Not-for-profit boards

Overview

Governance in not-for-profits (NFPs) is increasingly important. NFPs are facing more competition and stakeholder scrutiny, and their long-term sustainability depends on good governance. While NFPs have different characteristics to for-profit entities, the guidance in the Four Pillars is still largely applicable to them.

• The level of trust reposed in not-for-profits (NFPs) means good governance is imperative in such organisations.
• NFPs experience high levels of stakeholder scrutiny including by the public at large and the government.
• The NFP sector has undergone significant change and continues to face many challenges. Good governance can help address these challenges.

NFPs in New Zealand

NFPs are generally established to benefit the community or members. A NFP entity is any society, association or organisation (incorporated or not):

• that is not carried on for the profit or gain of any member, and
• whose rules do not allow money, property or any other benefit to be distributed to any of its members.

Common criteria for NFPs used by Statistics New Zealand include bodies that are:

• organised to the extent that they can be separately identified
• not-for-profit and do not distribute any surplus they may generate to those who own or control them
• institutionally separate from government
• self-governing and in control of their own destiny
• non-compulsory in terms of both membership and members’ input.

There are over 115,000 NFPs in New Zealand. Many NFPs are either incorporated societies or charitable trusts. Benefits of incorporation include separate legal personality, perpetual succession and the capability of holding real and personal property.

Incorporated societies

New Zealand has over 23,000 incorporated societies, including cultural, sporting, educational, religious, business and professional groups and social service providers. Incorporated societies are governed by the Incorporated Societies Act 1908. This Act is being updated to improve governance structures and arrangements for incorporated societies. A draft bill was released for consultation in 2015 and in May 2019 the government agreed to make a number of changes to it. The Bill is yet to be introduced into Parliament.

Charitable trusts

Trusts (and societies) that have charitable purposes can incorporate as charitable trust boards under the Charitable Trusts Act 1957. The law of trusts was reformed in New Zealand with the new Trusts Act 2019 and this is relevant to trustees of charitable trusts and other NFP trusts. This Act includes mandatory and default trustee duties and sets out trustees’ obligations to retain records.

Charities

All charities are NFPs, but not all NFPs qualify as charities. NFPs must meet certain requirements to register as a charity under the Charities Act 2005 and this includes being established and maintained exclusively for charitable purposes. Charitable purpose has a special meaning in law and is defined in section 5(1) of the Charities Act to include:

Charities Services, which is part of the Department of Internal Affairs, monitors charities and administers the Charities Act. The Charities Registration Board makes independent decisions about the registration and deregistration of charities. The Charities Act is currently undergoing its first major review since it was enacted in 2005.

Registered charities must use the External Reporting Board’s (XRB) financial reporting standards for their annual financial statements. Large charities are generally required to use a set of accounting standards. Smaller charities can prepare their financial statements on a simplified basis.

NFPs vs for-profit entities

The purposes and deliverables for NFPs are generally different from those of for-profit commercial entities. For example, NFPs are often set up to meet a social need and they focus on making a surplus and not shareholder profit. Other differences in NFPs can include:

• exemptions from paying income tax
• having donee status allowing donors to claim a tax credit for donations
• reliance on volunteers
• reliance on fundraising, sponsorship, grants or member subscriptions
• engagement with different stakeholders (eg volunteers, community groups and members).

Good governance in NFPs

NFPs are sometimes said to have a strong focus on the three S’s – stakeholders, sustainability and surplus. Good governance is important to all three. The need for a robust governance framework in NFPs may grow in proportion to the size of the organisation. Small NFPs (measured by people, operations and/or turnover for example) may have a relatively basic governance framework that suits their needs. However, larger NFPs may have more developed governance structures and arrangements in place, and aspire to best practice.

Governance documents

NFPs generally have founding documents governing how they operate, eg a constitution, rules or trust deed. These documents often set out key governance processes and the rights, powers and obligations of board members. Board members should be familiar with these documents and actively understand and be involved in the governance of their organisation.

Governance and management

The governance/management split can be blurred or intertwined in some NFPs, especially smaller organisations. It is important that people serving on boards of NFPs and involved in management be aware of their different roles and responsibilities and which hat they are wearing in carrying out their functions. They need to take a step back from the day-to-day operational matters and devote themselves to the bigger picture governance issues relevant to ensuring the long-term sustainability of their organisation. That is, they need to take time to work on the organisation, rather than in the organisation.

Stakeholders and accountability

NFPs often receive funds from government, the public and other stakeholders. They may also benefit from tax concessions and donations. Such NFPs have considerable trust reposed in them which demands commensurate probity and accountability.

Some stakeholders may take a close, semi-proprietal interest in the activities of NFPs. NFPs often meet their accountability obligations in ways that satisfy this stakeholder scrutiny and sometimes substantial public interest in their affairs.

The risk of abuse and fraud in the NFP sector means there is pressure to demonstrate best practice in governance. Risk management is important to ensure the faith and continued support of stakeholders.

Directors should be mindful of the specific governance matters that arise where an NFP raises funds directly from the public. Principles relevant to strong financial oversight must be observed. The NFP must operate with a principle of responsible fundraising, which includes the obligation to be accurate and truthful. A board should institute plans to protect the entity from damage or loss. NFPs should also consider adopting policies that outline where accepting a gift would compromise its ethics or other interests and institute policies that ensure funds are invested and managed responsibly and in accordance with all relevant legislation.

Continuing challenges for NFPs

The NFP sector has changed considerably over recent decades. The workload, level of responsibility, and skill and training required of volunteers and others working in the sector, has increased in conjunction with compliance obligations and public accountability. Other challenges include:

• intense competition for limited resources
• competing entities with similar services or scope
• attracting, motivating and retaining board members and staff
• securing reliable funding
• traditional reluctance to partner, enter joint ventures, collaborate or

Good governance can help address these challenges and increase the likelihood that organisations will survive and fulfil their fundamental purposes.

Duties and liability

NFP board members have key duties and responsibilities. These will generally be found in the entities’ rules, governing legislation, other legislation relevant to the entity, and case law. The consequences of a board member breaching their duties can be significant. Board members should ensure they are aware of relevant legal requirements and expectations.