The ACNC governance and external conduct standards: what they mean

for boards

Mark Fowler, Director

Neumann & Turnour Lawyers

Ph: (07) 3837 3600

mfowler@ntlawyers.com.au

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June; motions to disapprove withdrawn in Senate 27 June; no motions in House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

• 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

• 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:• 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)– 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 non-compliance

• Commissioner may exercise enforcement powers under Part 4-2 of ACNC Act:

• 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) 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.

b) 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.

c) You should tell Organisation B about the opportunity, as you should do everything you can to prevent Organisation B from trading while insolvent.

d) 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?