The debate about paying NFP directors is gaining traction

The question of whether to remunerate directors within the NFP sector is gaining traction as governance complexities escalate, cost-of-living pressures rise and board composition diversifies. 

While the AICD’s 2023–24 NFP Governance and Performance Study showed 21 per cent of not-for-profit (NFP) directors are now remunerated — a significant increase from 14 per cent five years ago — the vast majority of board members remain unpaid. This creates a double standard at odds with contemporary demands on directors’ time and skills, says Adam Davids, a non-executive director of CareerTrackers. “The governance demands in the NFP sector are no less rigorous than in other sectors.”

Upping the ante

Recent reforms and regulatory obligations arising after successive royal commissions have resulted in a need for specialist care governance skills and a demand for directors to increase the time they spend on their roles, particularly in sectors such as aged care.

The AICD study found 47 per cent of all directors were spending more than three days per month on governance of their NFP. Some directors surveyed expressed concern that the escalating regulatory and time burdens created an “unsustainable” situation that may result in them “walking away” from these roles in future.

Additional risks are also emerging, resulting in an urgent need for NFPs to secure directors with skills to manage the consequences of the rapidly advancing digital environment. For instance, 21 per cent of survey respondents indicated their organisation had experienced a cyber attack in the previous year.

Money talks

Against this fraught backdrop, talk has turned to whether and how NFP boards should approach the question of director remuneration.

“There’s a trend towards valuing [directors’] specialty expertise — of charity law experts, accountants who really know their stuff in the NFP sector and charities realising and budgeting for the fact that, underneath, they are effectively a business like any other business,” says Darren Fittler, lead partner of the charities and social sector team at Gilbert + Tobin. “They have to be operated well and governed well.”

The AICD study notes 24 per cent of boards are discussing remuneration for board members (up from 19 per cent the previous year) and some have introduced payment to plug skills gaps.

The argument that scarce resources should be used to further an NFP’s mission, rather than compensating directors, fails to recognise that top- quality governance could multiply the impact of the organisation — growing revenue, increasing visibility and attracting staff. Paying directors can help attract skilled professionals who may otherwise favour for-profit roles and it compensates them for the time and expertise they invest in an organisation.

Remuneration could also potentially increase accountability and performance, with directors approaching their roles with the rigour that contemporary governance demands.

“Paying board members makes sure [they have] skin in the game, and that’s a really important thing,” says Davids.

Supporting diversity

Some have argued that NFP directors should be motivated by altruism rather than financial reward.

However, this overlooks that there are huge opportunity costs for underrepresented groups.

Given the calls for greater diversity on boards, remunerating directors would boost equity and fairness, according to Davids. “There is a shift in board composition, where people with lived experience and diverse backgrounds are increasingly represented in these governing roles,” he says. “We’ve got to encourage and support more diversity in boards to ensure their composition isn’t just made up of people with a high net worth and a vast network. People with lived experience may not have the same financial means to volunteer their time, or compromise on the time they could spend in income-generating activities, even though they have exceptional talent that could benefit the organisation and its governance. Remuneration is potentially a key vehicle to increasing board inclusivity.”

Davids also points out that offering directors compensation is not incompatible with the principle or practice of volunteer work. “One of the main arguments put forward to NFP directors is that they should be volunteering their time,” he says. “They can still volunteer their time, even if they’re offered compensation, because they’re more than welcome to donate it back [to the NFP].”

Fittler agrees, noting that the pool of people bringing lived experience to the board, while also having the time and possessing the skills to govern effectively, may be quite small. “Those qualified people are highly sought after and often end up saying yes to many different [unpaid] boards,” he says. “This can lead to overwhelm and burnout, which makes it hard to bring your best self to the board table. Let’s value that person, their skills and lived experience — and if we bring them onto this board, then perhaps they ought to be paid.”

Remuneration considerations

Despite potential benefits, a decision to remunerate directors should not be taken lightly. “It’s certainly not something you should jump into without a lot of internal consideration and examination — and potentially some advice,” says Fittler.

One initial question is whether paying directors is even permitted under the NFP’s constitution or other governing document.

“A lot of constitutions of organisations say that you can’t pay directors, so one of the first things you need to do is change the constitution,” he says. “To do that, you need a special resolution of 75 per cent of your members in a meeting. So, if your members aren’t happy with the idea, they’re not going to approve changing the constitution and you’re not going to be able to pay your directors.”

NFPs also need to review budgets to ensure balance between directors’ remuneration and the ongoing viability of their core offering.

Charitable purpose

Sue Woodward AM, Commissioner of the Australian Charities and Not-for-profits Commission (ACNC) which regulates charities (a smaller subset of NFPs), says payments must also further the organisation’s charitable purpose.

Charities need to consider — and document the decision-making — in terms of how paying directors helps them to achieve that. Much also depends on the size, complexity and revenue of the charity, and the nature of the directors’ roles.

“One really important thing is that the payments are reasonable,” says Woodward. “If they stray into the area of private benefit, then we would be concerned about that.”

Communicating the decision-making process to donors, volunteers, members or other stakeholders is also key and serves as an insulating factor against reputational damage. “For example, charities may wish to explain that we need people with expertise around cybersecurity, health or aged care, in terms of the current risk environment that exists,” she says. “Also, by paying people, we can demand more of their time.”

However, this can prove an uphill battle, given the public perception that charities “waste” money on administration, when in fact, good administrative processes and practices allow charities to deliver on their charitable purpose, adds Woodward. To remove any perceived or actual conflict of interest, charities that pay directors would be wise to form a remuneration subcommittee with independent people charged with making those decisions.

Taking stakeholders on the journey via regular communications is vital, according to Fittler. “It’s about being open and transparent, not waiting until the AGM and saying, ‘Here’s our amended constitution — who’s in favour?’”