Putting the Squeeze on Charity

The boards of Australia’s charity and not-for-profits sector should be ready to deal with issues ranging from a growing lack of trust to demands for greater transparency on their impact, and questions around their funding. Tony Featherstone reports.

Not-for-profit boards must be alert to a wave of proposed regulatory reform that could change the nature of charities and their governance — and add to sector uncertainty. If implemented, the reforms would give the Federal government more say in how charities use their resources, accept donations and engage in public debate. They would lift governance expectations across the sector, adding extra risk and work for volunteer charity directors. This is a difficult time for the NFP sector. In the latest Edelman Trust Barometer (January), Australia’s NGO (non-government organisation) sector, which includes charities, received a “distrusted” rating for the first time in five years.

Headlining the reforms is the review of the Australian Charities and Not-for-profits Commission (ACNC) and the charity regulator’s submission in that process. Some fear the government wants to tell charities how to use their resources, lift sector accountability and quicken charity consolidation through mergers. The government’s proposed crackdown on foreign donations is also creating doubt.

If the changes are implemented, charities engaging in public advocacy may need to obtain statutory declarations from donors for even small annual amounts. There is also debate around whether directors of ACNC-registered charities should be subject to the same standard of account as those of for-profit companies and the broader NFP sector, which would increase their potential liability.

“The ACNC review adds to ongoing uncertainty in the charity sector,” says Anne Robinson AM FAICD. “The ACNC has done a good job over the past five years in challenging circumstances and there is fundamentally nothing broken with the current charity regulation framework. It’s too soon for major change to the ACNC; we should be bedding it down rather than changing it.”

Robinson has a long history in the NFP sector. As founder of Prolegis Lawyers, an NFP specialist, she has advised hundreds of charities. Robinson, current chair of Australia’s oldest charity, Bible Society Australia, is former deputy chair of the NFP Sector Reform Council and was chair of World Vision Australia.

“It is inappropriate for a charity regulator to tell the sector how to use its resources,” says Robinson. “The essential brilliance of charities is that they fill the gaps, they do what government doesn’t do, they take risks. That said, some of the sector’s reaction to the ACNC submission has been overstated. The sector has to work with the ACNC and there are many good people in the ACNC who want to support charities and find the right balance with regulation.”

David Crosbie, CEO of the Community Council for Australia, has led the NFP sector’s attack on the ACNC submission, describing its recommendations in January 2018 as “regulatory overreach at its worst”. “[This is] driving an ill-informed ideological campaign rather than enhancing the role of charities in our communities,” he told Pro Bono Australia. Crosbie described the appointment in December of Dr Gary Johns as the new ACNC Commissioner as “bizarre”.

Johns, a former Keating government minister, is a noted charity critic. His appointment as ACNC Commissioner attracted controversy because, unlike his predecessor, Susan Pascoe AM, he did not have a long history in the charity sector.

Johns has publicly said his job is to apply the law to the NFP sector and he argues that the new recommended objects in the ACNC submission are not about additional enforcement powers. His early comments as ACNC Commissioner suggest sections of the charity sector may well have overreacted.

For now, charity sector fears are conjecture. The ACNC review has a long way to run (submissions closed in February), the ACNC submission is one of 19, and there is no certainty that all of its recommendations will be adopted. Also, the ACNC legislative review panel is thought to have consulted widely with the NFP sector and its members have long experience with charities. The ACNC’s independent advisory board has told the review panel there is no need to change ACNC legislation, according to reports published by Pro Bono Australia.

A report on the review’s finding and recommendations is due by 31 May. Regulatory change, should it occur, is likely to be well flagged to the NFP sector. The process was expected as the government had an obligation to review the ACNC after five years of operation.

Boards need a considered response

Bill d’Apice, a partner at law firm Makinson & d’Apice, believes the government should limit change to the ACNC. “In my experience, the charity sector is for the most part very compliant. The sector strives to do the right thing and follow the rules. There will always be a few rotten eggs in any sector, but I don’t believe an increase in regulation is warranted or in the best interests of the sector or the community.”

A principal legal adviser to the Australian Catholic Bishops Conference and a current or former chair of over a dozen NFP boards, d’Apice says charities shouldn’t have kneejerk reactions to the ACNC review. “The potential reforms are hard to predict. Charities shouldn’t make significant governance or operational changes until there is more clarity around the new rules. I would be surprised if any major changes were legislated before the end of the year.”

D’Apice says directors should ensure their charity adopts best practice in terms of resource usage and “get their house in order”. “Good charities and their boards do this anyway as part of normal operations. NFP boards should follow the review, but not overreact to it.”

Phil Butler GAICD, AICD’s NFP sector leader, agrees charities should not overreact to proposed charity reform. “I don’t expect dramatic changes to the governance of Australia’s charities, although all NFP boards should be aware of the ACNC review and its outcomes.”

Butler notes a growing maturity of governance across the NFP sector and expects this will continue. “As expectations of the sector continue to evolve and the size of the sector increases, the community is wanting to see the quality of governance also increasing. While the charity sector is mostly well governed, there is always room for improvement, and recent instances of poor leadership in some organisations throw a spotlight on the whole sector. Similarly, a drop in trust across all sectors is a wake-up call for NFP sector leaders to continue to question the appropriateness of their governance processes.”

Finding the right balance

Much is at stake. The charity sector’s annual revenue (2016) of $143 billion is about eight per cent of Australia’s GDP, according to Treasury, and charities employ more than 1.3 million people. The ACNC regulates about 55,000 charities and there are an estimated 257,000 NFPs in Australia.

George Savvides FAICD, a former managing director of Medibank Private and World Vision Australia chair, is concerned that the ACNC submission, if accepted, could hurt the charity sector and, by default, the community and economy. “If the government misunderstands the sector or imposes unrealistic compliance and complexity that is beyond charity capabilities, it could do significant long-term damage. We could tear the fabric of a sector that does so much good work and is a key part of the economy.”

Savvides, who is also deputy chair of SBS and chair of Macquarie University Hospital, is concerned the government wants the charity regulator to function more like the Australian Securities and Investments Commission.

“The ACNC must be very different to ASIC. The charity sector needs a firm regulator, but equally one that is supportive through resources and more educative, and coaching in tone, and has a different relationship with organisations it regulates.”

Savvides adds, “The ACNC should not evolve into a ‘charity cop’ role or act like a ‘shadow’ organisation to ASIC in the NFP sector. A lot of goodwill built by the ACNC could be lost.”

These are the main proposed reforms:

ACNC submission

The ACNC review submission to the review recommends adding two key objects to the ACNC Act: to promote the effective use of resources of the NFP sector; and to enhance accountability of NFP entities to donors, beneficiaries and the public. Both recommendations are controversial.

The ACNC submission does not define “effective use” or mention how the change could be monitored or enforced across 55,000 registered charities. The potential change has been likened to ASIC telling for-profit companies how to use their resources.

Savvides says there is a risk that the ACNC could apply a one-size-fits-all approach. “There is a tendency to equate charity effectiveness with overhead efficiency. A charity that spends 10 per cent of donor funds on fundraising and administration is thought to be more efficient than one that spends 20 per cent. Yet the latter might have set the project up more effectively for sustainable multi-year program delivery and impact; had better planning and risk management; and attracted more volunteers, compared to the notionally more efficient charity whose project lasted just a year.”

Regarding the ACNC recommendation for enhanced sector accountability, Robinson says the current ACNC Act has sufficient accountability requirements for registered charities. “It’s hard to know what the benchmark is for enhanced charity accountability or why more is required. The sector is far more transparent than it used to be and there is sufficient information for donors.”

The two new objects recommended by the ACNC Commissioner are taken from the Charities Act 2011 (UK), which governs the Charity Commission for England and Wales. However, the legislative scheme there for charities is different from Australia. There was considerable controversy when the UK charity regulator introduced the changes and they do not appear to have had any positive impact on the charity sector there so far.

Johns downplayed the extent of the proposed changes writing on the ACNC website in January: “These recommended objects are not designed to create restrictions or impose limitations on charities. They are not additional enforcement powers, but... a mandate for the ACNC to support and promote effective and efficient use of resources.”

The problem for the charity sector is a lack of clarity on what “effective and efficient resource usage” means and what happens if the ACNC is dissatisfied in this regard.

The ACNC also recommended changes to secrecy provisions. The ACNC currently cannot publish information on its decisions when a charity’s status is registered or revoked. Johns said: “We need the ability to disclose information where it is in the public interest — for example, confirming if an investigation has commenced, disclosing action the ACNC took in relation to a registered charity and publishing a reason for a decision if we decide to revoke a charity’s registration. Donors have a right to know whether a charity is involved in an investigation. This level of transparency is critical in building trust.”

Charities under ACNC investigation would be made public, potentially creating reputational damage with donors and the community, and for directors. However, the move to name charities under ACNC investigation and explain reasons for deregistration, within reason, is clearly within the public interest.

Advocacy/foreign donations

The Federal government’s proposed crackdown on political donations could also create problems for the charity sector. The Inquiry into the Electoral Legislation Amendment (Electoral Funding and Disclosure Reform) Bill 2017 proposes a criminal offence and civil penalty provision for annual donations of $250 or more without declaring they are from an “allowable donor”.

Simply put, NFPs, including some registered charities that engage in political advocacy, would have to obtain a statutory declaration from foreign donors who give less than $5 weekly to prove they are Australian. This would add to administration costs and deter donors.

By including charities in proposed legislation around foreign donations, the Federal government may want to audit the advocacy activities of charities and their sources of income. In late February, Finance Minister Mathias Cormann ruled out exempting charities from a ban on foreign donations.

Dr Phil Ireland GAICD, chair of NFP activist group GetUp!, says the Bill is an “open attack on civil society designed to silence criticism, stifle dissent and constrict domestic participation in public debate. GetUp! doesn’t have a problem with reporting foreign donations, but it is madness to require donors to make statutory declarations for small donations.”

"So, a charity for the disadvantaged can offer blankets to homeless people, but not criticise the government for funding cutbacks." Dr Phil Ireland GAICD

Ireland believes many charities will be caught by the change and are unaware of its significance. “Charities that engage in both service delivery and advocacy say these changes will have a chilling effect on their ability to speak up on issues they care about. So, a charity for the disadvantaged can offer blankets to homeless people, but not criticise the government for funding cutbacks. If an international aid agency comments on government policy, it would have an obligation to ensure its donors have declared they are an allowable donor.”

NFP advocacy is contentious. The Charities Act 2013 (Cth) sets out “advancing public debate” as a charitable purpose under certain conditions. The government apparently believes some charities are too politicised and are using donor money to promote political causes. Johns has argued advocacy shouldn’t be considered a purpose of charities. He warned in January that a crackdown on foreign donations will place an extra regulatory burden on charities, possibly restricting their ability to advocate on issues around their charitable purposes.

A December 2017 University of Melbourne study found many NFPs are staying silent on public-policy issues for fear of government funding cuts or political payback. The authors, Dr Andrea Carson and Associate Professor Sarah Maddison, found a degree of “self-silencing” or “quiet advocacy”, whereby charities and NFPs “attempt to minimise the risk of retribution by selectively choosing which battles to fight”.

NFP director duties

The introduction of the ACNC in 2013 had the effect of “turning off” certain sections of the Corporations Act 2001 for charities that are incorporated using a company structure. Duties under section 180–183 (and parts of 185) no longer apply to charities. Instead, the ACNC’s governance standard five requires “charities to take reasonable steps to make sure that […] duties apply to responsible persons and that they follow them.”

These duties are similar to those set out under the Corporations Act, however this requirement applies to the charity itself, rather than its individual directors. This is most likely owing to constitutional limits on the power of the ACNC as a Commonwealth regulator.

This is an important distinction. Directors who breach their statutory duties under the Corporations Act can be punished through civil penalties, fines or disqualification as a company director, or imprisonment for criminal offences. Charity directors who breach common law duties can be sued for damages, but generally have a lower level of potential liability.

“The ACNC review is an opportunity to consider if directors of charities should be held to a lower standard of account than their counterparts in the NFP or commercial sectors,” says Bruce Cowley FAICD, chair of Minter Ellison, CPL (Cerebral Palsy League) and a member of the AICD NFP Chairs’ Forum. “Maintaining public trust and confidence in the NFP sector is an important part of the ACNC’s role and arguably should be one of its primary objectives. Eliminating legal anomalies between charity directors and those in other sectors would add to that trust.”

Cowley says there are pros and cons for charity directors having a different level of accountability. “Charity directors are often volunteers, they may be inexperienced in governance, and some NFPs may find it hard to get directors. The flipside is that their organisation is entrusted with public money to serve a cause, yet its directors are being held to a lower standard of account.”

He also notes that there are unfair anomalies with NFP director accountability. For example, under the Aboriginal and Torres Strait Islander Act 2005, (Cth) a director of a small Aboriginal Corporation set up to administer Native Title funds has a higher level of individual accountability than a director of an ACNC-registered charity with hundreds of millions of dollars of revenue.

“It makes no sense the law treats one set of NFP directors differently to another,” Cowley says. “The public should know that all directors are held to the same standards of accountability under the law.”

Three big themes

Much has changed in the charity and not-for-profit sector over the past five years. The AICD’s introduction of NFP Governance Principles in 2013 and its annual NFP Governance and Performance Study have provided a window into the boardrooms of this diverse sector on three important issues, writes the AICD’s NFP sector leader Phil Butler GAICD.

1. Financial sustainability

A well-functioning NFP sector is vital to our society. This diverse sector delivers critically important services and the organisations within the sector are generally innovative, outward-looking, and client-focused. However, for many in the broader community, there is an expectation these groups will be run by volunteers on the “smell of an oily rag”. Similarly, many are horrified at the thought of NFPs making profits, remunerating directors or paying market rates for executives.

The past few years of the NFP Governance and Performance Study has shone a spotlight on the financial position of NFPs and noted the diversity across the sector on their financial position. The study has revealed that close to 50 per cent of organisations are barely breaking even, or are making a loss. At the other end of the scale, some NFPs are budgeting and managing to achieve profit margins of 10 per cent or more.

As former ACNC Commissioner Susan Pascoe AM FAICD stated at the launch of the 2017 study, “Profit is not a dirty word”. This sentiment was applauded by many, but the broader community has yet to embrace it.

2. Purpose and performance measurement

An ongoing challenge for organisations in the NFP sector has been to measure the right things to determine the effectiveness of achieving their overarching purpose.

NFPs measure outputs rather than outcomes. The 2014 NFP study showed only 50 per cent of directors believed their organisation measured achievement of purpose effectively; 61 per cent wanted more information on measures around achievement of purpose.

For the 2016 study, there was an improvement in the measurement of purpose, with rapid improvement in technology making it easier and cheaper to collect and disseminate correct information.

Despite these advances, some organisations are dealing with such long-term, complex issues that performance measurement remains challenging.

3. Reputation

The NFP sector in Australia and across the globe is facing a reputational challenge, with trust in the sector falling over recent years. The latest Edelman Trust Barometer showed trust in the Australian NFP sector languishing at 48 per cent. This was alongside similar falls in trust for government, business and the media.

The 2017 NFP study delved into how boards managed and measured their reputation and culture. Boards generally viewed their organisation’s reputation and culture positively, although there was some informality in the way that these items were dealt with at board level. Many organisations did not have a plan in place for managing a reputational crisis.