Evolutionary pressure

Not-for-profit (NFP) organisations have endured testing times in recent years - and there are further challenges ahead as the sector evolves, according to the AICD’s 2022 Not-For-Profit Governance and Performance Study. 

The challenges of a global pandemic, along with successive royal commissions, have major implications for the governance of organisations across the sector, according to the Not-for-Profit Governance and Performance Study 2022. The study, commissioned by the AICD and conducted by Piazza Research, reveals that the NFP sector continues to change at a rapid pace. Directors’ roles are also evolving rapidly.

“We’re seeing directors spending more time on their role and the expectations from society probably means that will continue to increase,” the report states. “With these increased expectations also comes a question of whether our traditional governance model enables directors to really understand the quality of care provided or the effectiveness of their organisation.”

For more than a decade, the NFP study has delved behind the headlines to explain the unique challenges facing boards and directors in this large and diverse sector.

According to the Australian Charities and Not-for-profits Commission (ACNC), there are about 60,000 registered charities in Australia, working in a range of areas including health, education, social welfare, religion, culture, human rights, the environment and animal welfare. They range from small, volunteer-run groups with no funding or revenue, to large organisations with complicated business structures and operations.

This year, there were 2347 responses to the AICD survey, off a base of approximately 22,000 NFP members on the AICD data base. The 2022–23 study has again been conducted against a backdrop of organisations working with the nation’s most vulnerable individuals being under increased pressure and scrutiny.

“Will directors need to get their hands slightly ‘dirty’ or have their ‘noses further in’ to the operations of their organisation?” the report asks.

Measuring organisational effectiveness

The complexity of the issues facing organisations in the NFP sector means they may face challenges measuring their progress towards achieving their purpose. This year’s respondents indicate high levels of confidence in their organisation’s effectiveness, with 68 per cent reporting that their organisation is mostly or highly effective at achieving its purpose. Overall, 93 per cent said they were confident that their executive leadership was making good decisions. However, the top method used to measure effectiveness was “CEO reports”. Two of the other main methods were “business metrics collected through management systems” and “stakeholder surveys”.

Three in four (75 per cent) of respondents considered that their risk framework worked moderately to extremely well in responding to the COVID-19 pandemic.

Evolving role of directors

Many respondents remarked upon the extra time required in their role as NFP directors, with 44 per cent claiming that they spent “somewhat more” or “twice as much time or more” on their role.

More than half (55 per cent) said they spent between one to five days per month on their role, while nine per cent said they spent more than eight days per month on their role.

Among organisations that provided care or support services, 60 per cent said they relied upon “CEO and management reports” to ensure recipients received appropriate care and support.

Only 16 per cent of health and residential aged care, and 12 per cent of social services organisations used their expert care committees to ensure the appropriateness of care and support for recipients. This is despite Recommendation 90(b) of the Aged Care Royal Commission stating the need for “a care governance committee, chaired by a non- executive member with appropriate experience in care provision, to monitor and ensure accountability for the quality of care provided, including clinical care, personal care and services, and supports for daily living”.

The survey found that larger organisations with more than 200 staff members were more likely (19 to 25 per cent) to use expert care committees than smaller organisations (seven to 12 per cent).

Directors’ remuneration continued to gather pace. Although more than three in four (76 per cent) of board members reported being unpaid, or to only having their expenses covered, 22 per cent were remunerated, with an average salary across all NFP sub-sectors of $22,581. This has steadily increased from 14 per cent five years ago.

Financial outlook brightening

This year saw 24 per cent of organisations reporting a loss (up from 15 per cent the previous year). Health and residential aged care and social services were among those facing heavier losses. Despite this, most NFPs had a positive outlook, with most (73 per cent) forecasting a slightly, or much stronger financial position in three years.

Although 50 per cent of respondents expected profits to return to pre-COVID-19 levels in between six months to five years’ time, a small proportion of organisations (three per cent) estimated that they may not financially recover from the pandemic for more than five years — if at all.

Mergers remain on hold

Many observers of the NFP sector thought that merger activity would begin ramping up in the 2021–22 financial year, but this did not occur. Only five per cent of respondents reported that their organisations were currently undertaking a merger, while almost a fifth (19 per cent) were discussing a merger. A very small proportion (one per cent) of organisations reported that they would be winding up or discussing winding up (four per cent) within the next 12 months.

For organisations undertaking or considering mergers or winding up, the top three reasons that featured most frequently were to “broaden the range of services”, “better meet our mission” and “increase the number of people served”.

Challenges and opportunities ahead

Workforce planning and shortage issues continue to heavily impact the NFP sector. For those affected, the need for stable and diversified sources of income remain major priorities. The top actions for boards that featured most frequently in respondents’ answers were “regular review to track progress against goals or targets of the organisation”, “improve board composition”, “develop a new strategic plan” and “improve the use of digital technology”.

More than three in every five respondents (61 per cent) reported that their board should spend more time on climate change governance, with almost half of organisations (46 per cent) reporting that consideration of the relevant issues never appeared on their board’s agenda.

Most organisations do not currently have a reconciliation plan and only a minority of NFPs currently provide services specifically for First Nations Australians.

Four key findings

1. Measuring organisational effectiveness

Organisations continued to rate the effectiveness of their organisation and executive team highly — but failed to use evidence-based measures.

2. Evolving role of directors

As royal commissions highlighted the need for boards to better understand the level of care being provided, directors spent more time on their role, but the use of “care committees”’ remained low.

3. Financial outlook brightening

Sector profitability fell, with social service and health and residential aged care providers most affected. Nevertheless, respondents reported optimistic future outlooks.

4. Mergers remain on hold

The pace of merger activity had not increased as expected, despite the challenges faced by NFP organisations.

Life without barriers

NFP boards have traditionally viewed professional practice as the remit and responsibility of management. From nurses administering medication and disability support workers assisting clients engaged in community activities, to youth workers transporting their charges to and from school, the myriad day-to- day interactions between staff members and clients can still be seen as beyond the board’s purview.

But Life Without Barriers CEO Claire Robbs GAICD is keen to see directors and management put practice at the heart of decision-making and realise the positive impacts this has for vulnerable people. “Practice quality is a central board concern and ought to be a primary lens the board applies across its governance functions, including strategy, finance and risk,” she says. “It is the domain of the board and management — all of us have a role to play, and we need to do that in partnership.”

Robbs joined Life Without Barriers — which supports about 25,000 people across Australia — in 2004, becoming CEO in 2011. The organisation provides services for people with disability, children, young people and families, people seeking asylum/refugee status and people with mental health issues.

At around the same time, Robbs met Gillian Calvert AO MAICD, who’d built a career in child protection and human services, which included 10 years as the inaugural NSW Commissioner for Children and Young People (1999–2009).

“We needed someone on the board who understood intimately the practice on the ground and how that needed to be governed from a board perspective,” says Robbs. “That was in 2011, but if you consider all the former and current royal commissions that have offered in-depth analysis of issues in practice, it’s really called out the need for directors to have that depth of technical knowledge in the work of the organisation.”

Together, the pair forged an understanding that Life Without Barriers’ governance model needed the oversight and support of the board when it came to the care of vulnerable people. “Everyone was incredibly committed to doing the best for people we support, but it was clear that we, and others in the sector, didn’t have a framework for practice governance, or a history of saying, ‘This is a really critical role for boards’,” says Calvert.

In 2018, the organisation formally launched its first practice governance framework (PGF), which enables the board to understand quality in practice. It builds on the work the pair started in 2011, and is underpinned by a practice governance committee, chaired by Calvert.

She says the first practice governance committee included several clients of the service. “While that was challenging in some ways, it enabled us to persuade people of the importance of practice, because we were hearing from people directly about their experiences, and they were giving us feedback.”

Making the organisation’s principles explicit helps set out the kind of culture it aspires to for meaningful and genuine practice governance, adds Robbs. “For example, it’s imperative that our teams feel safe and supported to report incidents, performance concerns, adverse events or areas for potential improvement,” she says. “The interest and oversight of the board through the practice governance committee also enables us to share the myriad of positive stories and impact our organisation achieves everyday with people.”

Robbs and Calvert hope that their approach to practice governance will be adopted by others in the sector.

According to the AICD’s Not-for- Profit Governance and Performance Study 2022, only 11 per cent of organisations used their dedicated “care committees” as their primary source of information on the calibre of care they should deliver.

Initially, there was some apprehension to the Life Without Barriers practice governance framework. “There was a sense that this is professional business, not a board issue, so it was really important for Claire and I to be joined on our positions,” says Calvert. “Claire had to bring the organisation with her, and if she and I hadn’t had a good working relationship and a common understanding of where we wanted to get to, it wouldn’t have been as successful as it has been.”

Calvert says members of the management team have come to appreciate the board’s focus because it has made previously invisible work much more visible and has enriched the connection between the board and the organisation’s leadership and workforce. However, even with the new framework, the complexities involved in caring for vulnerable people have presented challenges.

In 2021, Life Without Barriers was called to give evidence before the Disability Royal Commission following evidence given by residents and their families of abuse in two supported independent living homes.

Appearing before the commission in December 2021, Robbs apologised, saying, “The people and families who offered their stories to the Disability Royal Commission have provided invaluable insights in areas we acknowledge we have further improvements to make.”

Calvert points out that practice improvement is not finite, but rather is a dynamic, ever-evolving process. “Organisations like ours never achieve a final state of practice [because] people’s needs change, models of care and evidence change,” she says.

While royal commissions, audits and reviews were all important, Calvert says they should not be the sole driver for boards to embrace the governance of practice with their management. “The people that drive the care sector forward are motivated to do good work,” she says. “They want to advance and do more by responding to good practice that improves the experiences of people.”

Robbs and Calvert advise that they can not discuss the Disability Royal Commission while it is ongoing and will need to wait until the commission’s final report is released on 29 September.

However, Calvert says that boards need to strive for diversity of experience and create a vibrant mix of experience, including practice knowledge. “The role of the board is a serious one. Boards need to manage themselves so they can take on criticism and accountability, whilst remaining open to learning and development. It is a symbiotic process of remedying, learning and developing — this is why a framework around practice governance can be so important.”