Governance & the Not-For-Profit Sector

Many of us may choose to become involved in the NFP sector because we want to “give back”. But even treating a role on an NFP board as a "starter" board career can be dangerously misguided.

Just because your new role may not be for personal profit and your organisation not profit driven won’t necessarily make your governance obligations any less serious.

Considering the increasing complexity of the operating environments and growing regulatory demands, your NFP board will likely have a range of governance challenges to meet.

Your NFP Director ToolKit

When taking on a new NFP role, a director should be asking a range of questions.

What is the nature of the organisation?

Most NFPs are small, unincorporated associations with no separate legal status to its members. But your organisation may be incorporated (say, as a company limited by guarantee) under the Corporations Act 2001 (Cth) or registered under the local state legislation for incorporated associations (such as the Associations Incorporation Act 2009 (NSW)? If so, a range of quite stringent statutory duties could apply to your new role.

Is it a charity?

From July 2013, registered charities were subject to new regulation by theAustralian Charities and Not-for-profits Commission which set minimum governance standards and reporting requirements in an effort to improve trust and confidence in the sector. But be aware - changing government policy means that the future of the ACNC is in doubt and the future arrangements uncertain.

Any governance issues?

Role clarity is your first step – as a director, will your role be limited to governance, or include hands-on day-to-day management?

Next, look around you:

  • With so many volunteers, does your board have the right mix of skills and are they adequately prepared?
  • Do they have good sector knowledge and appropriate risk taking approaches?
  • Are they receiving adequate training?
  • How is the board dividing its time between strategy, managing funding, reviewing performance, risk oversight and compliance, and is it the right mix?
  • And are there clear linkages and relationships with management?
  • What steps are being taken to check the financial health of the organisation?
  • Are there adequately documented procedures, policies and record keeping in place to defend any legal or regulatory actions against the organisation? In particular, are there clearly defined internal control policies articulating individual authorities, responsibilities and accountabilities?
  • How do you communicate with your stakeholders (and especially donors if a charity)?
  • Are you delivering appropriate accountability, transparency and disclosure?
  • What reporting requirements are there, and are they being met?
  • Are you and your board insured?

The Australian Institute of Company Directors has released a Good Governance Principles and Guidance which will be an invaluable tool for you.

2014 NFP Governance and Performance Study

In 2010, the Productivity Commission estimated that there were approximately 600,000 NFPs in existence. In aggregate these make up just over 4 percent of GDP — almost 60,000 (10 percent) of these are considered economically significant, contributing to 8 percent of employment (Australian Bureau of Statistics, estimate 2006-07).

The AICD has recently published its 2014 NFP Governance and Performance Studybased on a survey of its members in the NFP sector.

Interesting highlights:

* Top priority is responding to change and uncertainty in government policy - a good example of this is the aged care service sector. Australia’s demand for aged care services is expected to double in the next 35 years. Highest priorities for aged care service providers is maintaining financial stability and compliance with government requirements. The survey revealed that aged care boards need certainty – directors have implored government to think long-term and finalise policy change.

* NFP governance continues to evolve – 85 per cent of directors believe governance of their organisation is better now than it was three years ago.

* Governance ratings are mixed - some NFPs operating in the aged and international sectors have high ratings on their governance performance – the lowest is for those in culture and recreation, religion and business and professional associations.

* Governance is changing – over a third of boards are planning to change one or more of their governance documents in the next year – such as by updating their constitution, moving from an incorporated association to a company limited by guarantee.

* NFPs are collaborating – although it can be complex, expensive and risky, merger is being considered by 30 per cent of boards surveyed. Others are partnering with other NFPs to deliver services across a sector.

* Boards want better performance indicators - to better measure mission effectiveness, including improved operational reports and strategy (particularly non-financial) measurement information.

* Relationships between the board and CEO are strong – more than 60 per cent of directors surveyed believed the relationship between boards and CEOs are very good or excellent.

* School boards especially face increased challenges – managing uncertainty in government funding, the school’s reputation and performance are top priorities. Other issues include increasing own source income and managing parent engagement. Organisations providing education services are the single largest category of NFPs in terms of income, employment and community reach.

NFP Directors Face a Challenging Future

Regulatory change is a constant challenge for the NFP sector. Foreshadowed changes with the ACNC are not isolated. Indeed, here in NSW, a review of the Associations Incorporations Act 2009 is underway (see Improving governance in incorporated associations) which may lead to yet further regulatory change.

A willingness to learn and readiness to adapt will continue to be essential attributes of the NFP director.

15 November 2014

About the author

Dominique Hogan-Doran is an Australian barrister and experienced NFP director and corporate governance advisor. 

Liability limited pursuant to a scheme approved under professional standards legislation.