RSM New Zealand

Charities Act 2005 Modernisation | Issues & Thoughts – Governance Standards

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We explore another key issue raised in the Charities Act 2005 Modernisation Discussion Document and provide some thoughts for your further consideration.

Governance Standards

In our experience, good governance is absolutely essential to the sustainable success of any organisation. 

To throw in a mental image there is that lovely saying that “A fish rots from the head down”.   This is rather graphically trying to illustrate that the overall leadership of an organisation is essential.  (Actually we’re not sure it is a scientifically accurate analogy as usually the guts are the first thing to rot in a dead fish…but who are we to quibble over such details on such a useful saying?).

Another saying which we have sadly seen borne out in too many instances in commercial, Government and Charity/NFP sectors is that “Failure of an organisation is generally a failure of governance”

What is Governance?

To preface this discussion we think it helpful to revisit the role of governance and what it includes.  Type in the words “governance definition” into Google and in less than half a second you will have something over 252m answers!   Entire University courses have been run on this topic and numerous organisations exist solely to foster good governance.

We like the following definition which comes from the excellent Sport NZ publication “9 Steps to Effective Governance” (freely available on the Sport NZ website). This says that:

Governance is the process by which the board:

  • Ensures the organisation complies with all legal & constitutional requirements
  • Sets strategic direction and priorities
  • Sets high-level policies & management performance expectations
  • Characterises & oversees the management of risk
  • Monitors and evaluates organisational performance

….in order to exercise its accountability to the organisation and its owners.

The buck stops with the governing body. Regardless if they are paid board members of a listed company or a voluntary board of a tiny charity. 

We have heard some small charities complain that they don’t have enough resources to be able to apply great governance.  Our view is that the particular logic being expressed there is the wrong way around.  Part of the governance role is to determine how the organisation can have enough resources to do what it needs/wants to do.  That’s a key function of clarity of purpose and strategy to deliver – both core to the governance role.

We also appreciate the governance vs management distinction and the challenges that this can cause.  In smaller charities this split of role and functions can be especially challenging when sometimes it may be the same people wearing different hats.  However, this is not optimal longer term and ideally a separation will result in much better governance that is more objective and focused on the appropriate issues

The discussion document poses the following two questions with regard to governance:

1. Do you think governance standards could help charities be more effective?  Why?

Our view:  Yes.  Based on what we have seen as the auditors of a wide variety of New Zealand entities over many years we are firm believers in the critical importance of good governance.

We also have seen that having explicit standards can help ensure that all involved are aware and are broadly on the same page as regards expectations of them.Without any standards in place we observe that the spectrum of what may be considered acceptable behaviour by different parties can be extremely broad. There is also the issue that; people don’t know what they don’t know.What we may take for granted as common sense and common place may be completely new to someone else with less, or different, experience than us.

For any standards to be effective there generally needs to be:

  • Initial awareness
  • A common level of understanding
  • An appreciation of the value in order to prompt action (or compliance threat)
  • Ideally some form of education – whether that be guidance and/or examples

They also need to be of a principles nature in order to be able to be contextual i.e. in order to be able to be applied in a range of situations in entities of different sizes and levels of complexity.

However, the devil is in the detail here.Critical to positively changing governance behaviour in charities would be important detail such as:

  • What standards?
  • Who sets them?
  • How many standards?   
  • What level of detail should the standards go into?
  • Should they be mandatory and how enforced?
  • How does an entity demonstrate appropriate compliance?

Also of key significance in this Charities legislation review (which is why we presume the question is being asked) is whether enshrining governance standards in legislation will result in a positive improvement in governance behaviour in New Zealand?Or, whether it will be seen as just another compliance impost on the sector?Or worse still; seen as a threatening stick that the regulator has to hit charities with.

The alternative to enshrining in legislation would be perhaps to instead just provide some examples of good practice governance and suggest that entities look to follow these. Albeit we note that there are already many governance resources available so one would have to ask why are these not already used as widely and as well as they could be?

2. Do you think the Australian governance standards could be adapted to work in New Zealand? 

Our view:  Maybe.  We appreciate that this may look like we are sitting on the fence, but we don’t think this is a simple binary decision.  It depends on some of the questions above such as how they would be applicable, how supported (eg with education?), how an organisation is required to demonstrate compliance, how enforced? etc

Also, in order to answer the question competently one has to understand what is in operation in Australia.And perhaps more importantly; what the experience has been in Australia from this.The discussion document lists the 5 governance standards in force in Australia which, with respect, read like very high level “motherhood and apple pie” type statements.That is; they appear very broad, reasonably simple and extremely common sense in nature.They appear to be the sort of statements that any reasonable person would have a great deal of difficulty disagreeing with.

In addition, the discussion document does not assist greatly in providing any context of how effective these actually are in Australia and how they impact in practice. Accordingly we have attempted to make our own informal enquiries from Australian contacts.We stress that these enquiries were unscientific and anecdotal, however we were able to speak to a number of specialists in the charity sector in Australia ranging from external professionals, to board members & management employees, to standard setters.

The consensus view we received was that the governance standards in Australia had on balance been useful.There was general agreement that they are somewhat motherhood and apple pie in nature and should be common sense.However, for some poorly resourced charities the standards were not common sense or common practice and hence helpful in clearly outlining basic expectations.i.e. if the charity was not already all over these then they provided a useful guide as to expectations. We also heard that they provided a useful prompt for well resourced charities to also consider their governance against.

Apparently there had been instances when the governance standards had been a useful tool for the Australian regulator with which to investigate and take action with some problematic charities.However this was in a small number of cases.

Accordingly if we in New Zealand could introduce governance standards that helped clarify good quality governance behaviour and support these with positive education and resources, then we think the idea should be supported.We are also not averse to the standards being in legislation to provide an available tool for the regulator to use, as long as this was done in an educative way and that the compliance aspect was only used in extreme cases of need, rather than adding a compliance burden across all charities that outweighed the usefulness.

Having said all of the above, we want to offer that there is another emerging perspective on governance that is uniquely kiwi. Specifically the values that underpin decision-making in Te Ao Maori Organisations may be better served by some different governance principles and standards based around long-term, sustainability and guardianship of natural and human resources. It may be that the future of governance will open up different models from what we have traditionally followed.

As we have said previously; our thoughts above only cover a small sample of issues in the discussion document that are very worthwhile of debate. We have views on many other aspects and that’s the point – a robust democracy needs to allow a range of views to be expressed and considered hence we urge you to engage in the debate.

For more information about the review, discussion document and the public consultation process see the following link:   https://www.dia.govt.nz/charitiesact or click here to read the rest of the Charities Act Modernisation series. 

Would you like to discuss this topic further?

Please email us to submit a question or click on the author below to directly discuss this article

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Authors

Craig Fisher
Consultant
Wayne Tukiri
Associate Director - Audit & People - Auckland Central