Recommend: Empowering and educating non-profit board members for effective governance

It is critical that board members of non-profits be aware of compliance requirements and impactful changes in the law in order for them to exercise their fiduciary duties of obedience, loyalty and care.

DUTY OF OBEDIENCE

One such legal change, under the ‘duty of obedience’, has been the new requirements for section 18A of the Income Tax Act relating to the issue of donation certificates. For all new certificates issued from 1 March 2023, additional information must be collected and kept on file to promote transparency and prevent abuse. This new information includes:

• Donor nature of the person (natural person, company, trust, etc)
• Donor identification type and country of issue (in case of a natural person)
• Identification or registration number of the donor
• Income tax reference number of the donor (if available)
• Contact number of the donor
• Electronic mail address of the donor
• A unique receipt number, and
• Trading name of the donor (if different from the registered name)

New entities need to remember that the board must formally approve the annual organisational budget, both expected income and expenditure. While not responsible for day-to-day submissions, the board must be aware of legislation that impacts the non-profit’s financial reporting requirements to ensure compliance.

Extra layers of disclosure have been emphasised through the non-profit audit process, with required declarations. Board members should declare whether they have received any donations on behalf of the organisation they govern and whether they are aware of related party transactions or conflict of interest.

Rather than depend on an annual request for these declarations, it is useful to open governance meetings systematically with a request for any declarations. More important, however, is the need to educate board members, both in theory and with practical examples, of what a conflict means and how conflict of interest issues play out in the sector.

We need not look very far to find established non-profits with such issues, which have been suppressed for far too long. Unfortunately, these mis-governed entities end up tainting the sector as a whole. This is simply not fair as there are many non-profit entities which are governed properly and led effectively, resulting in resilient organisations undertaking impactful work.

DUTY OF LOYALTY

Many board members join the governing body of non-profits as they have an affiliation with the sector or see themselves as a stakeholder. We often remind board members to be fully aware of the various hats they wear at that board table and to ensure that their board hat takes precedence. This is what we mean by ‘duty of loyalty’.

Through our non-profit clinic advisory services, we notice that some boards are not exercising their duty of loyalty. Conflict of interest issues and traffic of influence are rife within the sector. As there is no non-profit sector ombudsman, these challenges remain within entities and can lead to serious mental health issues amongst both non-profit professionals and board members themselves. Some of these conflict-of-interest issues seem obscure, while others are blatant, and this is why board training and induction at the outset are so important.

The seeds of this disruption and dysfunctionality are often due to board values and personal agendas being misaligned with organisational values. A toxic culture on the board can trickle down to the organisation. We have witnessed the merit in boards carving out space to have a values discussion amongst themselves, which is equally as important (or sometimes more important) than financial discussions, which a values discussion drives.

DUTY OF CARE

Time is a precious commodity and competing priorities are real. We urge board members, when they initially contemplate joining a non-profit organisation, to think very carefully about their capacity to exercise true duty of care. If this isn’t possible, then the non-profit will be better served in the long run by the person declining the position.

Duty of care means ensuring that decisions are being made with adequate information and giving due time to important strategic decisions and processes. This also involves being available when needed for crisis situations, answering communication timeously, and providing informed guidance and approvals when requested.

Sometimes this needs to be provided yesterday! If board members are not able to serve their respective organisations fully, the future of these organisations will become compromised. Assessing the level of commitment required from board members is not only important when initially deciding to join a board, but equally important to assess on an ongoing basis throughout the term of a board member. Otherwise, we see organisations that become dependent on unavailable and despondent board members, which inevitably results in tragic circumstances for the organisation.

To alleviate this, we advise a refreshing of board members and defined board terms that are spaced to ensure the continuation of institutional knowledge. This should be embedded in the founding documents of non-profits. Periodic board evaluations also help to assess the ongoing effectiveness of boards and assist governing leaders to shed light on the need to prioritise the institutions they serve when required.

BOARD VS CEO

It is important to clearly define the strategic oversight role of the board vis-à-vis the role of the CEO. This may evolve over time depending on the life cycle of the organisation. In infancy, a board may find itself more hands-on, but as the organisation grows and matures, ideally the board can step into a larger, more strategic role, making it more effective in steering the direction of the organisation.

A mature board will be self-aware, diverse and high functioning in implementing its fiduciary duties.

The mandate of a non-profit board involves leading strategically, ensuring healthy governance, ensuring financial sustainability, supporting the CEO, and acting as an ambassador for the organisation.

BOARD SUB-COMMITTEES

We have found that there is a lack of awareness in South Africa about the importance of distinguishing between the roles and responsibilities of various members of non-profit boards, specifically their roles as chair, secretary and treasurer, and the support required by the organisations which they govern.

It is helpful to set up sub-committees − namely finance, resource mobilisation and human resources committees, amongst others − which can dedicate more focused time to key areas, acting as an extra layer of governance in making recommendations to the board. A key partnership is the relationship between the board chair and the CEO. If this partnership is strong and effective, it can make a huge difference to the work and sustainability of the non-profit entity.

BOARD INDUCTION

When new board members are appointed, it is critical that proper board induction be conducted, preferably supported by the presentation of a board manual and components of a finance manual. This should include references to key information about the organisation – both financial and non-financial – and provide institutional memory to those joining the board. The mission of the organisation should be embedded in the ethos of board members and influence governance dynamics when the board is exercising its fiduciary role.

It is surprising to see how many board members are not privy to, or versed in, the founding documents of the very organisation they are legally bound to govern. When these documents are shared, they are sometimes outdated, or certain sections are irrelevant as laws have been amended. It is vital for boards to revisit their founding documents and to be au fait with the contents, as well as the objective and purpose of the organisation’s existence, in order to provide strategic oversight of its future.

RISK MANAGEMENT

Another extremely important focus area is risk management. This involves not only financial risk (which is normally scrutinised during an annual external audit) but also operational, human capacity, technological, economic, political and reputational risk, which are all equally important to non-profits. A risk matrix is a useful tool for a board to use while assessing these issues of threats to sustainability. Post the pandemic, we find that boards are now increasingly setting up risk sub-committees to assist in mitigating these risks.

The dilemma in the non-profit sector is that board members are volunteers and not necessarily remunerated for their time. This can put organisations in a precarious position where they depend on the direction of their board but recognise that members serve in the capacity of volunteers and often run large entities of their own.

GOVERNANCE CODES

When King III was launched in 2009, there were concerns that the non-profit sector was not adequately consulted in terms of the altruistic mission of a non-profit as compared with a corporate entity, and how governance practices would be most applicable.

As a result, the non-profit sector mobilised to develop its own set of governance principles ‘for the sector by the sector’ which took a values-based approach. This is known as The Independent Code of Governance for Non-Profits. Many non-profit organisations have subscribed to these codes, which are freely available for download on www.governance.org.za.

With the introduction of King IV and supplement section 6.3 for non-profit organisations, these two codes – The Independent Code for Non-Profits and King IV Supplement 6.3 – were aligned in governing principles. Moreover, the King IV supplement addresses the governing of technology and information, something which is becoming increasingly important with rapid developments in technology and AI.

These governance codes are a good building block for adherence to good governance principles. We have seen the codes referred to time and again while non-profit organisations attempt to manoeuvre and hold to account good governance principles within their organisations and governing structures.

TO CONCLUDE

In conclusion, board members need to be up to date on legal, governance and financial management requirements, including governance codes, and to be aware of their fiduciary duties around obedience, loyalty and care, if they are to steer non-profit organisations towards a sustainable future.

Author
Soraya Joonas, Financial Director, Inyathelo