Heavy-handed approach could hamper effectiveness of NFP sector and attractiveness of NFP boards.

    Nobody should expect Not-For-Profit boards to have lower standards than those in other sectors or for NFP boards to be a stepping stone for those seeking paid directorships in industry. The NFP sector and its governance is too important for that.

    But it’s worth asking: Are we expecting too much of NFP directors, most of whom are volunteers who devote their time to help organisations and the community?

    Do we risk making NFP governance too time-consuming and complex, so that experienced NFP directors retire from boards earlier and prospective directors lose interest?

    Could we hurt the NFP sector with unnecessary compliance, when its red-tape must be reduced to ensure every possible cent of sector income goes to those who need it most?

    I thought about these questions after researching an article for the May edition of Company Director journal on several proposed changes that will affect the NFP sector. They range from the current review of the Australian Charities and Not-for-profits Commission (ACNC), to the Federal Government’s proposed crackdown on foreign donations, to early discussions on whether charity directors should be subject to the same statutory obligations as directors of for-profit companies and NFPs.

    It is, of course, dangerous to read too much into these reviews and assume key recommendations will be adopted and are bad news for the NFP sector. Attacking the Federal Government, as some sections of the NFP sector did after the ACNC’s own submission to the review was released, is neither wise nor in the sector’s best long-term interests.

    A combative relationship between the Federal Government and the NFP sector helps no one. Certainly, not the disadvantaged who desperately rely on charities. Over-reacting to recommendations that may or not be adopted and focusing on people, such as new ACNC Commissioner Gary Johns, rather than policy, does a disservice to the NFP sector.

    But it is hard not to conclude that the thrust of change will lift the regulatory bar and compliance burden for charities. The challenge is finding the right balance between further enhancing regulation in the NFP sector, without damaging its effectiveness or governance.

    The charity sector needs effective regulation. Charities have annual revenue of $143 billion, worth more than 8 per cent of Australia’s economy, Treasury data shows. They employ more than 1.3 million people and engage another 3 million. If one broadens the data to the full NFP sector, up to six million Australians volunteer for the sector.

    The government was right to introduce the ACNC in 2012 – the sector badly needed more regulation – and it is right to review the ACNC Act, which was legislated to have a five-year review, anyway. It’s also proper that a range of interested parties, including the ACNC, make recommendations to strengthen the ACNC Act, where needed, through the submission process and are given due consideration and respect.

    Too soon for major change

    That said, the government, in my opinion, should temper any major charity reform with the reality that the ACNC, in practice, is still being bedded down. The government’s intention in 2013, under then Federal Minister for Social Services Kevin Andrews, to kill the ACNC created great uncertainty about the organisation and the government’s preferred form of charity regulator.

    My sense is that it’s too soon to make a significant change to the ACNC; it was only in 2016 that the government confirmed the charities regulator was here to stay. Far better to keep the ACNC largely as it is and take time to assess its effectiveness and whether major change is needed.

    The ACNC, to my thinking, has done a good job in difficult circumstances. It could not have been easy to function when the government flagged its intention to discontinue the ACNC so soon after its launch. Yet the ACNC now regulates 55,000 charities.

    Sure, there have been occasional scandals, even fraud, in the NFP sector, as in other sectors. And community trust in NFPs, consistent with other sectors, is falling, according to the latest Edelman Trust Barometer. Incidences of misappropriation of donor funds by charities often make front news, but they are not indicative of the vast majority of charities.

    For the most part, Australia’s charities sector is well governed and compliant. Notwithstanding occasional unscrupulous operators, it’s a sector that wants to do the right thing and does. It’s not a sector that warrants heavy-handed regulation or a government “crackdown”. Australia should be proud of its world-class charities sector and the directors who govern it.

    I believe it would be wrong for the government to position the ACNC, after the current review, as the equivalent of the Australian Securities and Investments Commission in the NFP sector.

    Charities need firm regulation, but equally a regulator that is supportive and understands its other role as educator, coach and facilator to the sector. A regulator that is tough when it needs to be, but understands the nuances of charities and does not take a combative “watchdog” or “charity cop” approach.

    Proposed changes go too far

    The ACNC review submission, if adopted, would be a step too far. The submission recommended adding two key objects to the ACNC Act: to promote the effective use of resources of the NFP sector; and to enhance accountability of NFP entities to donors, beneficiaries and the public.

    It’s not clear what “effective use” means or how it would be monitored and enforced across tens of thousands of charities. Or if, as some in the charities sector fear, it would give the government much greater say in how charities should use their resources. ASIC does not tell commercial companies how to spend their funds, so why should ACNC have this power over charities?

    Greater accountability sounds like greater compliance, box-ticking, administrative cost and work for boards. And more reason for NFP directors to question if the time, compliance and risk involved in charities governance is worth all the effort.

    The ACNC recommendation for enhanced sector accountability is also confusing. The ACNC has not made a case as to why the charities sector needs greater accountability or transparency; or if donors feel they are not sufficiently informed when giving money.

    Greater accountability sounds like greater compliance, box-ticking, administrative cost and work for boards. And more reason for NFP directors to question if the time, compliance and risk involved in charities governance is worth all the effort.

    The Federal Government’s proposed crackdown on political donations, as they relate to charities, is equally puzzling. If adopted, NFPs, including some registered charities that engage in political advocacy, would have to obtain a statutory declaration from foreign donors who give less than $5 weekly to prove they are Australian. That would add to administration and almost certainty hurt charities that rely on small foreign donations, creating greater governance risk.

    Again, I’m not advocating that nothing changes in charities regulation. My concern is that policymakers have not thought enough about how major proposed changes could affect NFP governance and reduce the appeal of serving on NFP boards.

    Ultimately, the best form of charities regulation is self-regulation. That relies on strong, independent boards governing ethical organisations. A heavier-handed regulatory approach will not achieve that. It will just discourage more NFP directors from serving.

    - Comment by Tony Featherstone. Tony Featherstone is Consulting Editor of the Governance Leadership Centre. The views expressed in this article may not reflect those of the AICD.

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