AICD updates the NFP Governance Principles


    The AICD has updated its Not-for-Profit Governance Principles to guide directors through the evolving landscape of the NFP sector. 

    The new NFP Governance Principles, building on the foundations laid in 2013 and revised in 2019, respond to a sector experiencing increased regulatory scrutiny, societal expectations and the impacts of global disruptions such as the COVID-19 pandemic. The 2024 edition consolidates the original 10 principles into eight, introducing considerations for sustainability and organisational culture, alongside a new focus on elevating client voices in board decision-making.

    In his foreword to this new edition of the Principles, Assistant Minister for Competition, Charities, Treasury and Employment Andrew Leigh writes, “I welcome the publication of the AICD’s updated NFP Governance Principles. These Principles provide a contemporary framework to help directors understand and meet their governance responsibilities. This resource is a valuable supplement to the Australian Charities and Not-for-profits Commission’s extensive suite of free resources.”

    This latest iteration includes a governance checklist tailored for smaller NFPs with real-life case studies from senior directors, offering practical insights and solutions. It acknowledges the sector’s diversity, emphasising that application of these principles should be adapted to each NFP’s unique context. The development process involved comprehensive consultation with directors, legal experts, peak bodies and other stakeholders, ensuring the principles encapsulate a wide range of perspectives and best practices.

    Principle 1: Purpose, Vision and Strategy

    Purpose, vision and strategy form the lifeblood of an NFP. Together, they can guide and motivate everyone associated with the organisation including volunteers, funders and donors. They can also help to ensure resources are used in the best interests of those the NFP is supporting.

    The board is responsible for helping to define purpose, vision and strategy — although as Queensland Trust for Nature chair Bruce Cowley FAICD points out, there’s rarely an opportunity to create the purpose from scratch. All 60,000 registered charities in Australia must have a charitable purpose — a statement of why they exist — and the organisation’s purpose must reflect this. For example, the charitable purpose of RSPCA Australia is preventing or relieving the suffering of animals, while the organisation’s purpose is to make animals’ lives better.

    It is common for NFPs to develop a mission statement consistent with their charitable purpose. The Not-for-Profit Governance and Performance Study 2023–24, published jointly by AICD and Commonwealth Bank (the NFP Study), found that 70 per cent of respondents rated their organisation as either mostly (42 per cent) or highly (28 per cent) effective in achieving its mission.

    An NFP’s vision sets out what the organisation aims to achieve. It should be ambitious yet realistic, in line with the purpose and capable of inspiring the full spectrum of stakeholders.

    Strategy is the roadmap to achieving the purpose and vision of the organisation. It follows that developing the strategy in partnership with management is an important responsibility of the board. Cowley recommends setting and regularly reviewing strategic KPIs to help keep the organisation true to its purpose and vision. The board must be laser-focused on what strategic activities will have the greatest impact with limited resources. “NFPs are resource-constrained at the best of times, so boards should not be throwing good money after bad,” says Cowley.

    Principle 2: Roles and Responsibilities

    Achieving the clear and comprehensive roles and responsibilities that form the foundations of good governance can be challenging. One NFP Study respondent reported, “a lot of confusion among NFP directors about what their roles are”.

    This is something the board needs to address, especially as volunteers play an important role in many NFPs. “For newer NFPs, this means directors familiarising themselves with the organisation’s constitution and setting up charters for the board and committees,” says the former (inaugural) commissioner of the Australian Charities and Not- for-profits Commission, Susan Pascoe AM FAICD.

    A board authority matrix or charter is essential for larger NFPs with complex governance structures. “For example, St John of God Health Care is established under canon and civil law with a tricameral governance structure,” says Pascoe, who is also a trustee of that organisation. “The bishop appoints the non-executive trustees, who appoint the board, which is accountable for financial stewardship and strategic development. The board charter is essential in ensuring reporting lines and relationships are mapped out effectively.”

    In membership-based organisations, independent and member-elected directors should work together towards a common purpose, welcoming the lived experience of fellow member directors.

    “Australian Council for International Development (ACFID) board directors are elected by members at each AGM while the board elects an independent president, as enshrined in the organisation’s constitution,” says Pascoe, who is currently president of ACFID.

    Responsibilities cascade down from management to employees, and ultimately to the volunteers, who set NFPs apart from for-profit organisations. This process is formally documented in most larger organisations. In smaller NFPs, employees and volunteers might take on various responsibilities according to spoken instructions or even personal initiative. Whatever the process, it is vital that all NFPs make it clear what is expected from every participant in terms of their contribution to the purpose, vision and strategy.

    Principle 3: Board Composition and Effectiveness

    An NFP board must have the right mix of competencies to meet the organisation’s evolving needs. Ideally, this will include directors with a range of skills, experience and backgrounds who work well together as a team. Improving board composition was one of four actions prioritised by respondents to the NFP Study.

    Many NFP boards include a mix of directors appointed by the board and elected by members. In Australia, it is considered good governance practice for the majority of directors to be non- executive and independent, although this may prove challenging for smaller or membership- based NFPs. In all cases, a transparent selection process will help to cement stakeholder trust.

    Along with the skills on the board, a board skills matrix can include elements such as education, experience, gender, age, industry knowledge and specific business-related expertise. Strategy and risk adviser David Shortland MAICD suggests that the matrix be reviewed at least once a year, along with the board’s composition, effectiveness and governance structure.

    Succession planning is fundamental to an ongoing balance of tenure and turnover, and should appear regularly on the board agenda. “Good succession planning ensures boards are always prepared for the future and not rushed into making director appointment and reappointment decisions,” says Shortland, who is also on the board of ChildFund Australia and an AICD facilitator.

    The board needs a clear view of any vacancies they will need to fill in the upcoming 12 to 24 months and must maintain a pipeline of people with leadership potential.

    “Technology has become a key tool for boards to improve their board composition and effectiveness,” says Shortland. “For example, the ability to conduct hybrid meetings and use assistive technology can enable the governance contributions of regionally based directors and directors with a disability.”

    A director’s duties take effect on appointment and the board should be ready to fill any gaps in their knowledge. “All NFPs should invest in a director induction program, with ongoing learning and development to enable directors to contribute more quickly,” says Shortland.

    Principle 4: Risk Management

    The board is responsible for risk oversight — setting the risk appetite for the organisation and establishing a framework to identify and manage risk. While many of the risks NFPs face are common to all Australian businesses, others are specific to the sector.

    Cybercrime is a universal threat, although the Australian Signals Directorate describes NFPs as prime targets for cybercriminals. This is borne out by the NFP Study, where more than one in five respondents said they had suffered a cyber attack in the previous year. However, only 42 per cent have cybersecurity on every board meeting agenda and 14 per cent never discuss the topic at all.

    More specifically, funding is a challenge for practically all NFPs. The risks are particularly high for those that rely on a small number of sources, such as government grants. Australian Unity chair Lisa Chung AM FAICD believes that directors with networks and experience in engaging with major funding sources can help to mitigate this by maintaining clear communications and an effective relationship with critical stakeholders. NFPs face stiff competition for donations, which is particularly challenging in economic downturns when donations decrease as demand for services increases. There are also risks associated with volunteers, such as an appropriate level of skills and training, motivation, retention and compliance.

    Chung believes the board should set the tone from the top in terms of how risk is controlled. “It is invaluable to directly engage with employees and volunteers about how they are practically managing risk,” she says. This is particularly important where the NFP provides services to vulnerable people, as staff and volunteers face specific risks that vary by location.

    To identify emerging risks, the board should establish a whistleblower policy that encourages employees and volunteers to report wrongdoing and protects them from retaliation. There should also be formal processes in place for handling stakeholder feedback and complaints.

    Principle 5: Performance and Accountability

    Directors have even more accountability since recent royal commissions spelled out the need for greater oversight. NFPs are expected to report their financial performance, effectiveness, impact and sustainability to stakeholders and the broader community in a transparent and accountable way.

    NFP directors also play a pivotal role in ensuring that the organisation is staying true to its purpose, vision and strategy, and delivering positive outcomes for the community it serves.

    Extra responsibility has increased the amount of time NFP directors must dedicate to the role. Almost half of those who responded to the NFP Study said they spend more than three days a month on board work.

    Rosina Hislop FAICD, chair of aged care services provider ECH, recommends regular monitoring as a tool for evaluating performance. “Boards should set a small number of clear objectives and metrics to assess the NFP’s outcomes, not just outputs,” she says.

    Financial reporting mechanisms such as the annual budget and audit help to keep the board across financial performance and compliance with relevant accounting standards. The CEO appraisal process is another way of demonstrating the NFP’s performance and accountability. Annual reports and publications must be designed for a range of stakeholders to understand.

    “Boards should be clear on who their key stakeholders are, such as members and regulators, how they prefer to receive their information, and how stakeholder views will be considered during board decision-making,” says Hislop.

    Publishing audit results helps to build credibility. “It is an opportunity for boards to demonstrate leadership by explaining and owning the results, especially if there is a lot of room for improvement,” she says.

    Principle 6: Stakeholders

    Directors have a duty to act in the best interests of the organisation — and they also have considerable discretion in deciding what those best interests are. Stakeholders are a legitimate inclusion and good relationships with stakeholders can help the NFP to attract volunteers, donations and partnerships. Stakeholders can also provide insights to the workings of the NFP and help to give early warning of emerging risks. According to the NFP Study, stakeholder surveys ranked alongside CEO reports and business metrics as some of the most useful ways of measuring the effectiveness of an organisation’s purpose.

    Flourish Australia, a specialised community mental health service, has a framework to ensure that stakeholder voices are elevated to the board. “Stakeholder engagement is part of the DNA of Flourish Australia,” says its CEO, Mark Orr AM GAICD. “It’s not just what we do, but who we are.”

    Board committees and informal meetings are used to enable people with lived experience of trauma and mental health issues to participate on the board, as part of the executive team, as managers, and as frontline staff. Directors regularly visit sites to talk to team members and people who are using Flourish Australia’s services. They discuss the organisation’s formal commitment to the reconciliation journey with the First Nations YarnUp Group.

    Flourish Australia has also established the Flourish Foundation — a standing board committee responsible for providing guidance and oversight on the organisation’s philanthropic and charitable fundraising. The board also engages with a community advisory council, comprising people who access the services across metropolitan, regional, rural and remote areas.

    “The council is a valuable guide on important board issues,” says Flourish Australia chair Professor Elizabeth More AM MAICD. “It was involved in the development of the organisation’s strategic plan as well as the monitoring and evaluation framework, which the board deeply appreciated.”

    Principle 7: Sustainability

    Many directors think of sustainability in terms of finances — how the organisation can sustain its operations over time. However, today’s broader considerations encompass environmental, social and governance (ESG) issues, which include everything from energy efficiency and reducing carbon emissions to human rights and gender equality. Action towards sustainability depends largely on the NFP’s size, complexity, industry, purpose and charitable purpose. The board must be clear about its priorities, particularly in terms of resource allocation.

    Sustainability is central to the purpose and mission of Good Sammy Enterprises, a social enterprise and disability employer based in WA. More than half of its workforce are people with a disability and its board members have lived experience of disability. In 2022–23, Good Sammy diverted 6000 tonnes of textiles and other materials from landfill and recycled 30 million containers.

    “Sustainability isn’t just an environmental or social imperative, but also a strategic and operational one,” says the NFP’s former chair, Trent Bartlett FAICD. “It offers benefits that align with the goals, values and long-term success of NFPs.”

    Sustainable practices can benefit all NFPs by reducing operational costs and encouraging more efficient use of resources. They can build long-term value, strengthen the trust and confidence of key stakeholders and attract employees and volunteers whose values are aligned on issues such as climate change. Yet just 41 per cent of NFP Study respondents said ESG appears on the board agenda more than twice a year, while 21 per cent said it never appears at all.

    Low-cost initiatives — such as energy saving measures, recycling programs, volunteer-led projects, and partnerships or joint ventures — can assist when resources are constrained.

    “The board needs to ensure the organisation is ready, willing and able to commit to the journey and provide clarity about the sustainable outcomes they want to achieve,” says Bartlett.

    Principle 8: Organisational Culture

    Organisational culture — the behaviour, norms and values of the organisation — is central to best- practice modern governance. The board and senior management must model a culture that goes beyond the “can we?” of compliance to the “should we?” of ethical decision-making.

    “You need to behave as you would expect people in the organisation to behave,” says former Mission Australia chair Ken Dean FAICD. “The board should hold itself to a standard of conduct that will permeate through the NFP.”

    A code of conduct should document the behaviours expected from stakeholders, including directors, management, staff, volunteers and members. The board should also hold management accountable for creating and maintaining a positive and ethical culture, especially at senior executive and CEO level.

    The board must agree on which aspects of organisational culture are fundamental to the organisation and how these are linked to the NFP’s purpose. While conceding that not everything can be measured, Dean believes the board should have a view on the metrics and reports that will provide insight into organisational culture.

    Regular surveys, employee feedback and external reviews can help identify areas of concern and potential risks. Dean encourages directors to use these to gain a deep understanding of the experience and perspectives of employees across the organisation. He also recommends that every board meeting includes a dedicated time to listen to or read complaints from clients, employees, volunteers and other stakeholders.

    The board can help foster positive and productive work by cultivating a culture of employee and volunteer recognition. Along with providing resources and support, the board can set an example by personally thanking employees and volunteers for their contributions.

    This article first appeared under the headline ‘Fundamental Principles’ in the June 2024 issue of Company Director magazine.

    Latest news

    This is of of your complimentary pieces of content

    This is exclusive content.

    You have reached your limit for guest contents. The content you are trying to access is exclusive for AICD members. Please become a member for unlimited access.