A director’s guide to stronger NFP governance

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Ram Subramanian:
Welcome to With Interest. I'm Ram Subramanian. And in today's show, we are talking with Phil Butler about good governance in the not-for-profit sector. Phil is the not-for-profit lead at the Australian Institute of Company Directors, where he plays a pivotal role in promoting sound governance practises for organisations within this crucial sector. Welcome to With Interest, Phil.

Phil Butler:
Thanks, Ram. Great to catch up again.

Ram Subramanian:
I'm also joined by Joss Fenton FCPA, a not-for-profit specialist who chairs the CPA Australia Tasmanian not-for-profit committee. Joss has also authored the updated CPA Australia Guide to Not-for-Profit Financial Management and Good Governance. Welcome to With Interest, Joss.

Joss Fenton:
Yes, thank you, Ram. All good at this end.

Ram Subramanian:
Phil, if I could throw to you first, can you give us an overview of what good governance could look like for not-for-profit organisations?

Phil Butler:
Yeah, thanks Ram. And it's a really interesting one given the complexity of the not-for-profit sector, which is made up of charities and non-charities and a whole range of different organisations doing different things.

I'm always mindful that governance should be about helping organisations achieve outcomes. So yes, you could go to a classic definition about systems and processes to direct and control the organisation, and of course, that's true. But in the not-for-profit context, my observation, it’s very much about getting a group of people to ensure that they've got the appropriate systems in place to help the organisation achieve the outcomes.

And if it's not doing that then, to me, it's not good governance. So, just to extend that out a little bit further, the governance needed to run my local tennis club, right, and I was on the committee of that club for many years, is going to be vastly different than the governance that's required to run a large aged care facility or a disability provider or a business and professional association.

Yes, you will always need systems and processes, but they'll be different. They'll be less complex in a tennis club, more complex in a care governance environment. So, often my first thought when I'm talking with people about governance is to be thinking about, well, what's the organisation, what's its purpose, and what's the appropriate governance to help them achieve their outcomes?

Ram Subramanian:
I can see what you're saying here, Phil. The way in which a not-for-profit addresses its governance requirements will depend on what it is, the size of it, et cetera. But surely, you would say, the principles of governance should remain the same regardless of the size of a not-for-profit.

Phil Butler:
Yeah, I think the principles absolutely, Ram. And if I think about AICD's governance principles and guidance and the third edition released last year, it starts with vision, purpose, and strategy. And every organisation does start with that, but I'm mindful if I keep using the tennis club example, the vision and the purpose of that organisation will be completely different than the vision and the purpose of the large age care provider. And everything that then flows down from that is probably going to be somewhat different and certainly less complex for the smaller organisation which has less resources but less complexity to it.

Joss Fenton:
Thanks, Phil. That's really interesting to hear about the good governance, what that means to not-for-profits side to yourself. What are you seeing as some of the common challenges faced by not-for-profits regarding governance, particularly in the Australian context?

Phil Butler:
Yeah. Well, at the moment we are doing a bit of a roadshow based on our not-for-profit governance and performance study. And some real interesting findings came out of that survey that we did late last year and perhaps one of the key ones, I'd link back to the ever-increasing expectation on directors from regulators, but society more broadly.

We've had a number of royal commissions into aged care, disability care, previous ones into child sexual abuse as well as The Hayne Royal Commission. All of those have picked up on failures of governance at all different sizes and shapes of organisations. And this is leading to, dare I say it, a much heightened expectation on the role of directors and a real increased time commitment for them.

So we saw that over half spending more than three days per month on a single not-for-profit, we saw 14% of respondents saying that they had doubled the amount of time they were spending on a single not-for-profit in the last year. And if you think about the implications of a brand new aged care act coming in for 1 July, we're still seeing the flow on from the Disability Royal Commission that directors are needing to spend a lot more time understanding what's going on within their organisation.

And dare I say it, for those that are in the human services area where they are involved in the provision of care, needing to understand the operations of the organisation in more detail than probably we thought in the past. So that you can ask the questions of management, understand the answers, and then come back and ask further questions of management.

So you have got that really good sense about, well, how are we going about achieving this outcome of providing wonderful care for our vulnerable people? So that's just one, I think of a range of issues facing the sector, Joss.

Ram Subramanian:
Thanks for that, Phil.

Joss Fenton:
Yeah, thanks Phil. There certainly has been some media coverage on a number of those areas that you've raised around aged care and some of those others. So how does the AICD support not-for-profits in this space?

Phil Butler:
Yeah, absolutely. So there's a range of things, and my observation is there is so much information that is out there to assist directors. And if you're just on a committee, which many will be, they'll call themselves as a committee rather than a board, but still be thinking of yourself as a director as having a governance responsibility. There's resources on our website, but on other websites as well about good governance. So, I've mentioned the governance principles.

There's resources in our NFP portal on how you go about developing a framework for care governance. There's resources there around climate, cybersecurity, all of these things that now play out in boardrooms.

But one, I specifically wanted to mention was that we launched on Monday, we launched the not-for-profit scholarship programme where we are offering almost 400 scholarships to small not-for-profits to attend our day and a half not-for-profit foundations of governance course. And to me, yes, there is the company director course, which is so well known and so popular, but there's a whole range of information that you can get at shorter courses like that programme, but also on webinars, just so much information.

I think one of the challenges that's confronting for directors is how do you best use your time to get the right information that you need at the appropriate time so that they understand, "Hey, if we have a better governed organisation, we can actually achieve better outcomes for all our organisation."

Ram Subramanian:
Thanks for that, Phil. I think you've highlighted some of the good stuff the AICD is doing in supporting not-for-profits. And if I could turn our attention to what CPA Australia does in providing support and resources to the not-for-profit sector and many of the people who work in this sector. Joss, you were instrumental in updating the CPO Australia guide to Not-for-Profit Good Governance and Financial Management. How do you see good financial management playing a part in good governance of a not-for-profit?

Joss Fenton:
Thanks, Ram. Yes, I believe good governance, good financial management should typically include a number of aspects. First of all, risk management is particularly important as most risks will have an impact on the finances of the organisation. Related to this, a system of policies, procedures, and controls will also help manage those risks.

This in turn underpins good financial governance by ensuring the appropriate use of an organization's monies and other resources. The accounting system, cybersecurity, and operations will play a part by ensuring the financial transactions are appropriately recorded, controlled, and reported upon. And then compliance is obviously important as well. Reporting, audits or reviews, taxation and payroll, together, all these areas of financial management will impact the governance of an organisation.

I believe it is vital for the financial information to be accurate and reported upon in a timely manner so that good decisions can be made at a governance level. Reducing the risk of financial-related errors and fraud is also very important in good governance. I note the use of AI artificial intelligence has been reported upon in the recent AICD governance and performance study. AI can greatly assist in system controls, compliance, and reporting of finances.

However, if the financial management systems are not appropriately set up and maintained, AI could just increase the amount of reporting errors. I'd suggest that everyone involved in financial management and governance need to pay attention to this rapidly increasing use of AI and help ensure that the financial information is accurate and useful. Overall, I believe good financial management and governance is extremely important to not-for-profits given the funds are typically derived from the public, whether this be directly from donations and bequests or indirectly from government grants, services or goods sold.

Ram Subramanian:
Thanks for that, Joss. Phil, Joss just mentioned risks, and I think any not-for-profit should be very aware of the risks it has and it faces in carrying out its work. And I was looking at the AICD's governance principles this morning and I saw that risk is addressed as one of the key principles that form part of the governance matrix for a not-for-profit. In your experience, do you see not-for-profits actually being aware of what risks they face, and assessing those risks and addressing them properly? Do you see that happening across the board?

Phil Butler:
I'm seeing lots of different areas of risk, Ram, and to me it's a fascinating one. And you point out principle four of the NFP Governance Principles and about the board oversees a risk culture that aligns with its purpose, vision, and strategy. And I know I keep harking back to purpose, vision, and strategy, but I think it's really important that you do have that risk culture, risk appetite that helps to meet that.

Now if you're providing overseas aid, you may be in an extremely risky environment. And the board probably needs to establish a risk appetite and a very sophisticated risk matrix that's going to oversee those risks. Similarly, if you're providing care, thinking about the sorts of risks that can happen in that sort of environment.

If you're, on the other hand, you're running an arts organisation, and I've seen this firsthand, is the risk might be somewhat different. It might be thinking much more about the financial risks that are sitting within running an organisation or what might happen at a particular concept, for example. So I think risk certainly sits with strategy, but again, it also sits against the backdrop of the type of organisation that you are running.

And perhaps just one final point is trying to align the risk appetite of the board with that of the staff, because I've seen instances where the staff may have a higher risk appetite than the board, and also that individual directors will have different risk appetite. So, having a conversation around that at a board table is also a really useful thing to do.

Ram Subramanian:
That's so critical, what you've just said there, there needs to be total alignment between the board and staff on the risk profile and the risk appetite of a not-for-profit organisation. I think that's super important. Thanks for that, Phil. Maybe if I can turn back to you, Joss, and look at some of the positive things that come out of good governance and financial management for not-for-profits, are you able to share some success stories where improved governance has made a significant positive difference for not-for-profits?

Joss Fenton:
Yes, sure, Ram. Whilst we do look for those positives, I must admit, often they come out of a negative to start with. Unfortunately, it's often a case where an organisation is having some financial distress or governance issues, and then we see a turnaround in that. So that's the first example I'm going to share with you, Ram.

So that was where two staff members, a general manager and the person responsible for the financial administration came to me with their concern that their organisation was in financial distress. They said their board did not appear at all concerned and they didn't know what to do. I sat down with these two staff members, crunched a few numbers, and in true back-of-the-envelope style determined the organisation had about another two months remaining before they ran out of money.

So they just couldn't understand why the board [inaudible 00:15:32]. So we called an immediate meeting with the board chair and a couple of other board members to determine what the issue was or to at least identify and understand whether that indeed was an issue, and then look at next steps. So they did agree. The board members, when we had a closer look with them, they did agree, "Yes, we do have an issue." And so then the next steps had to be determined whether they needed a meeting with an insolvency practitioner or a consultant that could leverage additional funding, and assist with decision-making around cutting costs.

So there was a bit to do. So, they end up having a preliminary meeting with the insolvency practitioner and separately with the consultant, and they decided to go with the consultant to improve their governance structures and also see if they could leverage additional funding. So with the assistance of that consultant, they did bring in other expertise into the board, not just the consultant, but they did get a little bit of renewal on the board and made sure that they had people that better understood the financial governance of the organisations.

So, I saw that as a real positive for the organisation that that's what they really needed was that better financial acumen at the board level, at the governance level. We also looked at the financial reports of this organisation and made sure they were easier to understand for the board members. So, I see it quite common that board members of not-for-profits do not understand the reports that are given to them. And that can be a combination of issues. It could be that the board members themselves just don't have the skills, or it could be that the financial reports are just way too complicated and don't display the information well.

So, that is an obvious area that can be improved in many not-for-profits is the reporting to board. Another common practise I've seen introduced to help with better financial governance is the use of a finance subcommittee of the board, particularly where an external accountant might be included in that subcommittee to help drill into the financial information in more detail.

And I also find in that situation, having that external accountant, they can upskill the other board members, and I've had that as regular feedback that the other board members feel much better supported and much better within themselves and more confident once they've upskilled themselves through further conversations and support from an external accountant. I also understand the AICD course having done that, that includes financial governance as part of the company directors course. And I feel that is crucial for board members to better understand that process.

Ram Subramanian:
Great stories there, Joss. Thanks for sharing. Phil, if I could just throw to you a question following on from what Joss has just said, what practical steps can company directors take to improve governance within their own not-for-profits?

Phil Butler:
Yeah, thanks, Ram. And Joss's examples there, I think it really highlights some of the issues, particularly if directors aren't aware, don't take sufficient time to really understand what's going on in the organisation.

So to me, that's the first call-out is that if you are a director, you've really got to take your duties and responsibilities very seriously. And I think part of that is governance is a team game. It's about the board and the management team if you've got one or board and volunteers working together to achieve outcomes.

On one of the boards that I've been on, we spent time at the end of every meeting where we did a quick review of the meeting to understand were the sorts of things that we were discussing at the meeting actually going to assist in the organisation achieving its outcomes.

So did we have sufficient time spent on strategy? Did we spend enough time thinking about the financials over the longer haul? Do we really understand what's going on within the organisation? And that was so beneficial for us to be better directors of the organisation. So it's just those really practical things that you can do to assist in better governance.

Ram Subramanian:
Really good tips there. Thank you, Phil. It's clear that good governance is a vital component of the not-for-profit sector and there's so much we could continue to discuss on this important topic.

Thank you, Phil and Joss for joining us today to share your thoughts and experiences on this topic, and it's been absolutely fantastic talking to you both. And thank you for those of you listening to With Interest as well.

Don't forget to check the show notes for links and resources from CPA Australia and the AICD. If you'd like the show, please share it with your friends and colleagues and hit the subscribe button so you don't miss future episodes. Until next time, thanks for listening.

Garreth Hanley:
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