Governance Challenges of Running a Not-for-Profit in New Zealand

The Governance Challenges

of Running a Not-for-Profit

Guest Presenter: Kevin McCaffrey, Effective Governance

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Hayes Knight

Governance Challenges for NFP’s June 2011

Kevin McCaffrey

Partner [email protected]

Contents

1. Governance Overview

2. Got a Map ? How’s your WoF?

3. The Individual Board Member’s Role

4. The Board’s Role

5. What's the plan?

6. Managing Risk

7. Noses in and Fingers Out

8. Key Points

The Type of Organisation Determines Governance

Requirements

Start-up Mature

Commercial

Public Good

Regulatory

Listed Company

Organisation Life Cycle influences Governance

Transform

Governance is influenced by Current Events &

Future Demands

Degree of Change

Time

(yrs)

Level of Board Engagement

Appetite

For

Risk 1 2 3 4 5

low

low

high

high

high

Start-up

Mature

There are 4 Models of Governance

1. Agency Model – There is absolute separation of powers, the Board scrutinises Management on behalf of the shareholder, e.g. Listed companies

2. Stewardship Model – The Board works with Management to guide the organisation and is actively engaged in strategy and advising the management.

3. Resource Model – The Board is considered and acts as a resource for the organisation, networks, representation, skills etc, common in start-ups and Community and Social Organisations – NFP’s

4. Stakeholder Model – An emerging model where the Board represents a range of Stakeholders interests and guides the management in balancing their interests, common in Social – Political influencing organisations.

The Legal Framework

Incorporated Societies Have at least 15 members and are registered under the Incorporated Societies Act 1908. Members associate together for a mutual interest other than the pursuit of profit

Charitable Trusts (Charities Act 2005) comprise either 1. A Trust where property is legally owned by a group of people

(trustees) managed for the beneficiaries of the Trust. The Trust does not have a legal identity

2. A Charitable Trust Board is a group of people that holds assets or conducts activities for charitable purposes. The organisation acquires a separate legal identity that is independent of trustees or members

Are you a Trust or Trust Board??

Do Check !!

What is your Governance Map?

Council

Board

Committees

Influence

Over

JV

Members

Regions

Branches

Electoral

Colleges

Volunteers

What is the Source of Authority ?

Governance Map – XYZ Trust Inc

XYZ Trust Incorporated

(26th August 1969)

Trust Board Incorporated

(25th May 1967)

Standing Committees

•Women’s committee (Board sub-

committee)

•Finance & Audit

•Quality & Risk

Adhoc Sub-Committees

•Executive remuneration &

disciplinary

•Property

•Private Service Funding

•Positioning / Events

CEO

Elected by Board

Elected from society members at

each AGM

JV

Identify your Source of Authority

ABC Endowment Fund

Governance Structure – who was really in charge?

Board of Trustees

President

Finance Subcommittee

Funding Subcommittee

Marketing Subcommittee

Governance Ad Hoc

Subcommittee

CEO Ad Hoc

Subcommittee

Planning Ad Hoc

Subcommittee

Fundraiser

Senior Executive

Staff

Volunteers

Founders Syndrome ?????

Source of Authority

??

WoF Check

Is your Constitution, Trust Deed up to date?

Show it to me !!!

Does it meet your current and future needs?

Do you know the Source of Authority and the related

Authorities (not just delegated authorities)

Does everyone know the hierarchy ( parent and child)?

Do they follow it?

Can you draw it for me?

ORGANISATIONAL ENVIRONMENT

THE BOARD ENVIRONMENT

BOARD ROLES

Organisation

Type History

Legal

Framework Constitution Strategy

ORGANISATIONAL PERFORMANCE

Monitoring

Risk Management

Compliance

Policy Framework

Networking

Stakeholder Communication

Effective Governance

CEO Selection, Monitoring and Evaluation

Strategy

BOARD CAPITAL

Board Competencies

Knowledge

Skills

Abilities

Contacts

Board Structures

Policies

Processes

Procedures

Committees

Board

Dynamics

Board Behaviours

Personality Values Norms Board-

management relations

Decision Making

WORK WITH AND THROUGH THE CEO AND STAFF

Effective Governance Model

For Whom Must I Act ?

1. Members ?

2. Clients ?

3. Entity ?

4. All ?

Basic Duties of a Board Member

First duty:

To act in good faith and in what the director believes to be the best interests of the Company, Society or Trust.

To exercise powers for ‘proper purpose’

Not to allow ‘reckless trading’

To exercise reasonable ‘care, diligence and skill’

May rely on Information from management or

professional advisers subject to proper inquiry.

Individual's Responsibilities

The Fiduciary Principle

“One who having been entrusted with powers for another's benefit is under a

general equitable obligation when dealing with those powers to act honestly in what they consider to be in the other’s interests

“Fides” – trust, faith, belief, truth confidence

Independence, probity, honesty, diligence

Duty and Responsibility

– The Duty of Good Faith

– The Duty of Care

– The Duty of Skill

– The Duty of Diligence

In doing so, they must continually ask themselves the 8 questions;

Question One

Is there any conflict?

Duty of good faith

Question Two

Do I have all the facts to enable me to make a decision?

Duty of care

Duty of skill

Duty of diligence

Question Three

Is this a rational business decision based on all the facts?

Duty of care

Duty of skill

Duty of diligence

Question Four

Is the decision in the best interests of the company?

Duty of good faith

Duty of care

Duty of skill

Question Five

Is the communication to stakeholders transparent?

Duty of good faith

Duty of care

Duty of skill

Sunlight is the best disinfectant

Artificial illumination is the best policeman

Question Six

Is the company acting in a socially responsible manner?

Duty of care

Duty of skill

Duty of diligence

Question Seven

Am I acting as a good steward of the company’s assets?

Duty of care

Duty of skill

Duty of diligence

Question Eight

Would the board be embarrassed if its decision and the

process employed in arriving at the decision appeared

on the front page of the national newspaper? (The

Sunday morning paper test)

Duty of care.

Board Member Responsibilities- Cont’d

1. Is there a conflict? good faith

2. Do I have all the facts to make a decision care skill diligence

3. Is this a rational business decision based on all the facts? care skill diligence

4. Is the decision in the best interests of the Organisation? good faith care skill

5. Is the communication to stakeholders transparent? good faith care skill

6. Is the Organisation acting in a socially responsible manner? care skill diligence

7. Am I acting as a good steward of the Organisation’s assets? care skill diligence

8. The Sunday morning paper test care

The Board’s Core Accountabilities

1. Setting the Governance Framework

2. Strategic Planning

3. Risk Management and Compliance

4. Monitoring and Fiscal Control

5. Policy & Authorisations

6. Shareholder & Stakeholder Management, and

“Hire the CEO – Accept Their Plan – Fire the CEO”

Principles for Corporate Governance

( Securities Commission Guidelines)

Governance Principles

1. Directors should observe and foster high ethical standards

2. There should be a balance of independence, skills, knowledge, experience and

perspectives among directors so that the board works effectively.

3. The board should use committees where this would enhance its effectiveness in key

areas while retaining board responsibility.

4. The board should demand integrity both in financial reporting and in the timeliness and

balance of disclosures on entity affairs.

5. The remuneration of directors should be transparent, fair and reasonable.

6. The board should regularly verify that the entity has appropriate processes that identify

and manage potential and relevant risks.

7. The board should ensure the quality and independence of the external audit process. 8. The board should foster constructive relationships with shareholders that encourage

them to engage with the entity.

9. The board should respect the interests of shareholders (and stakeholders) within the

context of the entity’s ownership type and its fundamental purpose.

Principles & Rules Governance Framework

XYZ Trust

Constitution

Charter

•_____

•_____

•_____

Regulations

& Rules

Governance

Principles

Operating

Policies



BOARD ROLES

Organisation

Type History

Legal



Monitoring

Risk Management

Compliance

Policy Framework

Networking




Strategy

BOARD CAPITAL

Board Competencies

Knowledge

Skills

Abilities

Contacts

Board Structures

Policies

Processes

Procedures

Committees

Board

Dynamics

Board Behaviours



Decision Making

WORK WITH AND THROUGH THE CEO AND SMT

Effective Governance Model- Strategy Development

So what is strategy? - Really

Copyright -Effective governance 2010

“ A Commonly held view”

“ Its written down”

“ Its never complete”

“ It needs to guide decision making”

“ It’s the stories you hear in the organisation”

“Its our Values”

What is your Ambition?

Transform

You are here

Set Goals to describe the Ambition

V

Mission

Strategy

Business Plans

Forecasting

Performance Reporting

OUR VALUES

Vision: Trajectory

Mission: W+W+H

Goals &

Time Horizons Sectors

Clients

Size

Turnover

People

etc

Strategy – The guts of it = WWH

WHAT will we DO? -------------------------- NOT DO – What Services & Offerings will we do

– What will we NOT DO

Strategy is about saying NO

WHO FOR? ---------------------------- NOT FOR – Clients, Funders, Demographics,

– Members, Staff, Suppliers

– Volunteers, Stakeholders.

HOW will we do this? – The Operating Model

– Tangible/ Physical Resources – Facilities, technology, products

– Intangible resources - people, brands, IP, volunteers

This is the core purpose of the organisation

Values Vision Mission Council Ideas

Board Plans

Management Ideas

Branch Ideas

Stakeholders

Competition

People

Environment

Regulation

Joint Session of

•Council

•Board

•Management

To set priorities

5 Year Plan Strategic Goals

2014 +

Members

Our Clients

Our Services

Our Delivery Model

Our People

Fiscal Goals

Risk Appetite

Stakeholder Interests

3 Year Rolling Business Plan

Strategic Goals 2011 2012 2013 2014

Members

Clients

Services

Delivery Model

Our People

Fiscal Goals

Stakeholders

Strategy Drives Priorities and Resourcing

Research

Plan

Annual Plan

Strategic Goals Budget Actual

Members

Clients

Services

Delivery Model

Our People

Fiscal Goals

Stakeholders

Priorities



BOARD ROLES

Organisation

Type History

Legal



Monitoring

Risk Management

Compliance

Policy Framework

Networking




Strategy

BOARD CAPITAL

Board Competencies

Knowledge

Skills

Abilities

Contacts

Board Structures

Policies

Processes

Procedures

Committees

Board

Dynamics

Board Behaviours



Decision Making


Effective Governance - Risk & Compliance

What’s this all About?

What do we mean by Risk

How to Identify and Manage Risk

The Role of the Board

Source J Bendall

Survive & Prosper !

Source J Bendall

Firstly a common language is needed ….

Risk - the chance of something that will have an impact on objectives. It is

measured in terms of consequence and likelihood.

Risk Management - the culture, processes and structures that are directed

towards the effective management of potential opportunities and adverse

effects.

Risk Appetite – the amount of risk the entity is prepared to take in pursuit

of it’s objectives .

Risk Tolerance – the amount of loss the entity is will to bear should a risk

materialise.

Source J Bendall

Possible Risks

Fraud and theft

- Cash - Information

- Time - Property

Competencies

not Defined

Inadequate

Training and Support

Loss of Key Staff

Services Poorly

Defined

Service Standards

Slip

Negative Public

Disclosure

Poor Morale

and Motivation

Reputation / Brand

Legal non-compliance

Business Plans / Budgets

Not

agreed/finalised

Source J Bendall

Risk profiling and Reporting helps focus efforts

3

4

6

7

8

Insignificant

Likelihood of

Occurrence

Minor

Moderate

Major

Remote Unlikely Moderate Likely Almost

certain

14 3

Catastrophic

Imp

act

/ C

on

seq

uen

ce

# Tier 1 Risks

3

7

14

16

18

20

16

7 20

18

High

Short Term Action

•Reduce

Critical

•Terminate

•Transfer

Low Priority

•Accept /monitor

Strategies

•Transfer

•Reduce

Low

High

Likelihood

What can you do about it?

Impact

Assurance to stakeholders

Stakeholders

Board

Management

Employees

Risk profile Emerging Issues Early warnings

Current risk profile Action plan status

Risk management system

Ensure accountability Risk aware culture

Risk management - Policy - Philosophy - Appetite

Responsibility for risk management

Source J Bendall

The Board’s role

Set the “tone at the top”

Determine the organisation’s risk appetite/tolerance

Approve the risk management policy

Approve risk management framework for the organisation

Risk and compliance monitoring

Survive and Prosper!

Source J Bendall



BOARD ROLES

Organisation

Type History

Legal



Monitoring

Risk Management

Compliance

Policy Framework

Networking




Strategy

BOARD CAPITAL

Board Competencies

Knowledge

Skills

Abilities

Contacts

Board Structures

Policies

Processes

Procedures

Committees

Board

Dynamics

Board Behaviours



Decision Making


Effective Governance Model- So who is in Charge?

The Board’s Core Accountabilities

1. Setting the Governance Framework

2. Strategic Planning

3. Risk Management and Compliance

4. Monitoring and Fiscal Control

5. Policy & Authorisations

6. Shareholder & Stakeholder Management, and

“Hire the CEO – Accept Their Plan – Fire the CEO”

Its about having Noses in & Fingers Out !!!!!!

Degree of Change

Time

(yrs)

Level of Board Engagement ?????

Appetite

For

Risk 1 2 3 4 5

low

low

high

high

high

Start-up

Mature

Identify Board & Management Accountabilities

Range of Governance

Core Governance

Strategic Governance

Depth of Governance

Policy

Design

Approval

Implementation

Monitor

Review

Strategy

Audit Risk

Compliance

Fiscal

Reporting

Remuneration

Governance

Strategy

Stakeholder Mngt

Industry Knowledge

Channels

Markets

Acquisitions

Alliances

Funding Turn Around

Change Management

Ensure Financial Audit is conducted in accordance with

Regulations

BOARD CHAIR FINANCE

COMMITTEE CEO CFO External

POLICY A a

DESIGN A a a a auditor

APPROVAL A a

IMPLEMENT A a a a

MONITOR A

REVIEW A a a a a

A = Accountable Organisation Wide

a = Accountable for a Function/Area only

Assign Accountability for Audit

Develop and manage an effective Fund Raising Plan

BOARD CHAIR CEO

Funding

Manager

Branch External

Fund

Raiser

POLICY A a

DESIGN a A a a

APPROVAL A

IMPLEMENT a a A a A* a

MONITOR A? A

REVIEW A a a a

* Who keeps the money? Branch or Centre

A = Accountable Organisation Wide

a = Accountable for a Function/Area only

Governance Accountability Map

Policy

Design

Approve

Implement

Control

Review

Au

dit

Ris

k M

ngt

Fis

cal

Mn

gt

Com

pli

an

ce

Gover

nan

ce

Bd

P

erfo

rman

ce

Bd

Rep

ort

ing

CE

O A

pp

nt

Sta

ff A

pp

nts

Sta

keh

old

er

Mgt

Bu

sin

ess

Pla

n

Fu

nd

ing

Volu

nte

er

Mk

tg &

P

rom

o

Man

age

Op

erati

on

s

Board Finance Committee Governance Committee CEO Committee means Facilitation of process

Planning Committee Funding Committee Marketing Committee Senior Executive recommendation to Board

Governance Accountability Structure & Map

Board of Trustees

President

Finance Subcommittee

Funding Subcommittee

Marketing Subcommittee

Governance Ad Hoc

Subcommittee

CEO Ad Hoc

Subcommittee

Planning Ad Hoc

Subcommittee

Fundraiser

Senior Executive

Staff

Volunteers

The Founding President Resigned

Source of Authority

Conclusion

1. Check your WoF

2. Discharge your four fundamental duties; Good Faith, Care, Skill & Diligence.

3. Ask the 8 questions

4. A commonly held view = WWH

5. Prioritise how to get there – 3 year rolling plan

6. Identify and mitigate risk

7. Agree Noses in and Fingers out