AICD’s 2019 governance principles revamp and governance performance study

Introduction

The final report of the Royal Commission into Institutional Responses to Child Sexual Abuse in 2017^[1], along with the recently-released interim report of the Royal Commission into Aged Care Quality and Safety and press reports of the Royal Commission into Violence, Abuse, Neglect and Exploitation of People with Disability in recent months, has all meant that a bright light has been shone on the not-for-profit sector or at least certain parts of it. But the ripples of influence that these three Royal Commissions have had on charity governance are being felt by all sectors.  None in the sector can assume they are immune.

With that recent history in mind, the Australian Institute of Company Directors (AICD) released a revamp of its not-for-profit governance principles at the beginning of this year.

AICD revamped governance principles

The 10 not-for-profit governance principles are:

Principle 1: purpose and strategy

The organisation has a clear purpose and a strategy, which aligns its activities to its purpose focussing on:

• the organisation’s purpose is clear, recorded in its governing documents and understood by the board;

• the board approves a strategy to carry out the organisation’s purpose;

• decisions by the board further the organisation’s purpose and strategy;

• the board regularly devotes time to consider strategy; and

• the board periodically reviews the purpose and strategy.

Principle 2: roles and responsibilities

There is clarity about the roles, responsibilities and relationships of the board by:

• directors’ roles are clear and understood by the board;

• directors understand and meet their duties under the law;

• directors meet any eligibility requirements relevant to their position;

• delegations of the board’s authority are recorded and periodically reviewed; and

• the role of the board is clearly delineated from the role of management.

Principle 3: board composition

The board structure and composition enable it to fulfil its role effectively by:

• directors are appointed based on merit, through a transparent process and in alignment with the purpose and strategy;

• tenure of directors is limited to encourage renewal and staggered to retain corporate knowledge;

• the board reflects a mix of personal attributes which enable it to fulfil its role effectively;

• the board assesses and records its members’ skills and experience and this is disclosed to stakeholders; and

• the board undertakes succession planning to address current and future skills needs in alignment with the purpose and the strategy.

Principle 4: board effectiveness

The board is run effectively and its performance is periodically evaluated by:

• board meetings are chaired effectively and provide opportunity for all directors to contribute;

• directors seek and are provided with the information they need to fulfil their responsibilities;

• directors are appropriately inducted and undertake ongoing education to fulfil their responsibilities;

• the board’s performance, as well as the performance of its chair and other directors, is periodically evaluated; and

• the relationship between the board and management is effective.

Principle 5: risk management

Board decision-making is informed by an understanding of risk and how it is managed by:

• the board oversees a risk management framework that aligns to the purpose and strategy;
• directors seek and are provided with information about risk and how it is managed; and
• the board periodically reviews the risk management framework.

Principle 6: performance

The organisation uses its resources appropriately and evaluates its performance by:

• the board oversees appropriate use of the organisation’s resources;
• the board approves an annual budget for the organisation;
• the board receives and considers measures which evaluate performance against the strategy;
• the board oversees the performance of the CEO; and
• the board monitors the solvency of the organisation.

Principle 7: transparency and accountability

The board demonstrates accountability by providing information to stakeholders about the organisation and its performance by:

• the organisation’s governing documents and policies relevant to its governance are available to stakeholders;
• the board oversees appropriate reporting to stakeholders about the organisation’s performance and financial position;
• transactions between related parties, if any, are disclosed to stakeholders;
• directors’ remuneration and other benefits, if any, are disclosed to stakeholders; and
• members have the opportunity to ask questions about how the organisation is run and to hold the board to account for its decisions.

Principle 8: stakeholder engagement

There is meaningful engagement of stakeholders and their interests are understood and considered by the board by:

• the board understands who the organisation’s stakeholders are, their needs and expectations;
• the board oversees a framework for the meaningful engagement of stakeholders;
• stakeholders are considered in relevant board decision-making;
• there is a process for gathering and responding to complaints and feedback from stakeholders; and
• the board oversees a framework for how the organisation works with and protects vulnerable people.

Principle 9: conduct and compliance

The expectations of behaviour for the people involved in the organisation are clear and understood by:

• the board articulates its expectations of conduct and the consequences for misconduct for the people involved with the organisation;
• the board oversees compliance with relevant laws, regulations and internal policies;
• conflicts of interest are identified, disclosed and managed; and
• there is a process for investigating misconduct and relevant instances are brought to the attention of the board.

Principle 10: culture

The board models and works to instil a culture that supports the organisation’s purpose and strategy by:

• the board defines and models a culture that aligns to the purpose and strategy;
• the board oversees a strategy to develop and maintain the desired culture;
• the board oversees mechanisms to monitor and evaluate organisational culture;
• the organisation’s values are clear, periodically reviewed and communicated to stakeholders; and
• the board oversees a framework for the reward and recognition of workers.

AICD’s not-for-profit governance principles do not retract from ACNC governance standards

In considering the application of the AICD not-for-profit governance principles, it is important to remember that these principles are of broad and general application, to be tailored appropriately for an organisation’s specific requirements. They do not in any way detract from, or are a substitute for, the governance standards prescribed under the ACNC Act.  Indeed, in many ways, the governance principles and the ACNC governance standards significantly overlap reflecting, as they do, best practice in terms of organisational behaviour.

Central to acceptance of a best practice commitment to good governance is the need to ensure that an organisation has systems and processes in place that are appropriate to its circumstances and which enable the organisation to pursue its purposes effectively and meet its various obligations under the law.

NFP governance and performance study 2019

This year’s study by the AICD highlighted seven key findings as follows:

• Key finding 1: directors’ time commitment

The study found that half of directors surveyed spend 1-2 days a month on their not-for-profit role.  About one in 10 spend more than five days.  In some cases, directors give up oneday a week of their time, unpaid, to serve on a not-for-profit board. It shows that not-for-profit board work loads are rising with regulatory complexity and increasing community expectations.

• Key finding 2: board composition and director recruitment are ongoing challenges:

Not-for-profit boards continue to comprise mostly older directors with 77% over 50 and only 5% under 40 years of age.  Finding good directors remains the ongoing challenge for the sector.

• Key finding 3: not-for-profit director remuneration – where is it heading?

It would appear that there has been little change in the proportion of NFPs that pay board fees despite rising work loads and risks.  Some respondents to the study believe that more debate is required on whether NFPs should pay board fees or increase current remuneration rates.

• Key finding 4: NFPs are effective, but remain financially challenged

Not-for-profit directors are optimistic about their organisation’s future but reported profitability across the board is at a four-year low.  This may reflect a widening gap between the perception by directors of how their respective organisation is travelling financially and what the real performance is.

• Key finding 5: not-for-profit mergers appear to be slowing

After the large number of mergers in recent years reflecting introduction of the NDIS and changes in aged care, directors are reporting decreasing merger activity.

• Key finding 6: board performance is rated highly but directors see strategic planning and implementation as areas for improvement

Directors rate their board performance well but see strategic planning and its implementation as challenges.  Diversifying income sources and navigating the changed operating environment, particularly in those areas with the focus on consumer-directed care, have been priorities.

• Key finding 7: challenges facing sporting organisations have evolved

The study shows that directors of sporting organisations face unique challenges.  Those challenges appear to be around growth in audience numbers and participation in sport, the need for infrastructure and income uncertainty as challenges.  Governance of federated structures was a particular theme of challenge.  Other things challenging the sector are the growth of online sports betting and the impact of social media.

Myths debunked

The governance study challenges two myths concerning not-for-profit governance, namely:

• the myth that not-for-profit directors don’t work as hard as their for-profit director counterparts. The research shows that workloads of not-for-profit directors is broadly comparable to those in the for-profit sector for similar sized organisations; and
• the myth that governance standards are lower in the not-for-profit sector than for for-profit boards. The study has consistently found that not-for-profit governance is at least as good as for-profit governance.

Conclusion

There can be no doubt that the three Royal Commissions referred to earlier are focussing media attention on shortcomings in institutions that care for and educate children, as well as those who look after the elderly or those with a disability.

The Banking Royal Commission has seen a greater regulatory focus by ASIC and APRA on operators within the banking sector. It is most likely this will translate through to regulators, including the ACNC, in the charity sector.  The environment is changing rapidly.  This all means that all not-for-profit operators need to emphasise the importance of good governance and not simply pay lip service to it.  It is a matter of organisation culture.

But of course when we read and hear that not-for-profit boards are overworked, there will be an inevitable tension between monitoring compliance and strategic focus. The answer has to be to spend the time initially to get systems and procedures sorted out.  Once that has been done, and assuming cultural acceptance of that process, then hopefully valuable board time will be freed up a little to get back to the important work of focussing on those activities that effect a charity’s purpose.   That, after all, is what it is all about.

^[1] The State Government in Queensland’s most recent response to the Commission has been a bill recently introduced into the State Parliament creating yet more reforms around reporting of victims of sex abuse.  See our report on the bill later in this bulletin.