Appointing an alternate director

Under section 201K (a replaceable rule) of the Corporations Act 2001 (Cth), a director of a company may, with the other directors’ approval, appoint an individual to act as an alternate to exercise some or all of the director’s powers for a specified period. Under section 201D of the Corporations Act, the consent of the alternate director should be obtained in writing before they are appointed.

Alternate directors tend to be used where there is some ‘representative’ element of a directorship. For example, where two or more organisations have majority holdings in another company, each might have the right to appoint one or more directors. These companies will often appoint alternates to ensure ‘the numbers’ in any voting situation. When the appointing director is absent from the meeting, the powers of an alternate director at a board meeting are equivalent to those of the director appointing the alternate. The risks associated with being an alternate director are the same as those of their appointing director, i.e. an alternate director will be held equally accountable by the courts for any breach of directors’ duties.

The view of the Governance Institute of Australia (formerly Chartered Secretaries Australia) in their ‘Good Governance Guide: Appointment of alternate directors’ is:

Directors who cannot attend all meetings of the board are sometimes allowed to appoint an alternate director. This is not a common practice in larger companies but is prevalent in smaller companies and joint ventures. Alternate directors are often used in joint ventures where there is limited representation and attendance is important. Companies need to consider if it is appropriate to appoint an alternate director, given the duties and liabilities that attach to the role, which are the same as for a full-time director.

While the appointment of alternate directors may be convenient for the aforementioned companies, and for overseas based or busy directors, the practice can potentially lead to ineffective decision making and a dysfunctional board. Having reviewed the decision-making processes of in excess of 300 boards over the last 5 years, Effective Governance has observed that for boards with alternate directors:

• Decision making is a process that generally occurs over a number of meetings. The absence of a director from meetings, or the presence of an alternate director at meetings, when discussions are had on upcoming decisions quite often impacts decision making due to:
  • The same person does not have the same level as information as the other board members;
  • The same person does not have the same opportunity as other board members to ask management questions and/or request additional information be provided by management.
• The situation is further exacerbated where there is there is no consistency in alternate directors (i.e. whoever is available will attend) or frequent alternation between two directors.
• Take considerably more time to reach consensus on decisions than boards with structured decision-making processes that allow the draft resolution to be considered by all directors prior to the board meeting, and should a director not be able to attend, then the absent director may pass their views to the chairman prior to the meeting for inclusion in the full discussion.

A director has a duty to exercise due care and diligence. Demonstration of this duty of care is through preparation before board meetings by reading board papers and attendance at board meetings. Attendance at board meetings also demonstrates a high level of commitment to the role of director and to the organisation. A director who is unable to attend board meetings to an extent which warrants an alternate director may give the impression they are not totally committed to their role as a director. This perception may impact negatively on dynamics in the boardroom, particularly if all directors are being remunerated in their roles as board members.

In summary, the potential negative impact of alternate directors in providing continuity in the decision making process can be attributed to the alternate director not:

• fully understanding the business of the organisation, which the decision relates to;
• understanding context (including history of previous discussions) that led to decisions – especially if over a number of months; or
• taking ownership of past decisions if they were not present.

Further, a less quantifiable impact of alternate directors is on the group dynamics. Decision-making processes are assisted by directors knowing and understanding each other which in turn will build trust in the boardroom. A high level of trust impacts positively on decision-making processes as people trust each other to probe and challenge management to ensure the right decision is being made.

In addition, challenging each other in a constructive manner is viewed more positively among a group of people where the composition is consistent, as again, they know each other, understand each other’s viewpoints and tend not to become defensive should a disagreement occur due to the level of trust among the participants. Continually changing board composition has the potential to impact negatively on group dynamics.

Should alternate directors be deemed essential for the board, the above negative impacts can be partially mitigated by ensuring that alternate directors:

• understand their duties as alternates and are subject to the same duties and liabilities of any director, for example, a consent to act should be signed and they should have the benefit of any deed of access, indemnity and insurance provided to other directors;
• are fully prepared for meetings, by being briefed by the director who attended the previous meeting and provided with all information that all other directors have been provided.

Finally, the view of the Governance Institute of Australia in their ‘Good Governance Guide: Appointment of alternate directors’ is that an established alternate director appointment process is essential and should include:

• Consideration of whether an appointment by resolution of the relevant entity is required
• A requirement that the appointment be for a specified period (e.g., for one meeting only, for a known period the director will be absent, for example, for 12 months), or that the appointment could be expressed to remain valid until terminated by the appointing director, or the appointor by leaving the board, if no express end date is given
• A clear indication as to whether or not an alternate director is permitted to attend only those meetings where the appointing director is absent or all board meetings in an observer capacity where the appointing director is present (if so, there is no entitlement to speak and/or vote)
• A clear indication as to whether or not the alternate director is to be included in the distribution of board papers and any other director communications other than in instances where the alternate will be attending. Governance Institute notes that it is good practice for alternate directors to have access to company documents on the same basis as directors.

ASIC and, if a listed entity the ASX (see Chapter 3 of the Listing Rules), should be notified upon the appointment of an alternate director and where appointment of the alternate lapses due to resignation of the appointing director or termination of the appointment of the alternate by the appointing director. An alternate director of an ASX-listed entity is required to disclose any change to their notifiable interests to the market.

Update: Some questions that people had regarding this article here our our respones;

• Thomas Paterson When a Director is issued shares as payment for service and then appoints and alternate to do the job he is supposed to do and then shares are issued to that alternate as well is this a scam to gain shares or double dipping (making payment to two directors for the same position) something does not seem right?

  • Effective Governance The remuneration of an alternate director is usually paid out of the remuneration payable to the director appointing him or her, and is agreed between them. The alternate will, however, be entitled to be paid his or her expenses and to be indemnified by the company to the same extent as the director appointing him or her.

• Liv Where a board consists of say four Directors, can a Director who resides permanently overseas appoint another Director to be their Alternate?

  • Effective Governance Yes you can if the organisations constitution allows for it.

• Bill Hello, Please let me know, rock solid way and options for risk free director appointments in my company, while as an owner limited by legal residency requirements for new company set up before making any decision.thanks.

  • Effective Governance Appointing directors for organisations always depends on finding the right candidate through a sound recruitment process. While this is still not ‘risk free’, the best way to find an appropriate director is to put in place a robust search process that informs you on the director’s technical abilities, governance abilities and behavioural attributes. The latter is most important if you need an Australian-based director and you are not in the country. The best advice would be to find a director who has experience and a proven resume with a number of good referees. We also provide a placement service for directors using our existing clients, so that could well be an option for you.

• Nisha Najumudeen Should alternate directors sign and approve Board resolutions by circulation?

  • Effective Governance While it is not a requirement that alternate directors approve resolutions (assuming they are not in the director seat at the time), it is good practice that alternate directors still keep abreast of key decisions. If the alternate director has played no part in the decision, then they should not sign or approve that decision. If they have played a role in the decision, then it would be appropriate for them to sign off the resolution.

• Michael When an alternate director is appointed for a period, in our case 12 months, what does it mean for the obligations of the appointing director? Do they still retain the same CA obligations as any other director?

  • Effective Governance When the appointing director is absent from the meeting, the powers of an alternate director at a board meeting are equivalent to those of the director appointing the alternate. The risks associated with being an alternate director are the same as those of their appointing director, i.e. an alternate director will be held equally accountable by the courts for any breach of directors’ duties. Where an alternate director rather than their appointor is responsible for any misdeeds or omissions while acting as a director, the alternate director and not the appointing director is responsible.

    A case in the High Court of New Zealand (Strathmore Group Limited v Fraser & Ors) is instructive in this instance:
    “an alternate director is a director pro tem [i.e. temporarily]. When he or she is acting as a director, he or she has the rights, powers, privileges, duties and responsibilities of a director. When he or she is not acting as a director, then he or she has no legal status.”

    NOTE: This response is for your information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. If you have any issues related to alternate directors you should seek specific advice tailored to your circumstances.

• David Bailey Can a director of Company A Pty Ltd, appoint another director of Company A Pty Ltd to act in their absence?

  This effectively gives the alternate director two votes.

  Thanks you for your advice.

  • Effective Governance In answer to your question, if is permitted by the company’s constitution a director may appoint any other director as their alternate or any person willing to act as their alternate who has been approved by a resolution of the directors. In this case, an alternate director has one vote for each director for whom they are an alternate. If the alternate is already a director, they also have a vote as a director. Generally, however, the only director on the board with two votes will be the chair, who may be given a casting vote in the company’s constitution where there is a tie in the voting.

• Smita Can a sole director appoint an alternate director in his place as managing director but limit the alternate director’s powers of decision making with respect to the company? In essence can the alternate director’s decision making powers be controlled by the appointing director if the duties and powers of the alternate directors are same as any other director of the company?

  • Effective Governance Under the replaceable rules in the Corporations Act 2001 (Cth), a director has the authority to limit or expand their powers and responsibilities of an alternate director depending on the terms of their appointment. A company director can appoint someone to act as an alternate director for a set period of time and this can include some or all of the powers that a director would have.
    Under the Corporations Act 2001 (Cth) a company has all the powers and authority of a natural person. Thus, a company is a separate legal entity and can only act through its directors. If you are the sole director of the company and you are out of the country or not able to act (e.g. you are incapacitated), then the company effectively comes to a standstill as no major decisions pertaining to the running of the company can be made by anyone else if your alternate does not have sufficient delegated authority.
    The only people who can appoint a new director to replace a sole director with full powers are the company’s shareholders – and if you are the only shareholder of the company, then issues arise. As such, it is advisable for your company to have in place a corporate power of attorney for cases in which a sole director is unable to act and/or the alternate director does not have the authority to act. We suggest you seek legal advice on this matter.

• Mary Whelan Can you tell me if an Alternate Director is able to be appointed to a Board Sub-committee (i.e. A&R Committee) if the appointing director is not on that Subcommittee

  • Effective Governance Any qualified person can be appointed/seconded/co-opted to a committee of a board, either as a voting member or a non-voting member appointed for specific expertise. An alternate director could just be appointed in her/his own right.