Newsletter

Tell Me Now Review, Issue 7, March 2004

Welcome to the seventh issue of the Tell Me Now Review. In this review, we examine the roles of the Board and its Directors in the Not-for-profit Sector.

• Our research into this area covers the following:
• Definition of a Not for Profit Organisation
• What constitutes the Not-for-profit Sector in Australia?
• How do NFP Boards differ from listed company Boards?
• What are the Challenges for Nonprofit Boards

We have undertaken both primary and secondary research to provide a detailed analysis of the issue and hope that our findings will be of interest and value to your and your organisation. At the end of the Tell Me Now Review you will find a rich digest of links to recent articles and other resources.

Directors' roles in Non-for-profit organisations

Contents

1. What is a Not-for-profit Organisation
2. What constitutes the Not-for-profit Sector in Australia?
3. How do NFP Boards differ from listed company Boards?
4. What are the Challenges for Nonprofit Boards?
5. Key Publications
6. Journal & Newspaper Articles
7. Useful Web Sites
8. Courses & Events

What is a Not-for-profit Organisation

An independently constituted organisation that does not distribute profits to shareholders. The so called third sector, it can comprise of Non-Government Organisations (NGOs), Not for Dividend organizations and incorporated and unincorporated associations.

What constitutes the Not-for-profit Sector in Australia?

Australia's not-for-profit sector is unexpectedly large. It embraces hundreds of thousands of organisations, ranging from those with no paid staff to those with thousands, across a number of industry sectors, including health, welfare, medical research, education, sports, culture and religion. High profile organisations such as the RACV, the AFL the Australian Rugby Union and the Red Cross are part of this sector. In 1999-2000, some 604,000 people or 6.8% of Australians in employment worked in the sector and contributed $21 billion or 3.3 per cent of GDP to the Australian economy. When the services provided to not-for-profit institutions by volunteers were valued and included, the contribution rose to $30 billion or 4.7% of GDP. The economic value of volunteer services was estimated to be $8.9 billion.

The types of not-for-profit institution activities that contributed to total gross value added were education and research (32%), culture and recreation (22%), social services (17%), health (15%), business and professional associations and unions (3%) and all other not-for-profit institutions (11%). Annual income was $33.5 billion which came from sales of goods and services (58%), government grants and contracts (30%) and individual donations (nine per cent).

According to Philanthropy Australia there are some 700,000 not-for-profit groups in Australia, most of which are small and dependent on volunteers. Thirty-five thousand of them employ staff.

Although Not for Profit Institutions or NPIs as the Australian Bureau of Statistics calls them, are not an industry (they are institutional units) the contribution of NPIs to the economy can be compared against traditional industries as a point of reference. The NPI contribution of 3.4% to gross value added in 1999-2000 is greater than the contribution made by the communications; electricity, gas and water; accommodation, cafes and restaurants; personal and other services; and cultural and recreational services industries. If an imputation is also made for the value of services provided by volunteers, the adjusted gross value added of NPIs (4.9%) is greater than that for smining (4.6%).

How do NFP Boards differ from listed company Boards?

Apart from not distributing profits there are some differences worth noting between for profit and not-for-profit organisations:

• Almost universally, the directors of not-for-profit organisations are unpaid.
• The organisations have to report to a number of key stakeholders - government departments, major donors, service users (beneficiaries), volunteers and others, creating a complex range of accountabilities.
• The organisation's purpose is paramount: to deliver the benefits stated in their constitution.
• In many cases, the board members are not specialists in the industry sector concerned (and they are all 'non-executive' directors).

Most importantly, decisions in non-profits are often taken not on the basis of the impact on the financial bottom line, but for other reasons. Non-profits do not exist only to make money and stay in business - they exist to achieve specific social, cultural, educational or other objectives.

The boards and executive staff of a not-for-profit organisation have to tread a fine and difficult line between spending to meet today's urgent needs and saving to build tomorrow's reserves.

John Carver is an American governance specialist who focuses on public and not-for-profit organisations. He advocates a new conceptual framework and lists his ingredients for what a good model of governance should do. Policy-focused leadership is a hallmark of good governance. Carver stresses that the board's policy-making process should be firmly established so it is not driven by staff agendas into dealing with issues in an ad-hoc piecemeal or incoherent manner. The problem with most boards is that people join them with good intention, strong purpose and dreams of making a difference, but find themselves trapped in trivia and day-by-day detail. He believes boards suffer from inadequate job design which makes them reactive rather than proactive. His cure: get explicit about the big picture policy issues. What is the board's purpose in this world? Who is it there to serve? How can it best do that? What are the values and perspectives (the policies) that drive its activity?

It's the same recipe that values-led companies follow and is designed to state an organisation's essential raison d'etre and therefore provide a sound base for leadership that is strategic, decision-making that is coherent, and behaviour that is both consistent and purposeful.

David Fishel has written a handbook for those involved in the governance of not-for-profit organisations in Australia in which he puts forward 3 models –

• agency or stewardship,
• political
• managerial.

Stewardship might be the ideal, but in many cases lack of resources means that not-for-profit board members must "roll up their sleeves" and get involved in the management of organisations. The political/ representational model is required by legislation for some non-profits. While that does not prevent a board from acting as a holistic team, it can mean good governance is difficult to achieve when individual board members remain more tied to the organisations they "represent" than to the board itself.

Another commentator on boards wants to see the dynamics of business practices operating in non-profits. They could develop, for example, a market in comparative information so that outsiders have a better idea of what is happening internally. This should not mean more regulation, but more self-regulation. One of the worst ways to try forcing accountability is to pressure non-profits to spend very little on operational costs and everything on programs. That is a system that has led to what Christine Letts calls "the anorexic non-profit".

Professor Bob Garratt sets out a model called the ‘Learning Board' in his book The Fish Rots From the Head.

It takes the four board tasks -- policy formulation, strategic thinking, supervision of management, and accountability -- and organises them as interactive elements of an annual cycle of the board's learning. The aim is to establish a rhythm for the work of the board, allowing it to take a broad view rather than try to micro-manage the company. The model ties into a system for the appraisal and accreditation of directors in the UK, administered through the Institute of Directors in London.

Accreditation is becoming a best-practice issue and a key trend in company boards. Shareholders, regulators and other stakeholders are now demanding that boards do their job properly. Garratt also makes the point that most company board s in Australia are overly homogeneous, dominated by former executives in the latter part of their business careers.

What are the Challenges for Nonprofit Boards?

Not-for-profit organisations often approach businesspeople to join their board. This may be to strengthen the organisation's financial or planning skills base, to bring some entrepreneurial flair to the boardroom, or simply to generate access to networks that may result in sponsorship or other kinds of business partnership. Successful integration into the not-for-profit board can present a challenge. One of the growing challenges for not-for-profits is the increased professionalism now required.

Measuring performance is always a challenge. Robert Kaplan's Balanced Scorecard has played an important role in the not-for-profit world. Adapting and applying these concepts to nonprofit organisations can lead to confusions, as discussed in Mark Moore's working paper. The best way to measure the value created by nonprofit organisations is by developing measures of their success in achieving their mission. That usually requires non-financial rather than financial measures. Not-for-profit organisations have to be as concerned about their financial viability as their private sector peers. They also have the same kind of obligation to examine the costs of their operation, and to figure out how to reduce the costs without sacrificing quality in what they do. What the financial measures do not tell them, however, is how much public value they have produced. Their goals are social goals, not financial ones. Their value is measured by non-financial measures consistent with their social mission. Moore advocates the “Public Value Strategy”, a strategic concept that seems more appropriate to nonprofits than the competitive strategy model that drives so much of Kaplan and Norton's thought.

The basic idea behind the public value strategy can be captured in a simple mnemonic device: the “strategic triangle” This triangle directs the attention of nonprofit boards and managers to three calculations that they should make in advance of committing their organisation to any overall strategy.

• The first point of the triangle – the value circle – focuses attention on the key question of what constitutes the ultimate value that the organisation seeks to produce.
• The second point of the triangle – the legitimacy and support circle – focuses attention on those “customers” described as “upstream customers” or “third party payers.” These may be donors or governments. The nonprofits earn revenues by promising the donors and government something that they want – some kind of public value rather than financial returns.
• The third point of the triangle focuses attention on “operational capacity” – the question of whether the enterprise has the ability to achieve the desired goals.

Some of the pressing challenges faced by the nonprofit sector were highlighted at the Summit for Not-for-profit Leadership and the Building Better Boards Conference, such as how can not-for-profit organisations develop their own leadership and managerial capacity to enable them to develop strategic focus and make the most of their resources. The competitive pressures have never been greater - and not just from other non-profits - for the time, talent and dollars of supporters. For third sector organisations, finding the money and competent people to deliver on their mission and values is a continuing challenge. As government abandons its traditional approach to service provision, non-profits in fields like healthcare find themselves competing head-on with private enterprise for market share or public funding. There is now a much stronger emphasis on being more business-like, demonstrating financial accountability and being better at resource management.

Key Publications

Australian Bureau of Statistics, Non-profit Institutions Satellite Account, Australian National Accounts 1999/2000 . Cat.No. 5256.0 ABS Canberra 2002

Back to the drawing board - designing Corporate Boards for a complex world Colin Carter and Professor Jay Lorsch Harvard Business School, 2003

Argues that boards are being pressed to perform unrealistic duties given their traditional structure, processes, and membership.

Dimensions of Australia's Third Sector , Mark Lyons and Susan Hocking Centre for Australian Community Organisations and Management (CACOM). 2000

A report from the Australian Nonprofit Data Project which attempts to map and estimate the dimensions of Australia's third sector.

The Book of the Board: Effective governance for non-profit organizations, David Fishel, The Federation Press, 2003

A handbook for non-profit organisations in Australia. It includes interviews and case studies - most with identified and experienced non-profit board members and chairs and provides advice on topics that include the selection and induction of new board members. Highlights the complexities and uncertainties of non-profit governance.

Boardrooms that work: a guide to board dynamics , Margot Cairnes AICD 2003

Explores the effect that behavioural dynamics have upon effective decision-making in the boardroom, in board committees and by senior executives.

Boards that make a difference: a new design for leadership in nonprofit and public organizations, 2nd ed John Carver Jossey-Bass 1997

One of the most prolific authors on the subject, Carver focuses on non-profit organisations, though his ideas can apply to board governance in general.

The fish rots from the head: the crisis in our boardrooms , Bob Garratt, Profile, 1997

Sets out a model called the Learning Board

The Public Value Scorecard: A rejoinder and an alternative to "Strategic Performance Measurement

and Management in Nonprofit Organizations" by Robert Kaplan, by Mark H. Moore Hauser Center Working Paper No. 18 May 2003, 24p

The author provides a different way of thinking about nonprofit strategy and linking that to performance measurement which is simpler and more reliable for nonprofit organisations to rely upon than the Kaplan balanced scorecard performance measures adapted by for profit organisations.

Third Sector: The contribution of non-profit and co-operative enterprise in Australia, Mark Lyons Allen & Unwin, 2001

Provides an overview of Australia's nonprofit and cooperative enterprises.

Transformational Boards , Byron L. Tweeten Jossey-Bass 2002

This book is specifically designed to help nonprofit boards lead their organisations in the midst of change and transformation, providing practical, easy-to-follow strategies for making boards change-ready.

Working on governance and accountability: a manual for Philanthropic Foundations, DIana Leat, Philanthropy Australia in association with Deakin University 2002

Based on a comprehensive study of governance and accountability of philanthropic foundations in Australia, the manual encourages foundations to re-examine their approaches to governance, and address the field of accountability.

Journal & Newspaper Articles

Bad business to ignore non-profit groups Geoff Elliott The Australian 23 October 2003

Financial journalists have ignored stories about the not-for-profit-sector of the economy

Businessman David Gonski said many Australians "invest" donations each year in non-profit organisations "and they are given little, if any, journalistic analysis to assist them in their decisions".

A bit of give and take Australian , Ed Charles CPA December 2003

Looks at the question of ethics versus practicalities facing not-for-profit organisations.

Companies Slow To Shape Up, Gabrielle Costa The Sydney Morning Herald 25 September 2003

Fewer than half of Australia's publicly listed companies will immediately adopt corporate governance guidelines designed to improve the amount and type of information given to investors.

Compliance Rules, OK? Business Review Weekly 23 October 2003

Entrepreneurs are changing their attitude to corporate governance, and annoyance is giving way to a recognition of the benefits. Entrepreneurs and corporate governance are not an obvious fit.

The corporate world needs to reform itself Gregory Hywood The Age 18 September 2003

Presents an alternative view - that shareholders' interests are best served by a board of directors with deep knowledge of the business and with specific talents, rather than the ASX view that the independence of directors is paramount.

Corporate Governance - To make a difference, boards need a boardroom revolution , Vicki Jayne

Management Magazine (NZ) 2 May 2003

Discussion on John Carver's publication Boards that make a difference. A revolution is needed to achieve all that would make boards as effective and proactive as they should be.

Directors slam new ASX rules , Fiona Buffini with Martin Pretty, Jane Boyle, Lisa Murray and Katrina Nicholas Australian Financial Review 7 April 2003

Some of Australia's most senior company directors claim the new corporate governance rules unfairly attack the integrity of executive directors and could create new tensions in the boardroom.

A different drummer , Helen Trinca AFR BOSS November 2002

Christine Letts, a leading researcher on philanthropy and the leadership of non-profits, says they need to be more transparent, but not turned into corporates.

For love not money, Ed Charles Australian CPA December 2003

With donor dollars drying up the business of being a not-for-profit organisation is tougher than ever. Financial accountability is increasingly demanded of the sector. The forthcoming Charities Bill would put the regulation of the not-for-profit sector under the auspices of the Australian Taxation Office (ATO).

Governance for all , Debora Campbell; Michael O'Keeffe; Derek Parker; Marg Lennon; John Arbouw; Australian Financial Review AFR BOSS July 2003

Comments on David Fishel's book The Book of the Board which concentrates on non-profit and public organisation boards.

A Gateway to 21st Century Governance: are we ready? Ruth McCambridge The Nonprofit Quarterly vol 10, issue 3 Fall 2003

Poses questions such as should nonprofit governance be about the best interests of the community or the institutional interests of the organisation?

Mixed Business Tim Wallace Australian Financial Review AFR BOSS 9 November 2001

Describes some of the challenges facing nonprofits, which were highlighted during the first Summit on Non-Profit Leadership.

The non-profit boardroom: not as easy as it looks Australian Business Report August - September 2003 http://www.fleishman.com.au/abr/aug03/nonprof_gov.html

Success in a for-profit environment can lead to an invitation to join the board of a non-profit organisation. David Fishel explains how to ensure a successful transition to the very different world of the non-profit boardroom.

Not- for-profits have boards too Ethical Investor 5 November 2003

The issue of corporate governance has hit centre stage in Australia.

Not-for-profits must take heed of IFRS, Colin Parker Australian CPA December 2003

Changes to the not-for-profit category will allow more entities to slip into its special confines. Looks at the impact of IFRS on our more holistic organisations

Small fry charities beg to be known , Adam Carswell Australian CPA December 2003

With blanket coverage being given to a select group of popular causes on in the media these days, its easy to gloss over the fact that most charities and charitable foundations are small, cash-strapped and struggling for survival.

When a Business Leader Joins a Nonprofit Board , William G. Bowen, Harvard Business Review on Nonprofits, Boston 1999

Why boards need a change in direction , Derek Parker The Australian 3 January 2004

Professor Bob Garratt, Chairman of Board Performance in the UK says corporate governance is crying out for a shake-up.

Useful Web Sites

Alliance for Nonprofit Management http://www.allianceonline.org/

A professional association devoted to improving the management and governance capacity of nonprofits

Australian Institute of Company Directors (AICD) ww.companydirectors.com.au/

The peak professional body for company directors. Services include professional development programs, a monthly journal the Company Director and a bookshop.

Australian Institute of Management www.aim.com.au/

>Professional body for managers which publishes a monthly journal Management Today

BoardSource www.ncnb.org/

Formerly the National Center for Nonprofit Boards, BoardSource is a leading resource for practical information, tools and best practices, training, and leadership development for board members of nonprofit organisations worldwide.

Boundary Management www.BoundaryManagement.com/

Policy Governance Resource for Boards of Directors

CPA Online http://www.cpaaustralia.com.au/

Organisation for finance, accounting and business professionals which publishes a monthly journal Australian CPA.

The Hauser Center for Nonprofit Organizations . http://www.ksg.harvard.edu/hauser/

An interdisciplinary research center at the John F. Kennedy School of Government at Harvard University. A series of Working Papers can be downloaded eg The price of doing good: Executive compensation in Nonprofit Organizations

National Institute for Governance http://governance.canberra.edu.au/

The Institute provides a major point of contact for governments, business, policy makers, scholars and practitioners with an interest in Australia's expertise on governance issues.

Nonprofit Governance & Management Centre http://www.governance.com.au/

Provides governance and management expertise to charity and nonprofit organisations in Australia.

Publishes a newsletter, Board Matters and includes a Book Store with publications on governance and board accountability.

The Nonprofit Quarterly http://www.nonprofitquarterly.org/

Features innovative thinking and management practices in the nonprofit sector.

The Nonprofit Resource Center http://www.not-for-profit.org/

Provides a comprehensive list of links to websites of interest to nonprofits

The NonProfit Times http://www.nptimes.com/

A business publication for nonprofit management

Philanthropy Australia http://www.philanthropy.org.au/

Promotes and protects the interests of family, private, corporate and community giving in Australia. Publishes the Australian Directory of Philanthropy

Courses & Events

Australian Institute of Company Directors www.companydirectors.com.au/

AICD offers a range of courses, events, functions and briefings to support company directors in their professional development.

The Company Directors Course is designed to develop practice skills and knowledge as a director or officer. This program can be taken in one of three flexible modes of study and is accredited by many Australian universities.

Building Better Boards National Conference 31 July to 1st August 2004

Novotel Hotel, Brighton Beach, Sydney. The Management Centre

Of Nonprofit Organisations in association with the Nonprofit Governance National Roundtable see the website for details - www.governance.com.au/