Governance of not-for-profit organisations

The basic precepts of good governance are fundamental to all organisations – having a board charter, well defined roles and responsibilities for board members, appropriate financial knowledge, accountability and transparency to members, shareholders and stakeholders.

As part of our commitment to the NFP sector and its directors, we have developed the Good Governance Principles and Guidance for Not-for-Profit Organisations (Principles and Guidance). The Principles and Guidance are designed to assist boards in determining what constitutes good governance practice for their organisations and to achieve better outcomes through good governance.

WHAT IS THE NATURE OF NOT-FOR-PROFIT ORGANISATIONS?

There are around 600,000 not-for-profit organisations in Australia, with some 4.6 million volunteers (Productivity Commission Research Report 2010). They exist for the public good and can take many forms, such as charities, sporting groups, support groups, professional associations, church groups They can vary widely in size from suburban sporting groups to the Smith Family. The sector is often run by a largely volunteer workforce.

The majority (some 440,000) of NFPs are small unincorporated organisations (that is, they do not have a distinct legal status from their members). For the remainder of NFPs with a formal legal status, the most common corporate structures are incorporated associations under relevant State or Territory Incorporated Associations Acts (136,000) or companies limited by guarantee (11, 700) (registered with ASIC). Other legal structures for NFPs include trusts, cooperatives (State or Territory Cooperatives Acts), indigenous corporations; religious organisations (including those which are statutory corporations) and organisations formed by Royal Charter or by a special Act of Parliament.

The duties and liabilities for directors in each of the types of formal legal structures are generally similar in nature, although there are some differences between State legislation and the Corporations Act 2001. These duties generally centre on acting in good faith in the best interests of the organisation and for a proper purpose. In some cases, there will be a committee with members (rather than a board of directors) running the organisation.

WHAT IS THE AUSTRALIAN CHARITIES AND NOT-FOR-PROFIT COMMISSION?

The Australian Charities and Not-for-profits Commission (ACNC) is the newly established regulator which determines and regulates charities, and administers the statutory definition of charity.

The ACNC was established under the Australian Charities and Not-for-profits Commission Act 2012 (Cth) and the Australian Charities and Not-for-Profits Commission (Consequential and Transitional) Act 2012 (Cth) and commenced operations on 3 December 2012.

Only registered charities are affected by the ACNC. In future years,this may broaden to include organisations in the wider NFP sector.

The two-staged approach to the commencement of the new regulatory framework included financial reporting requirements and governance standards for registered charities which came into effect on 1 July 2013. The first financial reports will not need to be lodged with the ACNC until 31 December 2014. Registration with the ACNC is voluntary. However, registration is a necessary prerequisite for access to Federal taxation concessions. Initially, registration will be limited to charities although the ACNC's role is expected to expand over time to include all not-for-profit organisations. A charity will have to meet specified governance standards to be registered.

The Act sets up a framework for a set of minimum governance standards to apply to most registered organisations. There is also a new reporting framework. All registered organisations are required to provide an Annual Information Statement with medium and large organisations also required to provide annual financial reports.

It is important for all directors involved in the NFP sector to remain aware of the progress of the ACNC and regulatory framework. Ongoing information is available on the Australian Charities and Not-for-profits Commission's website www.acnc.gov.au

WHAT GOVERNANCE ISSUES DO NFP BOARDS FACE?

Governance is becoming a bigger issue in the sector. Board composition is focusing more on skills, knowledge and experience. In larger NFPs, boards are becoming more professional and providing training for volunteers or employing directors with relevant experience. Specific issues include (and are not limited to):

• Is there a clearly defined purpose and strategic direction?NFPs have social objectives rather than focusing on shareholder returns. Many NFPs struggle to define their purpose and direction and sometimes their views are different to those of stakeholders. There are significant risks associated with an unclear purpose, such as poor use of resources in terms of people and money, loss of confidence by donors and funding agencies, and potentially loss of reputation;
• What is the board's role? In an NFP with a CEO/General Manager, the board's role will be similar to in a company – to govern, not manage. In smaller NFPs like community groups, the Board may a more hands-on role in running and managing the organisation. Roles and responsibilities are best outlined in a board charter and made available to members and other stakeholders;
• Stakeholder issues. Because they are acting for the general good of society, public expectations of NFP directors can be higher than for ordinary companies. Stakeholders can include donors and funders, government agencies, consumer donations, interest groups and the community at large. NFPs have to balance all needs with the best interests of the organisation. Be aware that appointments to board to represent stakeholders can lead to factionalism and that, once appointed, a director's duties are owed to the organisation, not to their nominators;
• Lack of consistency in regulation. There is no centralised regulatory authority for not-for-profit organisations as there is in the UK, US and Canada. If operating nationally, an NFP may have multiple reporting obligations to various States and/or authorities, which creates a compliance burden. The Productivity Commission has proposed the establishment of a national 'one-stop-shop' for Commonwealth regulation in the form of a Registrar for Community and Charitable Purpose Organisations. This Registrar would establish a single portal for the lodgement, maintenance and dissemination of corporate and financial information, proportionate to size and risk;
• Board composition. NFPs traditionally show a heavy reliance on their membership and stakeholder groups to fill board positions. A large proportion of directors are volunteers who may not necessarily have business or legal experience. These boards risk not having appropriate skills, knowledge and experience to guide the organisation forward by not appointing people to fill gaps in needs. Conducting regular evaluations of the board can assist in identifying future needs;
• Potential legal exposure. Directors of NFPs face similar legal liabilities as company directors, in spite of many being volunteers. This highlights a number of important matters for NFP boards to attend to:
  • The importance of having properly documented procedures, policies and record keeping in place to defend any actions against the organisation;
  • Training of board members, especially if directors are volunteers without a business/financial/legal background (AICD offers training in this area);
  • Having an appropriate method of communicating with stakeholders and donors to ensure accountability;
  • Need for D&O insurance if things go wrong;
• Financial information. The board is responsible for clarifying what financial information it needs and ensuring that it gets this from management in a usable form. It may be helpful for the board to have predetermined criteria indicating the financial health of the organisation. Financial information should be presented to the board in a way that allows them to easily check the financial health. Directors should be able to read profit & loss statements and balance sheets or be trained to develop this skill, as they are liable if the organisation is found guilty of trading whilst insolvent. NFPs face four main types of reporting to government agencies:
  • Corporate and financial reporting associated with the legal structure under which they are incorporated;
  • Requirements of fundraising legislation;
  • Information required for endorsement for concessional tax treatment;
  • Financial, governance and performance information required for obtaining or acquitting government funding (grants, etc), or government funded service delivery contracts;
• Basic procedures. Many boards compromise their success by failing to get basic procedures right, e.g. board meetings don't run to time; board papers are not sent with enough time in advance; there are no or not enough board policies or a code of ethics; there are few work plans, succession plans, crisis plans; directors have not prepared properly for meetings, etc. Having appropriate policies and codes communicates the expectations of board members. Directors will feel that their time is well spent if these basic procedural matters are conducted in a professional manner.

WHAT DOES GOOD GOVERNANCE LOOK LIKE ON NFP BOARDS?

• There is a clearly defined purpose and strategic direction for the organisation with goals and objectives and these are communicated to all relevant stakeholders;
• The board's role is similarly well defined;
• The board is aware of its duties and responsibilities, the legislation under which it operates, and has appropriate documentation of policies and procedures;
• Board composition reflects the skills, knowledge and experience needed to achieve the organisation's purpose;
• Manage financial responsibilities – establish policies and delegations, set criteria/indicators of good financial health and ensure management reports on this to each board meeting, determine financial priorities, etc.;
• There is adequate D&O insurance.

FURTHER READING

Good Governance Principles and Guidance for Not-for-Profit Organisations, Australian Institute of Company Directors, 2013.
Contribution of the Not-For-Profit Sector, Productivity Commission, Canberra, 2010.
Australian Charities and Not-for-profits Commission
Not-for-Profit Director Resource Centre, Australian Institute of Company Directors, 2013.

RELATED COURSES

• Governance Foundations for NFP Directors
• Advanced NFP Governance
• The Role of the NFP Chairman

FEEDBACK

We encourage members to provide feedback on this Q&A by emailing library@aicd.com.au

LEGAL ADVICE

AICD regrets that it is unable to provide legal advice to members. Accredited legal specialists can be found through your state Law Society.