5 good governance essentials for not for profit organisations.
Governance is critical for community organisations, to focus on the activities that contribute most to their mission, use their resources effectively and ensure they are managed in the best interests of stakeholder groups.
Five governance essentials for not for profit organisations
- 1. Never forget your purpose.
- 2. Financial sustainability is inextricably linked to impact.
- 3. Role clarity.
- 4. Capacity building.
- 5. Defining and managing organisational culture.
Community organisations play an important role in our society providing a wide range of services including health care, disability services, religious services, amateur sports and help for vulnerable communities. Collectively they contribute significantly to Australia. According to the Australian Charities and Not-for-Profit Commission (ACNC) in their 2018/19 Annual Report (https://www.acnc.gov.au/tools/reports/australian-charities-report-2018) charities alone in Australia have combined revenue of $155.44 billion, 3.77 million volunteers, employ over 16% of Australia’s workforce (both directly and indirectly) and contribute over 8% to Australia’s Gross Domestic Product. Community organisations provide vital services. Well governed community organisations have proven to be more effective and more likely to succeed than poorly governed ones.
So, what should future and current leaders of community organisations understand about good governance?
1. Never forget your purpose.
Larry Fink, CEO of BlackRock Global Investment Management, stated in his 2019 annual letter to CEOs (https://corpgov.law.harvard.edu/2019/01/23/purpose-profit/) , “Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns”. Whilst Fink’s letter was directed at leaders of for-profit organisations, its message is very relevant for the management and boards of community organisations. Purpose is critical for community organisations to perform and exist. Clarity on your organisational purpose and what outcomes are sought to be generated through it are vital when dealing with your organisation’s stakeholders. Boards must ensure that purpose is clearly communicated and translates into the strategic goals of the organisation and helps drive the organisation to achieve these goals.
2. Financial sustainability is inextricably linked to impact.
For community organisations, financial sustainability is all about their ability to mobilise, manage and efficiently use its resources (financial, human and mission resources) on a reliable basis to achieve its core objectives. In the context of community organisations, financial sustainability cannot be separated from impacts and outcomes.
There are a number of features of financial sustainability in community organisations:
- Strong equity balances.
- Diversification of revenue sources.
- Growth of independent, unrestricted incomes.
- Alignment between the financial objectives and social objectives (for example, mission-based investment).
- Responsive use of financial information to strategic use of financial information in planning the organisations future.
3. Role clarity.
To ensure an organisation can perform well, everyone’s role should be clear. To understand the role of any community organisation’s board, it is important to distinguish between management and governance.
The board does not manage the operation of the organisation. That is the role of Chief Executive Officer. Instead, the board is responsible for governance. Essentially, modern governance means ensuring that all accountability safeguards are in place.
Board governance comprises planning, performance – including financial performance; strategy; talent; integrity and compliance. It is the board which is ultimately responsible for the organisation and its activities. These include employing and managing the performance of the CEO, adhering to relevant government legislation, overseeing the management and reporting of the organisation’s finances, and being accountable and reporting to its many stakeholders, including members and funders.
Board directors also provide the organisation with guidance and support and are the guardians of the community organisation’s vision and mission. Each board member is accountable to ensure the organisation acts according to its stated vision and mission and for the purpose for which it receives tax exemption.
Board directors could consider seeing their role as acting as guardians of the past and stewards of the future of the community organisation. Active and purposeful leadership is important, as true effectiveness occurs when everyone in the organisation is performing a well-defined role working towards achievement of a common goal. Role clarity requires good communication, regular engagement training and sound governance structures.
4. Capacity building.
An organisation’s success or otherwise is in no small part down to its people. So, community organisations should ask, ‘Do we have the right people on our board and in our organisation to enable us to achieve our goals?’
When the right people are identified for your organisation, it is then important to build their capacity to help get to the next level of operational, programmatic or financial maturity, so it may more effectively and efficiently advance its mission into the future. Capacity building involves the investment of effort over a sustained period to enable the creation of a sustainable and effective organisation.
There are a number of tools to assist with building capacity, including skills matrixes, board reviews, diversification, training, building each individual’s skills in independent thought and constructive challenge, as well as succession planning. Your community organisation’s board members should consider actively planning their own development, as well as that of their organisation. This is truly leading from the top.
5. Defining and managing organisational culture.
Culture is essential to ensure community organisations thrive. A healthy culture strongly supports the work of any community organisation. Conversely, an unhealthy board culture can undermine the most well-intentioned efforts.
The hallmarks of a healthy culture in a community organisation are ones that foster trust, transparency and accountability at all levels. Healthy community organisations encourage open, and honest discussions inside and outside the boardroom.
The Chairperson plays an important role in board culture when conducting board meetings. The Chairperson should invite all opinions and perspectives, drawing out opinions from the quieter members. An effective Chairperson should ensure that board directors do not practice group think.
A healthy culture takes time to cultivate. Even boards with high performing individuals are at risk of not functioning properly if they neglect to cultivate a healthy organisational culture.
The demand for the services provided by community organisations continues to grow. A clear governance framework and an effective board of directors have a greater likelihood of success in helping to serve our communities.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice. ©Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.