2020 Essential Director Update presentation by Lisa Chung AM FAICD

In this video presentation, Lisa Chung AM FAICD examines recent issues of accountability, innovation spurred by COVID-19 and developments in the not-for-profit sector.

This address was recorded on 11 September in the AICD's Sydney Business Centre and Member Lounge.

Lisa Chung AM FAICD is a professional non-executive director and currently sits on the boards of Australian Unity Limited, The Front Project and Artspace.

Full text of presentation

I’d like to begin by acknowledging the traditional custodians of all of the lands on which we are gathered today. I am speaking to you from the lands of the Gadigal people of the Eora nation and I pay my respects to elders past and present.

It is a pleasure to be co-presenting, for the first time, this year’s AICD Essential Director Update with my colleague, Graham Bradley AM FAICD, who mentioned in the opening of his presentation that, under the Chinese zodiac, he was born in the Year of the Rat. As it happens, I was also born in the Year of the Rat and as a Gold Rat, apparently I am meant to be good at delivering speeches and persuading others.

So, let’s see…

1. Work health and safety: A new set of challenges

In response to recommendations of Safe Work Australia’s Boland Review, the offence of industrial manslaughter now exists, or is proposed, in legislation in all states and territories, except South Australia and Tasmania. The manslaughter legislation differs in important ways between states and territories, including different definitions of key concepts and different standards of proof for the manslaughter defence, such as requiring gross negligence or just negligence.

Directors potentially face prison terms under the laws and, under some state and territory legislation, including NSW, directors and companies are prohibited from entering into insurance arrangements that purport to cover monetary WHS penalties and legal costs. A review of D and O insurance terms should be undertaken to ensure that they do not breach the new restrictions on WHS penalty indemnities and directors should, of course, be aware of potential personal exposure.

In March this year, the Australian Human Rights Commission released its Respect@Work: Sexual Harassment National Inquiry Report (2020) which outlines the Commission’s findings and a number of recommendations. Since the release of the report, COVID-19 has overshadowed public discussion, but the issue of sexual harassment has stayed in the headlines. First, in press reports on the findings of an independent inquiry commissioned by the High Court of Australia, that former Justice Dyson Heydon had sexually harassed six women while they worked at the High Court as judges’ associates.

The second case related to the controversial promotion of a senior executive at AMP Capital, who had been the subject of sexual harassment allegations and was penalised by AMP after an independent investigation. More on this later.

For particular consideration by directors, the Human Rights Commission’s report notes that no code of conduct or legislation governing duties of board members explicitly refers to sexual harassment and it includes recommendations addressing the cultural and systemic drivers of sexual harassment and preventative action. The report considers options within the Model WHS laws which could be utilised for that purpose, as well as the possibility of a new regulatory model, and a recommendation to the ASX Corporate Governance Council that it introduce sexual harassment indicators for ASX listed entities to report against, under the Corporate Governance Principles and Recommendations. This issue requires close consideration in the context of work, health and safety, but also organisational culture, and reputation, topics which I will cover in more detail later in this presentation.

As directors will be aware, COVID-19 has heightened the vigilance required around WHS. Safe Work Australia has put in place workplace safety protocols to guide businesses during the pandemic. Some sectors, including aged care, health care and education, are directed to follow the advice of their respective governing bodies. However, every business is unique and it is imperative that directors be able to identify within the context of their own companies, how risks around COVID-19 impact their workforce.

Questions to ask might include:

1. Is our compliance and risk management regime “fit for purpose” in responding to the risks and issues associated with COVID-19? Is there clarity around accountability?
2. How effectively do we communicate with staff and what steps are in place to ensure that workers remain connected and feel supported?
3. How do we ensure the physical and psychological safety of workers while they work from home? This includes physical support, such as work station set up and equipment, as well as awareness around mental health risks and access to employee assistance and other support programs.
4. How are quarantine and physical distancing requirements and the use of PPE and masks being addressed?
5. How are we engaging with building managers and landlords with regard to access, physical distancing and cleaning of workplaces, to meet more demanding hygiene cleaning standards etc

A heightened risk around mental health and wellbeing, caused by a range of stresses such as job and financial insecurity, social isolation, fears of illness and burnout, is an unsurprising issue requiring particular attention during COVID-19. This is coupled with expectations that the number of workers experiencing mental health issues will rise considerably during this period. Recent reports cite an increase of approximately 30% in the demand for mental health support services early in the crisis. In addition to monitoring this issue in their broader workforces, boards would do well to consider the issue in the context of their senior managers. In 2018, research by BUPA Global revealed that 64% of senior business leaders have suffered from mental health conditions, including anxiety, stress and depression. How well is your board across the health and wellbeing of your CEO and other senior leaders, particularly during these times of unusually high stress?

2. Board oversight of culture…during a pandemic

There can be little doubt that COVID-19 has been the ultimate stress test of organisational cultures. Issues ranging from redundancies, lay-offs, job and financial insecurity, health concerns, juggling work and personal responsibilities, such as home schooling, and uncertainty as to the future, have loomed larger than ever before, and all at once. Within a board’s responsibility for oversight of culture, some questions to ask include:

• How has our culture held up under COVID-19? Has it been a source of strength or have shortcomings been exposed and what risks do these pose? How do we address any shortcomings?
• Are we unified around our sense of purpose and is there commitment to it as an anchor of our culture?
• The board sets the tone from the top but how do our people see, hear and feel that, particularly in the context of remote working or workers who have been stood down? How effective are our communications?

Do they convey the right tone? How do we hear from our staff?

• What are the particular elements which go to culture that may be challenged we should focus on now?
• How do we effectively monitor adherence to ethical standards of behaviour and conduct generally?
• In terms of remuneration, how do we balance the need to recognise and reward, often for outcomes “above and beyond”, against the need to exercise financial prudence?

At Australian Unity, where I am a non-executive director, our 7000+ workforce, many serving clients as frontline carers in homecare, disability and residential aged care, have experienced the most intense and challenging period of their working lives, operating through the bushfire crisis and now COVID-19. The board accepted the CEO’s recommendation that no variable remuneration be paid in the year, despite the enormous efforts of our people and the extraordinary outcomes that were achieved. I suspect that our culture, and trust and respect in the executive leadership of the organisation, were strong components which influenced the supportive way our people responded to the decision.

• With remuneration necessarily less a lever in many businesses, do we have to work harder on addressing other things that our people value, particularly as FY2021 looks to be just as challenged as FY2020?

In its 2020 Global Human Capital Trends, Deloitte named wellbeing and belonging as the two top global trends for the year. How are these factoring in to your board’s consideration of culture?

Finally, as a general question, by what process does your board oversee culture?

From 1 July 2019, the board of the CBA renamed its Remuneration Committee the People & Remuneration Committee and announced that the Committee would give additional focus to people and remuneration strategies, talent management, diversity & inclusion and organisational culture. A quick review of the ASX10 disclosed, perhaps surprisingly, that not all expressly include culture as an area of oversight or responsibility within the charter of its board or one of its board committees.

Does the charter of your board, or one of its committees, expressly address the responsibility for oversight of culture?

3. Reputation and stakeholder engagement

So many things have the potential to impact reputation. However, for the purposes of this presentation, I have limited my focus to one or two specific areas which have come to the fore during the past year.

Firstly, I want to turn to the issue of so-called social movements. Whereas, in the case of marriage equality, the decision whether or not to engage rested, by and large, with the organisation. In contrast, in the case of social movements, such as #metoo and #blacklivesmatter and, possibly because of ongoing changes in community expectations, incidents related to these movements arrive at the door to confront companies who then, have no option but to engage with and address the issue.

AMP received much media attention and criticism by staff, shareholders, investors and various commentators in July and August, after its board endorsed the appointment of Boe Pahari as CEO of AMP Capital. In 2017, Mr Pahari was based in London as a senior executive of AMP Capital. In an independent investigation commissioned by AMP and undertaken by British QC Andrew Burns, claims of sexual harassment by a senior female colleague against Mr Pahari resulted in a finding that he had breached AMP’s code of conduct. It is reported that the female colleague received a sum in compensation and left the company. Mr Pahari was penalised financially but retained his position as AMP Capital’s Global Head of Infrastructure.

Amid the controversy, AMP acknowledged the need for change, announcing the establishment of a board culture working group, an employee led inclusion taskforce and the appointment of an external expert to drive inclusive leadership. Notwithstanding, the public scrutiny continued and, following threats by a major shareholder to call an EGM, the Chairman, David Murray and another non-executive director, John Fraser, resigned and Mr Pahari returned to his previous role.

When the AMP Board made its decision to endorse Mr Pahari’s promotion with knowledge of the sexual harassment matter, to what extent did it weigh the importance of that history and anticipate the negative response its decision would have on its various stakeholders?

Did it anticipate the need to have in place a clear strategy and communications plan in the event the sexual harassment claim became public (which it did) and to address the predictable negative responses, both internally from staff and externally from shareholders, investors and others? The ongoing attention also placed Mr Pahari in a difficult position, which certainly didn’t give him the best start to his tenure as CEO of AMP Capital.

Even the resignation of Mr Murray and Mr Fraser from the board and the demotion of Mr Pahari did not end ongoing criticism, with commentators demanding greater transparency through release of the independent report and other related documentation.

There was no non-disclosure agreement between the complainant and AMP in the Pahari case. However, boards should carefully consider the use of non-disclosure agreements in settling complaints of the kind discussed, unless it is a requirement of a complainant, for example, for reasons of privacy. Apart from the potential to stir demands from various stakeholders for greater transparency, there are also often concerns about the appropriateness of such agreements, which can be seen as a means of silencing complainants.

Boards should consider carefully how they might deal with demands for greater transparency and whether they are appropriate in the circumstances. In early September, QBE Insurance Group announced the sudden and immediate departure of its CEO, Pat Regan, following an external investigation concerning workplace communications, that the Board concluded did not meet the standards set out in the company’s code of ethics and conduct. It is reported that the investigation was triggered by a complaint made by a US based female employee.

The announcement of Mr Regan’s departure was followed by some shareholders calling for greater transparency in relation to the board’s decision, to enable them to assess its appropriateness. How far should a board go in its disclosures?

In February last year, the ASX Corporate Governance Council decided to remove the contentious phrase “social licence to operate” from the fourth edition of the Council’s principles and recommendations on best practice for corporate governance. The phrase had been included in an earlier consultation draft but was substituted with terms such as “reputation” and “standing in the community”. In any event, these terms all invoke useful concepts when reflecting on Rio Tinto’s decision, in May this year, to proceed with the blasting of two ancient rock shelters of cultural significance to their traditional owners, the Puutu Kunti Kurrama and Pinikura (PKKP) peoples at Juukan Gorge in the Pilbara region of Western Australia. Rio Tinto had obtained all relevant legal approvals to proceed with the blast to make way for the expansion of an existing iron ore mine and stated that it believed it had secured the consent of the PKKP peoples, until representatives of the traditional owners approached the company after explosive charges were already in place and could not be safely removed. The PKKP peoples have rejected the assertions that they had not previously communicated their position regarding preservation of the site.

Rio Tinto had earlier commissioned archaeological excavations of the site following which a report was delivered to the company in late 2018. The report described Juukan Gorge as more historically significant than previously thought and stated that one of the rock shelters, Juukan 2, was of “the highest archaeological significance in Australia”.

For many years prior, Rio Tinto had maintained a strong focus on building close ties with traditional owners, its most important stakeholders in this context. Following the destruction of the Juukan Gorge shelters, the company was stripped of its endorsement by Reconciliation Australia as an Elevate RAP organisation and suspended from the RAP program, faced national and international condemnation and the incident became the subject of a parliamentary inquiry.

A Rio Tinto board review of the incident, undertaken by one of the non-executive directors, Michael L’Estrange, found “no single individual error” was responsible for destruction of the heritage site. Three senior executives, including the CEO, had their bonuses reduced, reportedly by approximately $7million in total. However, some major investors and external commentators have publicly expressed their dissatisfaction with this as the only outcome and called for greater transparency and accountability for what had occurred. It has also been reported that some Rio Tinto board members have externally expressed disquiet at the findings of the board review.

What are the lessons for board directors from this unfortunate event? Questions abound:

How did the decision to proceed with the destruction of the rock shelters depart so widely from the company’s previous stated priority of building trust and working with respect with communities?

What were the shortcomings of the company’s decision-making and lines of accountability which produced this unfortunate result?

What were the shortcomings in the company’s communications and engagement with its key stakeholders before the blast, as well as after, in relation to the disastrous outcome.

Why did the board elect to have one of its own members undertake the review, rather than appoint an external party to undertake an independent review? Was there board consensus to proceed in this way?

What these two case studies of AMP and Rio Tinto highlight, is that issues we might once have categorised under corporate social responsibility and ESG, have become concerns which strike firmly at the very heart of a company’s reputation and, arguably, highlight cultural weaknesses. They follow the same path as the approach to climate change which has transitioned from being regarded as an ESG issue to becoming one which many, if not most companies, now treat as a significant financial risk issue. A catalyst for this shift has been the work of the Taskforce for Climate-Related Financial Disclosures (TCFD) and its now widely accepted framework for reporting.

4. Driving innovation and creativity: An opportunity and a matter of survival?

In September 2019, AICD published a report Driving Innovation: the boardroom gap. The report found that a risk-averse corporate culture is preventing boards from prioritising innovation, leaving Australian directors lagging their international counterparts. It made five recommendations to ensure innovation is prioritised by boards:

1. Lift directors’ technology and digital literacy.
2. Set clear expectations of management regarding calculated risk-taking to drive innovation.
3. Develop a shared language with management, and clear narrative for investors/members on innovation.
4. Ensure innovation features regularly on boardroom agendas.
5. Establish a budget and executive incentives for long-term innovation.

And then, wham! Enter left, COVID-19!

COVID-19 demonstrated Australian organisations’ ability to innovate and that they and their workers can be highly adaptive. It has been the catalyst for a number of examples of innovation playing out in our daily lives…gin distillers turning to making hand sanitiser, high end restaurants turning out gourmet takeaway.

What changes has COVID-19 necessitated in your board’s thinking to ensure survival and sustainability?

When restrictions on the number of customers who could enter supermarkets at the same time were introduced, Woolworths diverted from its usual process of centrally developing a detailed written policy using analysis of relevant electronically stored data, such as in relation to store sizes etc. In its estimation, this might have taken two weeks or more to roll out. Instead, it acted with greater agility by putting its store managers out front and placed authority with them to determine entry numbers on the ground. This process was able to be implemented within 24 hours across its stores nationally.

In addition to responding to the ongoing day to day urgent needs arising from COVID-19, many boards are also turning their attention to longer term issues, particularly how to navigate to the “other side”, including imagining what a post-COVID “new normal” will look like for their industry or organisation. In a world of uncertainty in which a return to the old life is highly unlikely for many businesses, the rate of change is faster than ever. We have seen the introduction of telehealth, a massive rise in online shopping and a near cashless economy. Investment in business innovation through data analytics and AI are gathering pace. Services such as Afterpay and Zip threaten traditional credit cards. Further erosion of intermediaries’ positions in many industries continues, as digitisation supports direct to consumer channels. In addition to IT and digital solutions, innovation also calls out for creative thinking, more generally.

Boards may wish to consider the following questions:

• What is our investment in R and D and is it still appropriately funded and directed in the current environment?
• Is innovation culturally embedded in our organisation? How do we empower and reward for it?
• Innovation is more than an invention or new ideas…does it create impact and deliver value by way of improved outcomes?
• Are we looking outside the box? Many of the most innovative organisations partner collaboratively with others, particularly in the research sector, to secure complementary skills and knowledge, maximise efficiency of resources and deliver outcomes more quickly.
• Are we bringing our best talent and newest and freshest thinking to the table to solve new problems? Do we have a genuine diversity of thought, experiences, perspectives?

In June this year, The Gender Equity Insights 2020: Delivering on Business Outcomes report, released by the Bankwest Curtin Economics Centre and the Workplace Gender Equality Agency found that increasing the representation of women across each of the key leadership roles in a company added market value of between $52million and $70million per year for an average sized organisation. This report focuses on diversity of gender, but this must logically be just part of a much wider opportunity yet to be fully exploited.

5. The post-pandemic workplace

In most sectors, workplaces transitioned very quickly to working from home where that was viable. In a survey undertaken by Gartner in the US in June, of 127 company leaders, 82% of respondents said, post COVID-19, they intended to permit remote working some of the time and 47% said they intended to allow employees to continue to work remotely full time.

This is consistent with discussions now occurring in many companies here. Atlassian has announced that its employees will now have the ability to work from wherever they want.

Questions for directors to ponder include:

• In the short term, with existing financial pressures, how do we ensure that we maintain morale and motivation in our people? What non-financial drivers do we need to double down on?
• What enhanced skills do we need to effectively manage a new hybrid workforce model, to preserve culture, employee engagement, teamwork, collaboration, productivity and to ensure ongoing development of our people and delivery of a quality output? We can no longer rely on the often-erroneous assumption that, because a team member is at their assigned desk in the office, they are being productive. Presenteeism is out and managers will have to determine what outcomes and results they are seeking from their team, how these will be assessed and measured, and communicate this clearly.
• Companies will also have to find new ways to onboard new recruits and ensure entry level recruits receive training and development in new ways.
• What opportunities will arise to recruit global talent or those in regional areas? In a virtual world, “across the street” is the same as “across the world”, save for time zone differences. What implications does off-shoring labour have for local labour markets?
• What macro changes in markets or the industry will have an impact on a new workforce model? How have our customers’ needs changed?
• How can we think about the workplace differently? In response to changes, such as a permanent hybrid workforce, how do we redesign the workplace? Some businesses are re-thinking the workplace for its highest and best use, that is, to prioritise activities from which they can derive the greatest value from the cost of the space and, in that process, reduce their space requirements and premises costs. An example might be better designed collaboration spaces, which attract team members to come together to work on specific projects or issues. The spaces become a compelling place to gather or visit for a purpose, rather than a place to “live”. There may also be meeting or working hubs, where colleagues have the opportunity to meet, work and interact informally.
• By all accounts, the central workplace will survive in most cases, but differently. Notwithstanding its work anywhere policy, Atlassian is building the world’s tallest hybrid timber building as its Sydney headquarters.
• What continuing investment do we need to make in technology to support a new workforce and workplace model? And importantly, how do we stay ahead in cybersafety?

The Federal Government has issued warnings about increased malicious cyber-attacks on Australia. A number of companies, including Toll Group and Bluescope have been impacted.

In August, ASIC commenced proceedings against RI Advice Group Pty Ltd for alleged failure to have adequate cyber security systems. ASIC alleges that one of RI’s authorised representatives was subject to a “brute force” attack, whereby a malicious user gained access to, and spent more than 155 hours logged into, the AR’s server, which contained sensitive client information, including identification documents.

Let me now turn to some issues impacting Not for Profit organisations.

6. Financial challenges in the Not for Profit sector

Needless to say, the challenges experienced in almost every part of the Not for Profit sector have been overwhelming.

Solvency and liquidity concerns, resourcing constraints in terms of employees and volunteers, together with other operational issues, have weighed heavily on the collective minds of Not for Profit boards.

In early findings of the AICD’s annual NFP Governance and Performance Study, a number of themes have emerged. 43% of organisations experienced a decline in revenue and 23% had an increase in costs. 36% reported a decrease in donations, 32% were not eligible for JobKeeper, 49% said they would be using more cash reserves than planned, and 15% were increasing debt.

The study highlighted the greater than usual time commitment required of the board during the early days of the pandemic and a period of closer operational oversight, before returning to more normal functioning.

Notable feedback highlighted the importance of organisational culture as an enabler, with some directors observing that those with poor corporate culture faced more difficulties during COVID-19. Similarly, in terms of stakeholder management, organisations which enjoyed strong relationships with key stakeholders, such as government funders and suppliers, reported significant benefit as a result.

The pandemic obviously impacted different Not for Profit organisations in varying ways. Many arts and sporting organisations have had to go into hibernation, threatening survival in many cases. Many boards have revisited their purpose in light of the challenges of COVID-19 and made adjustments, after asking themselves “what do we want to look like on the other side”? How will we re-shape ourselves?

For the almost 50% of organisations who dipped into their cash reserves more than expected, the question continues to be, “how much can we afford to utilise now and how much do we need to conserve for the next rainy day”?

To support the sector, the ACNC confirmed that the temporary insolvent trading safe harbour extends to directors of all charities (including those which do not operate as companies limited by guarantee), provided charities have an achievable aim to return to viability once the crisis has passed and inform members and the ACNC if trading insolvent. Notwithstanding, as at the beginning of August, I understand no organisation had made a notification to the ACNC under this requirement.

Many services organisations have seen heightened demand for their services, placing enormous pressures on their workforce, particularly those with workers from an older demographic and the volunteer base. In the medium term, with high rates of unemployment, there is theoretically an opportunity to deploy surplus manpower to where the need is, but of course, this requires investment of funds and time, to bring this to fruition.

A quick word on AGMs. The ACNC does not require charities to hold an AGM but it does require a charity to be ‘accountable to members’ and has stated that, if an organisation decides to cancel its AGM due to social distancing requirements and an inability to hold it electronically, it should consider alternate ways to demonstrate accountability to members within the context of its current operational circumstances.

If its governing document does not provide guidance on whether it can hold its AGM using technology, or delay it, directors should ensure that a proper record of a decision not to proceed with the AGM (together with reasons for the decision) is made.

COVID-19 was not to blame for the challenges of many organisations, which were already under financial stress, coming into 2020. Two high profile examples, over the past year, include the White Ribbon Foundation and Carriageworks.

White Ribbon, a charity established to raise awareness about domestic violence, particularly by engaging men, went into liquidation in October 2019. The organisation was operating with a high cost base and lower funds raised. In the financial year 2017/2018, it recorded a loss of $840,000 and was on track to record a loss of $500,00 in the financial year 2018/2019. In terms of leadership and governance, there was instability at the top, with 3 chairs in 12 months and 3 CEOs, also in a short timeframe, one of whom stayed only 3 months. The funding shortfall is likely to have been partly due to negative impacts to its reputation, including the decision of its then CEO to withdraw White Ribbon’s statement of support for women’s reproductive choice, which was later reinstated. There was also a public statement by one of its White Ribbon ambassadors, which was interpreted as excusing male violence against women because of “male disempowerment”, as well as revelations that the organisation had plans to accept money from a publican, if authorities let him install more poker machines in his venue. This story illustrates the direct link between funding flow and reputation and is a salutary lesson for boards, as guardians of an organisation’s reputation.

The Sydney arts venue Carriageworks went into voluntary administration in May this year, citing irreparable loss of income resulting from COVID-19 shutdowns. This followed a period during which there had been number of budget overruns on costs, which seem to have left little by way of buffer to weather the COVID-19 storm.

Both stories have happy endings. White Ribbon has been revived with a new CEO appointed, and is focusing on strengthening its relationships with women’s frontline services and overhauling its fundraising model. Carriageworks has been bailed out by a group of philanthropists. Both cases demonstrate that, despite financial problems, a worthy core purpose does resonate and can lead to renewed support in pursuing that purpose, albeit under revised financial models.

Unsurprisingly, funding certainty continues to be the issue of most concern for surveyed directors in all Not for Profit sectors. AICD’s proposed advocacy priorities are focused in this area, including the possible establishment of an emergency transition fund and the harmonisation of fundraising laws.

In positive news, the Intergovernmental Charitable Fundraising National Working Group has released a proposed model for harmonising fundraising regulatory frameworks, under which each ACNC-registered charity would be deemed to hold a local fundraising authority in each participating jurisdiction (already the case in South Australia, the ACT and shortly to be the case in Victoria). In the meantime, state and territory regulators responsible for fundraising laws have committed to taking “a supportive and educative approach to compliance” for NFPs, due to the impacts of COVID-19.

The power of social media and the reach of the internet has driven significant growth in funds raised via crowdfunding. Market research firm Valuates reports that the global crowdfunding market had a value of US$10.2bn in 2018 and is expected to increase to US$28.8bn by 2025. This relates to crowdfunding generally, not just charitable fundraising, but demonstrates its level of acceptance as a process and the expected growth trajectory. Online platforms, such as GoFundMe and Kickstarter, lend themselves to swinging a campaign into action quickly, at relatively low cost and invite a creative or novel approach. Recent examples during the pandemic include Buy Them a Coffee and Feed the Frontline, aimed at showing support for health and frontline workers. They work well for targeted, niche causes and donor bases, as well as providing a potentially global reach. Organisations can launch crowdfunding campaigns themselves and others may do so on their behalf. The latter, of course, leads to potential risks for an organisation, including fraud and reduced opportunity to capture valuable donor data, because of the lack of control in the management of the appeal. Safeguarding of an organisation’s reputation must continue to be a high priority, so cautious monitoring of any fundraising undertaken by third parties in the name of an organisation is a must.

I want to turn for a moment to two cautionary tales.

It seems like a good problem to have but sometimes organisations can be overwhelmed by a flood of funds (or goods), in a way in which the organisation does not have the resources to cope. During January, at the height of the bushfire crisis, images of fire affected Australian native wildlife prompted donations from around the globe in the order of $60 million to WIRES, a wildlife rescue charity. To put this in context, in the financial year 2018/2019, WIRES had reported total revenue of less than $3.5 million. By February, it was receiving criticism for having distributed only $7 million of the $60million donated, but in the context of the size of the organisation, perhaps that wasn’t such a bad effort. Dr Gary Johns, the commissioner of the ACNC, has said that the incident highlighted how donor expectations could clash with operational realities. This is a risk boards need to learn how to manage.

Also at the height of the bushfire crisis in January this year, the Australian comedienne Celeste Barber, who has a strong global following on social media, raised a record breaking $51.3 million via a digital campaign, nominating the NSW Rural Fire Service and Brigades Donations Fund, a trust, as the recipient. The trust is bound by a strict act limiting how its funds can be spent, that is, to improving equipment and facilities for brigades, training, resources and administrative expenses, and to help the families of RFS firefighters injured or killed on the job. It is apparent that Ms Barber intended that funds raised would be distributed more widely, including to families and communities who had suffered loss as a result of the bushfires, and to animal welfare groups. During the campaign, Ms Barber said the money would be distributed across multiple states and charities. However, she made no arrangements to enable that to occur.

In May, the Supreme Court of NSW ruled that this was not permissible, as the campaign donations page clearly stated funds raised would go to the RFS, despite perhaps the expectations of many of the donors. NSW Parliament is hearing a bill to amend the Rural Fires Act 1997.

So what could be done differently if such a situation were to arise again? Often these spontaneous fundraising efforts are launched quickly in response to an urgent need, as in the case of the bushfire emergency. There might be little regard paid to the technical legalities and consequences. But, what if a member of the public, or a senior leader of another relief organisation, focused on providing services addressing the same event or emergency, were to make contact with the organiser of the fundraising campaign to clarify the campaign’s intentions as to where the funds were to go and how they were to be used? In the case of a call to Celeste Barber, that would have been a call well worth making!

Given the pressures of COVID-19, the demands and requests on philanthropy as a source of funding have probably never been greater. In a survey of grant makers, published by Philanthropy Australia in May this year, more than 88% of respondents said they had adapted their granting and operating approach in response to COVID-19, with 70% of respondents reporting they had taken a more flexible. Some had met the cost of key staff and additional resources of grantees to build digital capability, increased support for advocacy and agreed to reallocation of funds to areas of more pressing need. 60% of respondents reported they were offering grants to new grant partners and 38% said for FY20, they were planning to increase distributions or grants, with only 7% intending to decrease distributions or grants. However, this level was not expected to be repeated in FY21 with many still undecided, 22% intending to increase, 15% intending to decrease and 30% expecting to stay the same.

In an interesting response, 50% of respondents indicated interest in pooling resources or combining processes with other foundations in response to COVID-19.

7. The road ahead: risks and opportunities in the Not for Profit sector

Given the likelihood that the impacts of COVID-19 are expected to be ongoing for a significant period, what questions should Not for Profit boards be considering now?

• Can we still effectively deliver on our purpose?
• How well did our crisis management and business continuity plans serve us, what learnings can we benefit from and what adjustments are needed as we look forward?
• Are the organisation’s strategy and business plans still fit for purpose in this fast-changing environment?
• How effectively are our risk management frameworks operating and how do we quickly identify and address new and changing risks?

It is important to keep an eye on the bigger picture and not just risks which are COVID-19 related. In particular, I raise the risk of the reckoning of past practices, or “sleeper issues”, which can impact the reputations of Not for Profit organisations very hard. In recent months, we have seen reporting of allegations of bullying behaviour and racism in arts institutions, as well as bullying allegations in the wildlife rescue sector. The Royal Commission into Institutional Responses to Child Sex Abuse demonstrated clearly that sweeping issues under the carpet will no longer be tolerated. Changed community expectations, greater access to knowledge and information, and demands for transparency, require boards to be enquiring, responsive and accountable. They must also remain aware of their responsibilities to ensure a safe workplace for all workers, including volunteers.

• Do we have adequate and sufficiently frequent oversight of financial issues and cashflow? Will a constrained financial future require us to make trade-offs and, if so, what principles will govern how we make those decisions?
• How well are our supply chains meeting our needs and what risks are there down the track?
• How do we maintain the health and wellbeing of our people, particularly given the prolonged nature of the pandemic’s impacts on our operations, and with particular regard to mental health?
• Are we confident that our future workforce needs can be met and what programs do we have for recruitment, induction and training during a largely remote working phase?
• How well are we maintaining quality communications with our various stakeholders, including clients, staff, funders and the community more generally? Have our key relationships been maintained or even enhanced during this period?
• What do we need to invest in to strengthen our position to meet the challenges ahead? Are our IT systems, cybersecurity and other capabilities in a strong position to support us as we look forward?
• Are there opportunities to merge with or form strategic alliances with peer organisations?

In these challenged times, there may be greater incentive to consider merger opportunities, but boards would be wise to give such possibilities early consideration and not wait until financial pressures become so great as to limit the likelihood of identifying a suitable merger partner. Boards, while fulfilling their governance obligations, should always have as a priority how well the organisation is delivering on its purpose. Is it doing so with the greatest impact? What options might be considered to improve the sustainability or effectiveness of the impact we seek to deliver, for example to drive greater innovation, strengthen expertise, improve operational efficiency or appeal to new sources of funding. Could a merger or strategic partnership be one of the options to achieve one or more of these?

Sadly, in the case of some Not for Profit organisations, there will be few choices but to wind up. There is no clear data on the number of Not for Profit companies which are effectively insolvent but for support from the Government’s various COVID-19 relief measures. If directors believe this is a risk for their organisation, early assistance should be sought to manage outcomes as well as possible.

The Royal Commission into Aged Care Quality and Safety released its interim report on 31 October 2019 and delivered a damning preliminary verdict, stating “the neglect that we have found in this Royal

Commission to date, is far from the best that can be done. Rather, it is a sad and shocking system that diminishes Australia as a nation”. There were three areas identified in the interim report requiring urgent action:

• The provision of more Home Care packages to reduce the waiting list for higher level care at home. In July, the Commonwealth Government announced 6100 new home care packages, but more than 100,000 older Australians remain on the waiting list.
• A response to the significant over-reliance on chemical restraint in aged care.
• A stop to the flow of younger people with disability entering aged care and expediting the process of transitioning out those younger people who are already in aged care.

Since the interim report was released, we have all witnessed the tragic impacts of COVID-19, in particular, on residents in residential aged care.

The Commission’s final report is due in February 2021.

In the meantime, the findings of the Commission’s interim report, and the shortcomings sadly laid bare during the pandemic, contain lessons for board directors of all organisations who care for vulnerable people.

The Royal Commission into Violence, Abuse, Neglect and Exploitation of People with Disability is due to deliver its final report by 29 April 2022, with an interim report due by 30 October this year.

Directors may have read in the press the tragic story of the late Annie Smith, a woman with a disability, who is said to have died in appalling circumstances. It has been reported that SafeWork SA is investigating the board members of Integrity Care SA, the provider of services to Ms Smith, and that the inquiry will focus on legal and regulatory compliance.

In March this year, the Federal Government released its response to the 2018 report, Strengthening for Purpose: the Australian Charities and Not-for-profits Commission Legislation Review, highlighting its support to reduce red tape and confirming that, in the view of the Government, the ACNC is an effective regulator.

Despite the ACNC review recommending that directors’ duties under the Corporations Act 2001 (Cth) be “turned on” for directors of charities, the Commonwealth is proposing to first consult on the merits and risks of doing this and intends to release a consultation paper. This means there will be a wait before there is clarity for directors on this issue.

In terms of reducing red tape, the Government supports:

• adjusting the reporting thresholds for registered charities and is consulting with states and territories on the appropriate level of revenue thresholds for minimum reporting requirements;
• streamlining and harmonising the regulatory requirements across all jurisdictions; and
• simplifying reporting requirements for small entities.

The Government supports a review of secrecy provisions to enable the ACNC to disclose greater information about its regulatory activity and investigations and is proposing to consult on the detail of the change, including the triggers for and bounds of the Commissioner’s discretion.

The Government also supports the ACNC Regulations being amended to disqualify a responsible person if they have certain criminal convictions.

The Government does not, however, support the recommendation that certain NFPs with annual revenue of $5 million or more must be registered with the ACNC to be exempt from income tax and access Commonwealth tax concessions. The Government considers this is best regulated by the Australian Tax Office.

The changes supported by the Government will not be immediate as some of the recommendations require legislative amendments, or significant changes to ACNC processes and, of course, COVID-19 has put a brake on many orders of business.

A final note on regulation. The previously announced reforms to the Deductible Gift Recipient (DGR) system, to streamline the administration and oversight of DGR organisations, which were due to begin on 1 July 2020, have been delayed due to COVID-19. In closing, a couple of final remarks:

Re-set

It’s been a momentous year by any measure and the events we have witnessed are triggering the biggest re-set opportunity in a generation. How ready is your board for what’s next? Do you have the right skills on your board and executive to take advantage of the changed world? Are you a maker or a taker?

Legacy thinking

How we conduct ourselves as leaders of our organisations during, and in response to, these times of crisis will be remembered by our staff, customers and other stakeholders and will shape behaviours and culture in many ways into the future. What do we want our legacy to be?