2.1 Directors’ roles are clear and understood by the board
2.2 Directors understand and meet their duties under the law
2.3 Directors meet any eligibility requirements relevant to their position
2.4 Delegations of the board’s authority are recorded and periodically reviewed
2.5 The role of the board is clearly delineated from the role of management
To achieve good governance, the roles of the people involved
in an organisation and their relationships to one another
must be clear and understood. Because directors are at the
top of the organisational hierarchy, they must make sure that
they understand and meet the responsibilities of their roles.
In this document the term ‘director’ refers to
the people who make up an organisation’s
board. In some organisations these people
may be known as the board members,
committee members, trustees, councillors,
governors or by another name.
What is a director?
A director is someone who is validly appointed to be director
of an organisation. Together, the directors of an organisation
form an organisation’s board and collectively have ultimate
responsibility for the company. The process for appointing
a director will generally be set out under an organisation’s
The law also recognises other people who are not formally
appointed as directors but who act as directors (de facto
directors), or people with whose instructions or wishes
directors are accustomed to act (shadow directors). In some
circumstances, it is also possible for a director to nominate
another person to act in their place (alternate directors),
although this will depend on the organisation’s governing
documents and any laws that apply to it.
Before accepting a position as a director, it is a good idea
- Do I understand the responsibilities of this
role, including my legal duties?
- Am I prepared to dedicate the time and
energy to perform this role in the way
- Do I have the skills and experience
to discharge the responsibilities of
Only if the answer to these questions is ‘yes’ should a person
accept the responsibilities of directorship.
Sometimes a director of an NFP may also have other roles
within the organisation. For example, a director of a sporting
club may also be a coach, a player or a parent of a player. It is
important for directors to be able to separate these roles and
not allow one to improperly influence the other.
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Who can be a director?
Generally, directors must be people over the age of 18
and who consent to taking on the responsibilities of
the position. Otherwise, there is generally no particular
qualification or experience level necessary to become a
director under the law.
There may be requirements in an organisation’s governing
documents or in the laws that apply to it that set out
eligibility requirements for directors. For example, if you
are an undischarged bankrupt, you cannot be a director of a
company under the Corporations Act.
Directors should know whether they are subject to any
eligibility requirements and be satisfied that they continue
to meet them. It is a good idea to set out any eligibility
requirements for directors in a letter of appointment, and
to regularly review whether all directors continue to comply
with these requirements.
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There are two sources of directories duties: general law
Under the general law, directors have duties that are based
on the relationship they have with the organisation. This is
a special relationship based on trust; a relationship akin to
being the trustee of someone else’s money, and for this reason
directors’ duties are sometimes called ‘fiduciary duties’.
Directors’ duties are usually also set out under statute,
though the way this is done will depend on how the
organisation is incorporated.
The four main legal duties based on general law and statute
- Act in good faith and for a proper purpose
This duty has two parts. Firstly, acting in ‘good faith’
means that directors must act honestly, fairly and
loyally. It requires that directors act in the best interests
of the organisation (rather than in their own personal
interests). The requirement to act for a ‘proper purpose’
means that a director’s decisions must further the
organisation’s purpose and be made within the board’s
- Act with reasonable care, skill and diligence
Directors must take their roles seriously and be
diligent in the exercise of their responsibilities. That
includes taking the necessary time to prepare for board meetings, keeping abreast of the organisation’s
activities and understanding the organisation’s financial
position (including making sure the organisation can
pay its debts when they are due), and attending and
participating in board meetings.
- Not to improperly use information or position
Information provided to directors to support them to
fulfil their roles must only be used for the benefit of the
organisation. Directors cannot use information provided
to them as a director, or their role as a director, to harm
the organisation or to gain an improper advantage for
themselves or another person or organisation.
- Disclose and manage conflicts of interest
Conflicts of interest are often unavoidable. They do not
represent a problem in and of themselves. However,
where a conflict of interests do arise, directors must
disclose them, and manage them appropriately. Conflicts
of interest are explored in more detail in Principle 9: Conduct and compliance.
There is some misconception that directors who are not
remunerated for their work (sometimes called
‘volunteer directors’) are subject to lower standards of
legal responsibility. This is not the case, and individuals
should think carefully before accepting the
responsibilities of directorship.
There are several laws that set out the specific duties to which
directors are subject. For example, there are directors’ duties
under the common law, the laws that govern incorporated
associations and under the Corporations Act. The ACNC
governance standards also refer to directors’ duties.
ACNC Governance Standards 5: Duties of Responsible Persons
- To act with reasonable care and diligence;
- To act honestly and fairly in the best interests of
the charity and for its charitable purposes;
- Not to misuse their position or information they
gain as a responsible person;
- To disclose conflicts of interest;
- To ensure that the financial affairs of the charity
are managed responsibly; and
- Not to allow the charity to operate while it is
Often an organisation’s governing document will also set
out certain legal duties and require directors to comply
with them. The ACNC has published a template constitution
for NFP companies limited by guarantee which is a useful
resource for organisations.2
It is a good idea in a letter of appointment for all new
directors to set out the legal duties and to revisit these
regularly as part of ongoing director development so
that directors understand and are meeting them. This is
discussed in greater detail in Principle 3: Board composition
and Principle 4: Board effectiveness.
There also are other specific legal obligations imposed on
directors regarding issues such as work health and safety,
tax and the environment.
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To whom do directors owe their duties?
Directors’ duties reflect the relationship that directors
have with the organisation and its members. Directors
are entrusted with the responsibility of governing an
organisation and so the law expects that they will act in
the best interests of the organisation and be accountable
for their actions.
Directors owe their duties to the organisation as a
whole – meaning that they must act in the best interests of
the organisation and its members. It is assumed that
the organisation will exist on an ongoing basis (in
perpetuity), and as such the interests of future members
should also be considered.
In exercising their responsibilities, it is a good idea for
directors to consider how their decisions might impact
other stakeholders who are not members, such as clients
and community members. This may be beneficial to the
organisation’s strategy and assist with improved decisionmaking, but it is important to recognise that directors do
not have a specific legal duty to act in the interests of
these stakeholders (aside from obligations arising from
other specific laws, for example regarding environmental
protection or WHS).
Some directors are appointed to the board to contribute
the perspective of a certain stakeholder group. For
example, a federated organisation might appoint directors
from its state and territory divisions to its national board.
This can provide valuable insight and promote a sense of
involvement among stakeholders.
However, it is important to recognise that even though a
director may be appointed because of their relationship
to a stakeholder group, they must exercise their duties in
the interest of the organisation and apply an independent
mind to their responsibilities.
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Role of the board
The board is responsible for the overall governance,
management and strategic direction of the organisation.
As a result, the board has ultimate accountability for
its activities and performance. Boards are comprised of
an organisation’s directors who can only exercise their
authority when acting as a collective.
This also means that directors may still be held legally
responsible for decisions of the board, even
though they may not have supported it individually.
In this document the term ‘board’ refers
to an organisation’s governing body (its
directors acting as a collective). In some
organisations these people may be known
as the committee of management, council
or by some other name
The role of the board may vary slightly depending on
the nature of the organisation. The boards of smaller or
newer organisations, or those without paid staff, may
have a more operational focus, whereas the boards of
larger and more established organisations may take a
more strategic approach to their work. Boards must
decide for themselves how best to contribute to their
organisation to make a positive impact and to meet their
duties under the law.
The role of the board can be broken down into six
Establish strategies to guide, monitor and
control the organisation’s activities.
Make resources available to achieve the
strategy and oversee their use.
Monitor the organisation’s performance.
Oversee processes to comply with legal and
Oversee a risk management framework that
supports informed decision-making by the
Report progress and align the collective
interests of members, stakeholders, board,
management and employees.
To assist in defining the role of the board and understanding
its legal obligations, many boards choose to develop a
board charter to govern the way the board works and fulfils
its responsibilities. This is a document that sets out the
respective roles, responsibilities and authorities of the board.
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Delegation of the board’s authority
The board has ultimate responsibility for and control over
the way an organisation is run, except in some matters
which may require the involvement of members (such as
changing the organisation’s governing documents). However,
boards can choose to delegate part of their authority to
others, such as an organisation’s staff and volunteers.
An organisations’ governing documents (particularly its
constitution) and any other laws that apply to it may limit
the ability of the board to delegate its authority.
There are some parts of the board’s authority that are
considered good practice to be reserved for the board or
which the board may be required to retain under the law, for
- Appointing, overseeing and evaluating the performance of
- Approving the budget and strategy; and
- Reviewing and approving financial reports.
It is important that any delegation of the board’s authority
is clearly defined and recorded appropriately and regularly
reviewed. One of the ways this can be done is through
establishing delegation policies that set out which of
the board’s authorities are being delegated and the
circumstances under which they can be exercised.
The board may delegate some of its
authority, but it cannot delegate its
responsibility. The board is still ultimately
accountable for any of its powers that are
exercised by others on its behalf.
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Many boards establish committees to assist with their
work. Committees can also be a helpful way to build
and access expertise as committee members do not
necessarily have to be directors. Some committees may
operate for a defined period (for example, to oversee the
appointment of a new CEO) and are referred to as ‘ad hoc
committees.’ Others may operate on an ongoing basis (for
example, a fundraising committee) and are referred to as
For example, many boards will establish an audit
committee to assist the board on an ongoing basis with
oversight of financial reporting and the appointment
of the auditor.
Although the board may delegate some
of its responsibility or authority to a
committee, the board is still accountable
for the operation of its committees and
for the use of any delegated authority by
One way this can be done is through establishing a
committee’s ‘terms of reference’ which include:
- What the committee’s purpose is;
- What its powers are (if any);
- Who its members will be;
- Who its chair will be;
- How often it will meet;
- How it will report to the board; and
- How often it will be reviewed.
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The role of the chair
In the boardroom, the chair is primus inter pares – first
among equals. Their role is to manage the business of
the board both inside and outside of the boardroom.
The chair does not hold greater authority than any other
director but will generally have additional responsibilities.
In this document the term ‘chair’ refers to
the person who leads and manages the
business of the board. In some organisations
this person may be known as the president,
convenor or by some other name.
It is common for the company secretary to report both
to the CEO and to the board. Directors should be able
to communicate directly with the company secretary
without having to go through the CEO. Often the decision
to appoint and remove a company secretary will be left to
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The role of management
Directors act collectively to provide governance and
oversight of an organisation and will typically meet
several times per year for a limited period of time. It
is not practical for boards to direct the day-to-day
operations of an organisation, or to perform themselves
the tasks necessary for an organisation to achieve its
goals. For this to happen, the board must delegate
some of its authority to ‘management’ (paid or unpaid
An organisation’s governing documents
and any laws that apply to it may set out
requirements about who can be appointed
as company secretary and the way this
must be done.
For example, the board will generally delegate authority
for the CEO to use the organisation’s financial resources
within the limits set by the budget and in alignment
with the strategy. It is important that any delegation of
the board’s authority to management is recorded and
The board oversees the strategy while management
develops and implements the plans to achieve it. Boards
are expected to operate on a more long-term and
strategic basis. By comparison, management should be
concerned with the more immediate operational needs of
“A company in many ways may be
likened to a human body. It has a brain
and a nerve centre which controls what
it does. It also has hands which hold
the tools and act in accordance with
directions from the centre. Some of
the people in the company are mere
servants and agents who are nothing
more than hands to do the work and
cannot be said to represent the mind or
will. Others are directors and managers
who represent the directing mind and
will of the company and control what it
Lord Justice Denning, HL Bolton (Engineering) Co Ltd v TJ
Graham and Sons Ltd, 1957
In practice, the division of responsibility between the
board and management may be less defined. It may be
possible in theory to divide responsibilities between
the board and management, but it is likely that the line
between the two will shift as an organisation’s needs and
Although the board may delegate
some of its responsibilities or powers to
management, the board is still ultimately
accountable for management and for
the use of any delegated authority by
Boards should take an active role in considering where
this line is drawn and in reviewing whether the focus of
their discussions is appropriate to make sure they, and
management, are making the most impactful contribution
to the organisation.
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Questions for Directors
- Do directors understand and meet their responsibilities, including legal duties?
- Are the roles and responsibilities of the board and individual directors clear?
- Are any delegations of the board's authority clearly recorded and regularly reviewed?
- Is there an appropriate separation between the role of the board and of management?
- Are directors subject to any eligibility requirements and are they continuing to meet them?
The board of HelpfulCare has established a
board charter that broadly sets out the roles and
responsibilities of its directors, the eligibility
requirements that apply to them, and their
duties under the law. The charter is a boardapproved policy document and is reviewed annually
so that it is relevant and to keep it fresh in the
minds of directors.
HelpfulCare also has a board policy handbook that
includes a range of governance policies about how
the board will operate. The handbook includes
policies that explain in detail the roles and
responsibilities of directors, the chair, the CEO
and the company secretary
The handbook also includes a policy on how the board
will use committees. In line with the policy, the board
of HelpfulCare has established three committees, each
with its own terms of reference that are approved
by the board and reviewed every two years. The
HelpfulCare board has an audit committee, a risk
committee; and a nominations committee.
The board’s delegation policy sets out how the
board’s powers may be delegated to management
or to committees. The policy also requires that
any delegation be reviewed after a certain period.
Delegations of the board’s authority are also recorded
in a register so there is clarity for the people involved
with the organisation on who has delegation and how
it is to be exercised.
When calling for nominations for directors, the Friendlies
provides a copy of a position description for directors
which explains what the board and directors do.
When people are appointed as directors, they receive
a letter of appointment from the chair which sets out
the expectations of their roles. The letter includes
matters such as eligibility requirements for directors,
minimum attendance at board meetings and their
general legal duties. Directors are required to sign and
return the letter, which affirms that they understand
their responsibilities and meet the relevant eligibility
requirements, and they will advise the board if they
are no longer eligible.
The Friendlies employ one staff member (their part
time coordinator). Their position description is set out
in their employment contract, which also explains
their responsibilities and their relationship to the
The Friendlies do not have any ongoing committees.
However, from time to time they establish ad hoc
committees for specific projects. In the past they
have had committees for coordinating their ten-year
anniversary and for reviewing their constitution.
When they established the committees and their
terms of reference, they also record these details in
the board minutes.