Corporate governance and the third sector
The current global financial crisis has further increased the need for careful governance, which has particular significance for not-for-profit organisations.
Largely unheard of even into the 90s, the concept of corporate governance has become more widely recognised over the years as corporate accountability has shifted from a relatively inert existence to an essential requirement, having been crystallised by such economic trends as the extravagant expenditure of the 80s and the dot com disasters – particularly prevalent in the USA.
Though the term ‘corporate governance’ is largely thought of as a concept relating to legal structures and financial accounting, it also extends into other corporate areas such as health, safety, environment issues, and integrity, where practice, procedures and systems have been developed. Guidelines such as Australian Standards, ISO, Total Quality Management and various ‘best practice’ procedures now all fall under the recognised ‘Governance’ label, and the majority of business is conducted through a ‘corporate structure’.
The corporate structure has also been largely embraced by the broad not-for-profit (NFP) sector – from charities to religious organisations, sporting clubs to business interest groups. More sophisticated organisations, and those with a substantial financial base, were incorporated – registered and certified as legal corporations – according to the ‘Corporations or Companies Act’ (now the Corporations Act).
Many NFPs, however, were also incorporated according to the less onerous protocols of the relevant State ‘Associations Incorporations Act’. Some charities are created as Trusts, often with a Corporate Trustee, and still fewer are incorporated by specific, private acts of Parliament.
Although the sector is described as ‘not-for-profit’, these organisations are essentially also ‘not-for-loss’, and it is within this context that it becomes distinctly important to maintain both solvency and Director accountability among NFPs that have been incorporated according to the Corporations Act.
Today it is probably quite difficult to find even a small, community NFP that is not registered as an incorporated association, since incorporation offers some degree of protection. There is also the need for appropriate (and where obtainable) adequate insurances, which applies to both NFPs and commercial organisations alike.
Directors’ duty and insolvent trading
Directors – meaning those who are directors for the purposes of the Corporations Act 2001 – are under the duty to prevent insolvent trading, especially where debt is incurred. The Act details particular circumstances and stipulations surrounding the issue of insolvency, incurred debt and responsibility. If a company is insolvent at the time of, or becomes insolvent by, incurring a debt, the individual company Directors become personally liable for that debt.
There are defined defences, however, where an individual had reasonable grounds to expect, and did in fact expect, that the company would remain solvent, even with incurring the debt. Moreover, a company’s solvency can be difficult to determine.
If it has been determined that a company is insolvent, the organisation can go into voluntary administration as a viable option alternative to liquidation. At this time, a voluntary administrator may be appointed and the board can execute a Deed of Company Arrangement.
The Constitution (formerly the Memorandum and Articles of Association) comprises the regulations governing both the relationship between the company and the external world, and the relationships between the shareholders and directors of the company. It is a basic document required for the incorporation of an organisation under Australian Law.
The constitution also contains specific provisions relating to calling meetings, notices, time requirements, record keeping, and accounting requirements. Prudential policy development, publication and adherence to such policies also form part of an organisation’s general governance.
NFPs that are industry organisations will almost invariably have as its directors, individuals who are also directors of their own commercial organisations where there is an awareness of the requirements of governance procedures.
Accountability and governance requirements apply equally to all bodies incorporated according to the Corporations Act, whether it is a commercial, industry or NFP organisation.
Legal Services Assistance – Pro Bono
Not-for-profits can often be reluctant to seek legal assistance in regard to improving their corporate governance profiles – even for a routine matter such as revising a constitution that could be years out of date – and particularly when they are facing financial difficulties. In such circumstances, legal fees are one of the last things that an organisation will want to incur.
Some law firms with experience in corporate governance matters have their own ‘pro bono’ programs. In the legal context, it generally means the provision of legal services on a free or significantly reduced fee basis.
Many of the larger law firms undertake structured pro bono programs in varying forms. Corporate governance legal advice for NFPs is provided by some of these larger firms, but usually only to charities, organisations that provide services to disadvantaged and marginalised people, or public interest community organisations such as Rural Fire Services and the Flying Doctor Service. Industry organisations, therefore, would most likely not qualify in this regard.
The National Pro Bono Research Centre, located in the Law Faculty at Sydney’s University of New South Wales, is currently conducting research into how to engage retired and career break lawyers in pro bono legal work. One possible pilot project idea is to work with such lawyers, who have relevant experience, to advise NFPs on corporate governance matters.
The Centre has consulted with Community Legal Centres, Legal Aid, law societies, law firms, bar associations, and law foundations to assist in this and other pilot project ideas.
With over 35 years of experience in the law, John Crosby now works as a consultant, a private practice lawyer and an adviser to NFP industry and charity organisations. He addressed the members of AuSAE in Victoria at a breakfast in March.