“It is unrealistic to expect not-for-profits to have a similar focus on governance issues as the private sector; it is ideal, but not practical.”

This is the comment of NSW Minister for Family and Community Services/Minister for Social Housing Brad Hazzard, and in our opinion NFP boards must future-proof themselves to be sustainable.

Our research and in-depth sector consultations highlight  the strategic challenges for NFP boards, including the long-term impact of the competitive tendering environment on their work and sustainability.

For this to be a reality, it must be based on quality data in order to support evidence-based decisions. This will enable them to better manage revenue from tightly unit-costed government tenders that now do not allow for innovation investment by the NFP sector. As Einstein defined insanity, “it’s doing the same thing over and over again and expecting different results”.

The question is: will NFP boards be able to reshape their vision, purpose and strategy to ensure they can continue making a valued contribution into the future? There is tension in generating innovation while maintaining accountability in the governance of large complex organisations drowning in “business-as-usual” activities that need to report to the government just to maintain their contracts.

Making a difference

Australian innovators from across the private, government and NFP sectors can make a real difference – not just rearranging the deck chairs, but creating strategic and sustainable organisations that can effectively deliver services. It would be a game changer, such as breaking intergenerational dependency on social services.

Most of the directors of the top 100 listed companies on the Australian Securities Exchange (ASX) also hold directorships in NFP organisations. What is the impact and influence they bring to bear? Some say they introduce greater, much-needed business acumen, moving the NFP sector toward greater commercialisation and corporatisation. Is this happening? Is it needed?

Good governance, provided by seasoned ASX company directors to the NFP sector, and good governance of essential government-funded programs administered by the sector are the basis for a thriving society within an economy. The challenge lies in maintaining good governance in the NFP sector to ensure their efforts to provide services is sustainable and viable to underpin a thriving society and economy.

In practice, the role of any board of directors is to oversee an organisation’s business in two broad areas of performance: business and compliance.

Just as with a board for a listed company, an NFP board specifically has responsibilities for working with the CEO to implement the organisation’s strategic objectives, to implement, maintain and refine a system of good governance; to review the board’s structure and composition; and appoint – and manage the performance of – a CEO (including succession planning).

However, across the NFP sector, seasoned ASX company directors often confide (in hushed tones) that they have concerns with their NFP boards and their CEOs. These concerns include:

• difficulties in defining and measuring organisational effectiveness
• negative impacts rising from the structural composition of a board, including those with representative models in which a member or church, for example, can override decisions
• funding dependencies and constraints, such as government contract terms.

It seems there may be a disconnect between the “outside” directors (from the markets) and the “inside” directors (NFP sector) and the NFP’s senior management teams in terms of the board receiving information that gives a clear line of sight to the organisation’s work.

In the commercial world, board oversight of management would not be questioned. The direction from the board may therefore become muddled in strategically addressing the sustainability of the organisation’s work, especially in the current environment of government demands weakening the capacity of NFP organisations to self-fund new initiatives.

We favour an enhanced approach to board involvement via a thorough induction program. Like any commercial environment, sector development is necessary if an outside director is to be effective on an NFP board. The process should include specific influences — the NFP lifecycle, structure and culture — that affect the environment in which boards make decisions.

Information vital

As NFP boards work within an environment of being a high-risk people business, they need to go beyond mere compliance in terms of accountability for funding.

Their ability to develop a strategic approach to growth that aligns opportunities to core capabilities and organisational purpose is impacted by their inability to capture and understand consolidated client information, especially their supply and demand pipelines.

How can NFP boards strategically plan when their management teams lack visibility of the most critical business input: client needs? How can any strategic plan be relied upon without baseline data?  

Among the people interviewed for this article, there seems to be a consensus that NFP boards are flying blind, as neither their management nor the government is providing a reliable baseline of data on which to forge a sustainable strategy.

Measuring performance is essential for developing strategy. Closely aligned to this issue is the fact that it is difficult to attain consistent standards for performance data in the sector when an organisation has limited resources to collect and analyse data.

Element of frustration

When we spoke to Hazzard about the lack of reliable data in the sector hampering innovation, said the government was also frustrated that it was not effectively collecting data from the sector.

“It’s a multilayered problem that is historical, faced not only by this government. There are no incentives on effectiveness in data collection, and it results in counterintuitive levers being applied … It’s recognised [by government] that an integrated e-platform is needed for standardised data collection by the sector.”

Interestingly, the commissioner of the Australian Charities and Not-for-profits Commission (ACNC), Susan Pascoe, has likened the sector to Cinderella.

“In an environment of reduced income and improved transparency of performance measurement, charities will need to ensure they are acting as efficiently as possible and … approach financial management more strategically,” Pascoe has told the Leadership Victoria conference.

Sleepless nights

At times, being the CEO of a NFP may mean some sleepless nights as they mull over the issues involved in delivering social and disability services while managing the tension between funding capability, quality and innovation.

With governance issues more important than ever, we surveyed NFP leaders on a range of topics…

• Working with a board that does not understand the sector
• Retrofitting new funding models (reporting to government)
• Building and maintaining capabilities across organisation members
• Addressing compliance without sacrificing quality and innovation
• Prioritising so as to deliver services sustainably.

Responses show that the CEO would sleep better if they had more help in building and maintaining capabilities across their people.
We found that 85 per cent of the CEO surveyed were more concerned about building skills in their people than finding ways to work with a board that does not understand the sector (45 per cent). Also, 29 per cent were happy to relegate the subject to the backburner, while 25.1 per cent were neutral on the issue. 

“Addressing compliance without sacrificing quality and innovation” ranked second in sleep disturbance (76.1 per cent), while retrofitting new funding models (reporting to government) came in third at 67.9 per cent.

But the most surprising result was that the CEOs were not so concerned about prioritising so as to deliver services sustainably (45 per cent). This raises many questions.

This article originally featured in the March print edition of Third Sector magazine. Click here to subscribe.