Transcript The ACNC governance and external conduct standards

The ACNC governance and
external conduct standards:
what they mean for boards
Mark Fowler, Director
Neumann & Turnour Lawyers
Ph: (07) 3837 3600
[email protected]
07 July 2013
© N & T Lawyers Pty Ltd
trading as Neumann & Turnour Lawyers (A.B.N. 11 955 351 885)
Overview
• Philosophical framework
• Existing common law and statutory
framework
• Governance standards
• Consequences of non-compliance
• External conduct standards
• Case study
ACNC
• ACNC established 3 December 2012
• Independent, national regulator of charities
with three objectives:
– Maintain, protect and enhance public trust and
confidence in the sector through increased
accountability and transparency
– Support and sustain a robust, vibrant,
independent and innovative not-for-profit sector
– Promote the reduction of unnecessary regulatory
obligations on the sector.
Governance Standards
• ACNC Act 2012 section 45 anticipates
Governance Standards
• Consultation paper and draft Regns
released December 2012
• Section 45 requires Parliamentary scrutiny
• Take effect as an amendment to the ACNC
Regulations 2012 (Cth)
When Do They Apply?
• From 1 July 2013
• Parliamentary scrutiny – approval or
absence of disapproval?
• Motion to approve passed by Senate 25
June; motions to disapprove withdrawn in
Senate 27 June; no motions in House
• Limited grace period until 2017 for
amendments to governing rules
Governance:
Philosophical Context
• Entities liable to ensure directors comply.
• Existing regime
– Directors must comply
– Affected parties may sue directors
– Company may sue directors
– Affected parties may sue company?
Who do they Impact?
• The obligations fall on the registered charity
• Charities must ensure their ‘responsible
entities’ are subject to and comply with
certain duties
• ‘Responsible entities’ include company
directors, trustees, corporate trustee
directors, management committee members
• Applicable to entities on ACNC register
Sources of Obligations
• Common law (including equity)
• Statute Corporations Act 2001 (Cth); State and
Territory Associations Incorporation Acts
• Contractual obligations (e.g. employment or key
suppliers or purchaser contracts)
• Industry best practice and codes (e.g. Corporate
Governance Council’s Corporate Governance
Principles and Recommendations)
• Governing rules of entity
• Wider law (OHS, environmental, employment etc.)
Common Law Obligations
• Fiduciary obligations:
– ‘Relationship of trust and confidence’
– Exercise power in interests of beneficiary
because vulnerable to abuse by fiduciary
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•
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Act in good faith
For proper purpose
Duty to avoid conflicts of interest
Avoiding secret profits
Not to fetter discretion
“Turning off” of Corporations Act
duties?
• Does the ‘turning off’ work?
• Section 111L of the Corporations Act from 01
July 2013, sections 180 to 183 and 185 to the
extent it relates to 180 to 183 do ‘not apply to
the body corporate’
• Does this affect duties for directors? Sections
180 to 183 are imposed on directors, not the
body corporate.
• Can aggrieved parties still apply to the court
against directors?
Corps Act Duties
• Section 180: Reasonable care and diligence
• Section 181: Acting:
– in good faith
– in the company’s interests
– for a proper purpose
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Section 182: No improper use of position
Section 183: No improper use of information
Section 191: Disclose all material interests
Section 588G: To ensure solvency
To whom are Duties Owed?
• The company as a whole
• Not usually to particular members (but can be
e.g. Brunninghausen v Glavanics 1999)
• Employees vs shareholders (subject to
contract) (Parke v Daily News Ltd)
• Holding company vs subsidiary (Equiticorp
Finance Ltd (in liq) v Bank of New Zealand
(1993))
• To creditors on insolvency (Kinsela)
• Victims of negligence
The Standards:
General Principles
• Principles based, not prescriptive
• Outcomes, as opposed to methodology
• Subjective elements, intended to allow
charities to consider how it fits their
circumstances
• Minimum standards, not ‘best practice’
Interpretation
• Must be consistent with
– the Objects of the ACNC Act.
– Section 15-10, which requires the
Commissioner to consider:
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Maintenance of public trust in NFP sector
Transparency and accountability of NFP sector
Proportionate regulation
Benefit of providing guidance and education to
NFP sector
• Unique nature and diversity of NFP and distinctive
role they play; etc.
Standard One:
Purposes and not-for-profit
nature of a registered entity
• Charities must
– be not-for-profit and work towards their
charitable purpose
– be able to demonstrate this to the ACNC via
governance rules
– make information available about their
purpose to the public
Standard Two:
Accountability to members
• Charities with members must take
reasonable steps to:
– be accountable to their members and
– provide their members adequate opportunity to
raise concerns about how the charity is governed
• Uncertain effect of:
– size
– financing
– number of members
Standard Three:
Compliance with Australian laws
• Must not commit an indictable offence
(offence punishable by prison >12 months,
such as fraud) under any Australian law or
breach a law that may result in a penalty of
60 penalty units ($10,200) or more
• Does not need to be established in a court of
law
• Doesn’t apply outside jurisdiction unless the
law expressed to be extra-territorial
Standard Four:
Suitability of responsible entities
• Charities must check that their responsible
entities are not disqualified from
– managing a corporation under Corporations Act
or
– currently disqualified from being a responsible
entity by the ACNC Commissioner
• Charities must take reasonable steps to
remove responsible entities that do not meet
these requirements. Action required?
Standard Five:
Duties of responsible entities
• Charities must take reasonable steps to
make sure that the members of their
governing body are:
– subject to; and
– comply with certain duties.
• Exercise care and diligence of reasonable
person
• Act in good faith and to further charity’s
purposes
Standard Five:
Duties of responsible entities
•
•
•
•
Not to misuse their position
Not to misuse information
To disclose material conflicts of interest
Charities financial affairs managed in a
responsible manner
• Not to allow the charity to operate while
insolvent.
2(a) Exercise care and diligence of
reasonable person
• Degree of care and diligence expected of a
reasonable person if they were a director of the
charity
• Look to a person with the same ‘responsibilities
within the company’ as the director and in the
circumstances of the company
• Rogers J AWA v Daniels (1992)
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–
–
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Size of organisation is relevant
Task assigned to the director is relevant
Executive v non-executive
E.g. CFO - ASIC v Vines (2003)
2(b) Duty to Act in Good Faith in Charity’s
Best Interest
• Good faith: To act honestly for the benefit of
the charity and not for ulterior purpose
– Personal benefits or secret profit
– Arises from not considering company’s interests
– E.g. Kinsela Case near insolvent company &
voided lease
– Conflicts: ASIC v Adler: promotion of self interest
is bad faith
2(c) Duty Not to Misuse Position
• Proper purpose:
– Loyalty: Use power only for company’s benefit
– Outside company’s objects
• E.g. share issue to avoid takeover
• Arrange personal affairs to detriment of company
– Honesty irrelevant
– Multiple purposes acceptable, but objective
determination – ‘but for’ the improper purpose test
– Don’t have to actually take a benefit, intention
sufficient
2(d) Duty Not to Misuse Information
• Information obtained in performance of
duties as a director
• ASIC v Vizard
– Sausage Software Ltd (loss);
Computershare Ltd; Keycorp Ltd (both no
real gain)
– Fine $390K; disqualification for 10 years
– Public policy considerations
2(e) Conflicts of Interest
• Equitable duty to avoid conflicts
• Diversion of business opportunities
– Green v Bestobell: Breach – manager tendering direct
– Peso Silver Mines v Cropper: no breach - approach after,
not due to board position & no confidential information
used.
• Misappropriation of company property
– Cook v Deeks: Breach disputing shareholders resolve to
not tender for construction contract
• Fraud or lack of honesty irrelevant
Conflicts and Disclosure
• Perceived or actual material interest must be
disclosed
• General law duty
– ‘no director shall obtain for himself a profit … in which
he is concerned … unless all the material facts are
disclosed to the shareholders and by resolution a
general meeting approves’
– Queensland Mines Ltd v Hudson
• MD took up mining rights renounced by companies, with
disclosure and assent
• Disclosure sufficient as few members and board members
were members’ nominees
Disclosure
• Disclosure is to:
– If director, other directors
– If company, to members (company includes
unincorporated associations)
– If corporate trust, other directors
– If trustee, unknown?
– If any other case, the Commissioner.
Where Std 5 deemed not breached
A charity will be deemed to have taken all reasonable steps to ensure
compliance with the duties required by governance standard 5 if:
(1) Protection 1 – reliance on information or advice provided by
others
• Reliance by director on information, including advice, in good faith,
which is given by an employee, professional adviser or expert,
another director, or authorised committee, where the director had
made an independent assessment of the information.
(2) Protection 2 – business judgement rule
• A director will not cause a breach of the duty of care and diligence if
the decision was made in good faith, for a proper purpose, on proper
consideration and in the best interests of the charity.
Where Std 5 deemed not breached
(3) Protection 3 – reasonable grounds that charity is
solvent
– A director will not breach the duty in respect of insolvent
trading if:
• he or she had reasonable grounds to expect and did expect that
the charity was solvent and would remain solvent if it incurrent a
debt; or
• he or she took all reasonable steps to prevent the charity from
incurring the debt.
(4) Protection 4 – non-participation in charity
management
– If a director could not take part in the management of the
charity, at the relevant time, due to illness or some other
good reason.
Tension Between Governing
Rules and Standards?
• If its governing rules prevent it from complying
with a requirement of the governance standards,
the registered entity will be exempt from
complying to extent rules prevent, until 1 July
2017.
• Must still comply with the governance standards
as far as is possible without breaching its
governing rules.
Associations and Standard 5
• Until 1 July 2017, a registered entity which is an
incorporated association under a State or Territory law
which sets out duties of responsible entities to the
registered entity will be taken to comply with governance
standard 5 if the registered entity and each of its
responsible entities is complying with that law.
• This ceases to apply if the relevant provisions of the
State or Territory law are amended to set out duties for
responsible entities that are the same as those in
governance standard 5 or otherwise adopts the content
of governance standard 5.
Associations and Standard 5
• Question whether this applies to associations in
Queensland and Tasmania
• ‘a law of a State or Territory’ cf ‘the law of a State or
Territory’ – statute law, not whole of law including
common law
• Queensland and Tasmania Associations Incorporation
Acts do not set out duties of management committee,
unlike eg Victoria
Exemption from Standards:
Basic Religious Charities
• Cannot require BRCs to comply with
standards: section 45-10(5).
• Reporting groups – if part of reporting
group registered with ACNC not a BRC
Reporting to the ACNC
• AIS doesn’t currently require statement on
standards
• Charities must notify ACNC of significant
breaches resulting in ineligibility to stay
registered
Compliance
• ACNC says focus in first two years will be
serious or deliberate breaches
• Compliance a condition of entitlement to
registration: section 25-5(3)(b)
Consequences for noncompliance
• Commissioner may exercise enforcement powers
under Part 4-2 of ACNC Act:
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Issue directions
Enforceable undertakings
Injunctions
Revoke registration
• Commissioner has powers to deregister, suspend
or remove a responsible entity for ‘federally
regulated entities’ ie companies, entities in
Territories
Measures in Response
• Subjective to your charity
• Board charters
• Contractual undertakings from directors will not
cause charity to breach standards
• Procedures to ensure directors ‘suitable persons’ –
at beginning of tenure and beyond
– Searching applicable registers
– Working with children check (if applicable)
– Annual statement from directors they are not
disqualified
– Desired or ideal skills and experience of directors
Measures in Response
• Train Board and management on the new
standards, especially if compliance will
involve new duties for them not previously
applicable or not previous contemplated
• Procedures for accountability to members:
– information about the charity’s purposes and
finances
– Avenues for members to raise concerns
– Changes to membership structure?
External conduct standards
• Applies to charities which
– Send funds outside Australia
– Engage in activities outside Australia
• ACNC Act states they are to be specified by
Regulation
• Objects are to ensure use of funds by
beneficiaries, use for legitimate purposes and
not terrorist activities
• No drafts made available as yet
How might we apply the
standards?
Question 1
You are a member of a board/management committee
(Organisation A) that is seeking to develop an innovative service.
During the board discussions you learn that a philanthropist is
looking to fund just such a service.
You are also on the board/management committee of a second
organisation (Organisation B) that operates in a related area of
service delivery.
During board discussions for Organisation B, the CEO asks if
anyone knows of possible additional funding sources, as times
are tough at Organisation B.
Which of the following is true?
a)
b)
c)
d)
You should tell the Organisation B board about the opportunity,
as you have a duty to do your best as a board/management
committee member for that organisation.
You should not tell Organisation B about the opportunity as you
have a duty not to misuse information and keep information
learnt as part of your board duties at Organisation A
confidential.
You should tell Organisation B about the opportunity, as you
should do everything you can to prevent Organisation B from
trading while insolvent.
You should tell Organisation B about the opportunity, as the
networking and information sourcing role of a board member is
critical to organisational success.
Question 2
You are the member of the management committee of a small
non-profit community centre which likes to support local
businesses, Your organisation needs to get new computers.
This is a major expenditure.
The chair of the board has a daughter who has just started
her own computer business, MyLocalDataCo. The chair
suggests it would be quicker, more efficient and would benefit
the local community if your organisation bought its new
computers from MyLocalDataCo.
The other management committee members think this is a
good idea. The decision is voted on and recorded in the
minutes.
Which of the following is most likely?
a) All management committee members are in
breach of their fiduciary duties.
b) The chairman definitely has a conflict of interest.
c) The chairman has definitely breached his
fiduciary duty.
d) Any breach of duty would depend on whether
supporting local businesses were part of the
organisation’s mission statement.
Question 3
Kerry is a non-profit board member with no head for
figures, who has difficulty with budgeting and has
frequently mentioned this in board meetings.
Two of the board members are accountants and the
accounts are audited annually. While always diligent
about at least looking at them, Kerry has always
accepted other board members’ opinions that the
accounts are correct.
Is Kerry entitled to go along with the opinions
and expertise of the fellow board members?
a) No, because Kerry has no knowledge of whether
the two fellow directors are competent.
b) Yes, because Kerry is entitled to accept the
skilled opinion of fellow board members with
professional qualifications.
c) No, because each board member has an
individual duty of due care and diligence.
d) Yes, because the accounts are audited.
Question 4
A management committee of a not-for-profit is faced with a
major strategic decision about whether the organisation
should expand its operations.
Having no real knowledge or expertise in this area,
committee members decide to get expert advice so an
expert report is commissioned.
The report recommends a particular course of action to
achieve the expansion and, without any further discussion
or review, the committee makes a resolution to accept the
recommendation.
Which of the following statements is the most appropriate?
a) The committee should not have sought outside advice
because the committee is responsible for all its
decisions.
b) It was appropriate to adopt the recommendation
because it would be negligent for the committee not to
follow expert advice.
c) It was inappropriate for the committee to adopt the
recommendation without giving full consideration to the
decision with committee members making up their own
minds.
d) It was inappropriate for the committee to adopt the
recommendation without getting a second opinion.
Are Standards Required?