We often refer to ‘directors’ or ‘board members’ without specifying what type of director or board member we are referring to. However, there are different types of director. Each type is expected to make a different contribution in a different way. No one type is better than any other per se. You might find that you prefer to act in one capacity more than in another.
It is important to remember that when we are talking governance, we are referring to directors who are members of the board of the entity. There are many people who have the word ‘director’ in their job title but are not directors.
In governance, when we refer to directors, we are likely referring to persons who would be considered as being directors under the Corporations Act, or ‘Responsible Persons’ under the ACNC Act. The Act allows for directors who are called by any name to be treated as Directors under the law, so even if you are called a ‘Councillor’ or ‘Sherpa’, you can be held liable for your actions.
Of course, you should always read your governing documents (constitution, enabling legislation, memorandum of incorporation, bylaws, etc.) to ensure that you understand the precise expectations of the role you are committing to when you join each board.
Some frequently encountered types of directors are listed below.
The Chair or Chairperson is responsible for leading the board of directors and ensuring effective governance. They may also provide liaison between the board and CEO and represent the board to external stakeholders. This role is usually the Chair of the Annual General Meeting (AGM). There is a strong preference for this role to be filled by an independent non-executive director although – in practice – it can often be filled by the founder or a member of the controlling family. There is a diversity of opinion as to whether the Chair is more responsible for company failings and transgressions or whether he or she is merely the first among equals and not held to a higher standard than other directors.
The managing director, also known as the Chief Executive Officer (CEO), is responsible for the overall management and performance of the company. They set strategic goals, make major decisions, and lead the executive team.
An executive director is typically involved in the day-to-day management of the company's operations. They may oversee specific departments, make strategic decisions, and implement policies. They have power as an executive under the delegations given to their role and as a director only in the context of a duly taken board decision.
Non-executive directors (NEDs) are not involved in the day-to-day operations of the company but provide independent advice, guidance, and oversight. They usually bring external expertise and experience to the board and help monitor the company's performance. They have no individual power, their powers exist only when they come together as a board to make decisions.
Independent directors are a special type of NED, they have no material relationship with the company or its management. They bring objectivity and independent judgment to the board and ensure that decisions are made in the best interests of the company and its stakeholders. Typically an independent director should not be:
- An employee
- A major shareholder
- A major customer
- A major supplier
- An associate or recent associate of any of the above
- A recent former member of any of the above categories
A nominee director is appointed by a specific shareholder or investor to ‘represent’ their interests on the board. They may act as a liaison between the appointing party and the company but always have a fiduciary duty to act in the best interests of the company. This is a balance that requires mature judgement.
In some companies, there may be executive directors with specific functional responsibilities, such as finance, operations, marketing, or technology. These directors oversee their respective areas and contribute to the overall management of the company. Or there may be a board director who has a specific responsibility for engaging with, and reporting to the board on, specific aspects of the company performance. The most common roles are those of Treasurer or Finance Director.
Some people have the ability to influence the board’s decisions (or even dictate them) without having been appointed to a director role. In Australia, these people are referred to as ‘shadow directors’ and they can be held liable for their actions or inaction as if they were a director. It is impossible to get insurance as a shadow director and the position is fraught with danger. Avoid it.
Key governance roles of senior executives
The key roles of the company secretary, the internal audit manager, the chief financial officer and the company counsel can have a major effect on the quality and nature of governance in the organisation. In smaller organisations they could be combined in one person or provided by an external, shared, or part-time resource.
The company secretary
The corporate or company secretary ensures that the board has the proper advice and resources for discharging its fiduciary duty under law, and that the board's records reflect the fact that it has done so. The board looks to the company secretary as a source of information on legislation and as the custodian of the corporate governance compliance system. The company secretary is sometimes called the “chief governance officer”, and as corporate practices evolve, it is likely that this role will be strengthened.
Generally, the company secretary is responsible for taking the minutes of meetings, making administrative arrangements, communicating with the board on issues that arise between meetings, distributing agendas and board papers and ensuring that delegations and authorities are properly registered.
The company secretary may well be the custodian of the company seal and also of the important legal documents of incorporation and registration that are kept on the company’s premises (or at its incorporated address).
Often the company secretary combines the role with that of chief legal counsel or some other senior executive, but as the work of the company secretary increases in importance this combination is likely to be too much for one person.
The company secretary normally attends all board meetings except for the non-executive-only or "in camera" sessions, from which all executives are excluded.
The chief financial officer
The chief financial officer (CFO) is responsible for planning, controlling, and directing the organisation's accounting and financial reporting systems. This role provides advice to the chief executive and to the board of directors about the organisation's internal accounting and financial reporting systems, policies, programs and procedures to ensure they comply with generally accepted accounting principles and regulations for government-owned organisations.
The chief financial officer appraises the organisation's financial position and issues periodic financial and operating reports on the financial condition of the organisation. He or she is often required to sign an attestation letter each year to certify that the accounts have been prepared using accepted accounting practice and that they give a true and fair view of the organisation and of its financial situation. This letter may also include a statement about the strength and operation of the organisation’s reporting and control systems. Even if the organisation is not required by any external body to have the chief financial officer sign such a declaration, it is a sound practice and reinforces accountability. There is nothing to prevent a board adopting this practice voluntarily.
Other functions that the chief financial officer may be, directly or indirectly, accountable for are treasury management, budgeting, tax, accounting, purchasing, insurance, record systems and control systems.
The chief financial officer liaises with external auditors, Federal and State organisations such as treasury, the Australian Competition and Consumer Commission (ACCC) and so on to ensure that the organisation complies with prescribed regulations, laws, rules, and generally accepted accounting principles.
The general or corporate counsel
The general counsel, the senior legal expert in the organisation, is responsible for monitoring the organisation’s compliance with the various regulatory bodies and laws that help define the work and breadth of the organisation. This person assists with the classic institutional needs that face any organisation. These include contract negotiation, employment issues, tort litigation, zoning issues and providing legal counsel and guidance to the board, chief executive and senior executive team.
In some organisations the position of general counsel is occupied by the person who fulfils the role of company secretary. In other organisations these are two separate roles.
In larger organisations the general counsel will be a full-time staff member and may have a whole legal department at their command. In smaller organisations the role may be part time and unsupported by other staff, or can even be outsourced. In organisations where the legal work is not performed in house, the general counsel is the person who briefs, appoints and manages external legal advisers.
The risk manager
The risk manager is accountable for the systems that identify, catalogue and track management of all forms of risk in the organisation. This person is usually not the chief executive, chief financial officer or chief operations officer, unless risk management is the central aim of the organisation and those people spend more than 50 per cent of their time directly involved in, and accountable for, risk management activities/issues affecting the organisation.
The risk manager does not manage the risks, although he or she may help obtain insurance cover for those risks that are insurable. It is important that the line managers are responsible for managing risks as they are responsible for the statistics. The risk manager is responsible for the accuracy and speed of the system that reports the risk statistics.
The risk manager is accountable for ensuring effective enterprise risk management for the organisation. This can include helping top management identify, measure and manage insurable, operational, financial, business or hazard risks, developing reports and plans, and analysing risk/insurance problems. If the risk manager is successful, the organisation will be in a better position to manage risks and thus increase the likelihood of achieving the strategic objectives. Good risk management also helps optimise future business operations.
Some organisations have the power to prosecute certain offences that fall within the remit of their duties. In these circumstances proceedings can be brought in the name of an individual employee of the organisation: the prosecuting officer. Often this is the general counsel, but sometimes it will be another employee with specific skills, such as the chief pollution control officer.
In an organisation that has a prosecuting officer role it is common for the board to authorise that person to institute legal proceedings against polluters, tax avoiders and so on. This can be done as a standing delegation of powers, where actions can be brought without referring to the board, or on a case-by-case basis, with each case brought to the board for a decision. Much depends on the number and importance of the cases.
Failure to properly delegate powers can put the prosecuting officer at risk. The organisation also, normally, expressly indemnifies the prosecuting officer for any costs that may be awarded against him or her in the course of such prosecutions. It is prudent to limit the indemnity to cases that fall within the powers delegated.
Every organisation is unique. Your organisation will have its own unique mix of skills and abilities in the boardroom team and in the executive management team. Understanding those skills and abilities, and how they are shared across the many governing roles, is the first step to working effectively within the governance framework to build the success of the organisation.
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