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AICD’s NFP Governance and Performance Study

AICD’s NFP Governance and Performance Study

The tenth annual AICD Not-for-Profit (NFP) Governance and Performance Study report was published at the end of July.

It highlights many of the challenges NFP directors face and discusses specific topics relating to NFP boards.

AFG has reviewed the report and condensed the information to help give you an overview of the findings.

If you would prefer to read the full report you can access it online via the AICD website here.

NFP directors' time commitment

Key finding 1 – NFP directors’ time commitment – is it sustainable?

The study results indicate that NFP directors are spending more time involved in their role on the board.

Over the past five years this upward trend has remained steady. It is believed that NFP boards are facing increased regulatory obligations and higher community expectations, which impacts the complexity of the director’s position.

The data shows that over 50% of the responding directors are occupied with their role on the board for more than two days a month. And within that figure, 10% are spending more than eight days per month focused on their board obligations.

Contributing factors to this greater workload include increased expectations of governance and ongoing financial pressures within the sector. In the disability sector for example, the increased demand on organisations as more people access the National Disability Insurance Scheme (NDIS)may stretch an organisation’s resources and require extra attention to the finances from the Board month-to-month as well as prompting a Board-level discussion on financial risk and strategy.

The report quotes the following comment from one of the directors:

“The responsibilities of NFP directors are increasing and we need more of their time, which may be beyond reasonable volunteer expectations. As the complexity of our NFP work increases, we have more risks and more complex business decisions. For example, investing in digital and clinical governance and compliance.”

Board composition and director recruitment

Key finding 2 – Board composition and director recruitment are ongoing challenges

This year’s study shows an increase in the number of women sitting on NFP boards. In 2010 this figure was only 27% but this year 40% of the responding directors were female. This is certainly a positive result in board representation.

The vast majority of directors on NFP boards are over 50 years old – this makes sense as later-career people may have reduced their working hours or stopped work altogether and they have a wealth of experience to share. It is important that organisations maintain a good diversity of skills on their boards as well as diversity in age to guard against the risk of your whole Board being ready to retire at the same time.

Without the addition of younger board members, it will be challenging to introduce new skills and maintain the board renewal cycle.

There is also a significant lack of cultural diversity on NFP boards. There are many large NFP organisations servicing a wide range of communities and the study suggests that while this may be reflected in the staffing and client profiles, this is not reflected in the board composition.

NFP director remuneration

Key finding 3 – NFP director remuneration – where is it heading?

The topic of remuneration for directors continues to be discussed but there has been minimal change in the number of NFPs paying board fees.

Typically, it is larger NFP organisations that pay directors for their board involvement.

And while supporters argue that payment would potentially attract younger directors to the sector, there is also the view that financial motive could detract from an organisation’s mission or value.

AFG has had very few clients over the years that remunerate directors – interestingly the couple that did were what used to be called QUANGOs – they are quite closely supported by government and a large proportion of their Boards is from the public service.

It is a dialogue that will no doubt continue.

NFPs are effective

Key finding 4 – NFPs are effective, but remain financially challenged

It is interesting that more than 90% of the responding directors believe that their organisation is achieving its mission and 82% believe it will be stronger in the next three years. These viewpoints are based achievement of strategic goals, key performance indicators and industry specific measures.

Unfortunately, when NFP organisation profitability is reviewed, there is a discord between expectations and reality. Over 80% of directors expect their organisation to make a profit this financial year, however the actual profitability is at the lowest it’s been in four years, at just 54%.

NFP mergers appear to be slowing

Key finding 5 – NFP mergers appear to be slowing – will this continue?

There has been a downturn in NFP merger activity. The report indicates that in 2019 only 30% of directors had discussed the option of organisational merger, compared to 38% in 2017.

Current views reflect that a merger can be an incredibly complex undertaking. It can heavily impact finances and be very time consuming.

The reports also notes concern from directors that mergers will dilute the mission and values of the NFP.

AFG has observed a number of mergers and amalgamations, especially with federated organisations where it is not uncommon to see the national, State and Territory entities merge back into a single entity.

Key finding 6 – Board performance is rated highly, but directors see strategic planning and implementation as areas for improvement

Board performance is rated highly

While most directors believe their board is performing well, there are still some improvements that can be made. These include:
1. Improve strategic planning
2. Improve board composition
3. Monitor implementation of strategy

Key priorities for their organisations include:
1. Diversifying income services
2. Changes in operating environment
3. Clarifying strategic direction

For directors who believe their board is underperforming, performance monitoring and strategic planning are high on the list of improvements to be made.

Challenges facing sporting organisations have evolved

Key finding 7 – Challenges facing sporting organisations have evolved

Within the NFP sporting organisation segment there is a key focus on growing memberships and audiences, plus gaining access to improved facilities and infrastructure.

Some of the unique challenges faced by this sector include rapid growth within sports gambling and the ethical concerns of organisations that rely on gambling income or advertising sponsorship. The income uncertainty linked with this is a high concern for many directors.

Final thoughts

The information within the AICD Not-for-Profit Governance and Performance Study has highlighted that the non-profit sector continues to face challenges… no surprise there – we continue to see funding streams diminish and greater focus, and therefore competition, for sponsorships, partnerships and public donations.

Good governance is essential to a strong NFP sector and AFG firmly believes that boards must be provided with accurate, timely and meaningful financial reports to inform their decision making and that the board must be able to make sense of those reports and understand the organisation’s financial performance and position.

Read more not for profit governance articles.

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