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The results of the 2014 NFP Governance and Performance Study (the Study) by the Australian Institute of Company Directors have revealed some interesting insights into the priorities and concerns of not-for-profit (NFP) boards.
Importantly, NFP directors are pushing for greater reporting of non-financial information, including on whether they have achieved their NFP’s mission.
Some key findings of the Study are that:
- non-executive directors spend 13% of their time on risk oversight and 12% on compliance;
- 40% of directors want more non-financial information, specifically on risk;
- 50% of directors believe board performance is not measured effectively;
- 17% of boards are seeking to change their legal structure. 60% of NFPs are currently incorporated associations, 12% unincorporated associations and 14% are companies limited by guarantee;
- mergers are being discussed by 30% of boards;
- nearly three-quarters of non-executive directors (NEDs) reported that their boards had undertaken one or more forms of formal professional development (PD) in the last year;
- more than 60% of NEDs believe the relationship between their board and their CEO is ‘very good or excellent’; and
- an NFP director spends an average of 20 hours a month working for a single NFP.
We elaborate on some of these key findings below.
Director contribution is significant
The amount of time a director spends working for an NFP varies between size and sector. Directors in the philanthropy and volunteering sector spend the most time working for their NFP organisation, working an average of 23.6 hours a month. The least amount of hours was spent by directors working in economic development and housing, averaging 17.9 hours per month.
51% of directors involved in the Study work for free; that is, they don’t receive any fees and they pay any expenses they incur in relation to their directorship.
Where directors are paid, their payment is correlated with NFP income. The Study found that nearly 30% of directors of NFPs with income over $20 million per annum are paid, compared with 12% of directors at NFPs with income of less than $10 million.
The health sector is the sector with the highest number of paid directors, with 31% being paid, compared to 2% of directors being paid in the culture and recreation sector, and none being paid in the religious sector.
In terms of the amount of payment (for those directors being paid), the numbers ranged from $1,200 to $185,000 (for the last financial year).
Directors want more non-financial information
The Study found that approximately 60% of directors want more measures of achievement of their organisation’s mission and half want more non-financial performance measures in general.
About 40% specifically want more information about risk, data on the sector and information on achievement of financial benchmarks.
Investing in resources and research to measure if an NFP is actually achieving its mission is clearly now recognised by board members as a beneficial investment. The increased transparency that this data can bring to an organisation’s opertaions, can also add important credibility to NFPs. This is especially the case at a time when large numbers of organisations in the sector are having their registrations revoked by the Australian Charities and Not-for-Profits Commission (ACNC), including for not having operations that were ‘solely charitable‘.
Some of the other key issues below directly reflect this increased emphasis on the importance of non-financial information and they also demonstrate some of the restrictions NFPs face when trying to achieve their goals.
Changing legal structure
The Study showed the continuously ‘evolving’ state of NFP governance structures. According to the Study ‘approximately one third of boards are planning revisions to their organisation’s constitution (or equivalent document such as statement of purpose, rules, articles of association) in the next 12 months’. Changing constitutions may be especially relevant where the organisation’s size and membership has increased so that the content of its governance documents are restrictive and outdated.
Some of the reasons for changing the constitution given in responses to the Study were:
- for a general refresh;
- to reduce directors’ terms on the board; and
- to change the definition of membership.
The drive to make these changes was prompted by ‘a need to revise outdated procedures; improve organisational agility; or change mission or purpose in response to changing client needs; or in response to changing legal obligations.’
As a consequence of changing governance structures, organisations will also be reviewing their board structures including their composition.
Professional development not always a priority
Professional development for Board members is often the missing link in ensuring appropriate Board expertise and Board performance. Of the NEDs that reported on their board’s PD training, the following details were provided:
- 35% reported that their board undertook an internal assessment;
- 25% said they had in-house training; and
- 15% had external whole-of-board training.
Unsurprisingly, the Study found a clear correlation between organisational income and the extent of PD made available to directors. Directors explained that ‘small organisations have little or no budget for PD, but also less need for advanced governance skills.’
However, directors in medium and large organisations (between $1-$20 million income) also apparently ‘struggle to meet their ongoing needs for enhancing performance’. Reasons for this struggle include an unsupportive culture that regards the time and cost of PD as unjustified, and not being in accordance with funder and donor expectations.
Benefits of collaborating and merging
According to the Study, merger discussions were most common in the larger NFPs, particularly those with incomes above $10 million or operating in the social services, development or housing sectors. The survey results revealed that the main reasons to consider a merger were:
- to improve existing services;
- for efficiency; or
- to broaden the range of services to existing users.
25% of respondents stated they had considered a merger in order to be ‘more attractive’ to funders and 18% in response to ‘encouragement by government’.
Undertaking a merger is not an easy process and a good alternative to embarking on merger negotiations (which aren’t guaranteed to succeed) is sharing or collaborating with other NFPs to deliver services across an industry. Interestingly, 25% of directors reported that their NFP organisation shares resources such as buildings and equipment and 18% share back-office costs with other NFPs. Collaboration was highest among NFPs operating in the education, health and social services sectors.
Greater government certainty is needed
Government uncertainty was found to be one of the key challenges confronting NFP boards, not least of which was the continuing struggle over the future of the ACNC.
Earlier this year Fairfax Media reported that the Minister for Social Services, Scott Morrison, had backed away from plans to abolish the ACNC, saying that the abolition of the ACNC was not a high priority.
This news would be welcome to many directors who took part in the Study as a ‘significant’ number of them wanted the ACNC to remain.
Uncertainty about legislative reform and changes and reductions in government funding also meant that NFPs are left ‘struggling to determine the impact’ of changes, especially where legislation implementing new government policies is left stagnating in Parliament, without a final decision.
36% of respondents considered that creating stability in government policy was a top priority , as this would lead to ‘better, longer term decision-making and investment’.
It remains to be seen if 2015 will provide any greater certainty for NFPs.
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