Building long-term strength

Organisational culture is at the heart of governing a successful NFP, according to the AICD’s latest NFP Governance and Performance Study.

A new report by the Australian Institute of Company Directors (AICD), 2017 NFP Governance and Performance Study, confirms not-for-profit (NFP)directors understand the importance of having a strong organisational culture.

The same report reveals, however, 55 per cent of NFP directors say culture at their organisations is not being monitored well.

Culture is on the agenda in Australian boardrooms; but there are opportunities for the issue to become a higher priority.

The prevailing culture of an organisation is akin to its personality. The culture – “the way things are done around here” – forms the fundamental basis on which an organisation’s staff set about fulfilling its mission.

The shared values, beliefs, norms and practices affect all its activities, and profoundly influence the ways in which employees and stakeholders interact with each other.

Having a strong culture is particularly vital to the success of NFP organisations, as culture is often one of the main reasons people choose to work in the sector.

The collective sense of mission and purpose they have compares favourably to the shareholder focus of for-profit companies.

Nicolas Parkhill AAICD, chief executive of health services NFP ACON, says fostering a good culture is vital.

“Human services organisations such as ACON are powered by people who are motivated and inspired to act because of shared values or belief in purpose, rather than by financial goals such as profits and earnings,” he says.

“By maintaining a strong, disciplined, nurturing, understanding and collaborative organisational culture, we are better able to meet our strategic objectives.”

Liesel Wett FAICD, chief executive of Pathology Australia agrees. She says with many NFPs delivering a social or community good, culture determines how the NFP goes about meeting its objectives and servicing its clients or community.

“The split between delivering for the NFP members and their clients is a balance,” she says. “Building a healthy culture that is embraced by both the board, executive management and staff is essential to success.”

Getting its culture right is a sine qua non for achieving an organisation’s mission and strategic objectives. Poor culture can lower staff morale, increase absenteeism, inhibit ability to attract or retain employees and expose an organisation to legal or regulatory action.

Sharon Winks GAICD, principal of management consultants Galent, says the culture of the organisation is often the point of difference for an NFP in attracting volunteers, fundraising opportunities or membership contribution.

“The culture is the foundation for the ethos of the workplace and is the NFP’s ‘brand’ in the highly competitive market place for resourcing,” she says. “The right strong and visible culture is a key consideration to volunteers and corporate sponsors when selecting an NFP with which to work or partner.”

A poor culture can erode donor and government trust, putting funding at risk. At the most extreme, poor culture can lead to harm for clients, who are often among the most vulnerable in the community.

There will always be isolated cases of poor governance in any sector, but recent media focus on this issue in NFPs has brought it to the public’s attention. This year’s Governance and Performance Study sought to separate the reality from that perception.

Distilling a sense of culture in any one organisation is a challenge, let alone getting a snapshot of the culture across a sector. The aim of the research was to understand how NFP directors rated their organisation’s emphasis on culture, how they felt culture was playing out on the ground and what NFP boards were doing to manage culture.

Culture as a point of difference

Although the culture of an organisation can appear to be a nebulous concept, there is an increasing awareness of the need for boards and management to actively promote the type of culture to which they aspire.

For instance, the establishment of a clear code of conduct around ethical standards and expectations sends a message to the entire organisation about expectations on these issues.

The board’s selection of a CEO also involves consideration of how that person would affect the organisation’s culture. Organisations are now putting in place reporting guidelines and whistleblower programs to make sure that behaviour outside the bounds of the expected culture is brought to the attention of senior leaders.

Winks says in this era of transformational change within the sector, many NFPs find they are operating in an increasingly competitive environment where culture is often a point of difference in attracting and retaining people.

“Culture is so critical that when boards are assessing options for NFP mergers, they spend considerable time considering the culture of their own NFP and the fit or alignment with the merging NFP,” she says. “If there is a misalignment, then even if the financial assessment looks good a board will often not go ahead with the merger.”

Wett, herself the chair of a large organisation, says the role of the chair is fundamental to culture. “Culture is driven from the top and the chair of the board sets the expectations and behaviours of the organisation,” she says. “Acknowledging this role and leading discussions on the key acceptable cultural parameters of the NFP should be key to any board’s work program.

“Boards are the essential custodians of behaviours to be replicated in any organisation,” she says. “How the chair behaves, how the board interacts with each other and the executive team is the baseline on which a good, healthy culture is formed. Leading by example, setting boundaries and being respectful all create the tone.”

While many NFPs are adopting best practices around management of culture, this year’s survey shows there is still some way to go before they are fully integrated across the NFP sector.

In terms of active management of culture, less than half (45 per cent) of the directors surveyed said the culture of their organisation was clearly defined and formally embedded in processes and decision-making. A further 13 per cent said the desired culture was defined but that it had only been included in some job descriptions and policies.

While only three per cent of directors said that culture was not considered or managed at all, many organisations had a piecemeal or informal approach to managing it. A quarter of directors surveyed said that either the culture of their organisation reflects the personality of key personnel, or the culture of the organisation is defined intuitively.

Parkhill says ACON’s strong organisational culture derives from having a board and staff comprised of incredibly talented and passionate people.

“We recognise that our staff and volunteers, which includes our board, are the foundation for our ongoing effectiveness and we continue to invest in their professional development and engagement to ensure we build our capability with people that have the right values, attitudes, skills and knowledge,” he says.

“We have a range of policies in place to ensure staff achieve a good work/life balance and also track employee satisfaction and implement strategies to continually build on and improve staff feedback.”

Parkhill adds that staff and board engagement is measured annually and shows that the organisation is on the right track with consistently high engagement results.

Placing culture on the board agenda

Even within the group of directors who said that their organisation’s culture had been clearly recognised, defined and formally embedded, many said that oversight at the board level was minimal.

A third of this group reported that culture had not formally been part of their agenda for 12 months, while 29 per cent said that their board did not receive reports, or set organisational KPIs, based on culture. Half of the group said that culture had been discussed at the board level at least five times in the last 12 months, but, importantly, only when it arose in regard to other matters.

Overall, more than half (52 per cent) of directors surveyed said that culture was not formally part of the board agenda in the last 12 months while 48 per cent said that they had not received any reports on organisational culture in that time.

There is a feeling among more than half (55 per cent) of NFP directors that culture at their organisations is not being monitored well and only one-third of directors say their board is actively overseeing culture.

Despite this, large majorities of directors believe that staff understand the organisation’s desired culture (70 per cent) and are aware of the consequences of actions that are counter to the culture (63 per cent). The discrepancies raise the question of the process by which the desired culture is being communicated to staff.

The AICD’s Good Governance Principles and Guidance for NFP Organisations states: “A board and its individual members have a leading role to play in promoting a healthy culture for the organisation they serve.”

Winks says it’s important for an NFP to identify the right culture for them.

“This culture needs to clearly align with the NFP’s vision and mission,” she says. “It needs to mirror what the NFP stands for, based on members and stakeholder expectations, and what the NFP wants to achieve. It needs to be clearly defined and easily explained and understood and must then be reflected across all levels of the NFP, in all branding, planning documentation, deliverables and reporting. It needs to have a common and consistent language.”

The old adage “actions speak louder than words” has never been truer than when discussing culture within an NFP, Winks believes. She says an NFP that achieves its vision and mission through volunteers and fundraising in the community needs a culture of selflessness, of giving, of pride in the achievement of the volunteers and of those who support them, and a culture of financial economy and prudence.

“If that NFP is perceived to be wasting the money so generously raised through the hard work of others then it risks losing that valuable support very quickly,” she says.

Risk impacts culture

The fact some NFP boards are not actively considering culture as part of their agenda, or setting and embedding cultural expectations for their organisation, does not necessarily mean the culture at those NFPs is deficient.

The vibrancy and general success of the NFP sector in delivering in the community militates against such a view. Organisations also may form strong cultures through an informal organic process, possibly based around strong personalities at the NFP.

But if boards do not receive regular reports on culture and take active steps to ensure that a strong culture exists at an organisation, they are leaving too much to chance, exposing the NFP and its stakeholders to the grave risks posed by weak or unhealthy cultures.

Risk management maturity varies

Setting and overseeing the risk policy of an organisation is among the fundamental responsibilities of a board.

There is a widely held view that the NFP sector is risk-averse when compared to the for-profit sector, lagging in terms of innovation because NFPs and their boards are less willing to take chances on new ideas and methodologies. The AICD’s study found the reality is considerably more complex.

Some NFPs can and do take on substantial risks while others are more risk-averse, but this may be appropriate for the context in which they operate. For many NFPs their ability to achieve their purpose relies upon them showing they have appropriate, effective and current risk management controls, systems and processes in place.

There may also be legal, financial and operational risk compliance obligations linked to NFPs being allowed to operate, for instance health and/or care providers have minimum clinical and qualitative standards that must be met. Government funding also often comes with robust risk management requirements relating to financial controls.

To gauge the level of risk NFPs are taking, the survey asked directors to place their organisation along a risk spectrum from 0–10, with 0 being absolutely intolerant of any risk and 10 being willing to take on maximum risk.

Around half of the directors (49 per cent) placed their NFPs around the middle values (between 4 and 6), just over a quarter (28 per cent) of directors considered their organisation as risk-averse (3 or lower) and just under a quarter (23 per cent) saw their organisations as risk-willing (7 or above).

The focus groups painted a similar picture with many directors bristling at the idea that NFPs take on lower levels of risk than their for-profit counterparts.

“To provide the services we do in the places we do involves risk that many companies would never dream of,” one director said.

But there were also directors who said their organisations were very hesitant to take risks.

“With a board chair that changes every two years, and a regular two yearly turnover of directors, there is a constant fear of ‘not on my watch’,” said another.

Maintaining a positive reputation

Evidence from the study also suggests that many organisations are not tracking their reputation in a consistent, reliable framework. CEO and staff comments are the second most utilised method (54 per cent) that boards use to evaluate the organisation’s reputation after client/stakeholder surveys (70 per cent).

Other popular methods are growth in fees funding and donations and media reports, which for the most part will only serve as lagging indicators of a dip in reputation when the board’s ability to intervene is limited.

Organisations and boards that are not actively managing their reputation and scenario planning can lose control at critical times. In a crisis, unless there are plans in place to effectively manage the crisis and crisis communications, people external to the organisation, some of whom may be malicious, will control the conversation.

Information and misinformation will spread on social media. Organisations that do not have plans in place will struggle to have their voice cut through the noise and lose goodwill among key stakeholders.

Organisational Repuation is Mission Critical

Over many decades, the NFP sector as a whole has built a strong reputation for helping the community and delivering vital services. NFPs start with large reserves of goodwill and public respect for their commitment to acting in the interest and for the benefit of others. Protecting and preserving that reputation helps a great deal in an NFP being able to deliver on its mission. Dints in an organisation’s reputation can lead to stakeholders being reluctant to deal with it, donors and governments being unwilling to fund it, and prospective employees being hesitant to work for it.

The potential for a dip in reputation to inhibit an NFP’s ability to do its job was highlighted by one director in the focus groups, who stated: “Our reputation externally as well as what our members say to potential funders critically drives our sponsorship income, which is 30 per cent of all receipts. The quality of the endorsement from members has declined... [this] undermines funding receipts and creates a vicious downward spiral in potential solutions.”

Managing an organisation’s reputational risk is possibly more of a challenge than it has ever been. Adverse commentary or criticism relating to, for instance, the handling of a crisis can spread rapidly on social media channels, then reverberate through the traditional media. This is now a concern even for smaller NFPs which may have been able to escape the spotlight before the emergence of social media platforms.

Fast Facts

• More than 70 per cent would be very likely to recommend their organisation to friends and family.
• Less than half (45 per cent) said culture was clearly defined and formally embedded.
• More than half (52 per cent) said culture was not formally part of the board agenda in the last 12 months.
• A total of 48 per cent said they had not received any reports on organisational culture.

What Boards Can Do to Build An Effective Culture 

Active management and monitoring of culture, as well as the reiteration of an organisation’s values, decreases the chance of a problematic culture becoming entrenched at an organisation.

Strong organisational cultures start with the directors and cascade down to management then to the rest of the organisation. A culture that rewards people’s dedication to the company’s mission and a commitment to integrity increases the likelihood that an NFP will succeed.

To help develop an effective culture, directors and boards should ask the following questions:

• Has the board developed a code of conduct and agreed set of values and behaviours to guide board members?
• How does the board hold itself accountable for compliance with the formal code of conduct and ethical standards?
• Does the board hold itself accountable to its own code of conduct?
• Does the chair proactively lead board culture and ensure the active engagement of all directors?

The complete 2017 NFP Governance and Performance Study will be available online at: companydirectors.com.au/nfpstudy17 from 5 September 2017.