Michael Moore - A Handbook for New Company Directors

A new director needs to become fully familiar with the fundamentals of the business and operations of the company. This includes making sure that one is fully informed about the company and its business. This can be done by making initial enquiries and doing some due diligence and research to ensure that this is a company which one wishes to participate in.

Becoming familiar with the financial operation and status of the company; including having the ability to read and understand financial statements and have a basic knowledge of accounting practice and material accounting standards, so that one has a thorough understanding of the companys financial capacity and solvency.

It means being able to understand financial reports and glean from them the existing and future condition of the company. It also means being responsible to ensure that accurate reports are presented under the Corporations Act, to satisfy legislative requirements and to query any inconsistencies or potential issues.

All directors are expected to attend board meetings, unless, exceptional circumstances such as illness prevents their attendance. Further, a director must be alert and pay attention to the matters being discussed at board meetings and should be aware that they cannot be excused from liability on the basis that he or she did not pay attention to the proceedings.

It is possible for a director to delegate responsibilities usually performed by the director. However, the director is still responsible for the supervision of the delegate and their activities whilst performing such duties and responsibilities. These do not include signing off the final approval of accounts which must be done by the directors themselves.

The Corporations Act requires a director to act in good faith and in the best interests of the company and for a proper purpose. The interests of the company, in this wise, take precedence over individual interests. Duty is owned to the company, not to any particular individual. This includes encompassing the interests of the shareholders, to which the director has a responsibility, as it is their money the director is being responsible for.

In situations where there is one shareholder, which is the parent company, the director should keep in mind the interest of that parent company. The Corporations Act shows that a director is taken to act in good faith in the best interests of a wholly owned subsidiary if the subsidiarys constitution authorises the director to act in the best interests of the holding company, the director does so in good faith and the subsidiary is not insolvent.

The interests of creditors should also be taken into account, particularly if the company is insolvent or approaching insolvency.

A proper purpose is where the purpose is to the benefit of the company. An example of an improper purpose is where the purpose would be to the benefit of the director or someone else, such as using knowledge of a companys new direction which, when publicly exposed, would affect the share price, for ones own benefit. In another example, directors issuing new shares for a collateral purpose, such as delivering control of the company to a particular person, ensuring that the directors remain on the board or obtaining some financial benefit for a director.