AICD updates the NFP Governance Principles

“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.