Duty Bound: 7 Tips for Company Directors and How to Navigate in a Safe Harbour
While there are no shortcuts to effective directorship, here are some of our suggestions to improve your performance at board level:
- Be sceptical. Question the information that has been provided to you. Wilful blindness is unacceptable.
- Deploy financial literacy. Basic accounting knowledge is a pre-requisite for discharging your directors duties.
- Keep the executive accountable. Develop relationships with senior employees and ensure they are managing the risks facing the company.
- Engage with company culture. Easily dismissed as a trendy issue, culture – or “the way we do things around here” – can be a warning sign, or a cause, of troubled times for the company.
- Learn. What does the company do? What is the profit margin on its most popular product? What are the big ticket expenses?
- Think strategically. Your role is to take a macro perspective of the company in the best interests of the shareholders. Where is the company going now? Where should it go in future?
- Meet effectively. Be prepared and efficient at board meetings. Listen closely. Only contribute if you have value to add. Remember, like you: your fellow board members are both experienced and time poor.
The Corporations Act 2001 imposes duties on directors to prevent the company from incurring debts if the company is insolvent, or if there are reasonable grounds to suspect the company is insolvent.
In the past, this duty has been criticised for, among other things, stifling innovation.
The safe harbour provisions, which recently celebrated their one year anniversary, deal with this.
In order for a director to improve her or his chances of avoiding liability arising from causing or allowing the company to trade while insolvent – and so remaining moored in the safe harbour – we make the following suggestions.
After the director has begun to suspect the company may become insolvent:
- Develop a course of action likely to lead to a better outcome than the appointment of an administrator or liquidator.
- Ensure that any debts incurred by the company relate to that course of action.
- Remain properly informed of the company’s financial position.
- Prevent misconduct from others that could prevent the company from being able to pay its debts.
- Ensure the company continues to keep appropriate financial records.
- Obtain appropriate advice from external professionals.
- Ensure all employee entitlements are fully paid.
If you would like to discuss your role as a director, and what strategies you can adopt to best discharge your duties and manage your risk, please don’t hesitate to get in touch.