What's next for NFP governance?

AICD's 10th annual Not-for-Profit Governance and Performance study provides insight into shifting governance trends for the sector.

Now in its 10th year, the AICD NFP Governance and Performance Study has provided valuable insight into governance trends in the not-for-profit sector. A review of the study over that period shows rising governance risks and prompts the question: is the traditional NFP board model sustainable?

AICD has surveyed more than 18,000 directors of NFP organisations and had in-depth conversations with more than 450 directors since 2010. Researchers have visited major capital cities and regional towns to source a range of director views. Base data has been collected annually to track governance performance and develop longitudinal research. Each year, the research has also included questions on emerging governance issues. Deep research dives have been conducted into NFP sub-sectors such as sports, disability, schools, aged care, arts and culture.

The result is the world’s largest study on NFP governance, an NFP information source cited in Commonwealth and state parliaments, and a knowledge base referenced by academics and other leading governance thinkers domestically and internationally. Most of all, the study has supported AICD’s mission to strengthen society through world-class governance. Nowhere is that mission more important than in the NFP sector, which touches the lives of millions of Australians and deserves greater recognition and support for its governance work.

Four key contributions

The NFP Governance and Performance Study has made four key contributions. First, it has recognised and helped raise awareness of the contribution of directors — most of whom volunteer their time, experience and skills — to the NFP sector.

The 2019 study found more than half of directors surveyed spend one to two days a month on their NFP role. About one in 10 spend more than five days. In some cases, directors give up one day a week of their time, unpaid, to serve on an NFP board, although many would argue they get more in return through the satisfaction of giving back to a cause and the community.

Second, the empirical approach of the study has challenged myths and misnomers about NFP governance. Chief among these is that NFP directors don’t work as hard as for-profit directors, or take their board roles as seriously. The research shows the workloads of NFP directors are broadly comparable to those of for-profit directors in similar-sized organisations.

Another myth is that NFP governance standards are lower than those on for-profit boards. However, the study has consistently found that NFP governance is at least as good as for-profit governance. A strong crossover of directors on NFP and for-profit boards explains similar governance performance across the sectors. In many cases, directors of for-profit enterprises bring their skills to NFP boards, and vice versa.

As the accompanying chart shows, there has been strong and continuous improvement in NFP governance, based on the study data. Directors consistently report the quality of governance in their NFP is better than it was three years ago.

Better-quality governance

The third contribution of the study is in its long-term tracking of NFP attitudes, practices and performance. This data has helped paint a picture of the evolution of NFP governance in Australia, albeit from a small sample of the sector each year.

In the 2010 study, experienced directors commented on the prevalence of “hereditary directorships” — board seats given as a reward for success in industry or the public service. Less was expected of directors at the time, there was scant discussion of board composition, director recruitment was usually done through personal networks, and boards were mostly white and male. Some directors served on their NFP board for 20 or 30 years. Other directors in 2010 commented they occasionally attended board meetings without having fully read the papers.

These shortcomings were not unique to the NFP sector. In 2010, many for-profit boards comprised mostly male directors and there was not the same focus on board composition, workloads and performance as there is today.

But “kitchen-table” governance in the NFP is long gone. Directors with a decade or more of experience uniformly agreed in the study that NFP governance is more professional; that the role and responsibilities of the board are “real and substantial”; and that NFP directors require a specific skill set. NFP governance training is common in larger NFPs and specific forms of NFP governance education, in sports for example, have emerged.

The study’s fourth contribution is its ability to highlight key challenges facing NFP boards. Ten years of the study have shown where directors believe NFP boards can improve — and how they are doing so. We have a better understanding of the time directors put into their roles, whether they are paid (or should be), issues that concern them most and their view on organisation performance.

These insights have shaped AICD’s NFP governance courses, NFP events and its advocacy for the sector. The data guides AICD’s work to help enhance Australia’s NFP governance capability and ensure it is grounded in empirical evidence over a long period.

NFP governance risks escalating

Since the study commenced, there has been significant regulatory change affecting the NFP sector and its governance. There was the establishment of the Australian Charities and Not-For-profits Commission (ACNC) in 2012 (and subsequent uncertainty about its future); passing of the Charities Act and National Disability Insurance Scheme Act in 2013; and publication of the first Australia Charities Report in 2014.

In 2017, there was the final report for the Royal Commission into Institutional Responses to Child Sexual Abuse; in 2018, the Royal Commission into Aged Care Quality and Safety; and in 2019, the Royal Commission into Violence, Abuse, Neglect and Exploitation of People with Disability. Similar to other sectors, there have also been issues surrounding privacy, work health and safety, plus an increased focus on culture.

This heightened regulatory change has occurred during a period of declining community trust in NFPs and the business, government and media sectors. The latest Edelman Trust Barometer shows trust towards NFP institutions is improving after hitting a five-year low in 2018, amid a “trust crisis” affecting institutions in Australia and worldwide.

Increasing workloads

Not surprisingly, this year’s study showed NFP workloads are rising. Directors reported they are putting more time into their role, although some of that might be because of this year’s sample, which had a marginally higher proportion of directors from larger NFPs (those serving on boards of larger NFPs tend to spend more time on their role).

Directors in this year’s study also reported that recruiting younger directors remains a challenge. Australian NFP boards, like those in the for-profit sector, are among the world’s oldest and face an exodus of baby boomer directors in the coming decade. At the same, time director remuneration remains a vexed issue in the sector. Most NFPs do not pay fees. As NFP governance complexities, workloads, risks and expectations rise, most NFPs still rely on volunteer directors.

As governance challenges increase, directors report the financial performance of NFPs is declining. They have an optimistic view on their organisation’s future, but evidence in the latest study suggests this view is, on average, unrealistic or overstated. The reality is rising demand for many NFP services at a time when NFP funding and resources are increasingly stretched.

Together, these findings create a narrative that broadly matches what the AICD is seeing on the ground in NFP governance — boards working harder as their organisations adjust to regulatory change; more governance complexity and risk; and rising financial pressure as service demand rises and funding competition intensifies.

NFP governance sustainability

If these trends continue, and if the findings of the latest study are experienced more broadly across the NFP sector, it raises the question: is the current model of NFP governance sustainable? And what can or should be done to innovate the traditional NFP governance model?

These are large, complex questions. To be clear, NFP governance is neither broken nor in need of urgent or radical change. Australia has a high standard of NFP governance and many talented NFP boards and directors who serve with distinction. But nor should we assume a governance model that works now will be as effective in the future as NFP governance goes through a period of unprecedented change. NFP boards, like those in other sectors, will have to grapple with digital technologies, cybersecurity, artificial intelligence, climate change and many other issues. As governance workloads rise in the for-profit sector, it is possible fewer directors will volunteer for NFP boards in the coming decade.

In light of these trends, can we expect NFP directors — average age 54 in the latest study — to continue volunteering as much time each year? Will NFP governance be as attractive as sector complexities, workloads and risks increase? What happens when a generation of skilled NFP directors retires in the next 10 years? Or if they cut back their board roles?

If Australia wants vibrant NFP boards in 2029, we must ask: what can be done today to ensure NFP governance heads smoothly and successfully towards that future? How can the sector attract and develop young directors? And is it time for more NFPs, particularly larger ones, to pay director fees that partly compensate for the workload involved?

Ten years of the AICD NFP Governance and Performance Study have given us a glimpse of the past and present of NFP governance. It’s up to us — the community of NFP governance practitioners — to create the future. Few tasks could be more important given the NFP sector’s contribution to our way of life.

Penny Knight is MD of BaxterLawley, which undertakes research on behalf of the AICD.