Understanding you financial responsibilities as a Company Director
Stepping into the role of a company director for the first time brings with it both a wave of opportunities for governance skill development and a heavy set of legal obligations. New company directors often exhibit a readiness to embrace risks that more experienced directors might shy away from. While this inclination towards risk-taking can sometimes fuel entrepreneurial innovation, it frequently results in financial repercussions not fully understood in terms of their risk potential. Familiarity with the statutory financial responsibilities outlined in the Corporations Act 2001 (Cth) is crucial for directors to evaluate their own competence and recognise when to seek external assistance.
A director has a duty of skill, competence and diligence in understanding their company’s financial reports.
Small comforts that don’t relieve a directors’ fiduciary duties
Directors have a core, irreducible requirement of involvement in the management of their company. They must take reasonable steps to place themselves in a position to guide and monitor the management of the company. This requires them to make concerted efforts to position themselves to both guide and oversee the company’s management practices. Directors might consider adopting various strategies, including:
Delegating financial governance tasks to a CEO, CFO, or another executive under a set-and-forget mentality.
Hiring an accountant, consultant or professional advisor for the financial management of the company and expecting the organisation to have accepted fiduciary duties;
Relying on fellow board members with financial expertise and delegating specific financial responsibilities to them.
Assuming that a lack of personal financial experience absolves them from their directorial responsibilities, focusing solely on areas within their expertise.
Using only high-level financial summary information for decision-making without knowing the assumptions and details underpinning the summary.
These practices, while common, do not relieve a director from their duty of skill, competence and diligence in understanding their company’s financial reports and generally to the central principles of governance that include recognising and managing risk (including financial risk).
Advice to new Directors
Directors’ duties, including their responsibilities to understand financial information, apply to Directors equally, whether they are the sole Director of a family business or an Independent-Non Executive Director of an ASX50 Company.
Become a member of the Australian Institute of Company Directors. Being a member of a professional body representing Directors provides many benefits that span further professional development, professional networking and access to guides and information relevant to Directors.
Talk to experienced Directors: Engaging with seasoned Directors, either through establishing an advisory board or cultivating a network of professional Directors, offers an invaluable resource for accelerating the professional growth of a new Director. Experienced Directors can provide a wealth of knowledge, offering strategic and practical insights drawn from their journeys in the corporate world. Their ability to act as a sounding board for ideas, challenges, and strategies not only fast-tracks learning but also enhances decision-making skills. By fostering relationships with Directors with a track record of success and expertise in various industries, you can gain diverse perspectives that enrich your understanding of different business landscapes.
Need assurance: Sometimes, it’s necessary to obtain assurance about a financial matter. Directors can obtain advice on an assured basis where the facts supporting the advice are audited and verified. If you’re unsure of key financials and need to decide, don’t guess; invest in assurance. Assurance may also provide you with a legal basis on which to defend a key decision, which can be particularly important when you owe a duty to shareholders.
Obtain professional advice early: Sometimes, new Directors who are engaged in start-ups and scaling companies can find themselves in difficult situations that don’t often present in more mature organisations. When uncertainty exists around key governance questions and legal obligations, including the duties of a Director and Boards, it’s important to seek professional advice. Mature Boards will often seek legal opinions or advice from experienced advisors on contentious or essential issues, and new Directors will benefit from establishing networks of professionals who support Directors and Boards.
Need help?
If you need help navigating your obligations as a Director or to review the governance model employed by your Board, Contact us for help.