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Insights from CEO Royal Flying Doctor’s Service

Little evidence that NFPs test governance practices with aim of preventing mission drift.

When I started my first charity role 20-plus years ago, friends and acquaintances somewhat patronisingly asked me why, saying how brave it was for me to forgo my career in law.

I think they were mainly surprised that a university graduate would deliberately set out on a not-for-profit career. But chances are that like me, anyone reading this also finds working in the third sector meaningful and demanding yet rewarding.

 NFP organisations and charities have become more professional. Service roles have grown as governments have outsourced services or given consumers self-directed funding. Doomsday concerns that corporatisation would change charities for the worse has simply not materialised.

According to the Australian Charities report of the Australian Charities and Not-for-Profits Commission (ACNC), the sheer number of people employed in the NFP and charity sector has also increased to more than one million. As the skill, service range and employee base of NFP organisations have broadened, the regulatory accountabilities of charities have increased. Public scrutiny, through social and mainstream media, has also lifted NFP sector standards.

Despite these changes, there has been little observable shift in how NFPs and charities go about achieving their aims. Clarity of purpose is essential. It determines ability to make a social impact. For charities, sticking to purpose is a condition of continued registration.

Three aspects of purpose are worth thinking about: the constant need to revisit purpose, the still-elusive way for NFPs to report on achievement of purpose or social impact, and checking and adjusting governance arrangements to best fulfil specific purposes.

Usually clear

Usually, the founding purpose of a NFP is clear, but being pulled in different directions can lead to mission drift over time. There is nothing wrong with having to adjust or reset purpose. The object is to be crystal clear about objectives, which for charities must also comply with charity law.

The Smith Family, as an example, was established in 1922 by business people supporting children in need. The organisation still enables donors to support children’s education as a means of preventing future need. At one point, its mission drifted into aged care, but The Smith Family checked and adjusted. It’s an exemplar of ensuring it can focus and deliver on its purpose.

Clarity of purpose for many NFPs is challenged by dependence on government. With overwhelming evidence, NFPs can mostly deliver service more effectively than government, which is why many of them have taken on outsourced government roles. NFPs, particularly charities, do not establish themselves for the purpose of delivering outsourced government services. To exist for a government purpose is, in fact, a disqualifier of charitable registration.

Bureaucratic contracts

The Australian Charities report again shows that large charities receive only 13 per cent of their revenue from donations, and small charities 32 per cent. The rest is mostly from government. It appears that many organisations today are so tied to government funding for service delivery that their purpose is effectively directed by bureaucratic contracts. It could be said some NFPs have outsourced their purpose to government without being aware they have done so.

In an ideal world, governments and NFPs would collaborate on mutually agreed service needs, gathering evidence to design suitable solutions. There should be enough respect for a capable NFP to deliver an agreed outcome, and for outcome data to inform future priorities and innovation.

This type of strategic commissioning is not new. It has endured some bumps in the UK. The New South Wales Treasury is pursuing a commissioning approach, and Social Services Minister Christian Porter’s Try, Test, Learn fund is the Commonwealth’s own dry run of contemporary commissioning.

If commissioning were ever to take hold, as indeed it must, NFPs would be more free to design community solutions founded in their purpose. It would require NFPs to constantly revisit their purpose, and would drive a new rigour in accounting for fulfilment of purpose.

Changes proposed

There have been several attempts over a few decades to promote how NFPs account for fulfilment of their purpose. Triple bottom-line accounting of social, environmental and financial activity has had its 15 minutes of fame. The Australian Accounting Standards Board (AASB) is proposing accounting changes to recognise revenue when services are delivered rather than contracted. While that proposal will be hard to implement, it also misses the opportunity to tackle how best to report fulfilment of purpose.

In the US, large human-service charities report their community benefit. They file an annual report quantifying the benefit to the community of the purpose for which they exist. Community benefit reporting is automated, with tools that enable charities to plan services in response to identified need.

Community benefit reporting has served as a defence against erosion by government of tax concessions in the US. Community benefit reporting in Australia would deliver evidence of the worth of NFPs, and reconnect them with their stated purposes.

NFPs are in the main governed just as well as, if not better than, many commercial enterprises. Part proof are the fewer governance scandals in the NFP sector than in the commercial world.

The AICD Not-for-Profit Director Survey last year revealed commercial and NFP directors alike were focussed on the similar dynamics of disruption, technology and productivity. Yet NFP governance differs to that of a business. The profit motive drives behaviours in the commercial sector, while the third sector is premised on a profit distribution constraint.

Not tested

With opposite motivations, I’ve not seen many charities test if their governance is fit for their purpose. I make this claim having studied governance practices of charities over the past few years. My doctoral thesis assessed methods by which board directors contribute to organisational outcomes. It found that some directors don’t think about how their governance practice helps or hinders purpose.

The corporate law principles and Australian Securities and Investment Commission inspired boards that govern nearly all significant NFPs in Australia take their origins from the industrial-revolution cotton mills of 18th-century England. Boards were first used 200 years ago by the owners of new industries to prevent managers putting their hand in the till.

Obviously, board practice today is mature, sophisticated and effective, yet its structure takes its lead from systems built for protecting profits rather than achieving purpose.

Options to the cotton-mill board exist. My thesis found that governance in China, France, Germany and Japan involves two-tier boards. One focusses on purpose, the other on service delivery. This can prevent mission drift within NFP organisations. Australia has a few of these two-tiered boards, and perhaps it could use a few more.

I am privileged to serve in several roles impacting different pockets of the NFP sector, and the thoughts I have expressed here are my own, rather than any official stance of the organisations I serve.

Martin Laverty, CEO, Royal Flying Doctor Service of Australia

This article originally appeared in Third Sector’s March mag- click here for more info.

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