Sobering truths of being a company director
It's hard enough to be a director of a company in normal times. But, during this economic crisis, it's a real test of any leader's determination. Stephen Barnes, a business recovery specialist, examines what it takes for a leader to succeed and what can quickly bring you down.
It's clear that many senior business executives want to be able to serve on the non-executive boards at the end of their careers.
They can use their skills and experience to make an impact on the board. Others can become directors of companies by default as owners or passive directors, such as a spouse.
Although it sounds glamorous, a directorship is hard work, dedication, responsibility, and accountability. Once you have a good understanding of what a directorship is, you can make an individual decision based on your situation to decide if it's worth it.
First, consider the duties of company directors. Directorship comes with many responsibilities. ASIC lists the following.
General duties of company directors
The Corporations Act imposes general duties on directors and officers of companies.
You have the duty to exercise your power and duties with the same care and diligence as a reasonable person would. This includes making sure you are fully informed about the company's financial situation and making sure that the company does not trade if it becomes insolvent.
You have the duty to use your powers and duties in good faith for the best interest of the company and for a legitimate purpose.
It is against the law to misuse your position in order to gain an advantage for someone else or to do any harm to the company.
You are required to not improperly use information from your position in order to gain an advantage for yourself, someone else, or cause harm to the company.
Insolvents are not allowed to trade.
Insolvency can also be a negative duty. If a company cannot pay its outstanding debts on time, it is considered insolvent. Before you take on a new debt, it is important to consider whether there are reasonable grounds for you to believe that the company will default or become insolvent.
It is not enough to be able to understand the financial situation of your company at the time that you sign off on your yearly financial statements. It is important to keep track of the financial situation of your company.
Record keeping and books to be kept
Financial records must be kept by your company to accurately record and explain transactions, as well as the company's financial performance and financial position. The Corporations Act prohibits directors from failing to take reasonable steps to ensure that a company meets this requirement.
A company is generally presumed to be insolvent if it fails to maintain adequate financial records during a period of insolvency.
Directorships offer many benefits
There are many benefits to being a director in a limited liability business.
Limitation of liability - If you comply with all statutory director duties, your personal exposure to the financial loss of the company is limited to the equity that you provided to it (there are exceptions that will be explained further below).
Directorship can help you to be more prominent among your peers.
A directorship involves skills development. This is a role that is different from an executive. Director's role is to oversee the company's strategic direction and governance. The executive role involves implementing and executing the company's strategic direction and governance. A directorship requires a different skill set than an executive.
The true characteristics of successful business directors
Keith Tully, the Managing Director cost at UK company, lists his top traits as a successful director.
Willingness and ability to do more. At the end of day, it is the board that is responsible for all aspects of the company. Directors must be willing to take on the responsibility for any shortcomings.
Ability to adjust and adapt - circumstances can change no matter how well planned. A competent company director should be able adapt to industry changes and make quick adjustments to their operations, if necessary.
Persistence and diligence - These are two traits I consider to be one. Persistence is the ability to persevere in the face of difficulties. Diligence refers to the drive to succeed at what you are focusing on. These two traits must be combined. Persistence without diligence is not a competitive advantage. Diligence without persistence won't make you more successful, while persistence without perseverance will make you work harder but not smarter.
Creativity is key to innovation and creativity. Sometimes you have to think outside the box and be creative. Innovators are leaders in their fields, creating new products and services and exceeding the expectations of all competitors to please and impress every client.
Able to learn and research well - No one starts off knowing everything. This is why it is so important to be able to efficiently research new topics and concepts to become a successful director of a company.
You must be able to observe and analyze the actions of employees to identify any potential problems that could affect overall productivity.
Competitive drives - Without a competitive drive, directors can lose sight on their goals and allow their competitors to capitalize unnecessarily.
Communication skills are essential when keeping clients satisfied and employee morale high. People prefer to work with people who are friendly, polite, knowledgeable, and easy to reach. Good communication skills can often be the key to retaining clients or motivating employees in difficult times.
Leadership qualities that are effective - An effective leader is confident and considerate, passionate but logical, persuasive, inspiring, and persuasive.
Kindness and strong ethics are important in business, especially when dealing with unhappy employees or clients. A strong sense of ethics allows a director to treat others with respect, and in turn, this respect is reciprocated.
Directors are not protected by a corporate veil
Limiting liability in a company can provide protection against personal loss due to financial losses. It is important to know that the corporate veil is possible in certain circumstances.
According to Lawpath, an Australian online legal platform, there are certain circumstances where a corporate veil may be lifted.
Fraudulent or improper conduct - If you register a company in order to take advantage of the veil, the court can lift it. If the company is not legitimate, it could be considered fraudulent or illegal conduct. This is most common when a company is set up for the sole purpose of not trading.
Agency - Companies often act as agents for other companies. The parent company may be held liable if a subsidiary acts as an agent for its parent company. The court can lift the corporate veil to make the parent company liable.
Avoidance of a legal obligation - The court can lift the veil if the company is 'using' it to avoid legal obligations. The court may lift the veil if a company owes money to a creditor but transfers its assets to another entity in order to avoid paying.
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Additional director liability possibilities
Directors, especially those who are new or small, often have to give personal guarantees to company debts. Director's personal assets and cash will be at risk if they guarantee a loan for a company. They will be responsible for repaying the loan.
A company will most often provide collateral for a loan, rather than its own assets. In the rare event that a director agrees that a loan be secured, he or she will need to forfeit his or her assets in order to repay the loan.
Director Penalty Notices
Directors of companies are legally responsible to ensure that the company fulfills its PAYG and SGC obligations. Directors can be held responsible for any company that fails to meet its obligations under the PAYG system or SGC provisions. This legislation is being considered to expand it to GST obligations. Anybody considering a position as a director of a company, including any shadow or passive directors, should be aware of this and do their research on the financial situation of the company.
Expectations of the Director
Be aware of the responsibilities and duties that come with being a director.
You should think about whether you possess the qualities that will make you a successful company director. Get advice on how to lift the corporate veil and reduce your personal liability.
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