The governance community is continuing to grapple with how to respond to APRA’s recent report on the Commonwealth Bank of Australia. There is a recognition that while boards bear ultimate responsibility for financial and non-financial measures of their organisation’s performance, oversight can be difficult in practice. There have been calls for change – ranging from better resourcing boards to a complete restructuring of our model of corporate governance. There are particular challenges for the NFP sector. The Governances Leadership Centre spoke to Phil Butler, who leads the AICD’s work on NFPs, about the evolving role of non-executive directors in NFPs, the challenges NFP directors face, and some practical tips for managing these challenges.
Governance Leadership Centre: Phil, how are NFP boards responding to APRA’s Report on CBA?
Phil Butler: I reckon every board in Australia would be thinking about the implications of not only the APRA report, but also the Financial Services Royal Commission and last year’s Royal Commission into Institutional Response to Sexual Abuse. I believe that the community’s expectations of directors is higher than ever, and boards are asking whether or not they can meet those expectations. They are also considering issues such as culture in a more formal manner.
GLC: ‘Culture’ is a key theme of APRA’s report and a theme that continues to arise at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. What can NFP boards do to ensure they have sufficient visibility over and oversight of organisational culture?
PB: The NFP sector is, of course, very diverse in terms of size, scope of work and structure. There is certainly no ‘one size fits all approach’. I suspect directors of smaller NFPs are more likely to be closer to the action, making it easier to see the culture at work. It’s a generalisation, but smaller NFPs probably have directors who do a range of activities alongside their role as directors. Many sporting and arts organisations, for example, rely on their directors having a more hands-on volunteer role, and directors probably know the small team of staff and volunteers and are more likely to understand how the organisation is operating. For larger organisations, there is often a more formal approach (similar to larger for-profit organisations), where staff engagement surveys, client surveys and the like are much more common.
GLC: What is required of today’s NFP directors and do you think the role of non-executive director has changed?
“While the old concept of ‘noses in, fingers out’ still applies, I believe that today’s directors need to be more aware of what is occurring within the organisation. So perhaps ‘noses in and hands just a little bit dirty’ may be closer to the point.”
PB: The role of the NFP director continues to evolve in similar ways to the role of directors in other sectors. The NFP director obviously needs to comply with their duties and responsibilities as set out in the various acts, but they are also expected to do much more than that. While the old concept of ‘noses in, fingers out’ still applies, I believe that today’s directors need to be more aware of what is occurring within the organisation. So perhaps ‘noses in and hands just a little bit dirty’ may be closer to the point.
GLC: Are our expectations of NFP non-executive directors too great?
PB: This is a tricky issue. Our society depends on a well-functioning NFP sector – we simply couldn’t operate without it. And the sector requires high standards of governance to achieve its desired outcomes. However we have seen the amount of time NFP directors spend on their responsibilities increase over the years. Our NFP study shows that 58% of directors are spending more than 2 days per month on the governance of their NFP. This is a significant increase from 41% only 5 years ago. And given that many people are on a number of NFP boards, this is a substantial time commitment and may not be sustainable. In addition, many directors are also expected to donate money as well as their time to their NFP and this expectation seems to have grown in recent years. I also don’t think that the broader society understands the complexities of modern NFPs and the fact that they are expected to make a profit as well as providing a broad range of services. They also have highly talented staff who need to be appropriately remunerated and given opportunities for career progression.
GLC: It has been said that ‘governance is broken’. Do you think that this is the case for NFPs?
PB: Not broken, but perhaps some (severe) bruising! I suspect we are at a stage when the expectations of the community cannot always be met by the leaders of our organisations. It is likely some new ‘norms’ will be set, perhaps with directors reducing down the number of NFP boards that they sit on.
GLC: What are some tips for NFP boards and non-executive directors to achieve what is expected of them?
PB: Take the role seriously – do your homework, understand your obligations and think through the issues. Most importantly don’t just join the board because a friend or colleague asks you to. Look and learn from others – there are some great individuals and organisations out there – look at what they are doing well and their mistakes and learn from them. Most importantly, enjoy the wonderful opportunity of being a leader of an organisation that makes a real difference to the world in which we live.
The AICD’s 2018 Not-for-Profit Governance and Performance Study looks at these issues and is due for release on 31 July 2018.