We are entering reporting season and performance is at the core of a board’s responsibility. As the ASX Corporate Governance Principles and Recommendations emphasise, companies should be looking to build value over the short, medium and longer term.
Performance for any organisation extends beyond financial performance to sustainability. This requires directors to have a deep understanding of their organisation, the drivers that impact its performance, its competitive landscape and the sources of potential disruption, the nature of the risks it faces and much more. Not-for-profit (NFP) organisations balance financial sustainability with mission — for public sector institutions, budget outcomes are balanced against public policy goals.
Every organisation focuses on the remuneration and incentives that will attract and retain the staff the organisation needs to deliver sustainable performance, and individuals with personal characteristics that align to the values and culture of the organisation.
The challenge extends past remuneration and incentives, however. The “terms of engagement” for any staff member captures how their performance and conduct can be held to account. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has highlighted examples of how a narrow focus on financial performance might deliver a short-term result for individuals and organisations, but how in the long term, a narrow focus can destroy stakeholder support and shareholder value. We continue to hear testimony at the Royal Commission that customers have been charged for no service, and that conflicts of interest may not have been handled adequately.
In the NFP sector, people responsible for the care of vulnerable people have let down their charges. The Royal Commission into Institutional Responses to Child Sex Abuse highlighted shocking failures across some of our nation’s most established and respected institutions. The repercussions from those failures will continue to reverberate for decades to come. In some cases, the loss of trust and legitimacy may not be recoverable.
So it is unsurprising that stakeholders across the community are looking for a culture of accountability. The onus is on our organisations to demonstrate that culture. Financial performance — whether it falls below expectations or is achieved through inappropriate measures or behaviours — is just one hurdle. The government’s recent announcement that it intends to install regulatory staff within financial institutions is a clear response to the community’s perception of failure in conduct in the context of strong financial performance in the financial sector.
NFP directors are engaged and committed, but many are finding contemporary governance issues challenging.
Reporting season is also an opportunity to reflect whether an institution is set up for long-term success. Our national rankings in global innovation measures continue to register as performance issues. Will the investments an organisation is making now prepare it for the future? Is the organisation positioned to take advantage of market trends? Does it have sufficient buffer to weather a downturn in its industry or in the economy?
Sustainable performance is as much an issue for NFPs and government bodies as it is for private and listed companies. It is central to the AICD’s mission to help develop the capability of our members — who are involved in the governance of all types of organisations — so they can drive strong sustainable performance from their organisations.
For NFPs, one of the most important pieces of work we produce each year to help fulfill this mission is the AICD NFP Governance and Performance Study which is now in its ninth year. NFP directors represent 20 per cent of the AICD’s membership and we are dedicated to supporting them in their roles.
The latest study showed that NFP directors are engaged and committed, but many are finding contemporary governance issues challenging, including overseeing innovation, cybersecurity and culture. This sentiment is not isolated to the not-for-profit sector, of course. And these issues, as the report states, “push boards to focus their energies beyond traditional metrics of performance”.
Boards across all sectors are facing similar challenges. The cultural problems in the financial sector are mirrored in examples from other sectors. Governance is not a check-the-box exercise. Sustainable performance is at the heart of our responsibilities as directors.
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