Challenges continue for NFP directors

By Kerry Hicks - August 19, 2019

“The role of boards and the expectations of directors across all sectors are under heightened scrutiny” is a quote in the latest AICD NFP Governance and Performance Study for 2019 (AICD Report). This report is now in its 10th year and provides some interesting insights over this time scale.

The intensity on governance has been raised in the recent years with past and current Royal Commissions that touch on certain areas within the NFP sector and this will likely continue into next year with another Royal Commission focused on the area of disability.

These inquiries have brought governance and cultural issues into the public eye and provide an opportunity for leaders to explore and face these challenges head on.

The AICD Report identifies a number of key findings, the most significant of which are outlined below:

  1. NFP directors’ time commitment is increasing

Over 50% of respondents are spending more than 2 days a month on a single NFP board, with the proportion of directors spending more than eight days a month on a single NFP directorship doubling to 10 percent since 2013.

The factors that were identified as contributing to greater NFP board workloads include

  • Rising governance expectations and complexities
  • Community trust challenges for NFP organisations
  • Introduction of the National Disability Insurance Scheme leading to rising demand for NFP services
  • Growing financial pressures
  • Changes in organisation complexity and regulation.

With these challenges in the sector it is pleasing to see the results indicating that 19% of directors undertook more than 1 week of training in 2018/2019 with only 8% having no training at all during the same period. Most of the training undertaken was focused on general governance, risk management and strategic planning.

  1. Board composition and director recruitment are ongoing challenges

The NFP sector continues to benefit from having the skills, experience and networks of older directors who mostly serve on a volunteer basis with 38% of those surveyed having had 11 years or more of non-executive experience in NFP governance.

However, NFP boards were found to be struggling to attract younger directors and to attract cultural diversity on NFP boards.

  1. NFPs and director remuneration

Whether a NFP pays remuneration or not is controversial – there are arguments for and against.  Larger NFPs are much more likely to pay directors with development and housing and aged care directors more likely to be remunerated.

The survey shows that paid NFP directorships increased from 13% to 19% over a period of 4-5 years and suggested that the increase may be partly due to a higher proportion of respondents from larger NFPs.

  1. Organisational performance monitoring is financially challenging

NFP directors surveyed overwhelming believe their organisations are effective. However, actual profitability for those NFPs surveyed is at a four-year low, at 54 percent, compared to 61% in 2017. This leaves 46% of NFPs breaking even or making a loss.

NFPs that continue to make losses or even break even are not re-investing in their organisations for future growth. Therefore, the survey indicates that financial sustainability of NFPs is not as strong as directors believe and may be weakening.

The challenges identified by directors include the need for:

  • Improved financial management
  • Changed business models due to changed government funding arrangements
  • Reliance on philanthropy
  1. Effective boards but strategic planning and implementation needs improving

Board performance is assessed by directors as being about right or better than needed. However, those boards that are under-performing have identified strategic planning and monitoring the implementation of the strategy as key areas for improvement.

  1. Identification of organisational priorities

The survey also asked about organisation priorities and the three top priorities were identified as:

  • diversifying income sources;
  • changes in the operating environment; and
  • Clarifying the board’s strategic direction.

Within NFP sporting organisations growth in memberships, audiences and improved facilities were identified as being key priorities.

This study (based on an on-line survey and focus group sessions) contributes to the broader knowledge about the practice of governance within the NFP sector. Along with the AICD’s NFP Governance Principles, released earlier this year, they provide extensive resources to the NFP sector to use to develop its people and de-bunk the prevailing myth that governance of NFP organisations is poor.

With the current environment focused more on investigating and uncovering poor practices in business and NFPs, building community trust is critical in order to support NFPs to thrive and grow. Improving governance practices, including effective financial management, can contribute to this process.

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