The Director’s Dilemma – November 2023 Edition
Contribution by Jana Martinová, is a long-term board member of the French-Czech chamber of commerce and has represented the ECE region on the AltoPartners global board. She is Managing Partner of Accord Group Ceska / AltoPartners Czech and Slovak Republic. Jana is based in Prague, Czech Republic.
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The Director’s Dilemma - November 2023
This month we advise a not-for-profit company board that has inadvertently breached the disclosure rules.
Harry was asked to join the board of a small not-for-profit organisation. The company was founded about ten years ago as a private company with a sole director. It became a company limited by guarantee two years ago and a board was formed. The board is very operational, and all directors are volunteers who work on the company operations. No staff are employed.
Harry loved the company’s mission (helping the disabled to enjoy holidays with family) and was keen to join however the governance seemed a bit informal and he made it a condition of joining that the company would engage a company secretary to minute meetings and help ensure compliance. A professional outsourced company secretary was contracted, and Harry joined the board.
The company secretary started to look through past minutes and make a decisions register. It became apparent that the company had not held an AGM within the two years of its existence. Legally, the company should have held an AGM within 18 months of its incorporation as a company limited by guarantee.
The company secretary has told Harry that this is serious and must be reported to the relevant authorities. Harry agrees but is worried about incurring fines and perhaps also personal liabilities.
What should Harry do?
I will answer as if the situation occurred in the Czech Republic:
- Harry should be aware that he is facing a quite common problem of NGOs; boards working on the basis of volunteering often struggle with legal compliance in a changing environment
- Harry should also know that he cannot be held responsible for mistakes or compliance issues which occurred before he engaged with the duty
- however, once he is in duty, he must tackle the problem and should not run away from it
- Inform the other board members about the issue and his decision to clean it up, ensure the “quorum” or minimal necessary presence of Board members and other stakeholders for an AGM
- Ask the company secretary for an action plan to organize the AGM asap and then register it to the authorities
- He may ask the advice of an independent lawyer to evaluate the risk described by the company secretary and shall inform the Board about a potential fine, which is, however, beyond his focus area
From the point of view of a Czech NGO this risk described is relatively low as long as there are not major actions which have taken place which were subject to the decision of the AGM that has not taken place.
Harry has joined a board without enough due diligence into the culture and compliance. He has – fortunately – little to fear as he was not involved in the breach of duty and was instrumental in ensuring a diligent company secretary was appointed.
Why is the company secretary asking Harry rather than the Chair? That is a more appropriate reporting line. Does the Chair still treat the company as a private business with only one shareholder? Does the Chair support and respect the company secretary? Harry needs to understand the interpersonal dynamics of the situation. What is the culture around informing stakeholders and what are the current practices? Harry needs to make sure rhetoric is backed by action.
It is imperative that the board be informed immediately of the failure to meet their requirement to hold an AGM. If the company secretary is loathe to do this, Harry must step up. The company secretary has a duty to inform the appropriate regulator of the breach and the board should be aware before that happens.
AGMs are not difficult or threatening, although they can appear so to directors who have not experienced one. There is a schedule of actions that need completion before the AGM. Harry should ask the company secretary to draft a plan of action that the board can endorse and implement to hold an AGM as soon as possible. If the board shows that they are working to remedy the breach, and that nobody has been harmed by it, it is possible that the regulator will let them off with a warning and a requirement to hold an AGM as soon as they can.
The board should then make an annual calendar to ensure they meet their compliance and strategic duties in future.