Welcome to the November 2008 edition of The Director’s Dilemma newsletter. I hope you find it interesting, informative and inspiring.

I advise Boards and Directors on complex and challenging issues which can be resolved in a variety of ways. Each way has different pros and cons for the individuals and companies concerned. Every month this newsletter considers three experts’ responses to a real issue. Which response would you choose?

Brad is a well respected management consultant who is just starting his board career. He has been asked to join the board of a soon to be established not-for-profit company as a ‘foundation director’. He has never heard of ‘foundation directors’ before and is uncertain as to the expectations that the proposers will have of him and the potential liabilities of the role. The cause is a good one and Brad is sure his business building abilities will be an asset to the board but he wants to know more before making any commitment.

How should Brad proceed?

Bill’s Answer

Since Brad is starting out on his board career he should avoid being seduced by the altruistic nature of the undertaking, because it is a serious legal commitment that he is potentially making in his personal capacity. Brad should seek clarity in four key areas:

  1. Fiduciary Responsibilities
    Brad needs to fully understand the statutory responsibilities of a Company Director and the difference between that and a Foundation Director. There are many national and state variables associated with the formalities of Foundation registration, their legal status and the duties and obligations of directors. However, for the most part he is likely to discover that there is very little difference between Company Directorship and Foundation Directorship, which are both largely rooted in the same statutes. To fully understand all of this, I would recommend that Brad

    1. Familiarise himself with the relevant statutes (for example in Australia that is the Corporation Act and in the UK the Companies Act),
    2. Discuss the proposal with a trusted advisor, ideally a professional mentor
    3. Visit a good book shop and purchase a few up to date texts on the subject of company directorship and managing not-for-profit enterprises, and
    4. Line up a suitably experienced commercial lawyer who is independent of the board and the other directors to look over all the documentation as the final step before he commits himself.

  2. Constitution
    Unlike a company, a not-for-profit entity doesn’t have a shareholders’ agreement, but a Charter or Constitution. The constitution of the foundation is lodged with the relevant authorities at the time of registration and may be updated from time to time via board resolution or AGM. This document is a critical reference point for Brad to familiarise himself with the formally stated aims, obligations and approach of this new entity. He should request a copy and review the contents thereof. Importantly, the constitution will clearly state the limit of Brad’s personal liability should the foundation ever be wound up.

  3. Co-directors
    Brad should meet all of his proposed co-directors. The success or failure of a company or not-for-profit entity almost invariably comes to rest on the expertise, passion, integrity and chemistry of the board members. He should seek to get to know who he is mixed up with and ask questions about their background as well as how and why they came to be involved in the foundation. He also needs to understand the political dynamics, such as who is funding the initial start-up costs, what they expect in return, and the relationships between the board members such as family members and other alliances or loyalties. He needs to tactfully ask direct questions and expect straight answers.

  4. Personal Contract
    Every Director of any board should have a contract of employment, or at the very least some formal written statement of their duties and responsibilities, remuneration, etc. even if the service is unpaid. This is also an opportunity for Brad to secure in writing any formal clarification of any matters or areas that he or his mentor are inclined to seek further comfort on from the board of the entity .

William (Bill) Smith is the Founder & CEO of Ethical Brand (International).

Julie’s answer

Brad is wise to be cautious. Foundation directors are not defined in legislation and their role may have expectations that Brad can’t meet. He needs to know what form the company will take. This will determine what legislation he is subject to.

The likely forms, in Australia, are ‘a company limited by guarantee’ or an ‘incorporated association’. These companies have very different constitutions and regulatory jurisdictions. Brad must understand the legislation that applies.

Brad must investigate the funding sources and, if there is a guarantee, the amount of that guarantee and the people providing it. As a member of the National Speakers Association of Australia (a company limited by guarantee) I could be asked to pay up to one dollar in the event of the company being wound up and there being a shortfall of funds to meet creditors’ entitlements. I can cope with that. In an organisation where the directors are the only members of the company, the guarantee may be far higher and Brad must be willing to share in the possible downside.

Not-for-profits expect directors to work, and carry liability for their own and the company’s actions, without being paid. They also often expect directors to assist in fundraising, representing the organisation to third parties, volunteering, and supporting and motivating the staff. This can take up a lot of time. My not-for-profit boards each take up more time than my paid commercial boards. I don’t mind. Brad’s employer, and family, may mind. Brad should request a clear statement of expected duties and time commitment.

Finally Brad should consider the effect on his reputation of being associated with this organisation. Who are the other directors? What organisations and people will Brad deal with as a director of this company? Will association with them be beneficial or harmful to his reputation?

It is hard to get the experience needed to be taken seriously as a company director and a first appointment is crucial to launching a successful career. Brad must not let his enthusiasm carry him into dangerous company. This could be his big break but he must be sure it won’t break him.

Kayte’s Answer

Just as with a job interview, checking out an "invitation" to serve on a board carries equal if not more scrutiny. Brad is right to be concerned. These are the items he should request under strict confidentiality for what he discovers; the current board roster; committee rosters; the current program of work; the strategic plan; committee descriptions; last year's financial report; the last annual report; last month's financial report and the annual budget; and, any printed materials including newsletters, fundraising collateral etc.

Brad should anticipate being interviewed. He should ask questions about expectations, should see a job description for a foundation director, and should inquire about D&O insurance. Program and evaluation processes should also be a source of discussion.

True, very true, that many of these answers may not be thought of as intricately involved with setting policy or fiduciary responsibility. Also, just because an organisation can produce all of these documents and also has a series of interviews does not indicate that they are necessarily well managed. But, it would give a clearer picture of what to expect, where Brad's skills could best mesh with the organisation and diminish a good number of questions that might be rolling around in his head.

Good luck to Brad.

Kayte Connelly is President, Best Principled Solutions, a Board Member of Art-Reach and a Non-profit Management Consultant.

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. Names and some circumstances have been changed to ensure anonymity.

What’s new

Useful sites – Aspiring directors of foundations and not-for-profits can get useful information from the following websites:

Get on Boards – I am often asked how to find board seats. For people in my home town I provide professional mentoring through the ‘Board Readiness Program’ and now I have developed a ‘Board Readiness Workbook’ based on the mentoring program that is available to people in other locations.   

Book review – Directors do a lot of reading. I keep a note of my thoughts on each book I read. Here is my review of Managing Whole People by Mark Herbert.

Be an expert – I will post next month’s dilemma on LinkedIn. If you would like to feature in December just log on to my Q&A and type in your advice. I will pick the best answer to be published in the December newsletter.  

This newsletter – Next month is the last newsletter for 2008 and I am considering what to do in 2009. If you have any ideas for improving the newsletter please let me know. It is currently read all around the world and I hope to reach 20,000 subscribers soon. Please feel free to forward it to your board colleagues.

Suggestions for dilemmas – Thank you to all the readers who have suggested dilemmas. I will answer them all eventually. (And good luck to ‘Brad’; I know he will be a great director when he gets a bit of experience)

Farewell until next month. Enjoy governing your corporations; we are privileged to do what we do!

Best wishes


www.mclellan.com.au | PO Box 97 Killara NSW 2071
email julie@mclellan.com.au | phone +61 2 9499 8700 | mobile +61 411 262 470 | fax +61 2 9499 8711