Spotlight on NFPs

The 2015 NFP Governance and Performance Study highlights funding stability as directors’ biggest concern and calls for more government focus on not-for-profits. Tony Featherstone reports.

Directors want governments to lift their understanding of the not-for-profit (NFP) sector and build a more collaborative relationship with it, an Australian Institute of Company Directors (AICD) survey has found.

The NFP sector faces one the biggest periods of change in its history. Federal and state government funding cutbacks, potential tax reform, new funding models, and rising demand for NFP services as the population ages, are key challenges.

But almost half of directors surveyed believe government has poor awareness of NFP issues, the 2015 NFP Governance and Performance Study reported. They say the gap between government understanding of the NFP sector and its reality is too large.

“The NFP sector is calling on a more mature relationship to develop with governments,” says AICD managing director and CEO, John Brogden FAICD. “It is recognised that to deal with many of society’s most important issues, no organisation or sector can do this by themselves. A partnership approach is usually required to tackle these issues.”

“The NFP sector is calling on a more mature relationship to develop with governments,” says AICD managing director and CEO, John Brogden FAICD. “It is recognised that to deal with many of society’s most important issues, no organisation or sector can do this by themselves. A partnership approach is usually required to tackle these issues.”

“We shouldn’t lose sight of the tremendous potential for NFPs either. Reforms such as the National Disability Insurance Scheme create opportunities and, longer term, the world is about to embark on the biggest transfer of intergenerational wealth ever seen, which could drive higher rates of philanthropy.”

Significant insight

Released in November, the sixth annual NFP Governance and Performance Study provides important insights into the sector. It was based on 2,976 survey respondents, most of whom govern NFPs, and 10 focus groups with more than 60 directors.

Financial sustainability, and mergers and collaboration were key issues for the sector. Enhancing NFP board skills, particularly around strategic planning, also remain a key concern, the survey found. Governing NFPs with federated structures, considered for the first time in the study, was another challenge.

Directors said the reduction of NFP funding and further reform in specific sub-sectors, as well as poor management of procurement reforms, have driven their low rating of government understanding of NFPs. The Commonwealth’s drawn-out deliberations over the future of the Australian Charities and Not-for-profits Commission, was another factor.

The study said: “Directors understand the desire from government for an efficient NFP sector and significant gains in efficiency have been seen in recent times.”

As a key purchaser (and sometimes only purchaser) of services from some NFPs, governments have strong influence over NFP sustainability and growth.

Directors rated stability in government policy, and improved government funding and contracting policies with NFPs, as the Commonwealth’s top priorities. Building sector capacity, more consistent Commonwealth and state and territory reporting requirements, and reducing administrative burdens, were other priorities.

NFP boards wanted longer (five-year) government contracts, more consultation in program design, better performance measures and simplified reporting, the survey found.

Financial sustainability issues were the major concern for most directors surveyed. Top priorities for organisational health included building and maintaining income, diversifying income sources, increasing own source income, and managing costs.

“It’s no surprise that financial sustainability is the largest concern of NFP directors, given the scale of recent cutbacks and the potential for more,” Butler says. “Many NFPs are struggling to find new funding sources as demand for their services grows.”

“It’s no surprise that financial sustainability is the largest concern of NFP directors, given the scale of recent cutbacks and the potential for more,” Butler says. “Many NFPs are struggling to find new funding sources as demand for their services grows.”

Butler says changing funding models are another challenge. “The introduction of consumer-directed care in disabilities and aged-care services, for example, has affected the cash flow of some NFPs that were used to getting the bulk of their funding upfront. In addition, with the business model being turned upside down and clients choosing their service provider, these organisations must market themsleves more effectively. That, in turn, is forcing more NFPs to review their sustainability.”

M&A activity

Eight per cent of directors surveyed said their board considered closing the NFP in the past year. Mergers are a likelier option to help NFPs weather the challenges. Almost a third of NFP directors had discussed an NFP merger and another 14 per cent had undertaken a merger in the past 12 months, or were currently undertaking one, the survey found.

But directors warned that mergers were no panacea to financial sustainability challenges. There were concerns that increased discussion of mergers were making them “trendy” in the NFP sector, even though they should be one of several options considered.

Encouragingly, 70 per cent of directors reported their organisation was collaborating with other NFPs to advocate for their sector or its beneficiaries, and about a quarter were sharing resources. NFPs in the social services sector were especially collaborative.

On boards, 84 per cent of directors believe their organisation’s governance is better than three years ago. Although commercial and government boards might report similar gains, it is clear NFP governance continues to be of high standard.

Key areas for board improvement include clarifying the organisation’s strategic direction and measuring its performance. Less than half of directors believe their organisation is effective in measuring performance against its mission.

About 40 per cent of directors saw a need for board members with higher skill levels and better information. A third said better governance skills would also improve board performance. Director ratings of NFP board skills were generally high.

An intriguing finding was the influence of federated organisations on NFP governance. A federated structure is an informal network that could include national, state and local NFPs that are individually incorporated and autonomous but work together for a common purpose. For example, a national charity that represents the interests of state or territory-based charities in a similar cause.

A quarter of survey respondents said their organisation was a member of a federation and 10 per cent said they governed a peak body. “The results indicate the number of directors governing federations could be significant,” the study found. These organisations can be harder to govern if directors have to manage the interests of the main board and those of the organisation they represent within the federated structure.

The study again confirmed the generosity of NFP directors. About 87 per cent of those surveyed are volunteers and the median fee for those paid is $17,000. On average, directors spend 24 hours a month on their role and have 1.6 directorships. In addition to their time, 39 per cent of directors donated to their organisation. Almost a fifth donated $1,000 or to their organisation.

Outlook for culture and arts

Directors of culture and arts NFPs were asked about key issues facing their organisations over three years. They were (in order):

1. Increasing private or corporate philanthropy.
2. Maintaining or building their client base/audience.
3. Improving the organisation’s capacity to attract government funding.
4. Reduction in government funding.
5. Building businesses that generate profit.
6. Advocating on behalf of the sector.
7. Conflict between providing services that recover costs, and creating innovative but unprofitable services.
8. Reporting outcomes to funders.
9. Encouraging board members to donate.