Presented by Vera Visevic

Doing Good Governance –the antidote to regulatory uncertainty

Current Regulatory Uncertainty

• The future of the ACNC is uncertain.

• The future of the Governance Standards is uncertain.

• How to transition from the ACNC to ASIC.

• How to transition from ACNC to the ATO.

• What is going to be required of charities that are incorporated associations?

•What is happening with the auditing requirements for NFPs that are companies?

•Draft laws about income tax exempt entities – TR 2014/D5.

•Future of “in Australia” special conditions.

How do we operate in this climate of uncertainty?

• Some of these possible changes may take another 2-3 years to iron out.

• How do NFPs operate and govern so as to minimise any non compliance when we don’t really know what compliance means?

• The answer is – practise principles of good governance.

Elements of Good Governance

a) An effective board;

b) Effective risk management; and

c) Maximising employee engagement and organisational culture and values.

(a) What makes an effective Board?

1. Robust decision making:

• Good decisions of the board may increase the likelihood and degree to which an organisation actually delivers on its purpose.

2. Compliance with directors’ duties:

• Good governance is embedded in the good behaviour and the good judgement of directors.

Trust, mutual respect, open communication and working together as a team are the basis for a strong and efficient, high-performing board.

Four ingredients for an effective board:

A.Clarity regarding role and focus

•Each member on the board begins with a clear understanding of their role, scope of responsibilities and has the common goal of the long-term success of the organisation.

•A high-performing board also has a set of objectives or outcomes that they wish to see through to fruition on a continual basis.

B. A balanced board

• A high-performing board has a balanced mix of directors. The directors should ideally possess a mix of skills deemed useful for the governance of the particular organisation. The directors should also be enthusiastic, enquiring, dedicated and able to work well with the other directors.

• The conversation between the board and the CEO should be an open dialogue. The CEO should be comfortable using the board as a first port of call to discuss ideas in their early stages. This way the CEO has the benefit of a ready made high-performing board which can give the full benefit of their expertise in helping make decisions.

C. An effective chairman:

• An effective Chair will create the atmosphere and set the tone for the environment that the board will operate in.

• A positive environment will include open ended communication between the Chair and the other directors at board and committee meetings which will flow through to increasing the performance of the board. Effective high performing Chairs lead performance driven teams.

• Effective Chairs also take the time to speak with their directors individually at frequent intervals in the year to discuss any issues they may have, to assess their performance and to encourage and foster effective contributions that the directors may want to extend to the board.

• The Chair also manages the process of encouraging directors to form a unified team in which all parties are aware of their responsibilities and boundaries within the board structure.

• Finally, effective Chairs establish open and honest relationships with their CEO based on a mutual trust and understanding which then extends to the wider board.

D. A culture of trust and respect

• A board is not a collection of individuals and talents, but a team.

• For it to function as a team, it needs effective chemistry, candid communication and mutual respect.

• This ensures that probing questioning, constructive criticism and challenging debate can take place.

Steps to take to develop an effective board – see hand out

1. Firm up your foundations – have a robust governing document

2. Organise around objects

3. Focus on the strategic

4. Get on top of the legals

5. Know the organisation

6. Create a strong relationship between the chair of the board and the CEO

7. Establish a strong advisory network

8. Build the board intentionally

9. Foster effective board operations

10. Create an innovative culture

11. Measure progress

Challenges – why is it so difficult to have an effective board?

• Directors are usually volunteers who are time-poor and often inexperienced;

• Directors are often elected from a membership base rather than being appointed for the skills that they individually possess;

• Constitutions lack appropriate clauses to encourage limited terms for directors, resulting in stagnant boards with long-serving directors;

• Directors do not understand the concept of good governance and their role on the board;

• Boards cannot attract skilled directors by paying them, as:

• the organisation is under-funded; or

• is prohibited in its constitution from paying directors;

• There is no clear “owner” of a not-for-profit to whom the board is accountable;

• Directors may individually interpret the objects differently – in a for-profit company, the goal of making money is clear, in a not-for-profit, often the “objects” are not so clear; and

• Success is harder to identify than it is for a for-profit company whose success can be measured by profit.

• On top of these challenges:

o Boards are facing increased scrutiny, from regulators to stakeholders;

o The regulatory environment has become more complicated; and

o There is increasing competition for donor dollars or membership subscription.

Overcoming hurdles

•Increase transparency – require thorough reporting and transparency. Longstanding directors may be encouraged to leave and ingrained bad practices might quickly be changed if they become visible.

•Amend the constitution to allow the board to appoint co-opted directors.

•Amend the constitution to allow directors to appoint their own Chair, rather than the members appointing the Chair. The board is better placed to know who would be most appropriate to lead the board.

•Amend the constitution to shorten the term for directors. We recommend having a maximum of three terms of two years each or two three year terms.

• Consider paying directors. This may require some form of campaign to educate stakeholders around the importance of having strong directors before implementing the change. You will also have to be aware of the potential implications:

o There could be reputational concerns.

o Ensure you are transparent – it is not the kind of thing you want the public discovering second-hand.

o You may have to re-instate the word “Limited” at the end of your name if you are a public company limited by guarantee.

• Avoid the temptation to micro-manage which can distract from considering important strategic issues.

• Be patient – sometimes achieving an effective board takes time as it may require longstanding directors to be educated about the need for fresh new people and ideas and for them to move on as amicably as possible.

(b) Risk Management

• Good governance can offer a number of important benefits to organisations, including:

•better organisational strategies and plans;

•improved operational effectiveness; and

•improved member and stakeholder engagement and communication flow.

• In an uncertain environment, prudent regulatory compliance, financial and risk management is the foundation of a sustainable and effective organisation.

• The board and the management need to be aware and proactive when it comes to risk management.

• Boards play an important role in establishing a sound system of determining:

• how to identify risks;

• management and minimisation of risks; and

• treatment and control of risks.

A. Types of risk

Boards must consider the following risks:

• staff or employment issues;

• volunteers;

•physical spaces and equipment;

•records;

•cash receipts and payment;

•financing;

•compliance risk;

•financial risk; •operational or program risks;

•environmental, including event risks; •brand and reputational risks;

•strategic risks; and

•insurance.

B. Strategies to manage risk

•risk avoidance; •risk transfer; •risk mitigation; and

•monitoring identified risks.

(c) Effective Working Environment

• The culture of an organisation will be influenced by the conduct and actions of the board.

• The board can take steps to influence organisational culture to enable it to more effectively implement its strategies and deliver on its purpose.

• These steps include:

• encouraging and facilitating open conversations on the values of the organisation;

• developing or adapting a formal code of conduct and ethical standards; • challenging undesirable practices and behaviour;

• undertaking team-building exercises;

• training and support;

• reviewing hiring and firing practices; and

• changing how success is rewarded/celebrated.

Questions?