Also generally, individual non-executive directors do
not have legislative or constitutional authority on their
own initiative to commit the organisation to a contract,
including one to provide professional advice to the director
on matters relating to their board service.
Organisations, whether on the initiative of management
or by board resolution, often take external professional
or consultancy advice on matters under consideration
by the organisation and/or its board. That advice
may be for the benefit of the organisation generally,
or even only for the benefit of the board discretely from
management; for example, in the performance of its
oversight role of management, the board may need advice
independent of any affiliation with management.
In terms of seeking external professional advice,
the following good governance practice is recognised:
- On occasions, an individual director or directors may
wish to obtain external professional advice discretely
from the organisation and the board on matters relating
to their duties and responsibilities as a director(s);
- Provided they are acting in good faith, it is reasonable
for them to do so at the expense of the organisation
- they should be entitled to reimbursement of expenses
for the external professional advice taken;
- they should not risk breaching confidentiality
obligations owed to the organisation by taking
- In such a case, an authority to do so should be
given by the organisation or the board on behalf
of the organisation;
- Commonly such an authority is found in one or more
of the following instruments which have contractual
status between the organisation and the director:
- Organisation’s constitution;
- Organisation’s governance or board charter;
- Letter of appointment by which the director was
appointed to office;
- Deed of access, indemnity and insurance between
the organisation and the director.
As board members act in a collective capacity where trust
and confidence is valued and consensus decision making
is favoured, directors should exercise any right to take
individual expert professional advice sparingly and only
in circumstances where the director has a legitimate and
significant reservation as to the matter upon which the
advice is sought, and which reservation the board and
its professional advisers (as appropriate) are not able
or are not willing to address to the reasonable satisfaction
of the director.
Directors are appointed to govern organisations. Occasionally,
an individual director or group of directors may need to
consider seeking professional advice independently of the
board and the organisation in order to effectively deal
with an issue. It is considered good practice to have policies
and procedures in place to allow for this. Such policies
and procedures on seeking external professional advice at
the organisation’s expense are often documented in the
organisation’s board or governance charter.
What legislative provisions are relevant?
Although replaceable rule s 202A (2)(c) of the Corporations
Act 2001 ('Act') states that a company may pay the
directors’ travelling and other expenses that are properly
incurred in connection with the company's business, even
if the section did apply, without further authorisation
it is unlikely to extend to a director obtaining external
professional advice for themselves.
No other section of the Act expressly addresses
a director's right to assistance from external advisers
(Austin and Ramsay, Ford, Austin and Ramsay’s Principles
of Corporations Law, 16e, 2014, p 198), nor is this a matter
commonly covered in other legislation under which
an incorporated entity may be registered.
Importantly, individual directors do not have the authority
to bind the company in a contract (ibid, p 201).
Case law is also yet to recognise any general right
for individuals to seek external advice (ibid, p 203).
What is good corporate governance practice?
Guidance has been provided by the ASX Corporate
Governance Council Corporate Governance Principles
and Recommendations 3e (2014). The commentary
to Recommendation 1.3 states:
[a director’s agreement or letter of appointment should
include a statement of] “... the entity’s policy on when
directors may seek independent professional advice
at the expense of the entity (which generally should
be whenever directors, especially non-executive
directors judge such advice necessary for them
to discharge their responsibilities as directors)”
Statement of Policy:
Independent Professional Advice
A board member is entitled to seek independent
professional advice (including but not limited to legal,
accounting and financial advice) at the Company’s
expense on any matter connected with the discharge
of his or her responsibilities, in accordance with the
procedures and subject to the conditions set out below:
- The board member must seek the prior approval
of the chair (or deputy chair/senior independent
director as appropriate having regard to the relevant
- In seeking such prior approval, the board member
must provide details of:
The approval of the chair (or deputy chair/senior
independent director as appropriate) must not be
- the nature of and reasons for the independent
professional advice to be sought;
- the likely cost of obtaining the independent
professional advice; and
- details of the independent adviser the board
member proposes to instruct.
This is designed to maintain a level of managed control
over the process and to guard against directors taking
excessive, and perhaps unnecessary, costly advantage
of the policy.
Some boards may decide to have a recommended panel
of expert advisers from which to choose when independent
advice is sought.
Where advice is received individually by a director at the
company’s expense, provided that any privilege attaching
to the advice is not comprised and the other directors
request the advice, the advice might also be shared with
other board members for information purposes.
When is advice ‘independent’?
Generally speaking, directors should consider whether
they ought to have the advantage of independent advice
from advisers not otherwise employed by the organisation
or the board as a whole).
“ For clarity of advice and possible future
evidentiary purposes, it is preferable
that advisers provide the director with
written advice. ”
In the US, the Security Exchange Commission’s view
is that the use of truly independent counsel is also
a factor looked upon favourably by the courts and may
help to shield directors from assertions of breach of duty
in certain circumstances. The presence of independent
advice, particularly in related party transactions, may
assist directors in marshalling arguments to counter
assertions that may be made that the director has failed
in his/her duties and responsibilities. Independent counsel
will also assist the directors to evaluate issues with
an independent and critical eye.
To what extent can the advice be relied
on as a defence?
Section 189 of the Act provides that a director's reliance on
information or advice is taken to be reasonable (unless the
contrary is proved) if:
(a) The director relies on information, or professional
or expert advice, given or prepared by … a professional
adviser or expert in relation to matters that the director
believes on reasonable grounds to be within the person's
professional or expert competence;
(b) The reliance was made in good faith and after
making an independent assessment of the information
or advice, having regard to the director's knowledge
of the corporation and the complexity of the structure
and operations of the corporation; and
(c ) The reasonableness of the director's reliance on the
information or advice arises in proceedings brought
to determine whether a director has performed a duty
under this Part or an equivalent general law duty.'
This document is part of a Director Tools series prepared by the Australian Institute of Company Directors. This series has been designed to provide general background information and as a
starting point for undertaking a board-related activity. It is not designed to replace legal advice or a detailed review of the subject matter. The material in this document does not constitute
legal, accounting or other professional advice. While reasonable care has been taken in its preparation, the Australian Institute of Company Directors does not make any express or implied
representations or warranties as to the completeness, currency, reliability or accuracy of the material in this document. This document should not be used or relied upon as a substitute for
professional advice or as a basis for formulating business decisions. To the extent permitted by law, the Australian Institute of Company Directors excludes all liability for any loss or damage
arising out of the use of the material in this document. Any links to third-party websites are provided for convenience only and do not represent endorsement, sponsorship or approval of those
third parties, or any products and/or services offered by third parties, or any comment on the accuracy or currency of the information included in third party websites. The opinions of those
quoted do not necessarily represent the view of the Australian Institute of Company Directors.
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