Update to AICD Not-for-Profit Governance Principles

As the Australian Institute of Company Directors (AICD) notes in its recently released Not-for-Profit Governance Principles (Third Edition) (Principles), there are approximately 600,000 not-for-profit (NFP) organisations and registered charities operating in Australia and registered charities alone employ more than 10 per cent of Australian workers.

NFPs, and those responsible for leading and managing them, have had to adapt and respond to a rapidly changing operating environment, evolving risks, greater regulation and heightened community expectations, including in relation to performance, accountability and governance. This is all despite the fact that NFPs are often resource constrained, commonly subject to funding uncertainty and heavily reliant on volunteers.

On top of this, the directors of NFPs – from the smallest community organisations to large multinational charities – who themselves are typically unpaid volunteers, must comply with the same general legal duties as their commercial counterparts.

It is against this background that the AICD has released the revised edition of the Principles, which are directed to providing practical guidance to the directors of NFPs, and others involved in an NFP’s activities, in understanding and discharging their governance responsibilities. It is approximately five years since the last edition of the Principles was released.

What’s new?

Heavily revised and simplified, the Principles set out eight key principles of governance (reduced from 10 in the 2nd edition), which are presented in a concise and easily digestible format. Reflecting evolving community expectations and regulation on the role of organisations in society and their broader impact, there is a new governance principle – Sustainability.

Designed to be easily read, the Principles include a summary of key points, questions for directors to consider, case studies and links to additional resources.

The Principles also feature a ‘snapshot’ version, a governance checklist designed for smaller NFPs, and a resource on how to elevate client voices within Board decision making. The publication also contains a useful summary of key obligations of NFP directors and certain regulatory requirements in Australia.

The principles

Set out below are the titles of the revised principles and our shorthand summary of some of the key points they raise:

1. Purpose, vision and strategy. A core responsibility of an NFP board is to contribute to defining, documenting and fulfilling the NFP’s purpose, vision and strategy, which are foundational to its existence. In addition to developing the NFP’s strategy in consultation with management and others, both monitoring the NFP’s success in implementing that strategy, as well as communicating the purpose, vision and strategy to key stakeholders, are important roles of the board.

2. Roles and responsibilities. Effective governance requires an NFP board to define and document roles, responsibilities (including the board, management, employees and volunteers where appropriate) and decision-making powers, as well as having oversight over key third-party service providers. Effective reporting to the board, which provides directors with relevant and timely information in a manner suitable for the board’s needs, is also essential.

3. Board composition and effectiveness. An NFP board should have an appropriate mix of people with skills, experience and backgrounds which align with the purpose, vision and strategy of the organisation. The board’s effectiveness should be periodically monitored and selection/appointment processes should be formal and transparent.

4. Risk management. Ultimate responsibility for risk oversight of an NFP rests with its board. The board must oversee a risk culture, including processes to identify, report, assess and manage risk that align with the NFP’s purpose, vision and strategy. Board decisions should be informed by the risk management framework, which should be periodically assessed having regard to emerging and evolving risks.

5. Performance and accountability. Directors should closely oversee the performance of the NFP and set a ‘tone’ of internal accountability and transparency within the organisation. Key to this is understanding the resources available to the NFP and monitoring how they are being, and how they should be, utilised. Understanding the NFP’s finances, selecting suitable financial and non-financial metrics to assess performance, and ensuring necessary information is provided to the board to enable directors to carry out their oversight role, and fulfil their legal obligations, is critical.

6. Stakeholders. Central to an NFP achieving its purpose, and board decisions being made in the best interests of the NFP, is engaging with key stakeholders and considering their views and interests (which may vary over time or even be in conflict). The strategy for stakeholder engagement should be overseen by the board.

7. Sustainability. A clear understanding, and articulation, of the NFP’s approach to sustainability issues (beyond just considerations of financial sustainability) is a key concern for the board. How an NFP approaches environmental, social and human considerations often involve key governance considerations impacting its profile, reputation and community standing and decisions on resource allocation.

8. Organisational culture. Organisational culture begins with the ‘tone’ set by the board and senior management. This includes holding management accountable for upholding the desired culture and addressing cultural issues promptly and effectively. NFP boards should proactively obtain information on key metrics of organisational culture, such as employee and volunteer satisfaction and compliance with relevant laws.

A copy of the complete AICD Not-for-Profit Governance Principles – Third Edition is available on their website.