NFP research round-up

This round-up of academic governance research focuses on the not-profit-sector. It considers the latest AICD survey on NFPs, social crowdfunding, reducing the risk of managerial opportunism, NFP succession planning, key challenges facing the NFP sector, and the potential of entrepreneurship for those with disabilities.

Government relationship with NFP sector needs to improve

Latest AICD survey outlines NFP priorities for public sector.

More than two thirds of directors believe governments should work more collaboratively with the not-for-profit sector and provide greater policy stability. And over half want improved funding and contracting policies and a lower administrative burden.

These are key findings from the Australian Institute of Company Directors’ NFP Performance and Governance Study 2016: Raising the Bar, released this month.

The findings are in line with the AICD’s national reform document, ‘Governance of the Nation: A Blueprint for Growth’, released in March 2016. The AICD called on governments to improve the funding of NFP organisations and introduce best-practice five-year funding cycles.

The AICD NFP Performance and Governance Study said governments and the broader community “must recognise that strong, financially sustainable and efficient NFPs are in the best interests of the sector, the community and government. At the same time NFPs must better understand and communicate with governments”.

The report argues that governments need to take a different approach to funding arrangements and that it is time to rethink government-NFP relationships. “To ensure a strong and competitive supply of services, governments need to take a more mature and less controlling approach to their portfolio of NFP suppliers,” the report said.

The findings were based on a survey of 1,822 directors, most of whom were current non-executive directors of NFP organisations. Eight focus groups of more than 50 directors combined and five individual interviews complemented the research.

The report is the seventh in an annual series by the AICD, and is Australia’s most update-to-date snapshot of NFP governance.

Key findings include:

• 78 per cent of survey respondents believe governance in the NFP sector has improved in the past three years.
• A third believe State/Territory governments do not have a high level of respect for NFP organisations, and 39 per cent felt the same about the Federal Government.
• Just over half said the Federal government does not have a very good understanding of the NFP sector.
• 60 per cent said Commonwealth agencies do not have a consistent approach to contracting.

The top NFP priorities for governments in the next five years (in order) are:

• Working more collaboratively with NFPs to achieve outcomes
• Creating stability in government policy
• Improving funding and contracting policies with NFPs
• Reducing the administrative burden
• Building NFP sector capability
• Building a better relationship with the NFP sector
• Improving consistency in NFP reporting requirements
• Harmonise State/Territory fundraising legislation
• Reform of tax arrangements for the NFP sector.

The AICD NFP Performance and Governance Study 2016 is available through the AICD website.

Crowdfunding muscles its way onto the charity scene

NFP boards need to know if online funding platforms have a role in their fundraising strategy

Understanding the potential impact of technology is a challenge for all directors. In the not-for-profit sector, the challenge extends to crowdfunding platforms that could disrupt traditional fundraising models and create powerful channels to reach donors.

Crowdfunding is arguably an opportunity and threat for NFP organisations. It is an opportunity because it uses the internet to connect NFPs and social enterprises with limited access to capital to a much larger base of potential supporters at low cost.

Crowdfunding is a potential threat if it encourages donors to bypass established charities and favour grassroots, internet-promoted campaigns from organisations that do not have the scale, governance or regulatory oversight of larger NFPs.

Either way, boards of large and small NFPs need to understand crowdfunding and whether it has a role in their organisation’s fundraising strategy.

Interest in crowdfunding is booming. The global crowdfunding industry for for-profit, NFP and social enterprises was expected to raise more than US$34 billion in 2015 and overtake the venture capital industry this year, according to a report by Massolution. Of that, US$5.5 billion was expected to go into donation and reward crowdfunding.

Social enterprises are expected to increase their share of the global crowdfunding market.

A recent academic study, ‘Kicking off Social Entrepreneurship: How a Sustainability Orientation Influences Crowdfunding Success’ (April 2016), suggests crowdfunding is addressing the needs of social entrepreneurs who have limited access to capital and that a sustainability focus is enhancing crowdfunding success. The insightful paper was published this year in the Journal of Management Studies, and was co-authored by Assistant Professor Goran Calic of McMaster University in Canada and Professor Elaine Mosakowski of the University of Tasmania.

The authors used data from Kickstarter, the world’s largest crowdfunding platform, which collected data on 87,261 projects over four years. Using a software algorithm, the authors focused on a selection of technology and film/video projects.

The authors hypothesised that a sustainability orientation (social and environmental) would increase the likelihood that a project will successfully raise capital on a crowdfunding platform compared with campaigns without a social orientation.

The research results confirmed that the adoption of a social orientation appears to facilitate crowdfunding success on reward-based platforms such as Kickstarter.

The authors postulated that a sustainability orientation in crowdfunding campaigns may impact creativity within new ventures. “We believe that the framing of entrepreneurial problems with a sustainability lens may encourage outside-of-the-box thinking, resulting in superior performance or at least more creative solutions to these problems.”

The takeout for boards is that crowdfunding and interest in social enterprise is booming, and crowfunding campaigns with a sustainability focus are more likely to raise their target donation amount.

For charities with strong sustainability credentials, the opportunity to raise funds via crowfunding platforms is worthy of further board discussion and investigation.

NFP boards need more involvement in CEO and director succession planning

Some need capacity to invite non-members who bring a certain skill set to the boardroom.

No board task is more important than choosing the right CEO. High-performing boards ensure their organisation has robust succession-planning processes that identify, groom and measure potential CEO successors and other executive talent, often years in advance.

But succession planning is more art than science and many commercial organisations struggle to ensure the orderly succession of CEOs. The talent pipeline is quickly eroded if potential CEOs abruptly leave the organisation and reduce the number of internal candidates.

Succession planning is particularly challenging in the not-for-profit sector – a topic that has had relatively little consideration in governance academic literature. A lack of resources and the volunteer nature of most NFP boards can complicate NFP board-renewal processes.

Macquarie University researchers Melinda Varhegyi and Denise Jepsen have made an important contribution to this topic with their 2016 paper, ‘Director Succession Planning in Not-For-Profit Boards’, published in the Asia Pacific Journal of Human Resources.

The authors studied the views of 88 directors of 17 registered clubs in Australia. Their study sought to measure volunteer director attitudes towards succession planning at board and executive level and understand NFP succession-planning issues.

The study found directors want to be involved in and responsible for succession planning for the CEO, more than they want to be involved in succession planning for the board, or the organisation’s broader management team.

The authors say NFP volunteer directors recognise that failure to provide a successor in the event of an abrupt CEO vacancy can significantly affect the organisation.

However, directors have less interest in their own succession planning. They may view director succession planning as outside the board’s responsibility or a task for the chairman or board nominations committee. In registered clubs, members typically nominate candidates for board vacancies. “Often, directors have little to no authority and involvement in the selection of directors,” wrote Varhegyi and Jepsen.

The authors argue that director-nomination processes and rules of some NFP boards may need to be re-evaluated and possibly modified. “Some not-for-profits need to reconsider member-only appointments of internal and voluntary directors,” they wrote.

They added: “Boards need to be provided with increased direct and formal involvement in the process. A skills or competency-based component should be explicitly included in the nomination and selection process. External (non-member) directors may be invited to serve as directors in those organisations that have previously relied on member-only directors.

“Given the shortage of qualified directors and the complex commercial requirements even in not-for-profits, NFP boards need to question an assumption of generally appointing only voluntary directors. Potential directors need to be invited in a paid or voluntary capacity.”

The research has several takeouts for NFP boards. First, understand the organisation’s succession-planning processes as it relates to the CEO, management team and board. Second, recognise that NFP directors may have a bias towards focusing more on CEO succession planning and less on board and broader management-team succession planning.

Third, if there is a process of member-only director appointments, assess whether this is providing the right skills and composition for the board. If not, consider other ways to invite non-member directors who bring certain relevant skill sets to join the board.

Risk monitoring and enforcement crucial for NFPs

Boards need to protect hard-earned societal trust from managerial opportunism.

Most not-for-profit boards are acutely aware of the value of societal trust. Without it, their funding can collapse and the media pounces on untrustworthy NFPs. Front-page scandals about the misallocation of donations, for example, have rocked some charities over the years.

But does a high level of societal trust in an NFP reduce the risk of managerial opportunism? Or can managers exploit public trust in an NFP by spending more money on overheads, paying higher salaries or charging greater expenses, for example?

These are challenging questions for NFP boards. University of Baltimore academics attempted to answer them in a recent paper, ‘Societal Trust and the Economic Behaviour of Non-Profit organisations’ (May 2016).

The authors said most for-profit academic literature finds that higher trust is associated with lower levels of manager opportunism. Surprisingly, the reverse is true in the NFP sector.

“Higher societal trust is associated with greater levels of administrative expenses, greater levels of executive compensation, and lower donor contributions among NFP firms,” wrote Robert Felix, Gregory Gaynor, Mikhail Pevzner and Jan Williams.

The study examined 86,567 firm-year observations, focused on public charities, from the National Centre for Charitable Statistics database in the United States. It tested them against cross-regional variations in societal trust in the organisation (taken from the World Value Survey) and against variables such as expenses and salaries.

The study found that higher levels of societal trust in NFPs were associated with higher administrative expense ratios. “This is consistent with the view that high levels of trust may cause NFP managers to engage in opportunistic behaviour.” NFPs in high-trust areas were likelier to have more employees on salaries over US$100,000.

Moreover, donor contributions were lower in high-trust areas, found the study. “Donors … appear to decrease contributions when opportunistic spending and financial misreporting occurs.”

It is possible that higher administration ratios (and a perception of funds being wasted) in high-trust NFPs deter donors. Or that donors see less need to contribute to NFPs that are perceived to be performing well – factors not considered in the paper. Or that NFP organisations with higher expense ratios are, sensibly, investing in leadership development or other areas.

The study found that monitoring mechanisms, such as external audits, can mitigate the relationship between societal trust and the potential for managerial opportunism in NFPs.

The authors drew on other academic research to argue that NFPs have weaker monitoring and enforcement mechanisms than for-profit firms. Donors lacked adequate incentives to seek recourse from NFPs for the potential misallocation or misappropriation of donated funds. Strong external verification of the NFP’s processes was needed to reduce manager opportunism.

Australian NFPs might dispute the relationship between societal trust and potential for manager opportunism or fraud. Plenty of well-respected NFPs, charities especially, enjoy hard-earned community goodwill and do not suffer from managerial opportunism.

But the research reminds NFP boards of the importance of risk monitoring and enforcement mechanisms in their organisation.

NFP boards must ensure hard-earned societal trust is maintained through organisation culture and values, governance processes and external audits. They should never assume NFP organisations that are perceived as highly trustworthy are immune from managerial opportunism or believe no staff member would ever betray the public’s trust.

Key NFP governance challenges

Study highlights complexity for NFP boards.

Organisation strategy, recruiting directors, funding and balancing stakeholders are key issues facing not-for-profit organisations, according to an Australian study.

University of Technology Sydney researchers used survey and interview data to explore what NFP leaders believe are the sector’s key governance challenges. Their research, ‘Governance Challenges for Not-For-Profit Organisations: Empirical Evidence in Support of a Contingency Approach’, was published this year in the Contemporary Management Research journal.

The study, co-authored by Dr John Chelliah and Alice Klettner, found that some NFP boards struggle with setting strategy. Interviewee responses suggested that volunteer board members can have little experience in organisational planning or strategy, even though they know the fulfilment of these tasks is critical.

NFP organisations, particularly those with membership-based governance models, may find it challenging to recruit suitably qualified directors, according to the study. The majority of respondents said that NFP constitutions that prescribe a specific pool of people from which to draw as directors (the members) limits the range of people and skills on the board.

The authors wrote: “The incapacity of a number of NFP organisations to recruit directors based on skills, as well as the lack of financial incentives to join an NFP board, clearly sets NFP boards apart from their commercial counterparts. As a result, training and development of sitting board members is vital to NFP organisations.”

About 72 per cent of survey respondents claim that training and development is available for NFP directors, but the study’s interview evidence suggests training may not be comprehensive. A lack of funding in smaller organisations could affect the depth of director training provided.

Accountability and stakeholder interests is another key NFP governance challenge. Survey respondents said balancing the needs and expectations of diverse stakeholder groups was a constant issue – particularly when many NFP rely on governments for most of their funding.

The authors argue that generic best-practice governance standards for NFPs should not be pursued. “Broad governance standards are likely to be too non-specific to provide substantial guidance, they wrote … In practice there are great benefits in considering the contextual elements of governance. NFP organisations should be able to choose how to model their governance frameworks according to different circumstances. This signals a move away from a strictly normative approach to governance.”

They concluded: “In other words, best practice governance in the NFP sector should not take the shape of broadly defined standards, formulated by organisations or regulatory bodies, but should instead be given form in an analytical tool that assists in identifying the contextual factors influencing the organisation, and contributes to the adoption of fitting governance responses.”

Boards of disability service providers should consider potential of entrepreneurship

New research suggests entrepreneurship can help those with disability into self-employment.

Not-for-profit boards of disability service providers should consider a new research paper that shows the potential of helping Australians with disabilities create their job through entrepreneurship.

La Trobe University Chair in Entrepreneurship, Professor Alex Maritz, says entrepreneurship initiatives can help those with a disability participate in self-employment.

Maritz and Richard Laferriere’s paper, ‘Entrepreneurship and self-employment for people with disabilities’, was published in the July 2016 edition of the Australian Journal of Career Development.

The research makes an important contribution to the understanding of employment rates for those with disabilities. A 2010 OECD study found that Australia ranked 21st out of 29 OECD nations on its labour force participation rate for those with a disability.

The labour force participation rate for people with a disability has been flat over the past 20 years, according to the Australian Human Rights Commission.

The Federal Government’s New Enterprise Incentive Scheme allows people with a disability to access training and support services through the Disability Employment Service. But Maritz says more can be done to help those with a disability into self-employment.

He says Australia can use its entrepreneurship strengths to address the employment challenges for those with disabilities and break down social barriers.

“(Self-employment) can provide those with disabilities the opportunities that traditionally are viewed as not possible or unattainable, given the constraints of finding employment,” says Maritz. “A discussion on entrepreneurship for the disabled should be considered an opportunity for Australia.”

NFP boards could use the paper to prompt discussions on whether their organisation can help those with disabilities into self-employment, or collaborate with other NFPs and governments in this underexplored area.