The importance of good corporate governance in the delivery of sustainable, ethical and high-quality services should not be under-stated. Not-for-Profit (NFP) organisations require robust governance arrangements appropriate to the size of the organisation to ensure sustainability, performance and achievement of purpose. Good governance assists the organisation to take advantage of growth opportunities and to effectively manage risks. Directors take ultimate responsibility for the governance of the organisation. Directors have fiduciary duties to members and other stakeholders; however, governance is not solely a role of Directors alone. Directors must also work with and through the CEO to ensure the organisation is effectively and properly run and meets the purpose for which the organisation was set up.
This blog intends to outline the underlying principles of good governance in a NFP approach to corporate governance and to help clarify the responsibility of the corporate governing body in carrying out their roles.
The role of Directors and the CEO
The flow of accountability to the Board of Directors is provided by the members of the company. The powers and responsibilities of directors is set out in the organisations Constitution (the ‘rule-book’). The Constitution provides a fiduciary duty between the directors and the organisations members. If the NFP organisation is a company limited by guarantee the members have a limited liability as established under company law (the Corporations Act 2001 Cth) and in accordance with the company’s rules contained in the Constitution.
Directors of the company are responsible for working with the full board to provide overall governance, management and strategic direction of the organisation and for delivering accountable performance in accordance with the organisation’s strategic goals and objectives.
Directors are responsible for appointing a Chief Executive Officer (CEO) or equivalent role to deliver on the strategic and business objectives and for reporting back to the full Board on the organisation’s performance. The CEO (or equivalent role) should operate under a documented and clear Delegations of Authority (DOA) Policy which should be in line with the Board approved strategic directions and the risk appetite statement set by the Board.
The CEO appoints a senior leadership team and operational staffing. The key duties and responsibilities of the CEO are outlined in the CEO Position Description and the CEO, management and other employees all share a contractual duty to the directors and the wider organisation.
One of the key duties of the directors is accountability to members and engagement with stakeholders. In this way the organisation is granted a ‘social license’ to operate which is created and maintained slowly over time as the actions of an organisation builds trust and respect with the communities it operates and other stakeholders. As a director it is therefore vital that the company is seen as operating in a responsible, ethical and sustainable manner; taking care of its clients, its employees, the community and the environment and for being a good corporate citizen. When problems occur and reputation is at risk the social license to operate may be put in jeopardy.
These concepts are demonstrated below in Figure 1.
Figure 1: The anatomy of a company limited by liability and the flow of accountability.
Source: AICD (2018) Company Directors Course Module 1 The Role of the Board and the practice of Directorship [unpublished]
It is important that there exists a clearly understood separation between the roles of Directors and the CEO (or equivalent role and including the executive management team).
The directors are responsible for appointing a CEO (or equivalent role) to deliver on the strategic and business objectives and to report back to the full Board on organisational performance. The CEO (or equivalent role) operates under the DOA policy and the CEO (or equivalent role) Position Description. Simply put, the role of management is to run the company and that of the board is to see that it is being run well and in the right direction consistent with the strategic objectives and the risk appetite set by the Board. This is also commonly referred to as ‘nose in’ and ‘hands out’ governance. The Board therefore approve and work with and through the CEO role.
This relationship between the board and CEO is outlined below in Figure 2.
Source: Hilmer, F. & Tricker, R. (1994) “An effective board”, Int. Corporate Governance.
The role of the board of directors and management across a whole-of-organisation approach to governance is also outlined below in Figure 3. This provides a very useful way of thinking about the role and flow of responsibilities of the Board and the role of the CEO, executive management and the organisations employees.
Figure 3: Whole-of-organisation approach to governance.
Adapted from: Governance Institute of Australia (2015) & Directors Australia Pty Ltd (2019).
Not-For-Profit organisations should ensure they have in place clear and documented Delegations of Authority, Risk Appetite Statements and a Corporate Governance Statement that outlines the organisations Governing principles.
In considering the organisations governing principles the following resources are key to informing their development and directors of any NFP entity should ensure they are at least aware of and comply with the ACNC Governance Standards:
We will cover the development of a Delegations of Authority (DOA) instrument and development of a Risk Appetite Statement in a later blog series.
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