13 Sep 2011

Legal responsibilities

'For all directors new dangers have become apparent and the directorial task has taken on a new reality. Prudence requires that it be approached with far greater care and professionalism than has hitherto been considered necessary.' Henry Bosch. The Director at Risk. Melbourne: Pitman Publishing, 1995


The legal entity, that is, the company/incorporated association, has an existence independent of its members. A board member's first duty is to the legal entity, in other words directors must ensure
that the company or association meets all requirements in law. These laws may be extensive and will include corporations' or associations' law, and common law. The organisation's company secretary or public officer must ensure that the organisation complies with the appropriate legislation for which that position is responsible. The board should monitor this compliance.

The board is ultimately accountable for the performance of the organisation. Each board member is responsible for all decisions taken by the board. This means that board members share a common liability and they could be sued individually or collectively (jointly or severally) in the event of a determination that the board failed to properly exercise its duty of care or knowingly acted in breach of the law.

Board members of companies limited by guarantee and incorporated associations have the same duties and responsibilities. These include:

  • acting honestly and in good faith
  • exercising a 'reasonable' level of care and diligence in order to meet their duty of care
  • not making improper use of information acquired by virtue of their directorship of the organisation to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the organisation
  • not making improper use of their position to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the organisation
  • complying with all relevant legislation
  • acting in the best interests of the organisation as a whole
  • exercising decision-making based on the 'reasonable person' test, that is, exercising a level of care and diligence that a reasonable person in a similar position would exercise
  • ensuring the proper keeping of records, registers, accounts, reports and lodgement of documents
  • ensuring that the organisation only exercises those powers and functions permitted to it under its constitution and rules.

The constitution defines the organisation's rules, including its governance structure and processes, for example, election of board members and office holders, powers of the board, annual general meeting procedures and procedures for winding-up.

The board must ensure that the integrity of the constitution is maintained. The law requires all board members to declare any conflict of interest relating to meeting their responsibilities as board members. The board should have a conflict of interest policy that describes the processes to be followed when a conflict is identified. Typically, when a conflict of interest is identified, the board member concerned is required to leave the room and play no part in any discussion or vote on the issue relating to the conflict of interest.

Conflicts of interest may be 'pecuniary', that is, involve the board member in financial dealings with the board, or may be non-pecuniary, for example, if there is family member or personal involvement in the matter under discussion.

Non-pecuniary conflicts of interests are less likely to occur when board members are independent rather than representing a particular member or group of members. The organisation and the board are required to comply with a wide range of legislation covering such areas as employment, trading, and occupational health and safety. The board should be aware of the scope and general content of such legislation and its relevance to the organisation.

Directors have certain responsibilities in relation to the accounts of the organisation, namely:

  • ensuring that proper books of account are kept
  • providing assurance that the published accounts give a fair and true view of the organisation's financial position
  • providing assurance that the organisation is able to pay its debts (is solvent).



Strategic responsibilities

'The board's first responsibility is to ensure that the organisation has clearly established goals; objectives and strategies for achieving them; that they are appropriate to the circumstances and that they are understood by management.' Henry Bosch. The Director at Risk. Melbourne: Pitman Publishing, 1995


It is the board's job to establish the organisation's strategic direction. This will be reflected in the strategic plan, which will typically include:

  • a mission statement or statement of purpose
  • the board's vision for the organisation
  • a statement describing the organisation's philosophy or values
  • a 'snapshot' or pre-plan position of the organisation at the start of the period covered by the plan
  • a SWOT analysis of the internal (strengths and weaknesses) and external (opportunities and threats) operating environment
  • clearly stated organisation-wide results or outcomes to be achieved, often referred to as Key Result Areas
  • each Key Result Area to have broadly stated objectives with related strategies and performance indicators.


The board develops the strategic direction and strategic plan in partnership with the chief executive officer and staff of the organisation and the sport's key stakeholders. Regardless of how the strategic direction and strategic plan is developed, it must ultimately be 'owned' by the board. Once adopted, only the board can change the strategic direction or alter the Key Result Areas.

The process of developing the strategic direction and strategic plan and ensuring that they remain up to date and relevant is called 'strategic thinking'. Strategic thinking involves constant analysis and assessment of external and internal factors that might inhibit or help the organisation to achieve its Key Result Areas, and results in decisions taken by the board and the chief executive officer to ensure sound, appropriate ongoing operations. Time should be set aside at every board meeting for strategic thinking.

All further operational plans should be consistent with the strategic direction and plan. Depending on the organisation's needs, these may include operational/business, marketing and high performance plans. Each of these plans should work towards achieving the strategic initiatives identified for each Key Result Area in the strategic plan.

Development of operational plans designed to achieve the strategies is the responsibility of the chief executive officer.

Generally speaking, the board should play no part in developing operational plans beyond setting the strategic direction and strategic plan. Some smaller sporting organisations with limited employees, however, require the practical support of board members to assist with certain aspects of the organisation's operations such as planning. When this is the case, care must be taken to ensure that the chief executive officer leads the process so that the plans are grounded in reality and are achievable.

To ensure sound management, the board may wish to view the chief executive officer's operational plans; it does not, however, have a role in developing or adopting these plans.

The one exception to this general rule is the organisation's budget, which the board must review, approve and monitor. The board should constantly evaluate progress made towards the achievement of the desired outcomes defined in the Key Result Areas.



Financial responsibilities

'Nothing gives boards more concern than the handling of money. They worry far more about how funds are protected and spent than about the most crucial accountability: whether total expenditures produce a sufficient human outcome.' John Carver. Boards that Make a Difference. San Francisco: Jossey-Bass, 1991



Financial governance

Financial governance entails setting financial policies within which the chief executive officer must carry out day-to-day financial management, and monitoring the effective implementation of these policies. Financial 'governance' is different from financial 'management', the latter being the responsibility of the chief executive officer.

The board must perform sound financial governance, and ensure sound financial management of the organisation. The board's financial governance policies might address some or all of the following:

  • chief executive officer expenditure authority
  • budgeting and financial planning
  • reserves
  • investments
  • general guidelines for financial management and overall financial condition
  • employee remuneration and benefits
  • protection of assets
  • financial reporting required by the board.

The external auditor is accountable to the board, not to the chief executive officer. When a board establishes a finance or audit committee, this committee works on behalf of the board to:

  • provide assurance of the integrity of the organisation's financial systems
  • be the board's link to the external auditor
  • carry out periodic internal audits of financial systems and processes
  • make recommendations to the board about financial policies
  • obtain management responses to issues
  • assist the chief executive officer to interpret the board's financial policies
  • carry out financial and other risk assessments.


The finance or audit committee is chaired by a director with appropriate financial expertise and does not include the chief executive officer or finance officer or bookkeeper as a member, as the committee will need to review the financial practices
involving these positions.



Financial planning

The annual budgetary process is the means by which the organisation establishes how it will fund its activities and what costs it will incur in order to achieve its desired outcomes. The budget thus reflects the organisation's overall strategic plan and Key Result Areas for the year.

The budgeting process should begin with the board determining the criteria for financial planning, including the 'financial state' the organisation should be in at the end of that financial year, for example, with a certain allowable deficit, a target surplus, a balanced budget, or some variation on these.

The budget is adopted by the board. By approving a broad rather than a highly detailed budget, the board empowers the chief executive officer to make necessary adjustments in response to minor changes in operating conditions without having to go back to the board for approval. The budget should be regarded as a 'live' management and governance tool that is subject to regular review and readjustment.



Financial reporting

In addition to viewing financial reports regularly, the board should also require evidence of compliance with the board's financial policies. The chief executive officer (or finance officer) should present financial reports to the board at every board meeting, typically monthly. When a board meets on a less frequent basis, say every two or three months, financial reports should be distributed to board members monthly.

The board is required annually to prepare an accurate and up-to-date statement of the organisation's finances for the year ended for all members and, where relevant, for government agencies and funding bodies.

All board members share equal responsibility to monitor the financial health of the organisation. Board members should never defer to the treasurer's or a committee's views without first considering the issue themselves.

As a minimum, financial reports to the board should include actual income and expenditure andbudgeted income and expenditure for both the most recent month or period and year-to-date, along with written explanation of significant variations between these figures.



Moral responsibilities

'The board system rests on the premise that the directors, and through them, management, are accountable for serving as agents of the business.' Leighton, D and Thain, D. Making Boards Work. Toronto: McGraw-Hill Ryerson, 1997


Board members share a common 'fiduciary' duty, that is, they are trustees on behalf of stakeholders for:

  • the achievement of appropriate outcomes
  • the financial security of the organisation
  • the expression of a moral and social responsibility to the members and the community at large.


Board members, as trustees of the organisation, have a moral duty to the sport. This involves keeping up to date with the sport they represent and sporting matters generally, and presenting their organisation and the sport it represents in a positive manner.

Board members have a moral duty to remain up to date with the concerns and expectations of stakeholders and to ensure that these receive proper consideration at board or management level.

In keeping with its duty to serve the interests of the sport as a whole, the board has a moral obligation to keep all members (and where relevant, key stakeholders) informed about current and future organisational matters of concern to them.

The board has a moral responsibility to establish and maintain an open and frank relationship with the chief executive officer. This entails carrying out all employer-related duties consistent with the law and in a manner that creates an open, honest and productive working relationship leading to the achievement of board-established outcomes and, in general, an effective organisation.

The board has a moral obligation to consider matters on the basis of equity and transparency and in the interests of the sport as a whole, and not in preference to any one or more classes of stakeholder.



Organisational Risk Responsibilities

'And the trouble is, if you don't risk anything, you risk even more.' Erica Jong


Risk is an inevitable and unavoidable component in organisational growth and development, providing both opportunities and potential threats to the health of an organisation. 'Risk management' is the means by which the board and the chief executive officer ensure that the risks faced do not result in significant loss or harm to the organisation.

Risk management involves not only taking protective measures but also evaluating opportunities and, where appropriate, taking considered risks designed to facilitate the growth and development of the organisation.

The board should have a broad appreciation of the risks facing the organisation and the likelihood of occurrence together with the potential impact of these should they occur.

The board should ensure that a risk management plan for the organisation is developed, usually by the chief executive officer. Such a process may involve identifying the risks facing the organisation, assessing the level of threat each presents, deciding what action to take in response to each risk and ensuring effective chief executive officer response to the risks through regular monitoring and review.

Typical organisational risk categories include:

  • financial
  • human resources
  • reputation
  • client/athlete harm
  • governance
  • technology
  • stakeholder relations
  • strategic
  • occupational health and safety
  • harm to or loss of physical assets.

Having established the level of acceptable risk and developed an appropriate plan, it is the responsibility of the chief executive officer to implement the plan by taking actions necessary to minimise the negative impact and maximise the positive opportunities arising from risk-taking.



Chief executive officer appointment responsibility

'A strong CEO needs a strong board.' John Carver. Boards that Make a Difference. San Francisco: Jossey-Bass, 1991


In appointing its chief executive officer, the board should take every care and make every effort to ensure that:

  • it canvasses the field of all available candidates in order to attract the best person for the position
  • the suitability of short-listed candidates is thoroughly assessed for organisational cultural compatibility, appropriate skills and an understanding of the organisation's business Governing Sport -- the role of the board © 2005 Australian Sports Commission
  • the successful candidate fully understands what will be required of him or her in the role, that is, the key strategic issues, the policy framework (including the nature and level of delegated authority), the way the board works, reporting expectations and all terms and conditions of employment.

The chief executive officer is the only direct employee of the board, all other staff being employed by the chief executive officer.



Responsibility to stakeholders

'[Organisational] ... learning comes not just from the directors, but from all members of the organisation and from those outside it. The information and "wisdom" of all stakeholders in and around the organisation is a valuable commodity which directors need to appreciate and use.' Bob Garratt. The Fish Rots from the Head. London: HarperCollinsBusiness, 1996


Stakeholders are those groups and individuals who benefit in some material way from the existence of the organisation. Boards of sporting organisations typically have three key groups of stakeholders:

  • Stakeholders who are legal owners - members, as identified in the constitution, own the organisation. Legal owners have the right to make changes to the constitution, to appoint or elect members to the board, and to determine that the organisation should wind-up or close. For example, the state associations are the legal owners of the national body of most sporting organisations. The legal owners of the state associations are typically individual clubs or athletes/players.
  • Stakeholders who are moral owners - are those people for whom the organisation exists but who cannot exercise the same rights as members. This may include players, coaches, officials and others involved with, or with an interest in, the sport.
  • Stakeholders with whom the organisation has a business relationship - includes all those individuals, companies, or entities with whom the organization establishes a contractual relationship. Included in this group are the employees of the organisation, funding bodies, the suppliers of goods and services, and the general public as paying customers.


The board is accountable in the first instance to its legal owners then to its moral owners. Accountability to those with whom the organisation has a business relationship is based on the nature of the relationship or the business contract. Certain stakeholders or stakeholder groups might contribute to the overall governance and management of the organisation by:

  • taking part in the strategic direction-setting process together with the board and staff
  • taking part in focus groups initiated by the board or by the chief executive officer
  • taking part in surveys, feedback mechanisms and other forms of communication initiated by the board or by the chief executive officer.



Rights of board members

In order to effectively satisfy their legal and moral responsibilities, board members have a right, in relation to sound governance decision-making, to:

  • receive or access information from management or staff in a timely manner
  • question management and receive truthful responses
  • access professional advice
  • have their views heard by fellow board members.


'It's not rules and regulations. It's the way people work together.'Jeffrey Sonnenfeld. Harvard Business Review. September 2002, vol. 80



Working as a team

At the core of board and organisational effectiveness is the ability of directors to work together as a team. One of the greatest challenges facing boards is the ability to achieve consensus and cohesion while at the same time encouraging diversity and legitimate dissent.

The following factors contribute to the development of an effective board team:

  • the skills mix of the board is appropriate to its role and tasks
  • there is agreement that the board will 'speak with one voice' about all policy matters when communicating with the chief executive officer and the outside world
  • there is a robust and productive partnership with the chief executive officer in which both good and bad news is shared openly and in a timely fashion.
  • there is a positive and constructive boardroom culture in which all directors know that their contribution is valued
  • there is a good balance between talking and listening. Board members are willing to suspend judgement until an issue is fully canvassed and all perspectives are aired
  • the chairperson manages the meeting processes so that issues before the board are adequately addressed. Agenda and time management facilitate appropriate attention to board issues
  • legitimate dissent and diversity are viewed as healthy components in boardroom dialogue and encouraged so that the full range of views, opinions and experience are available to support board decisions
  • the views of management are sought and valued
  • board members can ask tough questions without management becoming defensive.