Governance standards of charities in Australia, the United Kingdom

Dr Michael Gousmett, Adjunct Fellow in the School of Humanities & Creative Arts (History) at The University of Canterbury and Independent Researcher and Public Historian at New Zealand Third Sector Enterprises Limited, provides an overview of governance standards of charities in Australia and the United Kingdom, in the conclusion to his two-part series for Legalwise News.

Find Part 1 of the series, on New Zealand, here. This article series recaps the key points from Dr Gousmett’s recent presentation for Legalwise at the Not-For-Profits, Trusts and Charities Law Symposium.

In 2012 Australia passed into law the Act to create their Commission, through the Australian Charities and Not-for-profits Commission Act 2012 (ACNC).[1] The following year “[a]n Act to define charity and charitable purpose, and for related purposes,” was passed.[2] As with its counterpart in the UK, but not the New Zealand regulator, the ACNC has set “standards … [which are] a minimum standard of governance, to help promote public trust and confidence in charities.”[3]  However (emphasis added):[4]

[b]efore a charity can be registered with the [ACNC] it must meet a set of governance standards (unless it is a basic religious charity). The charity must continue to meet these standards to stay registered.

As well as charities and not-for-profits being required to have set minimum standards before applying for registration, the ACNC also applies “principles-based standards” while at the same time taking a flexible approach to enforcement. The minimum standards are:[5]

Governance Standard 1:        Purposes and NFP character of a charity

Governance Standard 2:        Accountability to members

Governance Standard 3:        Compliance with Australian laws

Governance Standard 4:        Suitability of responsible persons

Governance Standard 5:        Duties of responsible persons

With regard to managing a charity’s financial affairs, an Australian case from 2011, “Centro,” “highlighted the problems that can arise where directors lack the ability, time and motivation to comprehend and apply financial information to fundamental board decisions.”[6] The implications for directors of “portfolio bodies operating under the Commonwealth Authorities and Companies Act 1997” have been described as including:[7]

1. Duty to exercise care and diligence;

2. Duties to act in good faith;

3. Duty to disclose conflicts of interest;

4. Duty not to misuse position;

5. Duty not to misuse information;

6. Duty not to trade whilst insolvent;

7. Duty to act in accordance with other provisions of the Act or enabling legislation of a Commonwealth authority.

Australian Centre for Philanthropy and Nonprofit Studies (ACPNS), Queensland University of Technology (QUT)

Founded by Emeritus Professor Myles McGregor-Lowndes OAM, following the introduction of The Program on Nonprofit Corporations at QUT in 1991, the ACPNS is an internationally-recognized body for its contribution to the non-profit sector.[8] One of the Centre’s current projects is the ongoing development of a Board Assessment Tool, which followed a pilot study in 2012 on non-profit boards as a team.[9] The study used a team focus for the creation of a diagnostic tool, and concluded that “conceptualizing boards as a team appears to hold a great deal of promise.”[10] ACPNS have now developed a tool for board evaluation, which is freely available:[11]

A reflexive board has to give high priority to its own development and maintenance.  Boards that reflect on their practices and processes in a meaningful way are in a better position to aid overall organisational performance – they can learn from experience and look to their future development.  Importantly for the life of the organisation, they are then able to pass these skills on to incoming board members, achieving long-term sustainability.

ENGLAND, WALES, SCOTLAND, NORTHERN IRELAND AND THE REPUBLIC OF IRELAND

The Charities Act 2011 applies specifically to England and Wales and in limited respects to Scotland and Northern Ireland.[12] In Scotland the Charities and Trustee Investment (Scotland) Act 2005,[13] which also created the Office of the Scottish Charity Regulator (OSCR), is the legislation under which charities operate[14]. In Ireland, the Charities Act 2009[15] established the Charities Regulatory Authority (CRA)[16].

The Charities Commission for England and Wales (CCEW) “describes itself as existing to ‘promote sound governance and accountability’ and has been at the forefront in producing recommendations with regard to the proper governance of charitable organizations.”[17] One of those recommendations was “The Hallmarks of an Effective Charity,” which was withdrawn on 13 July 2017 and replaced with four documents as part of a Charity Governance Code (the Code).[18] The four parts to the Code are:[19]

• Charity Governance Code for larger charities;
• Charity Governance Code template for larger charities;
• Charity Governance Code for smaller charities;
• Charity Governance Code template for smaller charities.

The CCEW has an extensive list of other publications that have been produced as part of the Commissions Publication Scheme consisting of 50 detailed guidance documents, “CC publications” and a series of “How to” guides:[20]

• Managing your charity (54 guides);
• Charity money, tax and accounts (35 guides);
• Fundraising (9 guides);
• Setting up a charity (27 guides);
• Staff and volunteers (7 guides);
• Trustee role and board (18 guides);
• Your charity’s work (17 guides).

Charity Governance Code for larger charities

The 24-page Code for larger charities is recommended for those charities “with a typical income of over £1m a year, and whose accounts are externally audited.”[21] The Code “is designed as a tool of continuous improvement” which Boards will “regularly revisit and reflect [upon].”[22] The Code is based on seven principles:[23]

1. Organisational purpose

The board is clear about the charity’s aims and ensures that these are being delivered effectively and sustainably.

2. Leadership

Every charity is headed by an effective board that provides strategic leadership in line with the charity’s aims and values.

3. Integrity

The board acts with integrity, adopting values and creating a culture, which helps to achieve the organisation’s charitable purposes.  The board is aware of the importance of the public’s confidence and trust in charities, and trustee undertake their duties accordingly.

4. Decision-making, risk and control

The board makes sure that its decision-making processes are informed, rigorous and timely, and that effective delegation, control and risk-assessment, and management systems are set up and monitored.

5. Board effectiveness

The board works as an effective team, using the appropriate balance of skills, experience, backgrounds and knowledge to make informed decisions.

6. Diversity

The board’s approach to diversity supports its effectiveness, leadership and decision-making.

7. Openness and accountability

The board leads the organisation in being transparent and accountable.

The basis of the Code is that all trustees:

• Are committed to their charity’s cause and have joined its board because they want to help the charity deliver its purposes most effectively for public benefit;
• Recognise that meeting their charity’s stated public benefit is an ongoing requirement;
• Understand their roles and legal responsibilities, and, in particular, have read and understand:
  • • The Charity Commission’s Guidance CC3 The Essential Trustee
    • Their charity’s governing document

• Are committed to good governance and want to contribute to their charity’s continued improvement.

Charity Governance Code: Diagnostic Tool – larger charities

The Diagnostic Tool (see Appendix) is designed to assist board members in their regular visits to the Code to ensure their continuing compliance. Each of the seven principles (see above) begins with a rationale for each principle, and an explanation of “key outcomes.” The evaluation section has a series of items described as the recommended practices that are to be evaluated, with each requiring a notation concerning “evidence of application/explanation” and “areas for improvement/implementation.”

CC3 The Essential Trustee

While this 40-page publication is written specifically for trustees of charities in England and Wales, it is also a useful guide to trustees in New Zealand, particularly those new to the position, as it covers topics such as complying with governing documents, acting in the charity’s best interests, accountability, and acting with reasonable care and skill.[24]

The CCEW regulates charities in England and Wales, and to a lesser degree in Scotland[25] and Northern Ireland[26], which also have their own charity regulators, all of which provide or will provide guidance for trustees. On 7 November 2018, the Irish regulator released its new Governance Code, having released the Report of the Consultative Panel on the Governance of Charitable Organisations (The Report) on 5 April 2018.[27] The Panel defines good governance as:[28]

the duties and responsibilities of the charity trustees to put in place systems and processes to ensure that the charity achieves and sustains its charitable objectives with integrity and is managed in an effective, efficient, accountable and transparent manner.

CONCLUDING COMMENTS

Hyndman and McDonnell raise a very pertinent issue in their 2009 paper on governance and charities: “Are ‘good’ governance guides useful in practice?”[29] In answering that question, Hyndman and McDonnell suggest:[30]

[a]s governance issues in charities assume greater prominence, best practice guides have been developed (apparently as an aid to increasing “good” governance). Prima facie, these may represent a useful tool for charities. However, it should be determined: whether the recommendations contained in such documents are appropriate for all charities; the extent of adherence to their recommendations; and whether this adherence by charities is contingent on factors such as size, type, extent of dependence on large donors and regulatory framework. In addition, what are the consequences of adherence?  Does it result in improved performance, or is it merely a legitimizing mechanism used in interactions with key external stakeholders?

It can be seen, from the contents of this paper, that there are indeed “a myriad of ideas … under the umbrella of ‘good governance’.”[31] One size does not fit all.

Appendix

With thirty years’ experience in the charity sector, a background in secondary and tertiary education, as well as experience as a Company Secretary in the retailing and manufacturing sector, Dr Michael Gousmett, FCIS PhD BCom(Hons) BBS Dip CM Dip Tchg, is also an author and presenter nationally and internationally on charity sector issues. His Doctoral thesis, a study of the history of the charitable purposes exemption from income tax, is available via this link. He is a contributor to the New Zealand Law Journal, and the New Zealand Journal of Taxation Law and Policy; a contributing author on charity taxation in NZ Taxation; and a co-author with Sue Barker, and Ken Lord of The Law and Practice of Charities in New Zealand. Contact Michael at michaelgousmettphd@gmail.com or connect via LinkedIn