GOVERNANCE IN THE NON-PROFIT SECTOR Paper for CIS Corporate Governance Conference on 10 to 11 September 2009 Helen Starke Contents INTRODUCTION... 2 NATURE OF ORGANISATIONS IN THE NON-PROFIT SECTOR... 2 IMPORTANCE OF THE NON-PROFIT SECTOR IN THE ECONOMY OF SOUTH AFRICA. 3 THE STANDARD OF GOVERNANCE IN THE NON-PROFIT SECTOR... 3 STANDARD-SETTING IN THE NON-PROFIT SECTOR... 5 CONCLUSION... 7 Governance in the Non Profit Sector Page 1 of 8 Helen Starke
Development depends on good governance, and that is the ingredient which is lacking in far too many countries. (US President Barak Obama) Africans have paid a high price for the absence of good governance in many parts of the continent. (Former UN Secretary-General Kofi Annan) Both these quotes refer to the governance of countries, but they are equally applicable to the governance of organisations in the non-profit sector. INTRODUCTION The principles of good governance are the same in all entities, whether they are multi-national listed companies or small non-profit community-based organisations. However, the manner in which these principles are applied and the cost and practicality of their application would differ considerably. There have been various attempts by numerous organisations throughout the world to define non-profit organisations. The working definition for this paper comes from the Nonprofit Organisations Act, 1997. A trust, company or other association of persons established for a common purpose and the income and property of which are not distributable to its members or office-bearers except as reasonable compensation for services rendered. i NATURE OF ORGANISATIONS IN THE NON-PROFIT SECTOR Organisations in the non-profit sector vary considerably in size, complexity and legal status, but the common factor that identifies all of them is their non-profit, public benefit nature. The common factors of a non-profit organisation are: 1. All money accruing to the organisation is utilised in the pursuit of the objectives of the organisation; whether the money is obtained by way of donations or in a pursuit of a for-profit activity. 2. The members of the organisation do not share in any surplus, but it is retained for furthering the objectives of the organisation. 3. The organisation exists to provide a public service; it has a public benefit purpose. Legal status options for non-profit organisations Voluntary association Common law Trust Common law and Trust and Property Control Act 57/1968 Section 21 Company Companies Act 61/1973 (To be replaced by Companies Act 71/2008) Nonprofit Organisation Nonprofit Organisations Act71/1997 Governance in the Non Profit Sector Page 2 of 8 Helen Starke
Governance implications of the nature of organisations in the non-profit sector i. The focal point of governance is public benefit not shareholders. ii. Board performance must be measured against this focal point of governance. iii. As they have not earned their income from profits non-profit Boards are usually very risk-averse. iv. Non-profit Board members are seldom paid director s fees. v. Non-profit directors are almost exclusively non-executive vi. The ultimate compliance officer is the community served by the non-profit organisation and the donors who support the organisation. ii Despite the differences between non-profit and for-profit entities we are seeing convergence between the two. Non-profits are trying to become more sustainable and for-profits are being more socially responsible (triple bottom line or what King III calls integrated reporting social, financial and environmental dimensions). IMPORTANCE OF THE NON-PROFIT SECTOR IN THE ECONOMY OF SOUTH AFRICA Probably the vast majority of people do not realise the importance of the non-profit sector in the South African Economy. In a comprehensive study undertaken in 1999 and published in 2002 iii Swilling and Russell found that the non-profit sector is a major force in the South African economy. They employed a total of 645 316 full-time and part-time employees and full-time volunteers. This made the non-profit sector a larger employer than the mining industry at the time. Other findings significant to the economy were: Women and black people played a leading role. Of all managerial staff surveyed, 59 percent were women and 73 per cent were black. When looking at total staff it was found that 60 per cent were women and 81 per cent were black. Nearly 1.5 million volunteers contributed their time and energy. Volunteer labour was worth R5.1 billion. The non-profit sector had an estimated income of R14 billion. In a country attempting to redress past employment discrimination, the high percentage of Backs and women employed in the non-profit sector is a most positive finding; as is the high number of volunteers learning new skills in a country grappling with unemployment and a skills shortage. THE STANDARD OF GOVERNANCE IN THE NON-PROFIT SECTOR Before reviewing the standard of governance in the non-profit sector, it is necessary to have a working definition of good governance. There are probably as many definitions of good governance as there are authors on the subject. The common characteristics found in these definitions can be summarised as being: Governance in the Non Profit Sector Page 3 of 8 Helen Starke
Participatory Accountable Transparent Responsive Effective and efficient Equitable Inclusive Following the rule of law The non-profit sector varies considerably when measured against these characteristics of good governance. The larger, well-structured and well-funded organisations would measure up favourably against well governed entities in the corporate sector. They would have: skilled and well-informed Board members and management; a Company Secretary; board committees such as Audit and Remuneration; compliance with the legislation under which they are registered, which would probably be both the Companies Act (61 of 1973) and the Nonprofit Organisations(71 of 1997); compliance with other legislation such as the Basic Conditions of Employment Act (75 of 1997), Broad Based Black Economic Empowerment Act (53 of 2003),, Compensation for Occupational Injuries and Diseases Act (130 of 1993), Employment Equity Act (55 of 1998), Income Tax Act (58 of 1962), Labour Relations Act (68 of 1995), Promotion of Equality and Prevention of Unfair Discrimination Act (4 of 2000), Tobacco Products Control Act (83 of 1995), Unemployment Insurance Contribution Fund Act (4 of 2000), Unemployment Insurance Fund Act (63 of 2001), Value Added Tax Act (89 of 1991), Skills Development Act (97 of 1988), Skills Development Levies Act (9 of 1999), Promotion of Access to Information Act (2 of 2000), Electronic Communications and Transaction Act (25 of 2002) effective and efficient programme delivery; programme evaluation; a risk manager and an internal audit function; a Human Resources Department; a Marketing/Public Relations Department; a Research Department; good financial management and they would possibly employ a CA; good accountability for funds received and the way in which they are spent; accountability to all stakeholders; transparency in all aspects of their operation; an effective division between Board and management. When reviewing this list it becomes obvious that for an organisation in the non-profit sector to operate in this manner it needs to be well-funded. The other side of the coin would be that if an organisation does operate in this manner it continues to attract funding. Governance in the Non Profit Sector Page 4 of 8 Helen Starke
At the opposite end of the scale is the small, totally under-funded community based organisation; many of which do not even employ staff. They are run by volunteers who also deliver the services. They would be hard-pushed to achieve even a basic level of governance. The middle ground would be occupied by a large number of organisations, which are reasonably funded, employ staff and have a group of dedicated volunteers. They have effective programme delivery, but sometimes lack effective financial management. As a group they are attracting large sums of corporate, government and public funding and will continue to do so. It is this group of organisations who need expertise to assist them to improve most aspects of their governance in order to improve their sustainability and accountability. In a presentation by Marcus Coetzee on 28 July 2005, he makes interesting comments regarding obstacles to good governance from the perspective of staff, donors and the Board. iv Staff and donors perceived shortcomings of Board members as the main obstacles to good governance, whereas the Board members saw the obstacles as staff shortcomings with regard to service delivery. An important implication of Coetzee s perspective on obstacles to good governance is that donors hold Board members rather than staff responsible for good governance and the Board members in the non-profit sector would benefit tremendously from training. STANDARD-SETTING IN THE NON-PROFIT SECTOR There are standards of good governance in the non-profit sector in most developed countries the world, some of them developed by the government and others by the non-profit sector themselves. South Africa has the Codes of Good Practice for South African Non-profit Organisations issued in terms of section 6(1)b)(I) of the Nonprofit Organisations Act (71 of 1997). v The code is divided into three sections; namely leadership and management, fundraising and resource mobilisation and roles and responsibilities of donors and sponsors. This paper refers only to the leadership and management section as this is the core of what is generally meant by good governance The governing body According to the Code the effectiveness of a governing body is measured by the attention it gives to care, loyalty and obedience. Roles that the governing body performs are: Determines the organisation s mission and purpose Selects and appoints the chief executive officer Supports the CEO and reviews his or her performance Ensures effective organisational planning Governance in the Non Profit Sector Page 5 of 8 Helen Starke
Ensures the organisation has adequate resources Manages the organisation s resources effectively Determines and monitors the organisation s programmes and services Enhances the organisation s public image Serves as a court of appeal Measures its own performance Staff Leadership Endeavour to understand the organisation inside and out. Provide policy guidance and leadership to the governing body. Manage, direct and implement all services, fundraising and administrative operations, programmes and activities of the organisation. Implement the policy decisions and directives of the governing body. Uphold and adhere to the constitution and policies of the organisation. Educate the governing body regarding their unique and overlapping roles and responsibilities with the staff. Report regularly to the governing body and otherwise ensure that the board is kept informed of all organisation activities. Advise the governing body in a timely fashion of any developments that may affect the organisation s well-being. Establish and maintain effective internal communication systems. Maintain effective financial controls in place; approve all financial disbursements and otherwise monitor all financial and accounting activities of the organisation. Prepare annual budgets with the assistance of staff, a treasurer (if appointed) and finance committee (if appointed). Hire, supervise, evaluate and fire staff. Develop adequate and effective systems of assessing skills, experience, qualifications, levels of responsibility and performance, and remunerate on this basis. Have clear and transparent procedures for employing new staff and disengaging staff. Encourage and support the involvement of volunteers. Maintain organisation records, files, documents and archives. Enter into contracts with suppliers on behalf of the organisation, with approval of the governing body Represent the organisation to other organisations, the media and the public at large. Prepare meeting agendas, staff notices, reports, daily correspondence and other necessary internal and external communication. Maintain the confidentiality of sensitive information. Financial management Financial systems need to be developed and maintained to ensure appropriate use of resources. Governance in the Non Profit Sector Page 6 of 8 Helen Starke
Accountability and transparency A non-profit organisation exists and is sustained by its ability to maintain open and productive relationships with its key stakeholders: Those the organisation serves; those who provide the resources; and those who maintain an enabling environment in which the organisation operates. Ethical and responsible behaviour Honesty Integrity Promise keeping Fidelity/loyalty Fairness Caring for others Respect for others Transparency Responsible citizenship Pursuit of excellence Accountability Safeguard public trust This Code of Good Practice sets high standards for the non-profit sector and these are the standards to which every organisation in the non-profit should strive. It is also the standards to which they should be held accountable by donors and the public. CONCLUSION Governance in the non-profit sector differs in some aspects from governance in the for-profit sector, but the basic principles of good governance are shared by both sectors. Although there are considerable differences in the levels of good governance in the non-profit sector, the Boards and staff are generally driven by a passion and commitment to the cause and the communities they serve. i Nonprofit Organisations Act, 1997 (No.71 of 1997 ii Shelagh Gastrow blog on Thought Leaders: Mail and Guardian online: 15 May 2009 iii Swilling, M and Russell, B. The Size and Scope of the Non-profit Sector in South Africa iv Marcus Coetzee. How can you ensure that non-profit organisations practice good governance? www.icms.co.za v Department of Social Development. Codes of Good Practice for South African Non-profit Organisations Governance in the Non Profit Sector Page 7 of 8 Helen Starke
BIBLIOGRAPHY Business Sculptors. Calling all nonprofit organizations: its time to wake up or become obsolete, www.businesssculptors.com/social-enterprise-folder/callin-all-nonprofit-organizations-its-time-towake-up-or-become-obsolete Coetzee, M. How can you ensure that non-profit organisations practice good governance? www.icms.co.za 28 July 2005 Department of Social Development Directorate: Nonprofit Organisations. Codes of Good Practice for South African Non-profit Organisations (NPOs), Pretoria, 2001 Education & Training Unit for Democracy & Development. Legal Structures commonly used by Non- Profit Organisations, www.etu.org.za/toolbox/docs/building/lrc.html Gastrow, S. Thought Leaders: Mail and Guardian online, http://www.thoughtleader.co.za/shelaghgastrow 15 May 2009 Government Gazette No.1627. Nonprofit Organisations Act, 1997 (No.71 of 1997) Pretoria, Government Printer, 03 December 1997 Honey, M and Bonbright, D. The definition and typology of N.G.Os, Johannesburg, Development Resources Centre, 1993 International Non Governmental Organisations. Accountability Charter www.ingoaccountabilitycharter.org, 2005 Panel on the Nonprofit Sector. Strengthening transparency, governance, accountability of charitable organizations, Report to the US Congress and the Nonprofit Sector, June 2005 Swilling, M and Russell, B. The Size and Scope of the Non-profit Sector in South Africa, Durban, Centre for Civil Society, 2002 The Independent Commission for Good Governance in Public Services. The Good Governance Standard for Public Services, London, Office for Public Management Ltd, 2004 Governance in the Non Profit Sector Page 8 of 8 Helen Starke