As we help our approved provider clients prepare their governing bodies to include a majority of independent non-executive persons, we are continuing to see questions and confusion about whether advisory or non-voting persons can help to meet this requirement. The Commission’s Regulatory Bulletin (RB2023-23) released 28 November 2023 also helps to clarify certain aspects.
In our 17 October 2023 alert, we dispelled the myth that a member of the governing body need not be a director. For most approved providers, including companies and associations, the governing body will be the board of directors or committee of management, however described.
We have recently been asked by a number of providers whether they can appoint “associate directors”, advisory or non-voting directors to their governing body. The idea arises from broadly circulated comments from some advisors.
Key points
- The Regulatory Bulletin makes clear the governing body is the group of people assigned responsibility to govern the approved provider and where it is a legal requirement for the particular entity, such as a company or incorporated association, the governing body is that group meeting the particular legal requirement.
- “Associate directors” or non-voting directors are not a current recognised category of director. The adoption of either concept gives rise to poor governance, rather than good or best practice governance that the reforms are seeking to enshrine.
- These governance reforms derive from the Aged Care Royal Commission, which discussed at length that the governing body needs to be ultimately responsible for the governance of the organisation and holding management to account. An individual who cannot vote, or can only vote with the consent of the non-independent and / or executive directors, could never fulfil this role and could not properly be considered a member of the governing body.
- Apart from the approved provider being non-compliant, those individuals would likely be exposed to personal liability as a shadow or de facto director.
- In order to comply with the reforms, we encourage all aged care providers to properly and formally appoint individuals as “ordinary” directors and with full voting rights.
What is the ‘governing body’?
The majority of approved providers are companies (whether public or private) or incorporated associations. For those companies the governing body will be the board of directors. This is what flows from the meaning of ‘governing body’ in the Aged Care Act 1997 (Cth) (Aged Care Act) which states that ‘…if the provider is a body corporate incorporated, or taken to be incorporated, under the Corporations Act 2001 – [the governing body is] the board of directors of the provider’. For associations, it is the committee of management.
A director is, according to the definition in the Corporations Act, a person validly appointed to that position within the company. ‘Board of directors’ is a commonly used and well understood term, as well as one used in the Corporations Act. For proprietary and public companies, the governing body will be the directors, collectively the board. For single director proprietary companies the director is the board.
Unless a member of your company’s executive is also on the board of directors (eg a managing director), they will not be part of your governing body. This means that a Chief Executive Officer or a Chief Financial Officer, for example, will not be considered part of the governing body. Likewise, a lawyer, accountant, advisor or members of a subcommittee or advisory body, who may be invited to present to the governing body or provide recommendations, will not be part of the governing body.
For approved providers who are not incorporated or taken to be incorporated under the Corporations Act (for example, some entities incorporated under State or Territory legislation such as Property Trusts), the governing body will be ‘the group of persons responsible for the executive decisions of the provider’ In other words, this refers to the group of people performing a similar role to a board of directors. The analysis set out below would apply equally to a concept of a non-voting member or associate member.
The Regulatory Bulletin recognises this when it states:
A governing body is a term used to identify the group of people assigned the responsibility to govern an organisation, company or other similar entity. A governing body is a legal requirement of several different forms of for-profit and non-profit organisations.
An organisation’s governing body might be called a board of directors, board of trustees, committee, management committee, council, governing board or responsible entity, depending on your organisation’s legal form or constitution(s). The individuals who serve on the governing body might be called board members, directors, committee members, non-executive directors or trustees.
‘Associate director’ is not a recognised governance concept
The Corporations Act provides for individuals to be appointed as a director of a company. Directors have special or fiduciary duties to act in the company’s bests interests, not for their own personal gain. These duties apply to every director, whether or not they are appointed to a named director role such as Chair, Deputy Chair or a Treasurer. The key mechanisms to exercise those fiduciary duties are the rights to attend a meeting of the board or governing body, to debate the decisions required and to vote on those decisions. Failure to comply with these directors’ duties give rise to personal liability.
There is no concept of “associate director” either in the Corporations Act or as a current recognised principle of governance. The concept traces back to a previous era of companies law (eg Companies Act 1961). That era pre-dates the many director liability and civil penalty reforms introduced over the last three decades. Further, there is no concept of a “non-voting director”, nor the concept of a director who has voting rights turned on only some of the time. The adoption of either concept in 2023 gives rise to poor governance, rather than good or best practice governance that the reforms are seeking to enshrine. We are also concerned that relying on these concepts leave providers non-compliant with s 63-1D of the Aged Care Act.
The Explanatory Memorandum to the amending Act which introduced the notion of a governing body for the first time into the Aged Care Act specifically stated this was based on the recommendations of the Aged Care Royal Commission (ACRC). It went on to say:
The board or governing body of an aged care organisation has ultimate responsibility for the governance of that organisation and should have the right mix of skills, experience, and expertise to fulfil its duties, including the right mix of executive and non-executive, independent members. Governing bodies should comprise individuals who are able to ensure that there is the right culture and effective organisation-wide governance systems relating to care and services, including clinical governance.
Non-executive members bring independence and objectivity to a board. They can play a valuable role in providing specialist expertise and advice, challenging, monitoring, and holding management to account.
The Explanatory Memorandum and the ACRC Final Report use governing body and board interchangeably when discussing s 63-1D(2). This is reflected in comments such as the following which explains the role of the governing body in the same terms as a board:
The role of the governing body of an organisation is to provide leadership and set the organisation’s aims, to determine its strategic objectives and direction, and to monitor management to ensure that its aims are met.
An “ordinary” director’s right to vote is fundamental to their ability to hold management to account. Without the right to vote, it would be impossible for those individuals to fulfil their fiduciary duties to act in the best interests of their company, and by extension, care recipients. It would be ironic to go to the effort of recruiting individuals to comply with the Aged Care Act yet fall short of complying because they lacked the right to vote and cannot properly be considered a member of the governing body as envisaged by the Aged Care Act reforms.
‘Shadow director’ and ‘de facto director’ liability
The concept of ‘associate directors’ or non-voting directors also gives rise to the risk of personal liability for those individuals. The Corporations Act includes an extended definition of director to capture shadow and de-facto directors. In order words, this captures individuals who aren’t formally appointed as a company director, but in practical terms are able to influence board decisions. The purpose of this extended definition is to impose the same personal liability on such individuals as are imposed on ordinary directors. For example, this includes personal liability if the company trades whilst insolvent.
In our experience, a competent independent non-executive director will require that they be formally appointed as a director with voting rights. They will not accept an informal appointment and the associated liability as a shadow or de facto director. If you are working with an individual who offers to be a non-voting director, this should raise alarm bells regarding the competence of the individual to contribute to your organisation’s governance.
Recommendation
We encourage all aged care providers to properly and formally appoint individuals as ordinary directors with full director voting rights in order to comply with the reforms. They should not be advisory, non-voting or have ambiguous rights to vote on board or governing body decisions.
We encourage you to seek professional legal advice for your particular circumstances.
How we can help?
Russell Kennedy’s aged care team have a range of resources that can assist providers to comply with these requirements.
Please contact Victor Harcourt (03) 9609 1639, Jonathan Teh (03) 9609 1587, Anita Courtney (03) 8602 7211 or Felicity Iredale (03) 8602 7254 for further information.
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