The failures of governance and oversight in human services have raised questions about board accountability, writes Professor Pamela Hanrahan.
Every year, federal and state governments contract with non-government providers (NGPs) to supply tens of billions of dollars in “human services” to Australians, including family and community services, childcare, aged care, services for people with disability, employment services and community housing. The NGPs involved include both for-profit and NFP entities. As the Productivity Commission pointed out in its 2016 study of human services provision, NGPs “differ in many ways and include... mission-driven organisations that rely on volunteers and donations, and for-profit entities. Each will have a different balance between profit, organisational, social and other motivations”.
Over the past decade, the conduct of NGPs in the human services space has been closely examined by three significant Royal Commissions. The first two, into institutional responses to child sexual abuse (2013–17) and aged care quality and safety (2018–21), have concluded. The third, into violence, abuse, neglect and exploitation of people with disability, is now expected to report in September 2023. The failings in the respective systems — and by individual NGPs identified by those inquiries — raise important questions concerning governments’ stewardship of these programs and the accountability of NGPs and their directors when things go wrong.
In the aged care Royal Commission’s final report, delivered in February, Commissioner Lynelle Briggs AO GAICD noted: “I regret to say that some approved providers’ leadership and culture appears not to be aligned with their mission and certainly not with the purpose of the aged care system. Boards and governing bodies are responsible for setting the values, mission and strategy of their aged care services. They should set out what is permissible and what is not acceptable, and they should be held to account for those decisions. For some providers, the members of their governing bodies have not demonstrated the integrity, skills and independence to enable them to act, first and foremost, in the best interests of the people receiving that care.”
Individual accountability can take various forms. It can include legal liability, where conduct involves a breach of the duties owed by a person as a member of the board or other governing body of the NGP. But because NGPs adopt a range of legal forms, legal liability of governing body members’ for breach of their duties differs. The biggest difference is between entities registered with the Australian Charities and Not-for-profits Commission (ACNC), and those that are not.
For-profit NGPs are usually companies whose directors are subject to the statutory directors’ duties contained in the Corporations Act 2001 (Cth) including duties of care and good faith. The Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) , which governs Indigenous corporations, imposes similar statutory duties on directors. Members of the governing bodies of incorporated associations, another common form of NGP, are subject to more limited duties under state law. For example, in NSW, the legislation provides that it is the duty of each committee member to carry out his or her functions for the benefit, so far as practicable, of the association, and with due care and diligence.
Most NFP NGPs are registered with the ACNC. This affects the duties owed by directors and the consequences of a breach of those duties. Regardless of their legal form, ACNC-registered NGPs are subject to the ACNC Governance Standards. Governance Standard 5 requires the NGP to take reasonable steps to ensure that members of the governing body are subject to, and comply with, specified duties including duties of care and good faith.
For NFPs that are companies, including companies limited by guarantee, the civil duties imposed on directors and officers by the Corporations Act are excluded while the company is registered with the ACNC. However, the criminal offences relating to breaches of duties of good faith and acting for a proper purpose and misuse of position or information, and the duty to prevent insolvent trading, continue to operate. The statutory duties in the CATSI Act and the state-incorporated associations legislation apply alongside the ACNC Governance Standard, as do the duties — such as fiduciary duties — owed by officers under general law.
Spot the difference
Two key differences emerge in the overlapping regimes, between ACNC- registered entities and other types of NGPs. The first concerns the statutory good faith obligation. Officers of commercial NGPs and Indigenous corporations are required to exercise their powers and discharge their duties in good faith in the best interests of the corporation, and for a proper purpose. This involves careful balancing of the interests of stakeholders, including recipients of the services provided. In NGPs registered with the ACNC, the requirement is for members of the governing body to act in good faith in the registered entity’s best interests, and to further the purposes of the registered entity. This recognises the primacy of the registered entity’s purpose in director decision-making. That purpose must be explicitly stated and, under ACNC Governance Standard 1, made publicly available including to members, donors, employees, volunteers and benefit recipients.
The second difference concerns the consequences of breach of directors’ duties. A dishonest breach of the duty of good faith in the Corporations Act or the CATSI Act is a criminal offence, regardless of whether the NGP is registered with the ACNC. But directors of NGPs that are companies registered by the ACNC do not face civil penalty liability for breach of duty.
If Commissioner Briggs is correct, and members of NGP governing bodies ought to be accountable... then legal liability is potentially part of the picture.
The ACNC Governance Standards impose obligations on the NFP itself rather than the directors themselves, and theirCorporations Act duties giving rise to potential civil penalty liability are excluded. In for-profit entities and Indigenous corporations, the respective civil penalty regimes allow the Australian Securities and Investments Commission or the Office of the Registrar of Indigenous Corporations to take enforcement action against individuals who breach their duties — including the duties of care and good faith — and to seek civil penalties for breach of duty up to a maximum of $1.11m under the Corporations Actor $200,000 under the CATSI Act. This enforcement option is not available against directors of companies that are ACNC-registered entities.
If Commissioner Briggs is correct, and members of NGP governing bodies ought to be accountable when service delivery fails the people it is intended to benefit, then legal liability is potentially part of the picture. Failures of governance and oversight are a common theme in many of the case studies considered by the three Royal Commissions, and they occur in both NFP and for-profit NGPs. Where those failures result from a breach by directors of their duty to exercise reasonable care and diligence or to act in good faith in the interests of the NGP, public enforcement may be appropriate. The protection from civil penalty liability given to directors of ACNC- registered NGPs reflects the often voluntary and public-spirited nature of their contribution, but they cannot imply a lower standard of acceptable behaviour.
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