Grab a copy! Australian Institute of Company Directors publishes its 10th report into governance and performance in the not-for-profit sector

Key Points

• On 31 July 2019 the Australian Institute of Company Directors published its 10^th not-for-profit governance and performance study.

• The study explores key trends and challenges facing the not-for-profit sector, including directors’ time commitment, remuneration, entity and board performance, the rollback of mergers within the not-for-profit sector and financial performance.

Background
 
In 2010, the Australian Institute of Company Directors (AICD) launched the “not-for-profit governance and performance study” (originally called the “directors social impact study”). The study focused on key trends in the not for profit (NFP) sector and issues affecting NFP directors at that time. Ten years on, the AICD published its most recent findings in the latest edition of the study titled “the 2019 not-for-profit governance and performance study: 10 years on”. The report provides valuable insight into current challenges faced by the sector and its director counterparts.
 
The 2019 report produced seven key findings in the following areas:
 

1. directors’ time commitments
2. board composition and recruitment
3. remuneration
4. effectiveness of NFPs
5. the decline of mergers within the sector
6. board performance, and
7. challenges faced by directors of sporting entities.

 
Time commitment
 
Over the past five years, surveyed directors have reported devoting more time to their NFP roles. More than 50% of participants reported spending in excess of two days per month on a single NFP role. When asked to comment on workload commitments participating directors said, “the responsibilities of NFP directors are increasing and we need more…time, which may be beyond reasonable volunteer expectations”. Factors contributing to greater workloads include increasing governance expectations and regulations as well as growing financial pressures faced by the sector.
 
Composition and recruitment
 
The report notes that many NFPs continue to benefit from mature boards with the study reporting the average age of directors to be 54. While such directors bring considerable governance skills and experience to the table, the study also pointed to the need for NFP boards to strive for a more balanced composition to assist in succession planning. It is unclear why NFPs are struggling to attract younger directors.  
 
Remuneration
 
As to the issue of remuneration, rising time commitments have not been matched with increases in directors’ remuneration. The 2019 study found no significant change in the proportion of NFPs that pay director fees. The question of remuneration itself attracted debate with some directors supporting the payment of director fees and/or increases in those fees while others contended that the payment of director fees is not realistic due to resource constraints and mission/value perceptions.
 
Effectiveness of NFPs
 
The majority of directors surveyed during the study said that they considered their NFPs to be operating effectively and expressed positive outlooks regarding future profitability. Despite the optimism portrayed by directors, performance expectations appear to be at odds with reported profits. The study found that profitability is at a four-year low at 54% (compared to 61% in 2017), and that the percentages illustrate the need for some NFPs to reassess their financial performance if they wish to sustain future longevity.
 
The decline of mergers
 
Mergers between NFPs appear to be slowing. Only 5% of surveyed directors reported an intention to merge and most directors assigned a low probability rating to the possibility of merging over the next two years. The ability to better meet existing mission statements, expand market share and increase service delivery continue to be the driving forces behind mergers plans. Interestingly, financial sustainability does not appear to be a main driver. In 2019 directors reported an increased focus on collaboration between NFPs.
 
Board performance
 
Overall, surveyed directors considered board performance to be high, however, they note strategic planning and implementation as key areas of improvement. In particular, oversight of strategic planning, a better understanding of digital technology (including cybersecurity) and the appointment of talented directors were suggested as key action items that would improve board performance.
 
Sporting entities
 
Each year, the report focuses on a particular industry. In 2019, the report focused on sporting entities. Traditionally, sporting clubs and organisations have operated on an NFP basis with many directors volunteering their time to serve on the boards of such entities. Key issues for sporting clubs include:

1. facilitating growth in membership/audiences
2. improvement of existing assets
3. income uncertainty
4. ethical issues associated with sports betting, which is often used as a cross-promotional tool
5. the impact of digital technologies and in particular social media.

 
Key takeaways:
 
While NFP governance in general has been trending positively over the past decade, the current study serves as a timely reminder for the NFP sector to address the increasing demands of NFP board roles and to improve the standards of NFP governance and performance.
 
NFP organisations are encouraged to review current practices and to adopt innovative or flexible solutions in order to counter some of the key challenges identified in the study.

The 2019 “not-for-profit governance and performance study” by the AICD is available here.

Post by John Kell and Michael Fong