ACNC Taskforce Governance Consultation Paper
Author: Jonathan Casson, Partner
21 December 2011
The Australian Charities and NFP Commission (ACNC), which will begin on 1 July 2012, came a step closer, last week, with the release of ACNC taskforce’s, consultation paper on governance issues. The paper was derived from a series of roundtable meetings held by the ACNC taskforce throughout November.
Stung by criticism that it had allowed a particularly short time frame for comment, given the significance of the issues raised and the pertinent reality that the Christmas period is, often, the busiest time of the year for many charities and not-for-profit (NFP) organisations, the government has extended its deadline for submissions from 6 January to January 20, 2012.
Governance
Of note, are suggestions in the consultation paper (paragraphs 88-90) that governance rules – as currently recognised – might be affected by imposing a statutory expansion of to whom the duties are owed.
The consultation paper introduces the concept of the Responsible Individual, which generally follows the well understood concept of an ‘officer’ under the Corporations Act, and suggests that a principles-based approach to determining the standard be applied to the discharge of directors’ duties.
The standard of care and diligence expected of such an individual would depend on their qualifications and the position they hold, as well as the size of the organisation, how much public money it receives and the level of risk involved in its activities.
This potential widening of the net of Directors’ duties and the different levels of accountability introduces uncertainty to an already complex concept; that is not to say it is without merit, but, clearly, more consideration and input is needed.
Disclosure
For NFPs, disclosure and accountability go hand in hand and the consultation paper recognises this in annual reports, fundraising income and expenditure, related party transactions, remuneration and ad hoc publications. For registered charities, the paper suggests (paragraph 111) that information prepared in accordance with Australian Accounting Standards, in an approved form, will be lodged with the ACNC for mid-tier and upper-tier entities. The relevant standard to be applied would depend on the NFP’s activities, which is likely to include disclosure regarding:
- financial instruments (AASB7).
- interest in other entities (AASB12).
- employee benefits (AASB119).
- related party disclosure (AASB124).
- government Grants Assistance (AASB104).
It is important to ask how much more is necessary, for example, should related party transactions or remuneration of responsible individuals be included. The fact of the matter is that, reporting on the remuneration of responsible individuals (CEO, Senior Managers, Directors), will cause some concern and could operate as a disincentive to attracting and retaining talent in an already depleted sector. It is, also, not clear if such disclosure would be restricted to charities in receipt of government and philanthropic funds.
The consultation paper flags the possibility (paragraph 126) that the statute would require NFPs to abide by a conflict of interest policy, and sets out the criteria to be included. This is likely to be welcomed, or, at least, not opposed by the sector, especially where it will assist under-resourced NFPs, which might not, up to now, have had the where-with-all to draw such a policy.
Risk Management
The discussion paper rightly identifies a significant risk for NFPs (especially those enjoying tax concessions) of mission drift that could adversely affect its right to remain registered as a charity and receive tax concessions. It suggests that the internal and external auditing processes should be implemented and appropriate risk management strategies put in place. The paper tends to equate NFPs in this context with charities, but it should be remembered that the Commission will regulate NFPs that are not charities. We should ask then, given that NFPs control funds from the public, what additional risk management requirements should be required of NFPs.
Internal and External Reviews
The consultation paper notes the different reporting requirements under the Corporations Act for small, medium and large companies limited by guarantee and refers also to the equivalent tiers under the Associations Incorporations Act in New South Wales and Victoria. This leaves at large the question of what internal review procedures should be mandated for NFP organisations.
Governing Rules
The consultation paper raises the question of appropriate constitutions, rules and trust deeds. Given that the different jurisdictions, and formats (trusts, PAFs, indigenous corporations) have differing requirements, the question asked is: what are the core minimum requirements that registered entities should be required to include in their governing rules and should the ACNC have a role in mandating such requirements, and, should the ACNC have a role in the enforcement and alternations of governing rules when an entity is wound up and deregistered?
Relationship with members
Recognising that not all NFPs have members, the paper queries arrangements relating to core meeting notices, conduct of meetings, the use of proxies and so on. It proposes that it will be appropriate to set basic requirements for NFPs governance at least in relation to meetings of members and the responsible individuals.
Summary
The consultation paper highlights the need for transparency and accountability in the running of NFP organisations. It does not deal specifically with the difficulty an NFP’s corporate structure imposes on Directors and Officers, particularly with regard to fiduciary duties. Traditional governance theory requires Directors to act in the best interests of the corporation as a whole. In the for profit sector that usually translates to maximising profits and return to shareholders. In the NFP sector it is likely to refer to the best interest of the objects, taking into account the members of the organisation. Difficulties would arise if Directors feel it is incumbent upon them to take action to further the long terms objectives of the organisation that might not enhance the short term (personal) interests of the members. The liability of Directors is far from clear in this situation.
In the social enterprise (for profit) context the Corporate Flexibility Act (California) offers an alternative approach. It comes into force on 1 January 2012 and offers protection from liability for Officers and Directors of mission centred entities who pursue societal objectives at the expense of short term benefits (such as maximising income).
If the range of beneficiaries of Directors Duties is to be statutorily extended, what mechanism will be constructed to enforce those duties? Should the stakeholders (paragraphs 85 and 89) have the right to remove directors they believe have breached those duties? That would be an astonishing, but not implausible, extension of the proposed rule, and, most likely, any such rights would have to be enforced through the ACNC.
Please do not hesitate to contact Jonathan Casson or Lena Banoob for further information.
Jonathan Casson
Partner
T: +61 2 9390 8316
E: jonathan.casson@holmanwebb.com.au
Lena Banoob
Senior Associate
T: +61 2 9390 8308
E: lena.banoob@holmanwebb.com.au