Debunking NFP governance

I recall very clearly the advice of a highly respected ASX100 company director and former mentor who said, ‘Trisha, it’s really quite simple. If you are not comfortable with what you are doing making front-page headlines in the Sydney Morning Herald, then you shouldn’t really be doing it.’

All directors should ask themselves: What would ordinary, right-thinking members of the community — knowing all the relevant facts — believe to be an appropriate exercise of stewardship in such circumstances? That goes to the very core of good governance.

More broadly, Governance Institute defines corporate governance as ‘The framework of rules, relationships, systems and processes within and by which authority is exercised and controlled by corporations’. It encompasses the mechanisms by which companies, and those in control, are held to account. We also refer to the four pillars of governance: transparency, accountability, stewardship and ethics.

The role of the board

The board’s role is to govern an organisation rather than manage it and to take prime responsibility for driving the performance of the organisation through:

  • strategy formulation and approval
  • CEO succession planning and appointment
  • monitoring of organisational performance
  • overview of risk management policies and practices
  • overview of compliance polices and practices
  • ensuring an appropriate top-level governance framework exists and ratifying specific policies and practices
  • networking on behalf of the organisation to assist in achieving organisational goals
  • communications with key stakeholder groups, in particular members
  • providing the ultimate approval for major decisions.

Governance challenges in the not-for-profit sector

Though the sector is very broad, all not-for-profit (NFP) organisations face governance challenges, including ensuring that governing rules are in place (and reviewed regularly to ensure they remain fit for purpose) and member engagement.

NFPs are not there to make a return on financial investment, but to fulfil a mission. Members and stakeholders of all NFP organisations should have access to information that allows them to know:

  • the financial position of the NFP
  • that the organisation is being management prudently
  • that the allocation of resources is aligned with the values and objectives as set out in its constitution
  • who constitutes the governing body
  • what processes are in place to ensure the personal interests of directors do not override the interests of the organisation.

This means ensuring transparency and accountability to members, donors (for charities), employees, volunteers and stakeholders of the NFP, so that they have confidence that the NFP is acting to further its purpose, and can make an assessment as to whether the activities of the NFP match its stated purpose.

The responsible management of non-financial risks as well as financial risks is a key challenge. Putting processes in place, including risk management processes, to ensure the proper management of all fundraising, activity support, expenditure and staff and volunteers is central to a governance framework.

Managing conflicts of interest for ‘conflicts of loyalty’ is another challenge for NFPs. Many NFPs have representative boards, and ensuring that directors are aware that their fiduciary duty is to the organisation and not those who nominated them to the board is central to a governance framework. Many NFP directors are passionate about the mission, but they need to ensure they are also capable of reading the financial statements, challenging management in a constructive manner and developing strategy. They need to be aware of the risks attached to related-party transactions and act with care and diligence, in good faith, and not misuse their position.

Top five tips for good governance

  • Ensure the business has a clear ethical basis.
  • Determine appropriate goals arrived at through a suitable stakeholder decision-making model.
  • Implement an effective strategy process which considers stakeholder value.
  • Structure the organisation to effect good corporate governance.
  • Establish reporting systems that facilitate transparency and accountability.

Importantly, many NFP organisations are staffed or managed by volunteers so there need to be clear protocols around volunteer engagement and contribution.

How to work on these challenges

Governance is a work in progress, not a destination. The board needs to regularly review its governance arrangements, and ensure that accountability mechanisms are in place and monitor those.

Good governance extends beyond the boardroom. It provides the framework through which the strategic objectives of the organisation are set and cascaded throughout the organisation, and the means of attaining them are determined. This means having clarity as to purpose, alignment of effort with strategic objectives, and accountability. The board and management team should consider education and training in governance, and also joining an organisation such as Governance Institute to ensure they are kept abreast of a changing regulatory and operating environment, as well as evolving stakeholder expectations.

This blog was originally published as an article published by Third Sector in its September/October 2015 edition. Governance Institute has Not-for-Profit Governance Forums in Sydney on 18 November and Perth on 25 November 2015. 

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