Related Party Benefits are benefits, outside of normal remuneration or commercial arrangements, given by a Corporation to a related party.
For example if the Chairperson is given a loan by the Corporation, or another Director is provided with free housing, outside of normal remuneration or outside of an arms-length commercial arrangement where they have provided a service and are getting paid for that service – these are Related Party Benefits.
Related parties include Directors and close relatives, and the entities or companies they control.
Both regulatory bodies, ASIC and ORIC, require that Related Party Benefits and transactions are approved by members at general meeting, or where allowed by the legislation, approved by the Board. They must be transparent. Even without legislation it is simply good governance to manage any transactions in which related parties gain a benefit.
Clearly this could be a minefield in an Indigenous organisation.
Related Party Benefits should be managed transparently and properly. This means that you should have a policy in place about how you manage these.
A Related Party Benefits policy and process reduces the corporation’s risk of the Corporation’s assets being compromised by the provision of a Related Party Benefit – for example, what if the Chairperson above was given a large loan with no means of being able to repay it? What if a Director was being given a vehicle to use so that he or she would support the CEO’s pay rise?
In fact there are heavy financial penalties and even possibly imprisonment if you provide a financial benefit to a related party without complying with the legislation. Why risk that?
Here are some of the minimum actions you should implement in your policy to ensure that you manage related party benefits properly.
- Related Party Benefits are not automatically disallowed. Indigenous Corporations will have a number of related parties, particularly from family groups and their commercial activities. Sometime, it is unavoidable, and sometimes there may be good, compelling reasons to enter into a related party benefit or transaction. Simply being a related party is not a problem in itself – it is how the Corporation manages the situation and declares and obtains the required authorisation.
- Provide that Board members must attend sufficient and appropriate governance training. Ensure that the Board is trained in what a related party benefit is, what you need to do, and what is involved. Seek the correct information and background, don’t wait until you have to deal with it, get to understand the issue now.
- Identify proposed transactions with related parties as either a potential Related Party Benefit or a Conflict of Interest, or both. Understand that a related party benefit is similar to, but different from a conflict of interest. For example, if the Corporation decided to purchase supplies from a company owned by a Director’s son, but the negotiations had been at arms length and the terms are commercially comparable or better than others who openly tendered, then this may not be a related party benefit. However it may be a conflict of interest of that Director. In this case, the Director may have to be excluded from the decision, but the decision may not need approval by members.
- Specify processes to follow. Once the transaction with a related party is identified either as a Related Party Benefit and/or a conflict of interest, specify the steps that must be taken in order to consider and approve the transaction.
- Create a Register of Related Parties. Start with the Directors, then include their spouses, children and parents. Ensure that Directors have declared any related entities (other organisations in which they or their close relatives own or influence). Make sure the Register is available and referred to at meetings – should a name be brought up in relation to a financial decision check the Register. Keep in mind the 6 month rule because Related Party Benefit obligations cover a Director for 6 months after they have left the Board. Also, include in the policy how brothers, sisters, uncles and cousins should be treated. The CATSI Act refers only to spouses, parents and children of a Director; however good governance indicates that you should recognise close relatives outside of those listed and manage accordingly.
- Create a Register of Related Party Benefits and a Register of Conflicts of Interest. Enter into these any Related Party Benefits that have been managed, up to and including approval by members, and any conflicts of interest and how these were managed.
- Allow carefully thought out standing approvals from members. Members are allowed to approve a “class” or series or types of Related Party Benefit transactions. For example members could provide a standing approval of the provision of vehicles to Directors while they are Directors. Doing this would avoid constant and costly members meetings being called regularly. However when seeking a standing approval, you should put checks and balances into place, by ensuring they meet with CATSI rules, or that they expire every 12 months and have to be renewed at AGM.
- Ensure dialogue with the Auditor. At least once a year, have a discussion with the Auditor about Related Party Benefits and how they have been managed in the year. The currency of the Registers referred to above will help the Auditor come to a conclusion about your financial statements.
Related Party Benefits could be a legislative minefield for Indigenous organisations. However there are sometimes good reasons for awarding them and these should not be dismissed out of hand.
The key is to ensure that you have a policy in place along with processes to manage them before you run into trouble over them.