Newsflash: Not-for-Profit Governance Standards Enacted

As you may recall the Australian Charities and Not-for-profits Commission (ACNC) released a consultation paper on the Development of Governance Standards in December 2012 with the closing date for submissions being 15 February 2013.  

On 1 March 2013 (just two weeks after the close date), having considered approximately 100 received submissions, the government has signed off on the Australian Charities and Not-for-profits Commission Amendment Regulation 2013 (No.1).   

Unfortunately very little has changed between the consultation paper and the regulations being passed.

The five governance standards (down from six in the consultation paper), together with our observations, are as follows:

Governance Standard 1 – Purposes and not-for-profit nature of a registered entity

This standard does little more than require a registered entity to commit to a “purpose” and to give key stakeholders confidence that it is acting to further its purpose.   No doubt lawyers will be sharpening their pens to ensure that an entity’s “governing rules” are in order.   There is no guidance as to how key stakeholders may be given “confidence” that a registered entity is actually complying with its purpose.

Governance Standard 2 – Accountability to Members

The object of this standard is to ensure the accountability and transparency of a registered entity to its members.  Whilst providing that a registered entity must take reasonable steps to ensure that its members have an adequate opportunity to raise concerns about its governance practices, the standard simply outlines some “suggestions” as to how this may be achieved. For example, holding an annual general meeting, providing members with an annual report, or providing for election of its responsible entities (for “responsible entities” read “directors and officers” – more on this incredibly confusing use of language later).

Unfortunately, this concept of ‘accountability’ is restricted to members.  Given that in many organisations it is the directors that are the members, this concept of accountability becomes rather circular and not particularly useful.   There is no general requirement for organisations to have a complaints handling system in place which would have ensured accountability to a wider range of stakeholders.

Governance Standard 3 – Compliance with Australian Laws

This standard states the bleeding obvious, being that registered entities need to comply with Australian laws.  It then goes on to establish a “lowest common denominator” effect stating that registered entities must not engage in conduct that involves a criminal offence or civil fine of 60 penalty units (currently $10,200) or more.   In our respectful opinion, this hardly meets the stated objective of the standard which is to give the public trust and confidence that a registered entity is compliant.  The simple solution (as adopted by just about every other regulator) of requiring a registered entity to be able to demonstrate that they have processes in place to ensure compliance with laws (hardly a burden) seems to have been purposefully ignored.

Governance Standard 4 – Suitability of Responsible Entities

A “Responsible Entity” is a term defined in the ACNC Act 205-30 which actually refers to a director or trustee.  Our experience to date is that this concept of an “individual” being referred to as an “entity” is causing a great deal of confusion, especially as the not-for-profit or charity itself is referred to as “Registered Entity”.  So as it currently stands we have “Responsible Entities” governing “Registered Entities”.

Apart from the poor use of language this standard really doesn’t meet its stated objective of maintaining, protecting and enhancing public trust and confidence in the governance and operation of a registered entity.  In our opinion all it does is establish yet another  “lowest common denominator” test.  The only requirement for becoming a “Responsible Entity” (think director or trustee) is that you are not disqualified from managing a corporation or disqualified by the ACNC Commissioner.  Well that’s certainly giving the public trust and confidence! No skill requirements or “fit and proper person” requirements required.

For those that studied the early consultation paper you will notice that the provisions with respect to the “Disqualified Responsible Entity Register” have been moved into Governance Standard 5 at 45.150.

Governance Standard 5 – Duties of Responsible Entities (think Directors or Trustees)

Apart from absorbing the previous Governance Standard 4 – “Responsible Management of Financial Affairs” that appeared in the consultation paper, there has been little change to this standard.  In essence, it seeks to rewrite the current directors liability provisions of the Corporations Act into the ACNC regime and adds in a requirement to ensure that a registered entity’s financial affairs are managed in a responsible manner.

Under this governance standard it is the “Registered Entity” that is required to comply with the Duties of “Responsible Entities” (think directors and trustees) not the “Responsible Entities” themselves.  This places the onus on the Registered Entity to ensure that the “Responsible Entities” are made subject to the duties (we said it was confusing!).

For those charities which are moving from being ASIC regulated (from 1 July 2013) to ACNC regulated “Registered Entities” (about 6000 in number), this standard presents a “Get out of Jail Free” card, as there are no longer any fines or jail sentences for breaching directors and officers.  For the other 50,000 “Registered Entities” currently subject to state laws (usually the smaller and less complex charities) their “Responsible Entities” are still subject to quite serious sanctions e.g. the NSW incorporated associations legislation provides a maximum two year jail sentence for directors and officers.

In Conclusion

Now the new governance standards are in place the journey can start towards creating a system that actually works in practice.  The watered down nature of the standards means that they have effectively established a “lowest hurdle” and unfortunately provide little guidance as to contemporary governance standards that the Australia public expects from the sector. This being the case, our expectation is that, just as we have seen with regulatory regimes such as those established for Australian Financial Services Licensees and ASX listed entities, over the next 5-10 years we will see multiple amendments and refinements to this initial legislation.

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