Jean Roberts

A Constitution is not an easy document to read or understand for the average Board member. However, it is a legal document giving direction to the Board and CEO (or senior paid staff position): therefore a concerted effort should be made for whole-Board discussion on the legal status, role, structure and content of the Constitution.

(Note: The term ‘Board’ includes Board of Directors and Committee or Board of Management)

The Constitution as a legal document establishes the expectation of members of the legal entity upon the Board as the governing body of the legal entity. Together with the broader requirements of relevant law, the Constitution establishes the required behaviour and accountability of the governing body. Where the affairs and activities of a nonprofit organisation are not in line with their current Constitution, the Board may be at risk of not complying with the Constitution’s requirements.

The organisation’s membership base has the right to call a special general meeting, as set down in the Constitution, to call the Board to account for any such non-compliance.

In each case, the relevant legislation will provide guidance on the structure and content of a constitution, eg the Associations Acts provide a set of ‘model rules’ to guide the drafting of a constitution appropriate to an individual association.

The major sections of a constitution include:

1. the legal name of the entity or organisation,
2. definition of terms used in the constitution,
3. statement of purpose or objects – this is the purpose for which incorporation or registration is requested and granted, and for which the organisation exists
   rules by which the entity will operate at governance, management, and operational levels, including the process for amending or changing the statement of purpose or rules, and the legal process of winding-up or terminating the entity.

Direction is given in the rules within the Constitution regarding the procedure for nomination, election or appointment of Board members. The Board is legally accountable to the membership base to ensure that all resources available to the organisation are invested in or applied to the purpose of the organisation and to ensure that the affairs and activities of the organisation are carried out in accordance with the rules.

Most importantly, the Constitution gives direction on the distribution of surplus funds, requiring that they are to be invested in the affairs and activities of the organisation.

A Constitution is:

1. a legal document: it is the means by which the Membership base directs and monitors the performance of their elected governing body,
2. an open and working document for the governing body and senior staff position, and
3. the means by which the Regulatory Authority monitors the eligibility of a nonprofit organisation to fit and remain within the requirements of incorporation legislation.

Relationship of the Constitution with policies, procedures and planning:

• Board-endorsed policies and procedures set down the manner in which the rules within the Constitution are to be implemented, followed and resourced, and
• the Statement of Purpose or Objects provides the focus for the organisation in all strategic, operational and financial planning.

Each Board member should have their own copy of the Constitution and understand the importance and relevance of its contents to their governance role and function.

Should the contents of a Constitution differ from the manner in which the organisation is currently functioning, there are two options for the Board:

1. To bring the affairs and activities of the organisation back into line with the Constitution, or
2. to undergo the process, as set out in the Constitution, of amending the Constitution in order to bring it into line with the organisation’s forward direction.

In many organisations, the Constitution is seen as a document that is relevant only to the application for incorporation or registration. After that, it is then only occasionally referred to, filed under ‘M’ for Mysterious or located (with difficulty) when required by some external source. In other organisations, the Constitution is respected as an important source of direction and protection by the Board and CEO, with serious attention paid to keeping it up-to-date and in line with legislative amendments and using it as a working document.

The Constitution can also be mis-used or even abused, for example:

• used as a means of weakening the confidence of an elected Board or CEO,
  misinterpreted in order to favour one point of view only,
• held in protective custody by a long-standing office-bearer who denies access to other members of the Board and to the membership base, or
• totally ignored by a Board or CEO because they have no understanding of the status and importance of the document, let alone the content.

The legal duties of Board members

Fiduciary duties - Board members are under a legal obligation to exercise their powers in the best interests of the organisation and to act in good faith.
Duties of skill and care – Board members are required to exercise their powers with reasonable skill and care, particularly in requesting and receiving information and in the making and monitoring of decisions: the Board’s duty of care is to the membership base of the organisation, to achieve or address the statement of purpose and ensure that the organisation operates in compliance with the constitution.
Company/Incorporation regulatory requirements – Board members are required to act according to the requirements set out in the relevant state or territory Associations Incorporation Act, Co-operatives Act, or the Commonwealth Corporations Act, and in accordance with their Constitution.
General regulatory requirements – Board members are required to act according to all other relevant laws which include laws relating to industrial relations, occupational health and safety, equal employment opportunity, the environment, taxation, superannuation, workcover, anti-discrimination, etc.

Whole-Board discussion

It is suggested that the following Checklist, together with a copy of the current Constitution, be given to each Board member to facilitate a discussion on their Constitution.

There may be some doubt as to whether the Constitution on file is the current one – in this case, a request to the regulatory authority for a copy of the Constitution ‘as currently registered’ will ensure that the appropriate document is discussed. It can happen that an organisation can go through the procedure to amend its Constitution but then fail to submit the approved amendments to the regulatory authority for their acceptance, or omit to replace the previous copies on file.

The following Checklist provides some examples of what a Board and CEO should look for, note and act upon within their own current Constitution:

1. statement of purpose or objects – this is what your organisation is currently incorporated or registered to do
2. the legal name of the organisation and registration number – the name and registration number should appear on all ‘corporate’ stationery and documents
3. definition of key terms used in the Constitution – this list explains the meaning of such terms as ‘Act’, ‘Association’, ‘Company’ ‘Co-operative’, ‘Member’, ‘Board or Committee’, ‘Auditor’, ‘Officer’
4. categories of and eligibility for membership of the Association, Company or Co-operative, including the process for applying for membership
   • there will be a procedure set out for Membership application, eligibility, approval
   • mention will be made of the procedure when a member may be seen to be ineligible for continuing their membership, and situations under which membership automatically expires
5. how the register of members is to be kept and continually updated – this register sets out the date on which each member’s application for membership is approved by the Board, and the date on which a member ceases to renew their membership or ceases to be eligible to continue as a member
6. discipline, suspension, expulsion and appeal of members – for example, there are 3 relevant clauses in the Associations Act in Victoria:
   • discipline, suspension and expulsion of Association members – applies to situations where “the Board is of the opinion that a member (of the Association) has refused or neglected to comply with the rules or has been guilty of conduct unbecoming a member or prejudicial to the interests of the Association”
   • disputes and mediation – the grievance procedure to be followed where an Association member has a grievance or dispute with another Association member or with the Association.
   • removal of a Board member – where “the Association in general meeting may, by resolution, remove any member of the Board before the expiration of the member’s term of office …..”
7. details of the Board, including:
   • powers of the Board,
   • required number and (in some cases) categories or required background of Board members,
   • process of election or appointment,
   • office bearers, and
   • terms of office.
8. the grounds or reasons by which a vacancy occurs on the Board during the year, and process for filling such casual vacancies
   • in most cases, the Board has the power to nominate an Association, Company or Co-operative member to fill such a vacancy, and that person fills that vacancy until completion of the term of office of the person who vacated the position
   • when the term of office expires, the position is then required to be filled in the normal manner as laid down in the constitution, usually through the election of Board members at the annual general meeting
9. frequency and procedure for Board meetings, and minimum number of Board members required for a formal meeting (ie the quorum)
10. usually, the quorum is half of the required number of Board members plus 1 (this number includes both Board office-bearers and ordinary members of the Board)
11. for example, if the Constitution stipulates a Board of 8 members, then the quorum would be 5 members .. regardless of the number of Board positions that are currently filled: this means that if there are only 5 Board members in place and the Constitution stipulates 8 Board members, then all 5 must be present for a formal Board meeting to be held – the Constitution will explain the procedure to be adopted when a quorum is not present
12. the frequency, quorum and procedure at general meetings, annual general meetings and special general meetings of Association, Company or Co-operative members, notices of agenda items or motions, and style of voting – the annual general meeting is the legal procedure and forum for the Board to account to the membership base for the manner in which it has governed the affairs and activities of the organisation through the previous financial year: it is also the time at which the Annual Report (including the audited financial statements) is presented by the Board to the membership base for their acceptance
13. funding and financial sources, and how funds are to be managed, eg procedure for drawing and signing of cheques – indicates the range of ways in which the Board may generate income
14. procedure for amending or altering the statement of purpose or rules
    • this procedure requires a special general meeting or inclusion of such proposed amendments or alterations at the annual general meeting
    • the procedure will be set out for distribution of the proposed amendments or alterations to all Association, Company or Co-operative members within a given number of days prior to the special general or annual general meeting
15. provisions for the custody and use of the common seal – the seal is to be applied on contracts or deeds entered into by the organisation, and usually requires a resolution at a Board meeting for its use
16. custody of relevant documents and securities – the Constitution may state that these should be held at the address of the Secretary, or at the registered office of the organisation
17. right of members to inspect relevant documents, and procedure for doing so – Association, Company or Co-operative members should be made aware of this right, and the procedure for inspection
18. procedure for winding up or dissolution of the legal entity
    • this can be a lengthy and drawn out procedure, particularly if the organisation has considerable assets and/or liabilities
    • upon being finally and legally wound up, the organisation ceases to exist .. in effect, the organisation ‘dies’

Contact me to discuss the constitution within your organisation.