets at risk?

Becoming a company director in Australia is in some ways easier than obtaining a driving licence. According to section 201B of the Corporations Act 2001 (Cth), you only need to be an individual of at least 18 years of age, and not disqualified from managing a corporation under Part 206A of the Corporations Act. There is no upper age limit in the Act, although there may be under the company’s constitution. There are no educational qualifications required.

You must have given written consent to the company before becoming a director and the company must keep this consent.

You must obtain a Director’s Identification Number. This travels with you all your life across any companies that you manage.

Under section 198A (1) of the Corporations Act the directors are ultimately responsible for the direction and management of a company, even though they may have delegated some responsibilities to officers of the company.

Here are the three main factors that you, as a potential company director, need to be consider before you join the board.

  1. Understand your legal obligations to the company and its shareholders.

Directors have extensive legal duties and obligations imposed on them.

The most important statutory duties are found in the Corporations Act sections 180 to 184. Directors must exercise their powers and discharge their duties with care, skill and diligence, act in good faith in the best interests of the company, and not take advantage of their position or access to information to gain an improper advantage for themselves.

Directors have an obligation to ensure the company does not trade while insolvent under section 588G of the Corporations Act, and they can be held personally liable if found to have breached this section.

There are many other legal obligations imposed upon directors under workplace health and safety law; employment law; competition and consumer law, whistleblower law and many others.

It is important that you not join a board unless you have a good practical knowledge of these legal obligations and any other laws that relate to the company you are considering joining.

2. Undertake a thorough due diligence on the company, its directors and officers.

It is important that you undertake a thorough due diligence on the company that you have the opportunity of joining. This includes not only the business affairs of the company but also its Chairperson and your potential fellow directors.

It is the Chairperson who should set the tone for the behaviour of the board and, along with the Company Secretary, be the champion of good enterprise governance. Learn what you can about the Chairperson. For example, do they encourage active director participation or do they favour an autocratic leadership style?

Interview the other directors and determine whether they been appointed independently or via the Chairperson or another director. Question whether their skills match the needs of the company.

Probe deeply into the financial statements of the company. Ask for the last five years of profit and loss statements, cash flow statements and balance sheets statements. Forward cash flow statements are even more important; find out whether the company has these and for what future periods of time.

Is the company involved in any litigation? If so, what type of litigation how will it impact it the future prospects of the company?

3. Ensure that the company has a Deed of Access, Indemnity and Insurance to cover you for access to certain documentation and for potential liabilities.

Such a deed is extremely important. It will ensure you are indemnified against liability for certain actions as a director — as long as they were not intentionally fraudulent or malicious.

It will also ensure you can still access documents once you leave the company, which will be important if you unfortunately end up involved in any litigation regarding the actions of the company or its directors.

Directors and Officers Insurance is also extremely important. The company should provide this for you, and if they do not this should be treated as a red flag.

While it is exciting to be offered the opportunity to join a board of a company, there are risks associated with doing so, including the risk of losing all of your personal assets if something goes wrong. It is important that you at the very least follow the points given above. And you should make sure you seek additional legal or professional advice if there are any matters that concern you about the company.

There are other risks facing individuals in joining company boards. If you are interested in exploring these and other related topics in more depth, Bond University offers a Master of Laws in Enterprise Governance, the first and only degree of its kind in Australia, as well as a micro credential, the Advanced Credential in Enterprise Governance. To find out more about either of these educational opportunities please click on the links.

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