10. Legal Obligations and Potential Liability of Board Members
10. Legal Obligations and Potential Liability of Board Members
There is a mistaken but commonly held view that members of school Boards do not have the same legal duties as directors of ‘for-profit’ companies. However, school Board Members are obliged to comply with general law and legislative requirements. These legal obligations are not dependent on the size of the School or experience of the Board.
It is a fundamental aspect of good governance that all Board Members understand that their role on the Board is first and foremost to act in the interests of the School as a whole. Board Members are not on the School Board to represent and promote the interests of particular groups or stakeholders.
This overriding obligation on all Board Members to act in the best interests of the School as a whole arises by virtue of what is known as the ‘fiduciary relationship’ between each Board Member and the School. A fiduciary relationship is a general law notion, dictating that Board Members must always act in the best interests of the School and must act honestly, fairly, loyally, in good faith and with integrity.
In all deliberations, a school Board Member must observe the overriding principle that it is his or her duty to act in the best interests of the School, irrespective of any personal or other interests.
Another essential aspect of good governance is confidentiality in respect of all Board matters and discussions. Confidentiality forms the basis of trust and encourages an open and honest forum for discussion. Board Members have a right to freely express their views without fear of being named outside the Board Meeting as taking a particular position.
A person or organisation has a fiduciary duty where he or she has assumed the responsibility to act in the best interests of another person or organisation to which the fiduciary duty is owed. A person who occupies a fiduciary position may not use that position to gain a profit or benefit for himself or herself or for the benefit of a third party. The distinguishing obligation of the fiduciary is the obligation of utmost loyalty and to act in good faith. Each Board Member has an obligation to exercise their powers in good faith and in the best interests of the School.
“I am a former student of the school and I am also an active representative of the Old Collegians Club. I have recently been appointed to the School Board as the delegate of the Old Collegians. Whose interests am I on the Board to represent and protect?”
All Board Members have an ongoing obligation to act in the best interests of the School. Although you have been appointed to the Board by a specific interest group, your role on the Board requires you to act strictly in the best interests of the School as a whole, and not for the benefit of the particular interest group. The Old Collegians have selected you to go on the Board as they believe you to have the desired qualities to do so. You are prohibited from acting as the mouthpiece for the Old Collegians, and you are not permitted to report back to the old Collegians on the deliberations or decisions of the Board unless expressly authorised by the Board.
‘I am a parent and I am also a member of the School Board. When I see other parents at the School or in a social setting they often ask me about decisions that were made at the last Board meeting. Am I allowed to discuss this information?’
Not unless you are expressly authorised by the Board to do so. Board meetings are completely confidential and as a Board Member you must always respect the confidentiality of all Board discussions. It is for the Board to determine how, when and what to communicate to stakeholders.
“What do my duties under the Corporations Act require me to do?”
Act with care and diligence (s.180)
This duty requires Board Members to apply reasonable care in the performance of their office.
The standard of care and diligence is determined both by reference to the School’s circumstances and the specific Member’s position, experience and responsibilities.
Be informed on matters under discussion (s.180)
As a Board Member, you are under a continuing obligation to keep informed about the activities and affairs of the School.
Ignorance is no defence to liability for breach of these provisions – a Board Member must ask questions and seek advice, where necessary, in order to have a complete understanding of all Board issues, discussions and resolutions.
Board Members should bring an informed and independent judgment to bear on the various matters that come to the Board for decision.
Act in good faith (s.181)
Board Members must act bona fide for the benefit of the School as a whole – the interests of the School must always be the principal consideration.
To act in good faith means not to act in bad faith.
Act for the proper purpose (s.181)
As a Board Member, you must only exercise any associated powers for the purpose for which they were conferred.
You must not act for an improper purpose.
Not make improper use of the position on the Board (s.182)
A Board Member must refrain from improperly using his or her position on the Board in order to gain a personal advantage or an advantage for a third party (for example, the Board Member’s child).
A Board Member must also refrain from improperly using his or her position to cause any detriment to the School.
An individual will make improper use of the position on the Board if he or she uses it to manipulate or intimidate other stakeholders.
Not make improper use of information obtained by virtue of the Board position (s.183)
A Board Member must also refrain from improperly using any information obtained by virtue of the Board position (e.g. information obtained at Board Meetings, information divulged to the individual in the capacity as Board Member) in order to gain a personal advantage or an advantage for a third party, or to cause any detriment to the School
Ask searching questions (s.189)
It is the responsibility of Board Members to ask searching questions in order to gain a complete understanding of all Board matters and to obtain clarity on any of the affairs of the School.
Ignorance is no excuse to liability so questions need to be appropriate in the circumstances.
Declare any conflicts of interest (s.191)
A Board Member who has a material personal interest in a matter that relates to the affairs of the School must give the other Board Members notice of the interest.
In practice, inevitable conflicts of interest may arise and, in such circumstances, a Board Member must be candid with disclosure in relation to the nature of the interest and its relation to the affairs of the School.
Not use the position for personal gain without informed consent (s.192)
A Board Member must give notice to the Board of any material personal interest in matters that affect the School.
Ensure that the school remains solvent (s.588G)
A Board Member has an ongoing duty to ensure that the School does not incur a debt unless there is a reasonable prospect that the School will be able to repay the debt when it falls due.
A Board Member is obliged to maintain familiarity with the financial status of the School by a regular review of financial statements.
Although extremely rare and unlikely if good governance processes are in place and acted upon, Board Members of a school can incur liability for breach of their fiduciary obligations or for breach of any of their legislative obligations under the Corporations Act.
Board Members can also incur personal liability under other legislation such as the Income Tax Assessment Act, Environmental Protection Act, Occupational Health and Safety Act, and the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act). Victorian and Commonwealth legislation can be accessed via the Austlii Website.
Whilst it is clear that Board Members can be held personally liable for their conduct or for the financial failure of the school, this is an extremely rare event and will usually be accompanied by a fairly significant degree of negligence.
The School may elect to take out directors’ and officers’ insurance to provide some protection for Board Members. Policies cover nominated Board Members and officers against liability for ‘wrongful acts’ committed in the course of their office. ‘Wrongful acts’ generally encompass breaches of duty, neglect, misstatement, omission or other acts of the insured, or liability arising from the performance of their office.
However, the School is prohibited from insuring its directors and officers against a liability arising out of conduct involving a wilful breach of duty or a contravention of their duties under the Corporations Act. Many Directors’ and Officers’ Insurance Policies contain additional exclusions for claims alleging dishonesty or fraud, insolvent trading, and claims arising from breaches of environmental health. It is important to understand the extent of the School’s Directors and Officers Insurance Policy and to ensure that it is maintained.
Directors and officers are entitled to take out personal insurance cover at their own expense to cover additional liabilities above and beyond the School’s Directors and Officers Insurance Policy.
School Boards as a body may also face potential liability in the following areas:
negligence claims (including vicarious liability for the negligence of employees)
claims for unlawful, unjust or unfair dismissal of employees
breach of contract
land use obligations
“I do not have the same corporate experience as some of the other Board Members and I regularly leave Board Meetings feeling very confused and not truly understanding the decisions that were made. What should I do?”
As a Board Member it is your duty to be informed about all matters discussed at meetings and to ask searching questions if you have a lack of understanding. It is no defence to claim ignorance.
It is the responsibility of the Board, and more specifically the Chair, to ensure that all Board Members feel comfortable asking questions and seeking explanations. If you are reluctant to speak up you should address this issue with the Chair.
Board Members can be held personally liable for their conduct or for the financial failure of the School but this is extremely rare and will usually be accompanied by a fairly significant degree of negligence.
“As a Board Member, can I be held personally liable?”
Board Members may incur liability for breach of their legislative obligations under the Corporations Act or for breach of their fiduciary duty owed to the school or for breaches of specific legislation. Although it is imperative to consider these matters before accepting a role on the Board, an individual who is sufficiently committed to the role and acts with integrity, diligence, honesty and accountability should not incur any liability.
“How can I avoid personal liability?”
There are a number of ways Broad Members can avoid personal liability. These include:
complying with your obligations;
ensuring the school remains solvent. Management should provide a regular solvency report to the Board;
ensuring that there are appropriate compliance programs in place to minimise risk;
remaining vigilant; and
maintaining Director’s Insurance.
“I am on the School Board and the School has taken out Directors and Officers Insurance. Does this mean that I am insured against all liability?”
No. The School’s insurance policy can specifically exclude certain liabilities and will most likely not cover you for a range of potential liability arising out of conduct involving a wilful breach of duty in relation to the School,. This includes, but is not limited to liability arising from:
a contravention of the duty not to improperly use your position in order to gain a personal advantage;
causing detriment to the School; and
a contravention of the duty not to use information obtained by virtue of your position improperly.
It is highly recommended that you read over the School’s Director and Officer Insurance Policy carefully in order to understand the extent of the cover and exclusions.
It also imperative that you understand the length of time you will be covered by the policy after you leave the Board.
Guiding principles for Board Members include:
acting in the best interests of the School at all times
acting with integrity, honesty, diligence and accountability
disclosing all potential conflicts of interest to the Board
maintaining confidentiality of all Board discussions and decisions
reviewing the School’s Directors’ and Officers’ Insurance Policy and understand any potential liability that is not covered under this policy
speaking up at Board meetings if you do not understand or are unclear about any Board matters, discussions or resolutions
not using any information obtained by virtue of your position on the Board in any manner other than that which it was intended
not simply going along with the rest of the Board if you disagree with their views or decision-making
not allowing the School to incur a debt without there being a reasonable prospect that it will be able to pay the debt as and when it falls due
not getting involved in the day-to-day management of the School.