How Can Charities and Non-Profits Demonstrate Governance and Accountability?

By Andrew Heaton

(image via Victual)

When it comes to worthy ways to spend taxpayer dollars, backing an initiative which sees food otherwise destined for waste collected and distributed to thousands of people who live on or close to the poverty line in Illawarra sounds like money well spent.

Yet many have no doubt felt extremely disappointed after media reports broke late last year in respect of allegations that Illawarra Hope Centre Food Barn manager Lizzie Millar had allegedly defrauded the charity of more than $12,000 by allegedly taking money of varying amounts at different stages.

Clearly disappointed are founders and Christian pastors Jeff and Gally Dakers, who say they themselves have had to carry the financial implication associated with the missing money to ensure that the Barn’s operations were not impacted. Also disappointed (though reportedly not financially impacted) are federal and state taxpayers, who have reportedly contributed thousands of dollars to the charity’s work over the nine years in which it has been in operation.

Though disappointing, such events underscore the importance of broader questions about how charities and not-for-profit organisations throughout Australia can adopt effective practices with regard to governance, accountability and transparency.

In this respect, it is important to look at common areas in which organisations fall down, benefits for charities in following good practice and important features which are evident in organisations who have adopted optimal strategies and practices.

On the first point, Vera Visevic, Partner, Charity & Not-for-Profit, Property at national law firms Mills Oakley, says the most important consideration is the board itself. In this respect, she says there are two concerning trends.

First, there is the process by which board members are elected. Particularly in the case of clubs, she said there is a tendency for people to be elected on the basis of the popularity or respect they enjoy from members. Whilst those elected in this way are typically dedicated and hard-working, they may lack experience in a director capacity and awareness about the extent of responsibilities associated with their role on the board. In addition, whilst the strong understanding of operations which many of these people typically bring is beneficial, there is a risk that they may not be as strong in their ability to see beyond current approaches and to think at a more strategic level about how the organisation could change and evolve going forward.

In addition, Visevic says a second problem can occur where board members lack the confidence to adequately respond to questioning – a phenomenon she says can lead to situations whereby questions from members in fact not being encouraged and a breakdown in confidence between members and the board.

Speaking particularly of charities, David Locke, Assistant Commissioner, Charity Services at the national charities regulator the Australian Charities and Not-for-profits Commission (ACNC), said two common areas where practices can fall down revolve around inadequate management of conflicts of interest and poor practices regarding financial control.

On the former issue, Locke says potential conflicts can arise where there may be inadequate separation between the finances of individuals and those of the charity, such as what can happen where board members receive payment for their services or when an individual’s business interest benefit directly from the expenditure and activities of the charity. Where such conflicts are not appropriately managed, Locke said problems can result.

In respect of the latter issue, he says the ACNC has seen cases whereby inadequate checks and balances had enabled fraudulent activity to occur. These checks and balances include straightforward procedures such as requiring cheques to be signed by multiple parties.

He stresses, however, the majority of those involved with charities do the right thing. Whereas there are around 54,000 registered charities in Australia, he says the ACNC had revoked only 34 registrations following investigations.

In terms of what accountable organisations look like, a Governance for Good publication which the ACNC has produced talks about elements such as the composition of the board, governance documents and financial control. According to five ‘governance standards’ which the regulator says should represent a minimum as to what needs to be done, charities should be able to demonstrate that their work is performed on a not-for-profit basis for genuine charitable purposes, show accountability toward their members, comply with all applicable laws, ensure that only suitable (and not disqualified) people are appointed to the board and take reasonable steps to ensure that their board members understand and carry out their duties.

Asked what he would expect to see in a well-functioning organisation, James Beck, Managing Director of governance and risk management consultancy Effective Governance, breaks this down into what you would expect from an external stakeholder perspective and also from an internal perspective.

Externally, there are a number of things which Beck says he would want to see on an organisation’s web site. At a minimum, this would include a statement which aligns the organisation as a not-for-profit and aligns with the guidelines of the ACNC governance principles. Beyond that, he would look for:

  • A condensed version of a charter outlining how the organisation is governed and how interactions between with stakeholders or members will work (approx. ten pages).
  • An annual report (or preferably a series of annual reports) which includes comments from both the chairperson and the chief executive officer outlining what the organisation has achieved during the year, what has and has not worked well as well as what lessons have been learned and critical priorities for the coming year.
  • A directors’ skills matrix outlining in a structured manner the skills which each of the directors bring to the table and how the mix of skill sets amongst different board members works together to create a board with a diverse range of skill sets
  • A statement about how the board undertakes a reflection of its own performance and how it is contributing to the organisation.
  • A one page governance activity statement outlining critical things the board had done from a governance perspective during the year.

In respect of the skills matrix, Beck says it is important to go beyond the straightforward picture and bio approach and to explore the competencies and capabilities which board members have in terms of governance, technical capabilities and their industry competencies within the sector involved.

With regard to the board reviews, Beck says he would look for an internal reflection at least annually and for external input to be sought every two to three years. Whilst it would neither be necessary nor appropriate to display the outcomes of these reflections on an organisation’s external web site, what should be displayed is an outline and description about how the review process takes place, he said.

Internally, the most important thing which Beck would look for is a directors’ handbook – an evolving and regularly updated document which is transferred from one generation of directors to the next and which describes in some depth how governance is undertaken within the organisation, critical governance policies and important processes which have been refined by the lessons which have been learned along the way. This would serve as the primary document during the induction process when new directors are brought on board.

Beck says the importance of this cannot be overstated. Governance, he says, is not about running the organisation from an operational perspective but in fact ensuring the structures are in place to facilitate the organisation being run well. In order to do that, it was important that new directors have a vehicle which provides guidance about how to ensure that the organisation is being managed effectively.

Others offer slightly different perspectives. Visevic, for instance, says the composition of the board should be given careful thought to ensure that the board reflects a diverse skill set and range of people from the community. Board members themselves should be comfortable in anticipating longer term challenges and being prepared to adopt new strategies and engage in innovation, she said.

Locke, meanwhile, says it is critical to have people who are not only dedicated but who have the right skills and to ensure that those who volunteer understand what is required, manage the finances of the charity carefully and act in the best interests of the organisation. Locke also says it is important to regularly review the charity’s constitution and rules as well as to review at a strategic level what the organisation’s bigger picture objectives are and whether or not the strategies which are in place in order to deliver on those are indeed optimal.

Finally, an important question revolves around how all this benefits organisations themselves and why they push good practice in this area.

According to Beck, the benefits of good accountability are substantial. In fact, he insists that effective governance practices can add between ten to twenty percent to a charity or not-for-profit’s bottom line outcome compared with what would otherwise be the case if such practices were not in place. Breaking this down, he said the simple act of undertaking a review of strategy and ensuring that key performance indicators were appropriate in accordance with the strategy could by itself deliver improvements of between one and two percent to bottom line outcomes. A similar impact could apply in respect of other areas such as an annual assessment of long term risks to the organisation in order to adopt strategies to manage those risks, carefully reviewing performance indicators for key staff to ensure that these are aligned with organisational objectives, reviewing policies and procedures to ensure these are appropriate and engaging proactively with stakeholders and donors according to a stakeholder engagement plan which is aligned to core strategies.

“There are about ten key areas of good governance which you could by implementing good practice or leading practice add at least ten percent to the bottom line of the business which you are overseeing,” he said.

At a broad society level, Locke says the importance of transparency in charities and not-for-profits cannot be overstated. Australians, he says entrusted more than $11 billion of their money to charities in 2015 (ACNC data) whilst millions of volunteers gave their time around the country. Moreover, he says that charities and not-for-profits have a substantial and beneficial impact upon our economy and society. Because of this, the ability to demonstrate that they are being well run and operating as they should is imperative, he said.

At an individual organisation level, meanwhile, Locke says charities need to adopt good governance principles in order to be sustainable over the longer term.

“Charities are in many ways like small businesses – you’ve got to have good procedures in place and you’ve got to have good governance if the organisation is to survive,” he said.

“Its’s difficult out there, it’s difficult to raise funds. Often charities are working in difficult areas with people who are in real hardship.”

“You won’t be sustainable as an organisation if you don’t have good procedures in place and good people following them.”

Resources and fact sheets about effective charity governance including the Governance for Good publication are available on the ACNC’s web site.

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