The future landscape

The not-for-profit sector has experienced some turbulent times recently. Domini Stuart examines the challenges and opportunities that lie ahead as the sector enters a new year.

For the last two years, the not-for-profit (NFP) sector has been plagued by political and regulatory uncertainty. The good news for 2016 is that there are unlikely to be any major changes in the law.

“We know now that the government isn’t going to discourage commercialisation by introducing the unrelated business income tax or to inhibit overseas activities, at least for a very long time,” says Vera Visevic MAICD, head of the NFP team at Mills Oakley Lawyers and a director of a number of charities.

Plans to abolish the Australian Charities and Not-for-profits Commission (ACNC) also appear to have been scrapped due to lack of Senate support. “I think that will please most of the sector’s directors because the ACNC is committed to reducing onerous reporting requirements,” says Michael Coleman FAICD, chairman of Planet Ark.

However, NFPs will still be operating in a fast-changing and disruptive environment.

“I believe that boards must accept volatility, embrace change and continually address the brand’s relevance and sustainability,” says Frank Lancione MAICD, president of the National Heart Foundation in South Australia, a director on the national board and partner at law firm Piper Alderman.

Raising funds

Pressure on funding is converging from three directions. “There’s more competition,” says Visevic. “On average, nine new charities are being registered with the ACNC every day.”

The shift to the consumer-directed funding typified by the National Disability Insurance Scheme (NDIS) has also introduced competition from for-profit organisations.

“For-profits now dominate the aged-care sector and, during the NDIS trials, we saw hundreds of new for-profit enterprises seeking to compete for consumer-directed disability funding,” says Paul Ronalds, CEO, Save the Children Australia.

At the same time, demand for services is growing. “More than one million Australians live in poverty and, globally, there are more people displaced or seeking refuge than at any time since the end of World War II,” Ronalds continues. “The sector has never been larger, employed more people or had responsibility for delivering more services.”

Revenue from traditional sources is also in decline. “Not surprisingly, boards are under constant pressure to step up fundraising,” says Rick Crethar, a partner at PwC and director of the Shake It Up Australia Foundation that promotes and funds research into Parkinson’s disease. “They must continue to invest heavily in developing long-term, sustainable relationships with donors, including corporates, and they must also be prepared to explore any new revenue models that are aligned with the vision and purpose of the organisation.”

Lancione believes that a fundraising capability is critical. “We recently recruited Stirling Larkin to our board and the newly-formed brand subcommittee,” he says. “Stirling is chairman of the National Revenue & Brand Advisory Committee and his appointment is an example of how we are addressing contemporary challenges and turning them into opportunities.”

More boards are exploring new funding models such as crowdfunding, smartphone apps and social bonds, but, as Coleman points out – innovation costs money. “I’m very lucky at Planet Ark to have a board that is very much on the pace but we’re still hostage to available funds,” he says. “We’re not short of good ideas but we can only afford to pursue so many.”

Commercialisation and innovation

Visevic regularly presents to the boards of NFPs about the benefits of commercialisation. “I’m trying to encourage directors to think more creatively about ways they could provide goods or services for a fee, or come to a mutually beneficial arrangement with a business,” she says.

Breast Cancer Network Australia (BCNA) recently entered into an agreement with For Benefit Medicines (FBM) Australia’s first NFP pharmaceutical company. FBM has been established with the sole purpose of distributing 100 per cent of its profits to Australian patient support and medical research organisations and is thought to be the first social enterprise pharmaceutical company in the world.

“BCNA has always had a policy of not accepting funds from pharmaceutical companies, so the board spent a lot of time ensuring that this relationship would not compromise our philosophy or values in any way,” says CEO Christine Nolan. “There is no guarantee that such a cutting-edge business model will succeed but innovationalways involves risk and this is a very worthwhile initiative.”

Christine Franks FAICD, chair of Habitat for Humanity Australia, agrees that directors should be willing to drive change.

“NFPs are notoriously conservative but, over the next few years, the charities that do best will be those with boards courageous enough to develop bold propositions for the future,” she says.

Boards must also be prepared to start linking their strategic thinking to digital delivery. “They may need expert advice at times but the digital landscape is changing so fast that putting one person on a board is not going to be a magic bullet – they may quickly become out of date themselves,” Franks continues.

“In my view, board briefings from external experts is a great option, though it may not be easy to find people with the right knowledge who are willing to share and give up their time. A big organisation is more likely to have access to supporters who can help them tap into major trends; directors of smaller organisations may need to focus on keeping their own skills up to date by connecting with technology blogs and attending workshops and conferences.”

Recruiting the right directors

The proliferation of NFP organisations is creating increasing competition for board members. Many people are looking for opportunities to launch a boardroom career and, with the right support from more experienced colleagues, can provide valuable skills. “But it’s vital to ensure they’re willing to stay the distance.” says Franks. “It’s very frustrating to discover that a new director regarded your board as nothing more than a stepping stone to a more interesting position. It wastes time and effort, disrupts the board dynamic and leaves a very bad taste.”

Other willing volunteers are less qualified. “There’s no shortage of people who are keen to help but have limited knowledge of the board environment and its responsibilities,” says Coleman. “Directors who don’t fully understand the liabilities they’re incurring and the challenges of operating under the rules of the Corporations Act can jeopardise the rest of board. And, if more experienced directors constantly have to explain the processes and why things have to be done in a particular way, a lot of time will be wasted in meetings.”

More than two-thirds of concerns investigated by the ACNC relate to governance standards. “Directors must be familiar with the governance standards and confident that they are meeting them,” says Susan Pascoe AM FAICD, commissioner at the ACNC. “It’s also vital that they understand their organisation’s charitable purpose and ensure that every activity they undertake is consistent with this – it is the foundation of their work. They must also be clear about the roles and responsibilities of everyone involved – board members, volunteers, paid employees and clients – and familiarise themselves with both the legal requirements of running a charity and their obligations to the ACNC.”

Consolidation

The NFP sector is remarkably fragmented; the Productivity Commission’s 2010 research report Contribution of the Not-for-profit Sector estimated that there were 600,000 NFPs in Australia of which about 54,000 are registered with the ACNC. And each one has to pay for administration and compliance.

“Our organisation is large enough to have a national body that does a lot of the common work and heavy lifting on behalf of the states and territories,” says Lancione. “This makes it easier for us to absorb rising costs associated with increases in regulation. I suspect that many smaller organisations will struggle to find the money to comply.”

Boards may need to be open to co-operation and collaboration. “Even something as simple as sharing an office or secretariat services could cut costs,” says Visevic.

There is also growing incidence of mergers in the sector. “Whitelion, an NFP providing services to vulnerable young people, has merged with two smaller organisations over the past few years,” says Ronalds.

“Two major disability service organisations, VATMI Industries and the Endeavour Foundation, merged so that they could respond more effectively to the NDIS. In Western Australia, UnitingCare West was created by combining eight Uniting Church agencies and parish missions. And, last May, we merged with Good Beginnings to create one of the country’s largest agencies working to improve the lives of children in disadvantaged communities.”

Both Save the Children and Good Beginnings recognised that they needed to do things differently in order to achieve their goals. “Good Beginnings was looking for a new long-term plan and strategic options,” says Lynn Wood, director of Save the Children Australia and the former chairman of Good Beginnings. “Joining forces with Save the Children Australia will enable us to broaden our reach, drive systemic change and become greater advocates for children and their rights.”

The difference in size and scale of the two organisations meant that there were inevitably some differences in procedures, particularly back office processes, but each organisation brought different strengths and experiences to the table.

“We were excited by the opportunity to learn from each other and looked for best practice regardless of which organisation it came from,” says Wood.

Operating overseas

Charities operating in the overseas sector face a more complex set of challenges. “In my view, digital disruption is one of the most significant because it’s an unknown – an emerging threat to current working models that also represents a huge opportunity,” says Franks. “For example, digital access is increasing the pace of economic development in some small communities so directors must be prepared to make the most of rapid change.”

Aid funding is shrinking so fast that it’s changing the face of the sector. “We have already seen major upsets in larger organisations that have lost major grants,” Franks continues. And while donor funding is still strong, more people are choosing to send money directly to local non-government organisations (NGOs) in developing countries. “Unfortunately, this introduces a very high risk of fraud, embezzlement and consequent scandals,” says Franks. “The Department of Foreign Affairs and Trade has also changed its emphasis to NGO business partnerships but these are difficult to identify, set up and implement on both sides and, as yet, there is little government funding to support them.”

Anyone considering joining the board of an NFP in 2016 should be prepared to do at least as much due diligence as they would for a for-profit organisation. “Make sure you feel comfortable with the other members of the board, have a good sense of the effectiveness of the CEO and staff, and a very clear understanding of the administrative processes,” says Coleman. “The risks and challenges for a director of an NFP are at least as significant as they are for a director of a public company. Your reputation can suffer just as much if you’re on the board of a failed NFP as a failed for-profit company.”