Being a Director of a private company requires careful due diligence.

This article appeared in the Geelong Advertiser on Monday 19th July

Do you really know your legal obligations and responsibilities as an official company director, shadow director or the nominated general manager of the family business?  I find that many have no real idea of their obligations under the Corporations Act 2001.

Over the years I have chaired and/or sat on boards of private companies, my own family business, hospitals, schools, churches, rotary and other NFPs. In all situations, too many do know how to be an effective board member. I know I have made mistakes in the past and the lessons learned have been many.

More worryingly, in my opinion, is that very few understand their true legal obligations and responsibilities and the potential repercussions when leading and managing a family business.  The onus on anyone deemed to be a major decision maker is not clearly understood or taken into consideration when operating a family-owned company. Many family business owners and family business members are directors of their operating companies which are most likely operating trading entities that are also legal proprietary limited entities. I often come across this when working with family business. Some wrongly believe that they are protected because the overall legal structure is often through a web of family trust structures which have overall ownership of the IP and the assets.

In one family business where I sat as a new board advisor, I watched as directors were appointed, family board members were given loans from company funds and other handouts and there was no traceabilty through board agendas or board minutes. I happen to go back and read the company’s original Articles of Association as they were written when the company was established and found the directors were not legally appointed nor did they have the legal power to operate as they were. They had very little idea of their obligations as directors and were unaware of the consequences of their actions.

In another family company where I sat as an external advisor, the elderly widow of the founder was on the board and she had no idea that her assets were on the line if something went wrong. She quickly resigned when this was explained. In another family company an extended family member participated in board meeting and engaged in decisions. Again, when it was pointed out that they would be seen as a shadow director and therefore liable if something went wrong, they ceased to be involved.

I always recommend that at least one family member completes the Australian Institute of Company Directors Course as this is good governance and risk mitigation strategy for the family board.

Finally, I further recommend, through actual experience, that only family members be directors and others appointed as advisors within the framework of an advisory panel. The risk is that sometimes family member directors make decisions around the kitchen table unbeknown to external directors.