The surprising results of AICD's 2018 not for profit survey

Directors are engaged, committed and have stronger foundations in place to meet the demands and expectations ahead, says AICD's NFP sector leader Phil Butler GAICD.

The launch of the 2018 NFP Governance and Performance Study comes at critical time in the evolution of corporate governance, with increased community expectations on the role of directors. Now in its ninth year, the study is the largest survey of its kind in Australia, with 2022 respondents and dozens of directors involved in national focus groups. Survey participants included directors and executives from a diverse list of NFP organisations in every state and territory, from arts, culture and local sporting clubs to health, aged care and social services providers, with incomes ranging from $100,000–$50 million.

 Governance in the sector continues to improve, with 40 per cent of respondents assessing the quality of governance in the sector as “much better” than three years ago, and 42 per cent rating it “somewhat better”.

Slightly more directors were spending more time on NFP governance work, with 52 per cent saying they spent between two and eight days a month on NFP governance.

While the proportion of directors receiving some remuneration, expenses or an honorarium for their roles has marginally increased, approximately 80 per cent of directors were not being remunerated for their roles.

The pressure to innovate in the current operating context is reflected in 45 per cent of respondents agreeing the organisation did not allocate sufficient resources to innovation. Nearly a quarter said the board was the primary driver of innovation.

Delving into such hot topics as innovation, cybersecurity and culture, the study found common themes, with many NFP directors viewing these issues as being squarely in the operational domain.

Conversely, other boards are extremely involved in these issues and leading their organisations in how they, for example, ensure the appropriate culture exists.

Mergers are an increasing topic, with 36 per cent of directors saying the issue had been discussed, and 12 per cent having either completed or about to complete a merger in the next 12 months. Asked about the likelihood of a merger in the next two years, 40 per cent said there was a 50 per cent or greater chance.

What directors say

AICD spoke to four leading directors in the NFP sector to gauge their view on hot topics.

Culture

Liesel Wett FAICD, chair of Canberra’s Goodwin Aged Care Services, says, “It is entirely the board’s role to set the culture of an organisation. The chair plays a crucial role — the board needs to model the behaviour they want to see in the executive team and across the organisation. What’s measured is what’s done. How is the board taking the temperature of the culture of the organisation through management reporting, and what might be some indicators of success?”

Justin Koonin, president of ACON (formerly AIDS Council of NSW), says directors clearly cannot and should not be involved in every decision an organisation makes. “There is an increasing recognition that directors need to take active steps to outline explicitly the values of the organisation and actively promote decision-making congruent with those values. This is where culture comes in. Culture is what happens in an organisation when the board is not looking. Policies are important, but they are not enough. The board needs to act on those policies, and lead by example.”

Fiona Payne GAICD, chair of WA therapy provider Therapy Focus, says, “Culture is everyone’s business and the board has an important role to play in ensuring the culture of the organisation is one that enables the pursuit of purpose. Monitoring culture is possibly more easily done in smaller NFPs where board members are closer to the coalface, but larger NFPs may have more resources to dedicate to more formal systems and processes. Directors need to make a concerted effort to connect with the purpose and the people in their organisation.”

The community is questioning whether director focus is extending far enough inwards toward the operations and activities of organisations that were once trusted.

Governance

“The role of directors is changing,” says Wett.” Directors are more visible and accountable. Broader community expectations are changing, too. How is the board making the tough decisions to benefit the community you are serving? How visible is the board and chair?”

“Balance is the key word,” says Koonin. “In general, our board sees its role as to question management, and would only consider getting further involved in the management of the organisation in those rare circumstances where satisfactory answers were not forthcoming.

“A relationship of respect between the CEO and the board (the chair in particular) is critical. When the board respects the work of the CEO, it’s more likely to entrust the management of the organisation to them, and when the CEO respects the board, they will welcome the board’s questions.”

Rowena McNally FAICD, independent chair of the National Employment Services Agency, says, “It is not possible or necessary for board directors to have the same level of expert knowledge that operations staff require, nor desirable to direct every element of operations. This would diminish the value-add and oversight capacity of the board and usurp the role of the CEO and managers and other employees. [However] many boards are looking at ways in which oversight can be made more effective and how directors can make sure, for example, that reporting processes allow issues to be properly elevated, instead of them being massaged, ignored or whitewashed.”

Cyber risk

Regarding cybersecurity, approximately half of the directors surveyed said they did not regularly have this as a board item to be discussed, while 19 per cent said it was an operational issue for management.

“These are not hypothetical issues for our organisation,” says Koonin. “We have actively had to guard against cybersecurity threats and if we don’t innovate, particularly in the realm of social media, we will lose touch with our communities.”

The board does not necessarily need to have complete technical mastery over all of these issues, but it needs to know where the gaps are and ensure they are filled.

Aged care

The most significant concerns for aged care providers are maintaining financial sustainability in an environment of decreased funding, increasing infrastructure to grow service volumes, and improving the workforce. Respondents from the aged care sector tended to be from larger organisations than the broader sample.

“Any sector supported by the government will always have those challenges,” says Wett, “and as our population ages, we need to look for smarter ways to deliver care to older Australians.”