NFP GOVERNANCE AND PERFORMANCE STUDY - Examining governance practices and opportunities in Australia's NFP sector
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
NFP GOVERNANCE AND PERFORMANCE STUDY Examining governance practices and opportunities in Australia’s NFP sector
companydirectors.com.au
Commonwealth Bank
Supporting you and your mission
Commonwealth Bank’s Not-for- in which we live and work, both In this rapidly changing environment,
Profit team are delighted to support through the Commonwealth Bank Staff it’s more important than ever to build
the Australian Institute of Company Community Fund and through enduring the firm financial foundations necessary
Directors’ NFP Governance and partnerships with some of the country’s for sustainable success over the long
Performance Study 2014, the largest leading community organisations. In term. Those challenges have, if anything,
of its kind in Australia. This year’s fact, Commonwealth Bank has been become more acute over the last 12
study once again confirms the growing supporting the organisations that months. As competition for the
significance and professionalism of strengthen and sustain our communities philanthropic dollar has intensified, the
the not-for-profit sector, as well as for more than 100 years. demands on social enterprises from both
the unique challenges not-for-profit clients and governments have increased,
We are working to build financial while the policy framework in which
directors face. To address some of
capability in the not-for-profit sector, they operate continues to evolve.
these challenges and continue to drive
with specialised bankers and banking
excellence in governance in the not- We hope you find this year’s study
solutions backed by our team’s deep
for-profit sector, we are also pleased as revealing and thought-provoking
expertise. We also draw on the extensive
to announce our involvement as a as we have. We look forward to the
resources of the wider Commonwealth
program partner in the new Australian opportunity to work with many of you
Bank Group to bring our not-for-profit
Institute of Company Directors’ NFP in the year ahead.
customers a range of value-added
Thought Leadership Program.
programs and opportunities, from events Vanessa Nolan-Woods
The Bank has a long history of and training programs to educational General Manager – Schools and
supporting the Australian communities guides and online tools. Not-for-Profit, Commonwealth Bank
We would like to thank the
Commonwealth Bank for partnering
on the NFP Governance and
Performance Study 2014.
commbank.com.au/
notforprofitsectorbanking
commbank.com.au/community
2 | NFP Governance and Performance Study 2014
companydirectors.com.au
Contents
4 FOREWORD BY JOHN H. C. COLVIN FAICD
5 KEY FINDINGS
6 NFP GOVERNANCE CONTINUES TO EVOLVE
10 BOARDS TARGET AREAS
FOR FUTURE DEVELOPMENT
15 COLLABORATION AND MERGERS
ON THE AGENDA
18 BOARDS WANT BETTER
PERFORMANCE INDICATORS
20 RELATIONSHIPS BETWEEN
BOARDS AND CEOS ARE STRONG
23 EDUCATION – STRIVING TO BE
‘TOP OF CLASS’
26 AGED CARE RESPONDING
TO CONSTANT CHANGE
29 DIRECTORS’ CONTRIBUTION IS SIGNIFICANT
32 CERTAINTY IN GOVERNMENT
POLICY IS NEEDED
35 RESEARCH METHODOLOGY
NFP Governance and Performance Study 2014 | 3
companydirectors.com.au
Foreword by
John H. C. Colvin
The not-for-profit (NFP) sector is participated in 2013. These directors are
an essential part of the Australian highly skilled and experienced and lead
economy and society. organisations from small rural community
groups to national organisations with
In 2012-13, according to ABS
turnover above $100m.
estimates, there were approximately
57,000 economically significant NFP In addition to providing insight into
organisations generating over $107bn the governance of the NFP sector as
a year in income and employing more a whole, this year the study includes
than one million people – or about detailed information in three specialist
eight per cent of the workforce. areas. For the first time, we examine
NFP governance from the perspective
The 2014 NFP Governance and
of senior executives employed by NFP
Performance Study is the largest
organisations. We also include specific
and most comprehensive source of
analysis of issues faced by boards in
information on the governance of
the education and aged care sectors.
these NFP organisations in Australia.
It answers questions about the quality Company Directors is absolutely
of governance of our NFPs, if this is committed to providing valuable
changing and how boards can improve resources for the NFP sector and
further. It examines the complex we trust this report will inform
issues of mergers and collaboration, governance practice into the future.
performance measurement and the
payment of directors, and identifies
the key issues governments should
address in supporting the sector.
In its fourth year as a national study it has
received huge support from the sector.
More than 2,700 current NFP directors John H. C. Colvin
answered the questionnaire, which is a Chief Executive Officer
significant increase on the number that and Managing Director
4 | NFP Governance and Performance Study 2014
companydirectors.com.au
2014
Key Findings
1. NFP governance continues to evolve
2. Boards target areas for future development
3. Collaboration and mergers on the agenda
4. Boards want better performance indicators
5. Relationships between boards and CEOs are strong
6. Education – striving to be ‘top of class’
7. Aged care responding to constant change
8. Directors’ contribution is significant
9. Certainty in government policy is needed
NFP Governance and Performance Study 2014 | 5
companydirectors.com.au
1
NFP governance
continues to evolve
Over 85 per cent of non-executive Australian Charities and Not-for-
directors (NEDs) believe that the profits Commission Act 2012 that The 2,700 NFP directors
governance of their organisation is codified NFP governance requirements
represented in this survey
better now than it was three years and subsequently established the
Australian Charities and Not-for-profits work for NFPs with a
ago. A similar proportion believe the
overall quality of governance in the Commission (ACNC). combined income in
sector has improved. 2013-14 of over $15bn.
This legislation was introduced to
Directors in our focus groups improve public trust and confidence in
commented on the increasing complexity the NFP sector, support sustainability
in operating environments and growing and innovation and enhance
demands on their organisations and transparency and accountability. In
their directors, yet they believe addition to these overarching changes,
that their boards had risen to these government agencies such as the
challenges. Many of these challenges Australian Sports Commission and the
are summarised in this report. Department of Social Services have been
actively promoting good governance
Governance of the NFP sector has been within their sectors of operation.
under scrutiny by government, the Industry bodies, including Company
sector itself and the wider community Directors, have been actively conducting
for at least ten years. Some had concerns governance education programs and
(or assumed) that NFP governance was disseminating support materials.
‘below par’ when compared with that of
It is not possible to identify which, if
the for-profit sector.1
any, of these activities have resulted in
In 2010, the Productivity Commission change, but clearly the collective focus
published its evaluation of the on NFP governance has encouraged
contribution of the NFP sector2, boards and individual directors to reflect
which led to the introduction of the on, and improve, their performance.
1
Our research over four years based on independent evaluations found no evidence that NFP governance is (or was) any worse than that of for-profit organisations of similar size.
2
Productivity Commission 2010, Contribution of the Not-for-profit Sector, Research Report, Canberra
6 | NFP Governance and Performance Study 2014
companydirectors.com.au
NEDs’ views on the quality of governance compared with three years ago
n = 1,911
86%
12% 2%
Better Same Worse
How boards are is diverse and their time is divided
between strategy (22 per cent),
spending their time managing funding (16 per cent),
The NEDs who responded to our 2014 reviewing performance (14 per cent),
survey are highly experienced in the risk oversight (13 per cent) and
governance of both NFP and for-profit compliance (12 per cent).
organisations. Their work for NFPs
Proportion of time spent on governance activities
n = 2,303
9%
Other
7% 22%
Succession
Strategy
7%
Legal
12% 16%
Compliance Funding
13% 14%
Risk
Review
oversight
performance
NFP Governance and Performance Study 2014 | 7
companydirectors.com.au
Governance performance governance standards are still meeting
basic expectations3.
varies by size of
Although these results show that
organisation – the quality of performance varies
suggesting appropriate with income, income is only a proxy
measure of organisation size and
governance practices
risk. Governance requirements must
The results from this year’s study be commensurate with the nature
confirm that directors’ rating of of the activity undertaken and
governance performance varies with regardless of size, NFPs operating in
the size of the organisation. Directors high-risk areas will need governance
in our focus groups believe that, for practices equivalent to much larger
the most part, this reflects the less organisations. For example, an
sophisticated governance requirements emergency service brigade could
of smaller entities, rather than smaller have an income of less than $10,000
entities having governance standards per year, yet must have governance
below those necessary to deliver on systems that ensure adequate training
their mission or purpose. and supervision of volunteers
operating in high-risk situations.
The average score of the smallest NFPs
was 5.9 out of 10, indicating that
Directors’ rating of governance performance by NFP income*
n = 2,070
7.9
6.9 7.1 7.3 7.4 7.4
6.4 6.6 6.7
5.9
Under $100k - $250k - $500k - $1m - $2m - $5m - $10m - $20m - $50m+
$100k $250k $500k $1m $2m $5m $10m $20m $50m
*Rating out of 10
Size categories
Per cent of
Income last financial year
directors/NFPs
Very small Less than $250k 14%
Small $250k to $1m 15%
Medium $1m to $5m 26%
Large $5m to $20m 22%
Very Large $20m + 23%
3
Scored using a sliding scale with 0 = poor and 10 = good.
8 | NFP Governance and Performance Study 2014
companydirectors.com.au
Governance performance religion, and business and professional
associations. These results may reflect
is similar across sectors variations in the complexity and risk of
Directors’ ratings of governance operations but also the average size of
performance show only minor NFPs, which differs considerably.
variation across sectors. The highest For example, the average annual income
ratings were for organisations of aged care organisations was $23m
operating in the aged care and compared with $8.6m for religious
international sectors, and the lowest organisations and $7.1m for those in
for those in culture and recreation, the culture and recreation sector.
Directors’ rating of governance performance by sector*
n = 2,086
7.7 7.1
Aged care Social services
7.5 6.8
International Environment
7.3 6.8
Health Law, advocacy and politics
7.3 6.7
Research Culture and recreation
7.3 6.6
Philanthropy and volunteering Religion
7.2 6.4
Development and housing Business/professional associations
7.1
Education
*Rating out of 10
NFP Governance and Performance Study 2014 | 9
companydirectors.com.au
2
Boards target areas
for future development
To further improve governance, half In the discussion groups these two
of all NEDs and executives believe board attributes (innovation and risk) "Our board struggles to be
their boards should focus on attracting were seen as strongly related.
more highly skilled directors, and 40 innovative really. We have
The largest difference between NEDs’
per cent of executives want further
and executives’ views on priorities for an older crew, a bit risk
improvement in governance skills.
improvement were related to board averse – ‘the we haven't
One in five NEDs and 29 per cent of information. Forty per cent of NEDs
executives want better chairmanship, believe their board’s performance done that before' types."
highlighting both the high expectations would be improved with better
of this role and the need for some information, whereas this was raised
chairs to further improve their skills or by only 29 per cent of executives.
performance. One in five NEDs believe Nonetheless, 29 per cent of executives
their governance would be improved is a significant proportion (particularly
with a more highly skilled CEO. as the provision of information to the “I want my board to
board is a responsibility of executives)
About a third of both NEDs and
and supports the findings in Section 4 challenge me – to give
executives believe their board should
be more innovative and one in five
regarding directors’ desire for better me ideas.”
measures of performance.
believe it should better manage risk.
10 | NFP Governance and Performance Study 2014companydirectors.com.au
Three things that would most improve board performance
53%
47%
41% 40%
35% 36%
31%
29% 29%
21% 20%
19% 18%
NEDs n = 2,089 15%
Executives n = 283
More highly
skilled directors
Better information for
decision-making
Higher levels of
governance skills
More innovation
Better chairmanship
More highly
Better risk
skilled CEO
management
Definitions of terms
Non-executive directors (NEDs) are directors who are not paid
employees of the organisation.
An independent NED is one who is free from any relationship that could
materially interfere with the exercise of their judgement.
Executives are employees of the organisation but are not voting members
of the board.
Executive directors are both employees of the organisation and voting
members of the board. For example, a CEO or Managing Director may be
an executive director.
Definitions are not clear among NFP directors. Forty per cent of those
classifying themselves as executive directors in the survey were not voting
members of the board.
In this study, the term ‘executive’ includes both executive directors
and executives as they are both employees of the organisation.
NFP Governance and Performance Study 2014 | 11companydirectors.com.au
Over a third of NFPs are Nearly half of those implementing
planning to change one or
changes will be amending their board “We are moving from an
structure, for example to change from
more of their governance a representative model to a skills based Incorporated Association
documents in the next year or independent board. Twenty nine to a Company Limited by
per cent are revising their mission or
This year’s survey shows the extent purpose and a similar number will be Guarantee mostly because
to which governance structures of changing the length of time directors the Companies Act is a much
NFPs are evolving. Approximately can serve on the board.
one third of boards are planning more settled law... and we
Interestingly, 17 per cent of boards
revisions to their organisation’s
are seeking to change their legal won’t have to change again.”
constitution (or equivalent document,
structure. Sixty per cent of NFPs are
such as statement of purpose, rules,
currently Incorporated Associations,
articles of association) in the next 12
12 per cent Unincorporated Associations
months. In most cases, this is driven by
and 14 per cent are Companies Limited
a need to revise outdated procedures;
by Guarantee. Intention to change legal
improve organisational agility; or
structure did not appear to be correlated
change mission or purpose in response
to size.
to changing client needs; or in response
to changing legal obligations.
Planned changes to constitution in the next year
n = 699 “The constitution was
written 20 years ago,
47% when we had about 20
Changing board clients and we wanted
structure
them to be members. Now
that we have over 350
clients it’s not functional.”
29%
34% Changing mission
Other or purpose
17%
Changing
27% entity type
Changing length of time
directors can serve
8%
Changing charitable
or tax status
Note: Total does not add to 100 per cent due to multiple responses allowed
12 | NFP Governance and Performance Study 2014companydirectors.com.au
Reasons given for changing the constitution:
• Moving from a federation of • Changing the definition of
state bodies to a single membership
national organisation • Provide greater clarity on
• Becoming a Company Limited board governance roles
by Guarantee and responsibilities
• To reduce directors’ terms on • General refresh
the board • Remuneration policy of
• To comply with changes in directors
government regulations • Change to our mission
• Amalgamation and winding up or purpose
of other entities • Allowing the CEO to join
the board
• Tidying up the constitution
and modernising • To enable merger
Boards continue to invest • 35 per cent reported that their board
undertook an internal assessment.
in formal professional
• 25 per cent said that they had
development in-house training.
As in previous years, nearly three
• 19 per cent said their board had
quarters of NFP NEDs reported that
an externally facilitated board
their boards had undertaken one or
assessment and the same said
more forms of formal professional
that individual directors had been
development in the last year.
evaluated.
• 37 per cent reported individual
• Only 15 per cent had external
directors had undertaken
whole-of-board training.
external training.
NFP Governance and Performance Study 2014 | 13companydirectors.com.au
Professional development undertaken in the last year
n = 2,064
37%
35%
27%
25%
19% 19%
15%
External training for
individual directors
Individual director
Internal board
assessment
In-house training
External facilitated
board assessment
evaluation
External whole-
None
of-board training
Medium and large NFPs cover the basic governance requirements.
Very large organisations have much more
struggle most to provide complex governance needs but are also
professional development more likely to have the budget to fund
individual or board PD programs.
There is a clear correlation between
organisational income and the extent However, directors felt that it is the
of formal professional development (PD). medium and large organisations (between
Only half of directors of organisations $1m and $20m income) that struggle
with income below $500,000 stated most to meet their ongoing needs for
enhancing performance. This group
their boards had undertaken any PD,
can have complex governance needs
and in most cases this was external
but continue to find it very difficult to
training for individual directors or
justify the costs and time requirements
in-house assessment or instruction. In
to stakeholders and even the board itself.
comparison, 90 per cent of those working
There was also a view expressed that the
with very large NFPs said their board
culture of the organisation has a bearing
had undertaken PD and on average they on the acceptability of the board paying
had undertaken twice as many types for PD. In some organisations, spending
of development programs as the small any money on the board is ‘not done’
organisations. and directors are expected to volunteer
Directors in focus groups explained their time and pay their own expenses,
that small organisations have little or including PD.
no budget for PD, but also less need Some directors also commented that
for advanced governance skills. For this many funders or donors do not want their
audience, there is a need for short, simple resources allocated to these activities and
training sessions and online seminars that this attitude is hard to shift.
14 | NFP Governance and Performance Study 2014companydirectors.com.au
3
Collaboration and
mergers on the agenda
NFPs show a high Two-thirds of directors said their NFP
works with others to advocate for their
degree of collaboration sector or to service beneficiaries, and
Directors attending focus groups more than a third have an agreement/
over the last three years have often memorandum of understanding (MOU) to
commented on the number of NFP refer or service clients (this was highest
organisations in Australia, the capacity among NFPs in the health sector).
of the community to accommodate A quarter of directors reported their NFP
so many small entities, and whether shares resources, such as buildings and
there should be encouragement from equipment and 18 per cent share back-
government for NFPs to merge. In some office costs. Over 40 per cent report
sectors, notably aged care, disability and subcontracting the provision of some
community housing, pressure to merge services to other NFPs and 15 per cent
is arising from economic factors such as outsource their back office functions to
staff and infrastructure costs, and costs another NFP for which they pay a fee.
of compliance.
There are slightly higher proportions of
This year, we asked directors if their NFPs collaborating with others among
organisations collaborate with other organisations with income less than
NFPs, how they collaborate and $250,000 and between $2m and $10m.
whether a merger is something they Collaboration was also highest among
have considered. NFPs operating in the education, health
The results reveal that NFPs are actively and social services sectors.
collaborating and partnering with other
NFPs to deliver services across the sector.
Example of how NFPs work collaboratively
An NFP in the disability sector with a turnover over $30m invests in a new
accounting and payroll system, and associated staff training.
It recovers some of this cost by providing ‘fee for service’ bookkeeping
and/or payroll functions to six NFPs, each with income below $2m.
NFP Governance and Performance Study 2014 | 15companydirectors.com.au
Extent of collaboration with other NFPs
n = 1,936
67%
41%
38%
25%
18%
15%
We collaborate to
advocate for the sector
or beneficiaries
We subcontract the
provision of some
services/products
We have an agreement
(or MOU) to refer or
service clients
We share resources
(e.g. buildings, vehicles,
IT systems)
We share the cost of some
We outsource back-office
functions for which
back-office functions
(e.g. payroll, accounts)
we pay a fee
Mergers are being in social services, more than 50 per cent
said that their board had discussed
discussed by 30 per a merger. Similarly, over half of the
cent of boards 62 directors of NFPs in development
and housing had discussed a merger.
Thirty per cent of directors said their
boards had discussed or taken action The main reasons to consider merger
to merge their NFP with another were to improve existing services,
organisation in the last year. Merger efficiency or broaden the range of
discussions were most common in the services to existing service users. Twenty
large NFPs, particularly those with seven per cent said they had considered
income above $10m or operating in the merger in order to be more attractive to
social services, development or housing funders and 18 per cent in response to
sectors. Of the 259 directors of NFPs encouragement by government.
16 | NFP Governance and Performance Study 2014companydirectors.com.au
Reasons for considering a merger
n = 627
Improve efficiency 47%
Broaden range of services
to existing services users 40%
Develop/maintain market share,
including reducing competition 34%
Increase the number
of people served 32%
Be more attractive to funders 27%
Not large enough to be
financially sustainable 20%
Encouraged by government
to merge 18%
Changing compliance
requirements or costs 15%
Other 14%
About a quarter of boards Several focus group participants had
recent experience of successful mergers
that discussed merger or were currently involved in merger
expect it will happen negotiations. They believe the key factors
to achieve success are thorough due
in the next two years diligence investigations prior to beginning
Undertaking a merger of organisations, initial undertakings, a shared mission
whether for-profit or NFP, is complex, and/or common beneficiary groups,
expensive and risky. Only a quarter of sufficient financial resources to support
those that discussed merger, or eight per change, cultural compatibility, strong
cent of all directors, believe it is likely or leadership and stakeholder support.
very likely that their organisation In many cases, a takeover of a smaller
will complete the transaction. enterprise by a much larger one is easier
to arrange and complete, as are mergers
strongly supported by a key funder.
Likelihood of merger in the next two years
n = 616
23%
16%
13% 13% 13% 13%
8%
Very Unlikely Somewhat Undecided Somewhat Likely Very likely
unlikely unlikely likely
NFP Governance and Performance Study 2014 | 17companydirectors.com.au
4
Boards want better
performance indicators
Measuring mission Researchers in the disability, aged care,
effectiveness
homelessness and health sectors have “It keeps me awake at
long sought definitive measures of
The overall performance of an NFP is quality of life or wellbeing. Considerable
night. I don't know if
determined by how well it achieves work has also been completed on ways what we provide will have
its mission or purpose, yet only 50 to measure social return on investment
per cent of directors believe that their in order to choose between alternative
an effect in the long run."
organisation measures this effectively. investment options. These assessment
frameworks have yet to result in
Performance measurement can be
evaluation structures that produce
a complex and enduring problem.
consistent results when used by different
Essentially, NFP boards need two types
evaluators. Further, some NFPs are
of information:
tackling complex problems that do not
1) They need regular operational reports have established or even agreed solutions
that tell them if the organisation is to test, or which will take 20 years or
efficient, effective and sustainable. more to observe substantive change.
Collection and analysis of this information Others are providing services for which
is straightforward and common to NFP outcomes may never be quantifiable.
and for-profit organisations, and across Examples of these NFPs include those
sectors of operation. working in overcoming indigenous
2) NFP boards also need information disadvantage, homelessness, and drug
that tells them if their strategy is and alcohol abuse and advancing religion.
achieving the organisation’s purpose or Directors in our focus groups commented
mission. For NFPs with tightly defined that boards operating in these sectors
missions, or for which results can be must rely on proxy measures and the
seen within short time frames, this is judgement of experienced directors
comparatively easy. NFPs in education and management. They also noted that “Our outcomes are very
can measure student numbers and
absence of hard outcome measures can
achievement; arts and sports bodies can difficult to measure
result in boards focusing too much on the
measure the extent of participation; and
operations or activities (the things that can and even the idea of
fundraising organisations can measure
be measured); and the difficulty in having measuring outcomes
the net amount of funds raised.
constructive conversations of alternative
For NFPs in other areas, measuring strategies when there is little objective can be contentious.”
their success is much more complex. evidence to evaluate alternatives.
18 | NFP Governance and Performance Study 2014companydirectors.com.au
The complex problem of measuring want more non-financial performance
achievement of mission is not fully measures in general. About 40 per
captured in the results from the survey. cent specifically want more information
The data does suggest that organisations about risk, data on the sector and
with income below $1m are twice as information on achievement of financial
likely as larger organisations to state benchmarks.
that they were ineffective at measuring
In the focus groups, the executive
their mission. It also shows that
directors were supportive of providing
directors in the education, international
boards with what they need, but
aid, philanthropy and research sectors
commented that NEDs are not always
gave their organisations higher
aware of the resources required to
ratings for measurement of mission.
provide data and that in some cases,
the board did not use the results.
Directors want more They also gave examples of preparing
papers based on past practices and an
non-financial information assumption that ‘more information
Approximately 60 per cent of is better’ rather than what is most
directors want more measures of effective and efficient to produce for
achievement of their mission and half today’s decision-making.
Information the board should have more of
Boards should consider
undertaking an annual audit n = 1,837
of the information provided
and allocate time in the agenda
to discuss the use of this
information and alternatives.
61% 59% 41%
Measures of Performance measures Risk reports
achievement of mission (non-financial)
39% 39% 38%
Sector info Information on Financial measures and
(e.g. industry reports) board governance benchmarks
NFP Governance and Performance Study 2014 | 19companydirectors.com.au
5
Relationships between
boards and CEOs are strong
More than 60 per cent of NEDs report Overall, the executives in our focus
that the relationship between the boards groups were very positive about, and What would you say to
they serve on and CEOs is very good or grateful for, the role their boards play.
excellent. Only a very small percentage They were also particularly aware of the the NEDs on your board?
of both NEDs and executives believed dedication and the hours contributed by
“Thanks for supporting me,
that relationships between the CEO and board chairs – in many cases chairs were
the board were poor. contributing more than twice as much for providing a sounding
time as other board members.
board. And, of course, for
the skills and experience
they bring which we can’t
The relationship between the CEO and board do without.”
38%
35%
34%
32%
20%
19%
9%
3% 7% NEDs n = 1,968
4% Executives n = 280
Poor Fair Good Very good Excellent
20 | NFP Governance and Performance Study 2014companydirectors.com.au
Role clarity environment of shared responsibility
and delegations of authority. They
An issue that is often raised in gave examples of both chairs and CEOs
governance discussions and director who behaved as if they were running
education programs is the need for their own business, not considering
clarity in regard to the role of the board alternative opinions, withholding
and the role of the executive. Although information and issuing orders. They
the majority of directors believed that also gave examples of the opposite, that
role clarity was good to excellent, 19 is, chairs or boards that were passive
per cent of NEDs and 20 per cent of or disengaged, and CEOs unwilling to
executives believe that the definition make operational decisions without
of their board and CEO roles is only fair approval from the board. Finally, there
or poor. Lack of role clarity can have a were stories of directors or CEOs who
significant impact on the performance simply lacked the interpersonal skills
of the board and relationships between and respect for others needed to work in
members. For boards that have poor collaborative environments.
or only fair role clarity, discussing and
Directors mentioned that the most
agreeing the boundaries between board
effective solution to this problem is often
and CEO duties should be a priority.
external whole-of-board evaluation or
Directors in our focus groups told ‘war training but noted it can be difficult to
stories’ of situations where conflict was get a highly autocratic CEO or chair to
so severe it resulted in director and agree to participate. Occasional whole-
CEO resignations. In nearly all cases of-board evaluations can be useful for
this conflict was caused by a lack of all boards as members’ understanding of
understanding of how to operate in an roles can change over time.
Clarity of board and CEO roles
33%
31%
29%
25%
23%
20%
14% 13%
NEDs n = 1,968 7%
5%
Executives n = 280
Poor Fair Good Very good Excellent
NFP Governance and Performance Study 2014 | 21companydirectors.com.au
Executives want directors Executives’ concerns in regard to their
Some boards regularly
boards’ governance of risk were specific
with better sector to their organisation and its current
meet in different service
locations, incorporate tours
knowledge and balanced operating environment. Some felt their or demonstrations of new
boards were overly focused on risk and
risk-taking equipment and bring board
that strategies were too conservative members into staff briefings
NEDs and executives responding to the and not sufficiently innovative, while and training. Others have
survey generally agree on the areas of others felt that their board had little separate informal ‘fireside
strength and weakness of their boards. understanding of key risks or focused chats’ outside regular meeting
However, when tested in the focus times so concerns, ideas and
on the wrong risks. It is possible that
groups, executives said they would like comments can be shared but
directors’ level of sector knowledge and
NEDs to invest more in understanding not formally recorded.
risk appetite are related.
the sector of their operations and
approach to risk4. Several executives, Both executives and NEDs are
particularly those working in human interested in sharing their knowledge
services and education, stated that and in having more open and
the commercial experience of their challenging conversations to improve
NEDs was invaluable, but would be their common understanding of
Overall performance
better applied if they had a greater the organisation and build greater
consensus about its direction. They of my board
understanding of how their sector
works. They encouraged NEDs to believe this will improve the quality
Executives
visit operations, engage with staff of strategic planning and particularly
6.8 out of 10
and see the day-to-day service delivery its implementation. This is something
for themselves, and gave examples chairs may wish to consider when Non-executive directors
of directors who had only ever visited determining agendas and can be built 7.0 out of 10
the boardroom. into the board routines.
4
These differences in views are reflected in the survey data, but are not statistically significant.
22 | NFP Governance and Performance Study 2014companydirectors.com.au
6
Education —
striving to be ‘top of class’
Organisations providing education dependent on the governance skills of
services are the single largest local boards. Although independent
category of NFPs in terms of income, public schools do not have the full range
employment and community reach5. of responsibilities of their peers in the
These organisations include pre- private sector, many of the issues they
schools, primary and secondary face are similar.
schools, and tertiary and vocational
education providers. It also includes
supporting organisations such as school
Independent school
associations/entities (e.g. Scouts) governance
and some health promotion charities.
The structure of school boards varies
This year our study focused on the considerably. Some are representative
unique governance challenges of a boards with defined positions for past
subset of this group – independent students, parents, church leaders and
(private) primary and secondary appointed directors. Others may have
schools and colleges. boards with all external appointees.
The issue of school governance is The time requirements of a school board
increasing in priority in the public can be considerable. A quarter of NEDs
sector. In the last five years, state spend between two and five days per
governments, notably Victoria and month on their directorship duties and
Western Australia have introduced major 10 per cent report spending more than
reforms that enable public (government) five days a month. A large majority (76
schools to choose to be governed locally per cent) are not paid, but 11 stated
by their boards and principals rather they received directors’ fees. These
than an Education Department. This ranged from $250 to $55,000, with the
is also a major policy direction of the average $17,600.
Commonwealth government. There are
There are approximately 2,700 Members of our focus groups raised a
now hundreds of ‘independent public
independent schools across number of unique challenges faced by
schools’ in Australia taking decisions
Australia, of which about schools and their boards. These were
about resource allocation, curriculum
1,000 are affiliated with the ranked from one to five in terms of their
and staffing. This has created huge
importance in the survey.
Catholic Church. changes in stakeholder relationships.
The success of this policy will be highly
5
ABS 5256.0 – Australian National Accounts: Non-profit Institutions Satellite Account 2012-13
NFP Governance and Performance Study 2014 | 23companydirectors.com.au
Priorities of Funding uncertainty
Changes to the funding of private
school boards
schools has been on and off the
Managing the school’s reputation Commonwealth government’s agenda
A school’s most important asset is several times in recent years. School
its reputation, which can take years infrastructure can take years to
to build, but be lost in a day. A good plan and fund, and combined with
reputation attracts the best teachers, changes to curriculum have created
students and community support, as significant uncertainty and stalled
well as steady donations. Top academic some investment.
(and sometimes sporting) results
Increasing own source income
have always been important but the
introduction of national testing and Schools are increasingly seeking major
publication of comparative results online donations and bequests from past
has made performance increasingly students and parents of current students
transparent and is putting more pressure for infrastructure or scholarship funds.
on schools. Schools with male students (either
single sex or co-ed) were reported to
A school’s reputation is also strongly receive more than double the donations
influenced by the quality of its principal received by girls’ schools.
who is primarily responsible for building
a culture of high standards and a loyal Managing parent engagement
and stable workforce. He or she must School directors noted that the
also be able to create strong and resilient boundaries between school and home
relationships with students, parents and have become increasing blurred.
the school’s external stakeholders. Parents can be exceptionally demanding
Any souring of relationships can have but valuable stakeholders and some
a swift negative effect on the school. schools have developed education
Other risks to reputation are related and engagement programs to make
to the size of the student and staff it easier for parents to engage in the
populations and the possibility of school, while providing boundaries for
criminal or corrupt behaviour and ‘helicopter’ parents. At the same time,
long court processes. These risks schools are increasingly being asked “With the number of things
include fraud, drugs, indecent assault, to deal with complex social, emotional
and sexual abuse. Directors recently and behavioural problems. that can go wrong in a
attending governance forums have been Executives and NEDs generally agree school on any single day,
told to plan what they will do when
(not if) their school is involved in a case
on these priorities, but executives have I often wonder how she (the
greater focus on building enrolments,
of child sexual abuse and how they performance on academic testing and Principal) sleeps at night.”
will handle the impact on reputation, cost management.
whether substantiated or not. The
liability issues for abuse cases can
extend for more than 50 years after
a student has left school.
24 | NFP Governance and Performance Study 2014companydirectors.com.au
Five most important challenges for schools in the next three years*
n = 128
3.9 3.7
3.5 3.4 3.3 3.3 3.2
Maintain or build
our reputation
Uncertainty about
government funding
Maintain or build
our enrolments
Cost management
Raise capital to
improve or replace
infrastructure
Management of risks
to students
Maintain or replace
existing infrastructure
*Rating out of five
When asked what they want from curriculum support, infrastructure and
governments, the answer from school staffing. A further 10 per cent requested
“Governments should directors was very clear. Sixty five funding not be reduced or for it to be
make a commitment to per cent mentioned clarity of funding applied equitably. The next most common
arrangements. Specifically, they wanted request was for clarity and stability
a funding model beyond government to make a commitment to around policy in regard to curriculum
a year.” a funding model for at least five years and for consistency across State and
so that they could make better decisions Commonwealth government programs.
about investment in curriculum and
Two focus groups were held with directors of private schools and 300 NEDs
and 32 executives of NFPs in the primary, secondary, higher and vocational
education sector responded to the survey. Of these, 150 serve on the boards
of independent (private) primary and secondary schools and colleges.
In our sample:
• 8 per cent were directors of schools with income of less than $1m
• 40 per cent were directors of schools with income of over $20m
• 40 per cent were directors working with schools that are registered
charities and 70 per cent were working with schools that are registered as
deductible gift recipients
• 6 per cent of directors were paid
On average, schools received 45 per cent of income from student fees, 26
per cent from the Commonwealth government and 16 per cent from state
governments. Income was also generated through donations, commercial
activities and funds invested.
NFP Governance and Performance Study 2014 | 25companydirectors.com.au
7
Aged care responding
to constant change
With our ageing population, the most in need or deal with emergencies.
demand for aged care services in This is a particular challenge for NFPs “Strategically it is difficult
Australia is expected to double in whose missions are values based.
the next 35 years6. In response, the to plan services to meet
Maintaining financial stability and
Commonwealth government continues
compliance with government community needs when
to implement major reforms to the sector,
including the restructuring of support
requirements are the highest priorities the goal posts are
for providers of aged care services.
packages and funding, the expansion of
Fundamental changes in the cost of continually changed with
consumer directed care (CDC), removal
of distinctions between high and low
service has pushed the minimum viable changes in legislation,
size of an independent residential
care residential services, and revisions
aged care facility to more than 100 government whims, and
to aged care bond arrangements.
beds; others suggested it is higher. not enough money in
Directors in aged care commented most Directors spoke of the need for aged care
about the complexity of the system for providers to grow and 40 per cent stated the system available into
all stakeholders, but particularly for that their board had discussed a merger the future.”
service users, their families and service in the last 12 months and half expect it
providers. CDC and individualised to happen. The main reason for merger
funding is seen as a positive policy was to ensure their own organisation’s
direction and supported, but there are financially sustainability (52 per cent)
concerns about how this will impact or because they had been approached
providers’ capacity to ‘bend’ service by smaller providers.
allocation at the front line to serve those
6
Centre of Excellence of Population Ageing Research 2014/01
26 | NFP Governance and Performance Study 2014companydirectors.com.au
Two focus groups were held with directors of NFPs operating in the aged
care sector and 135 NEDs and nine executives answered specific survey
questions related to aged care governance in the survey. Aged care
organisations are typically large. In our sample:
• Nearly a quarter of NEDs work • Over 70 per cent of these
with aged care organisations organisations are charities
with income of $10m to $50m • 15 per cent of NEDs are paid. The
and a third served organisations highest reported directors fee was
with income over $50m $88,000 and the average $33,000
One of the major cost drivers for those the freehold to the land, reducing their
“The government needs who provide residential aged care is ability to finance capital investment.
to look long, long, long the cost of building or refurbishing Despite this, many providers were in
existing facilities to meet current service the process of finalising planning for or
term to work out what expectations. Modern residential aged building of new aged care facilities.
is needed.” care facilities are expensive to build and
maintain and providers may not own
Five most important challenges for aged care organisations
in the next three years*
n = 110
4.1 3.9
3.6 3.6 3.5 3.5 3.4 3.3 3.2
Financial
sustainability
Compliance with
government requirements
Changes to Consumer
Directed Care
Changes to bond
arrangements
Maintaining or
replacing existing
infrastructure
Maintaining/improving
staff quality
Risk management
Shift towards
in-home care
Raising capital to build
new infrastructure
*Rating out of five
NFP Governance and Performance Study 2014 | 27companydirectors.com.au
Similar to others, aged care directors Directors also spoke of a desire for
want the government to create the Commonwealth government to “We are moving towards
stability in the policy and funding change its attitude to the sector and
environment to enable providers to to stop treating it as a problem that more user pays and
catch-up with current change and needs to be solved. Instead they want while this presents
allow them to develop strategies. But recognition that, for the most part,
they also want simplification in the Australia has world class aged care opportunities for provider,
policy environment, a reduction in services, most of which are provided it also presents serious
reporting burden and streamlined by NFPs with significant experience
accreditation standards. In particular, and the capacity to offer more with the challenges for the care of
they want standards that reflect the right support. They believe the future those without significant
quality of life of aged people, not “44 of aged care services will be driven
measures that don’t mean anything by the effectiveness of government means. In moral terms,
at all.” They also believe that the policy in regard to setting more realistic to what extent can
government should be supporting the expectations about entitlements,
provision of low cost finance to enable superannuation policies that result in government expect aged
further investment in infrastructure to a higher proportion of people having care providers to ‘balance
meet growing demand. sufficient resources from retirement to
death, and investment in an ‘ageing well’ the social ledger’?”
program and preventative health.
The Commonwealth government regulates and provides most of the
funding for aged care services in Australia. In 2012-13, the Commonwealth
spent a total of $13.6bn on aged care including $9.4bn on residential
services and $3.3bn on community care.
NFPs provide 58 per cent of residential aged care places and for-profit
organisations 36 per cent. Governments provide the remainder. Community
care services are also provided by a mix of NFP and for-profit providers.
Aged care services include low and high care residential places, and
community care services such as home nursing, meals, help with personal
care, and help with household maintenance.
Reform of aged care has been progressively introduced over the last two
years and will continue to be rolled out until 2016.
28 | NFP Governance and Performance Study 2014companydirectors.com.au
8
Directors’ contribution
is significant
The average amount of time NFP philanthropy and volunteering spent
“No, I don’t claim expenses directors spend working for a single the most time on their directorship
NFP organisation increased from 16 duties, averaging 23.6 hours a month
and this year I have spent hours per month in 2012 to 20 hours on a single NFP. The least amount of
a lot of time traveling in 2013. This year, the average was time was spent by directors working in
again 20 hours per month. This equates economic development and housing,
(interstate) to recruit a new who averaged 17.9 hours per month.
to over six working weeks per year or
principal. The expenses about two and a half full working days. Nearly half of NEDs included in this
are in the thousands but Directors’ time contributions vary by study work for more than one NFP
size and sector. A quarter of all directors organisation and, on average, they have
I make a donation to the 1.6 directorships, which is similar to
of very large NFPs spend more than
school every year – which five days a month on their directorship previous years. Despite no change in the
number of directorships they hold, there
is expected – so it doesn’t duties for a single organisation,
has again been an increase in the amount
compared with only 10 per cent of
make sense to then claim directors of small NFPs.
of time directors’ report spending on
all their NFP directorships. In 2012, the
expenses.” In regard to the sector, directors average was 23 hours per month; this year
working for NFPs operating in it is 32 hours or four days per month7.
Average hours NEDs spent by sector
n = 2,237
23.6
22.3 21.9
21.6 21.1
20.0 19.5
19.0 18.9 18.8 18.6
18.2 17.9
Philanthropy
and volunteering
International
Religion
Business/professional
associations
Health
Aged care
Culture and
recreation
Research
Education
Social services
Law, advocacy
and politics
Environment
Development
and housing
7
This information is based on reported not recorded hours, and it is possible that the increase partly reflects an increase in awareness of the hours spent.
NFP Governance and Performance Study 2014 | 29companydirectors.com.au
Payment of directors’ fees per cent of directors of NFPs with income
over $20m per annum are paid, compared “Payment of directors is
The majority of NEDs of NFPs provide with 12 per cent of directors of NFPs with
their time and expertise for free. This income less than $10m. only going to happen if
is true even for those who work for
Perhaps less expected is the extent to we have a major change,
our largest NFPs. More than half of
our respondents (51 per cent) do not which the payment of directors’ fees like taking over another
receive fees and pay any expenses they varies across sectors. This difference is
likely to be partly related to the variation operation (merging)”
incur as a result of their directorship
role. Approximately a quarter have their in the average income of NFPs operating
expenses paid and three per cent receive in different sectors. Nevertheless, it is
an honorarium. interesting that 31 per cent of this year’s
directors working for NFPs in the health
This year, 16 per cent of directors sector are paid, as were 28 per cent
reported being paid. Although this working in economic development and
appears lower than the 19 per cent in housing. In contrast, only 12 (four per
our 2013 study, the result is within cent) of the 307 directors working for
error levels and therefore reflects NFPs in the social services sector received
approximately the same ratio.8 directors’ fees, and none of the directors
As reported in 2013, payment of directors of religious NFPs received payment.
is correlated with NFP income. Nearly 30
Per cent of directors paid by sector
n = 2,239
31% 6%
Health Business/professional associations
28% 5%
Development and housing Law, advocacy and politics
20% 4%
Environment Social services
20% 3%
Research Culture and recreation
15% 2%
Aged care International
14% 0%
Education Religion
8%
Philanthropy and volunteering
8
This could be the result of sampling not a decline in the percentage of paid directors
30 | NFP Governance and Performance Study 2014companydirectors.com.au
How much are NFP separated from the question of how
“On one hand, directors directors paid?
much. Several remarked that there
was no evidence that NFP director
contributions are significant For the first time, the 2014 study performance is correlated with quantum
and they should not be asked how much directors were paid of pay, and therefore the decision on
in the last financial year and 321 the amount of pay is highly subjective.
expected to do it for free. directors provided this information. They also noted that constitutions of
But on the other, how much The amounts received ranged from NFPs, and the difficulty of changing
$1,200 to $185,000. these, are significant barriers to change.
to pay is just fraught with Further, that once done, it was not
When ranked in order of amount
so many problems; it’s just received, the lowest ten per cent
likely to be reversed, opening the
door to possible exploitation or, at
easier not to go there.” of paid directors received less than
least, for on-going disputes between
$6,800 and the highest ten per cent
stakeholders. Directors of organisations
more than $60,000. The median
in competition for government funding,
payment for 2013-14 was $20,000.
or reliant on donations, believed that
Although payment of director fees payment of directors fees would have
Directors’ fees
appears dependent on both income and a direct and significant negative impact
Highest: $185,000 sector, the history and culture of the on future income.
organisation are also key determinants.
Median: $20,000 We aim to explore these issues in more
It is clear that there is no rulebook detail in future studies, with a particular
Highest paid 10 per cent focus on identifying the characteristics
on this issue and the decision to pay
receive more than $60,000 directors is unique to each organisation. of organisations that pay director fees;
Lowest paid 10 per cent In our discussion groups, directors’ if they shifted from non-payment and
opinions remain strongly divided and how; and if they noticed an increase in
receive less than $6,800
they commented that the question of the quality of governance or ability to
whether to pay directors cannot be attract directors.
NFP Governance and Performance Study 2014 | 31companydirectors.com.au
9
Certainty in government
policy is needed
Responding to change our survey receive an average of 30
and uncertainty in
per cent of their income from the "Decision-making is frozen.
Commonwealth and 23 per cent from
government policy is the state governments, and both tiers We have no choice but
a top priority
have announced significant reductions in to wait – but there's no
government spending.
Maintaining or building income,
certainty that when they
Many NFPs are struggling to determine
diversifying income sources and the impact of these changes and in change something it will
clarifying strategy are still key priorities
for the next year but many boards now
several areas policies and legislation stay changed."
are either still being determined or
have to meet these challenges in an have not been passed by government.
environment of widespread change This has a significant impact on NFPs’
in government policy. ability to plan for the future, to secure
The election of the Coalition Federal appropriate resources and to maintain
Government in 2013 brought with the required number and composition
it major reforms to education, aged of staff. They are caught between
care, disability services, health care needing to respond quickly and
and social services, many of which effectively to new policy and trading “We can cope. We just
conditions or waiting until changes
will have a major impact on how need to know what we
have been finalised.
NFPs operate, even requiring some
to completely redesign their business This was a strong theme throughout are coping with.”
models. In addition, the NFPs in this year’s study.
32 | NFP Governance and Performance Study 2014You can also read
