Developing principles of good governance for NFPs

The AICD is currently undertaking a review of its Good governance principles and guidance for not-for-profit organisations (Principles). The purpose of the review is to bring the Principles up-to-date with current practice of directorship and to introduce more detailed examples of good governance. This review is in response to feedback received from our not-for-profit (NFP) directors, including the AICD’s NFP Chairs’ Forum, that additional guidance would be valuable.

The operational context in which NFPs operate, and consequentially the expectations of their governance, has changed significantly since the original publication of the Principles in 2013.

Over the past two months we have been speaking with directors and governance practitioners around Australia about how we can shape the Principles to best support NFP directors to achieve good governance.

We have consulted with AICD Division Councils, our policy committees, the NFP Chairs’ Forum and held four focus groups in Toowoomba, Hobart, Melbourne and Canberra. We have also received many written submissions in response to the draft Principles released for consultation in April this year.

This feedback has been invaluable in informing the direction of the review, while revealing some fascinating perspectives on governance in the sector.

1. Grappling with risk

Risk management in the NFP sector was one of the most common themes in the consultation. Directors reflected their experience that risk management in NFPs tends to lag behind the for-profit sector. Risk management frameworks were generally perceived as weak and too heavily reliant on the advice of management.

Further, the focus groups revealed that NFP directors tended to have a ‘risk averse’ attitude to risk management. Risk was seen as something ‘bad’ and the role of risk management as to avoid risks. The Principles will help NFPs to take a positive and strategic approach to risk management by framing risk management as an exercise in managing uncertainty to carry out the organisation’s purpose.

2. Good intentions do not a culture make

Many directors reflected that NFP boards tend not to take an active role in managing culture. Participants in the focus groups made the observation that many NFPs regard having a compelling purpose as sufficient to build a positive culture. This is not so.

A compelling shared purpose is a useful tool in building a strong culture, but it is not a guarantee of one. Participants reflected on the importance of boards taking an active role in shaping culture, beginning with setting the tone from the top. In response, the Principles will emphasise the role of the board in defining, measuring and influencing culture.

3. Clearer articulations of good governance welcome

The most significant proposed change to the Principles is the introduction of ‘supporting practices’ which describe specific behaviours of organisations that are likely to be achieving the Principles. The supporting practices are drafted in a broad way which provides flexibility for users to determine how to interpret and apply them within their own unique circumstances.

Consultation feedback strongly supported this approach, noting that a practical industry-driven framework for achieving good governance would be invaluable in the increasingly complex NFP operational environment. Participants also felt that this would help directors to better understand what the community’s expectations of good governance are so that boards can respond appropriately.

4. Diversity of the NFP sector

Throughout the consultation, participants emphasised the importance of recognising the enormous diversity of the NFP sector. There is an enormous breadth of organisational characteristics such as size, purpose and structure among NFPs, and recognising this in the Principles was considered crucial to their success.

Participants expressed strong support for taking an ‘outcomes based’ approach which supports organisations to use the Principles regardless of the sophistication of their governance. Recognising this, any new concepts introduced in the Principles will be supported by additional guidance and case studies to help users to apply the Principles in their unique organisational context.

Next steps

Over the next few months we will be working to incorporate the feedback we have received into a revised version of the Principles to be released later this year.

For more information on the review of the ‘NFP good governance principles’, contact Lucas Ryan GAICD, Senior Policy Adviser at lryan@aicd.com.au.