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Governance challenges for the not-for-profit sector

4 min read

Total income in Australia’s not-for-profit sector was $33.5 billion in 1999-2000. Not-for-profit organisations (NFPs) employed 604,000 people and there were 558 million hours of work undertaken by volunteers in the sector – the equivalent to 285,000 full-time employees. Yet even the scale of these statistics does not do justice to the social capital generated by the organisations they represent.

Guiding this effort are boards of varying nature and in this article we concentrate on three of the biggest challenges facing governance in the sector. First, it is important for boards to recognise the context in which they operate, particularly that governance of a not-for-profit is similar to, but different from, for-profit governance. Second, articulating and operationalising the mission focus for a not-for-profit can be a particular challenge. Finally, succession and development of both boards and senior management is fundamental to success.

Similar but different
As Justice Tadgell pointed out in the landmark National Safety Council Case “There is nothing in the [Companies (Vic)] Code to suggest that the standard to be expected of a part-time non-executive director of a company not-for-profit is different from the standard expected of any other director of a profit-making company.”

Yet despite the similarity of obligations and challenges like: sound decision-making, financial accountability, risk management, ensuring ethical conduct and legal compliance, and maintaining public trust and confidence in the organisation, NFPs are fundamentally different in several important ways.

Perhaps the most fundamental involves the measures of success and its implications for resourcing the organisation’s mission. In the for-profit world, successful organisations generate funds. They supply goods and services at a surplus to cost which in turn can finance further resourcing of the company’s operations. In contrast most NFPs provide services at a subsidy, so success, and consequent high demand in service delivery results in a paradoxical draining of corporate resources.

While this has obvious implications for strategy setting at a governance level, for example, ensuring the organisation pursues growth in a manageable way, it also places direct stress on the governance practices and arrangements in the organisation.

As managers become busy delivering the service, governors often step into the breach to fill the gaps, possibly acting on their self-perception as volunteers for the organisation. In doing so, they often fail to separate the notion of volunteering for the organisation, in most other capacities, from the particular responsibilities of being a governor of the organisation, whether honorary or not.

This ‘transgressing of role boundaries’ is symptomatic of a problem seen in many NFP boards: uncertainty, confusion and ambiguity about roles. Not-for-profit boards must understand their role and functions in terms of governance generally and in terms of their own organisations.

Focus on the mission and make it work
A fundamental role of any body of governors is setting the organisation’s goals and strategic direction.

This includes both a forward thinking view of where the organisation is headed and recognition of its history. In contrast to their for-profit counterparts, the not-for-profit governor has a more difficult role defining, operationalising and maintaining a focus on the mission of the organisation. Where the for-profit’s overall objectives are reasonably clear and outcomes can be measured in accepted ways, in the not-for-profit sector defining and measuring effectiveness is conceptually difficult, complex and often quite expensive.

NFP governors need to play the defining role in what the organisation is doing and this has to go beyond merely stating the mission. The board must articulate in operationally relevant terms how the organisation achieves its mission and it must oversee management in carrying it out. It has to look at the long term perspective to be able to develop strategies which achieve the mission and withstand crises.

The danger is that without strong leadership within the board, it can get distracted by detail and find it easier to stray into management roles, affecting its ability to fulfil its essential governance function.

Achieving the mission may require the board to change leaders when it’s needed. This can be difficult for a NFP board because of fear of taking risks; the difficulty of managing tensions between members’, funders’ and stakeholders’ interests; and a tendency to institutionalisation.

Institutionalisation not only inhibits change when needed to achieve its mission, it can be a significant hindrance to a NFP being able to build on its successes and develop. Focus on the mission is essential for success and confidence in the mission; and its operationalisation allows a not-for-profit to grow.

Planning for the future
NFP boards face particular challenges in self adaptation and succession. The voluntary nature of board positions in the sector often results in committed, well-intentioned individuals taking positions for which they may not be well-equipped.

These challenges can be amplified by the structural composition of many NFP boards, particularly those with rules that entrench short tenure limits or prescribe board membership based on particular member or constituency interests. Together, these factors can result in a board that lacks the knowledge, skills and experience required to carry out its role effectively.

Therefore effective boards are aware of the need to groom members for leadership through a process of planned succession and board member development. NFP boards need to be constantly searching for potential members rather than waiting until the eleventh hour to identify new recruits.

While this does not guarantee an ideal structure, it is more likely to result in a superior combination of skills, knowledge and experience than an ad-hoc approach. As part of this approach, boards need to be searching for new ways to uncover this talent rather than relying on the ‘usual suspects’ and their networks.

Boards also need to focus on building a culture of continuous improvement in the governance arrangements in place. Well implemented induction programs, regular reflection and development activities, co-opting skilled members to committees of the board and using outside expertise in a judicious manner, are all elements of getting the most from the board. This culture builds on an effective board structure to provide leadership and modelling behaviour to the rest of the organisation.

Your civil duty
Effective governance in the not-for-profit sector is serious business – it ensures the vitality and sustainability of the organisations that help deliver a civil society.

Boards as a whole need to understand their governance function and ensure they are equipped to carry this function out well, despite the many challenges of the role. While the responsibilities for NFP boards are just as onerous as those of for-profits, and the peculiar challenges they face actually make the responsibilities even greater in many ways, NFP governors are also rewarded by knowing they play a fundamental role in upholding civil society.

Dr Gavin Nicholson is a governance researcher, board consultant and lecturer in the areas of governance policy and practice and the Centre for Philanthropy and Nonprofit Studies at the Queensland University of Technology.

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