Dear reader,

Welcome to the February 2018 edition of The Director’s Dilemma.

Contact me to arrange for a practical board workshop or conference presentation for your organisation.

To read this email in a browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.

This month our case study explores issues around payment arrangements for directors and the pros and cons of the two main types of payment mechanisms. I hope you enjoy thinking about the governance and other implications of this dilemma:

William is a young director who is building a portfolio that includes two commercial boards and a not-for-profit. He applied to join the board of a government body and, after a thorough process, received a letter from the Minister informing him of his appointment. He is delighted.

At the first board meeting William came prepared with all the information he expected to give: Tax File Number, details of other directorships, shareholdings and potential sources of conflicts of interest, a brief bio for the website, bank account details, etc.

When he offered the board secretary this information so she could enter his details to the payroll system she was surprised and said that all the other directors simply invoiced for their fees at the end of each month.

William's other two boards both pay directors through the monthly payroll. He has a personal company that he uses for consulting and is able to issue invoices. However, he is a bit unsure about the appropriateness of invoicing rather than being paid fees as 'a salary'.

How will this arrangement affect his company's professional indemnity insurance and his personal liability as a director, what are the tax implications, and why is this board different to his other boards?

As directors are not employees of the company or, in this case, government body, they are not paid a salary; rather, they are paid a fee or emolument.

This is an important legal distinction. Directors are appointed by the shareholders, or the government in this case, to direct the affairs of the company while its employees carry out those directions.

Therefore, normally, directors or their personal companies invoice the company for their fees rather than being paid via the payroll system.

Further, unlike its responsibility for deducting Income Tax from employees' wages and salaries, the company is not responsible for deducting Income Tax from its directors' fees. Directors are responsible for declaring their fees in their own Income Tax returns and paying tax accordingly.

William, of course, may well be an employee of his personal company and be paid a salary in that capacity but that is separate from his role as director of another company. In this case, his personal company can invoice the company for the services that William provides as a director.

While, as such, there is no obstacle to directors being paid via the payroll system, it would require additional administration to exclude their fees from the company's PAYG and other returns and annual pay summaries. For the directors, it would also be inefficient as tax free thresholds can only be applied at one company rather than being spread across several.

While this does not seem to apply to William, executive directors must distinguish their salaries as employees from any fees they receive as directors. Often, they just receive a salary and no fee for being a director.

Malcolm Simister is the Principal of FinAcc and the author of Accountants' New World - the Essential Guide to being a Valued Business Partner. He is based in Melbourne, Australia.

William is right to check the administrative arrangements. Company directors rely on their excellent reputations; he must be scrupulously correct.

Many companies choose to put their boards on payroll. Others choose to pay invoices. If this is William's first invoiced position he will need to ensure that he is correctly established to present invoices.

Some directors prefer to invoice through their personal companies; others prefer to invoice as if they were sole traders. William will need good advice about all his circumstances to choose wisely the arrangement that will most suit him. He should consider his superannuation and insurance requirements as well as tax.

If William invoices through his company, he will still be personally liable for his actions as a director and must arrange for personal D&O insurance protection. Only people can be directors - not companies - and this is not changed by having invoiced through a company (or by being unpaid if you are on a NFP board).

Paying the correct amount of tax and superannuation contributions is William's duty and responsibility; he cannot rely on the board telling him what to do and must get proper advice.

Doing 'what everybody else was doing' is not a defence. If he invoices as an individual he must pay tax and superannuation. If he does so through his company he must ensure that all company taxes are paid, that the company is able to provide his service as a director, and that any income which passes through the company to his own accounts is properly accounted for. Directors' careers have been terminated because of a tax office investigation (even one that doesn't lead to an adverse finding). Now is the time for William to take careful financial advice about his needs and desires, his rights and duties, and his risks and rewards.

Julie Garland McLellan is a practising non-executive director and board consultant based in Sydney, Australia.

Helen's Answer

William's personal liability as a director is unaffected by whether he receives directors' remuneration through the payroll or whether he invoices directors' fees through his personal company.

William should request full particulars of the government body D&O policy and satisfy himself (or seek advice) as to the adequacy of cover.  William's position as a director for the government body will not be covered by his company's professional indemnity insurance, unless he has also been specifically engaged to give advice to the body (not just as a director), in which case he would have to have this noted by his professional indemnity insurer.

Helen Wiseman is an independent professional director of Choice, Bidfood and WPG Resources. She is based in Sydney, Australia.

Book review - All Above Board by Julie Garland McLellan

Government boards are complex and complicated workplaces. The organisations are often required to balance competing interests, model desirable traits such as transparency, inclusivity, and sustainability, while generating returns that are comparable to those of efficient private sector entities.

Add to that a political dimension, intense public scrutiny and awareness,  a watchful press that needs stories, and a board of directors that is often drawn together by a process that is not run by the board itself, and you have a recipe for disaster. Yet most government-owned organisations do an admirable job and are well governed by highly motivated and professional boards.

This practical manual explains some of the key differences in roles and responsibilities between public and private sectors. It shares good practices and case studies that can be emulated by other boards and is an excellent reference for senior executives and directors in government entities.

Available in soft or paperback format through the Australian Institute of Company Directors.

What's New - In December and January

I enjoyed a frantic approach to the holidays with a new board seat that generated exciting - and gratifying - work. I also ran a governance update for a not for profit board in the medical sector, some leadership workshops and training for a government sector organisation that is currently under administration and will resume board leadership in the future, presented a workshop on how to approach a board portfolio for the alumni association of a prestigious university, launched an exciting international directorship program for IE Business School and AGSM,  attended my usual board and committee meetings, kicked of a board performance review for a major government sector company, and enjoyed meeting a few Director’s Dilemma readers at the inevitable and enjoyable Christmas parties.

January has been similarly busy and I am looking forward to another great year.

I am always keen to work more and will be delighted to hear from you if you would like to arrange a board strategy workshop or board performance review!

Inspirational quote for February - This month my favourite quote is:

 

A note on names - A few readers have asked me where I find the names for the protagonists in each case study. I can only say that I 'borrow' them from people I meet or things that I read. William is an old Germanic name that encompasses the concepts of 'Will' or 'Desire' and also of 'Protection'. Our protagonist William is showing signs of being a protective leader by making sure he understand the rules and implications before following the lead of his fellow directors.

This newsletter - If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription.

Suggestions for dilemmas - Thank you to all the readers who have suggested dilemmas. I will answer them all eventually. I could not write this newsletter without your help and without the generous help of all the experts who respond each month to the case studies.

Be a contributor - if you would like to attempt a response to the dilemmas for publication you will be most welcome. Simply reply to this email and let me know.

Let's connect - I use LinkedIn to share information about boards and directorship with my friends and acquaintances. If you use LinkedIn and we are not yet connected I will welcome a connection from you. You can find me at linkedin.com/in/juliegarlandmclellan.

Let me help you - If you would like me to speak to or train your board, staff, audience and/or group please contact me at julie@mclellan.com.au.

Farewell until the next issue (due 1 March 2018). I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work.

Enjoy governing your corporations; we are privileged to do what we do!

Best regards,

Julie

 

Photo Credits:
Personal images in this newsletter are provided courtesy of the contributors, course attendees and conference participants.
Stock photos illustrating case study and quote of the month are provided courtesy of Shutterstock.com

Disclaimer:
The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling and do not constitute legal advice. Names and some circumstances in the case study have been changed to ensure anonymity. Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.