The Australian Institute of Company Directors (AICD) has published its 2015 NFP Governance and Performance Study (Study), which contains numerous interesting insights into the operation of boards in the NFP sector. The study was based on the findings of a survey which received over 2,750 responses from current non-executive directors of NFPs. The study also involved ten focus groups located in six different cities that discussed contemporary challenges faced by NFPs.
The study focused on the demographics, priorities and concerns of board directors. The key findings included:
- financial sustainability is the core issue;
- directors want a more collaborative relationship with government;
- NFP boards are leading on diversity – in both implementation and awareness;
- the quality of board governance is perceived to be improving; and
- federated organisations carry additional complexities for board members.
Financial sustainability: Efficiency is a concern
Four of the directors’ six top priorities were directly related to the financial health of their organisation. Concerns included cost management and diversifying income streams. The focus on financial sustainability is closely related to the idea of efficiency within the organisation.
The Productivity Commission stated in 2010 that productivity was an alien concept to many NFPs and that some eschew all ideas of efficiency and effectiveness. The AICD pointed out that these claims were not substantiated with any evidence comparing NFPs to for-profit organisations, but the Commission’s view persists. The Study provided evidence of directors’ opinions regarding efficiency of both their organisation and the sector as a whole. 70% of NFP directors rated their organisation as mostly or highly efficient but only 38% of respondents gave a similar rating to the sector as a whole. The AICD argued that this formed an attitude that ‘my organisation is efficient, but others are not.
Although these findings would suggest that most organisations are confident in their efficiency, deep concerns about sustainability are reflected in the fact that 8% of directors reported that their board had discussed closure of the NFP. The inability of NFPs to attract sufficient financial support can mean that the closure of the NFP is the only sensible option.
Another measure being considered by a third of all directors is a merger with a similar organisation. 7% of directors reported that a merger had been completed in the past year, with an additional 7% stating that they were currently undertaking a merger. Although mergers can be a way of reducing costs, they must not be treated as a ‘fix-all’. Finding a good cultural fit is crucial, as the anticipated savings from increased efficiency often fail to eventuate.
As an alternative to a merger, some NFPs have increased collaboration as a way of drawing on the expertise of other NFPs. 70% of directors reported that their organisations were collaborating in order to advocate for the sector or for beneficiaries.
A large factor in the financial concerns of many organisations is the sharp decline in government funding to the NFP sector.
Unsatisfactory relationship with Government
There is general dissatisfaction with the Government’s understanding of NFPs, with half of all respondents giving the Government 4 or less out of 10 in this regard. Given that the Government plays a central role in the sector, its management of issues such as funding and regulation can have a large impact on the sustainability and efficiency of organisations. Directors flagged the procurement practices of the Government as being in need of particular reform, and have called for reduced red tape and harmonised legislation.
Diversity in boards
Although there are some areas in need of improvement, NFP boards are ‘leading the conversation on the role and benefit of diversity in the boardroom’. In particular, 60% of the directors surveyed were confident that their board composition reflected the gender balance of stakeholders. 38% of directors participating in the survey were women, which would indicate a greater general diversity in NFP boards than in the for-profit sector. Directors were conscious that there were areas that they could do better in attracting greater diversity in relation to cultural backgrounds and youth, such as creating youth boards.
Role of board members
13% of board members are paid, with the remainder donating their time to the organisation. Director pay, when awarded, was on average $25,700, with the highest paid director receiving $200,000. The larger the NFP, the more likely the directors are paid. The hours contributed by directors remains significant, with directors spending on average 24 hours per month per directorship, and the respondents having on average 1.6 directorships.
In addition, 39% of directors also reported making a donation to the organisation. The median donation was $1000, with higher rates of donation to organisations with lower incomes.
Additional complexities exist if an organisation is part of a larger federated structure, as is the case for organisations such as Alzheimer’s Australia. Federations are complex and rely on managing a range of different relationships. The Study gave several tips for federated structures:
- ensure that the missions of the member organisations are aligned;
- clearly define the roles of member organisations and the peak body;
- take a formal approach to planning and implementing conflict resolution;
- identify the areas in which economies of scale can be achieved, and for other areas encourage specialisation;
- decentralise decisions to encourage accountability in member organisations; and
- build skill through collaboration.
It is interesting to note that when the ratings for ‘high priorities’ were ranked, the lowest priority for directors going into 2016 was improving board governance, and ensuring compliance with regulations was the third lowest priority. Whilst this may demonstrate satisfaction with these areas, it may also indicate that board members are choosing to focus on pressing issues such as financial viability at the expense of how, as a board, they go about doing that.
84% of respondents believed that their organisation’s governance had improved over the past three years, with directors rating their efforts an average of 7 out of 10. Interestingly, 33% of directors believed that the board required greater knowledge of governance and duties, although they considered the greatest priorities for additional skills were in the areas of strategic planning and oversight of strategy implementation.
Financial viability is clearly a key concern for directors, with uncertainties relating to government funding, as well as red tape and further regulation relating to procurement causing additional concerns. However, the obvious focus on efficiency within organisations, and looking outside by considering mergers and collaboration with appropriate partners, indicates that boards are very aware of their challenges and working towards meeting them.