Fighting back

Domini Stuart examines the governance challenges facing not-for-profit organisations and finds a sector determined to succeed in the face of adversity.

These are tough times for the boards of not-for-profit (NFP) organisations. State and federal government funding cuts and increased competition are placing enormous pressure on NFPs to look for other revenue streams as well as driving up competition for funding in the market.

“The importance of fundraising and sponsorship acquisition has become critical for the survival of a number of vital services,” says Dr David Marshall AM FAICD, chairman of the Snowy Hydro SouthCare Rescue Helicopter Service Trust.

“This is turn places greater emphasis on providers to seek partnerships with private sector companies and philanthropists, creating intense competition. This is not a healthy environment for those who have to devote time to raising funds just to exist rather than to meeting an ever-increasing demand and enhancing the quality of the care or service they provide,” he says.

Major reforms are occurring in sectors such as education, aged care, disability services, health care and social services. However, the future of some policies and legislation is hanging in the air, making it almost impossible for many NFPs to plan strategically for the future.

“Investment in infrastructure, resources and new programs becomes problematic as boards can’t commit to projects that will impact on their viability,” Marshall continues.

“This has serious implications for the entire NFP sector that flow through to the pressure placed on government services. Any change in government can also create a minefield for the NFP sector.

“All of this causes immense stress for the boards, executives, staff and volunteers of NFP organisations and, in particular, to those who have become reliant on the services they provide,” he adds.

Short-termism in tendering

This uncertainty is exacerbated by the short-term approach to government tendering. “Some organisations are trying to survive on 12 month contracts with two month extensions, but you can’t turn an NFP operation on and off like a tap,” says Paul Murnane FAICD, chairman of the Australian Scholarships Foundation (ASF) and MS Research Australia. “NFPs are being forced to operate in a really dysfunctional way; no for-profit organisation could function like that.”

One glimmer of good news is that the Australian Charities and Not-for-Profits Commission (ACNC) may have been reprieved. “While no formal change in government policy has been announced, I welcome recent comments made by the Minister for Social Services and Assistant Treasurer that the abolition of the ACNC is not a priority,” says Susan Pascoe AM FAICD, ACNC Commissioner.

“Although our future remains uncertain, the ACNC is continuing to enhance public trust and confidence in charities through increased transparency. We are also working to promote sector sustainability and reduce unnecessary red tape,” she says.

The sector itself lobbied for many years for an independent regulator and many directors were baffled by plans for its demise. “A recent Pro Bono Australia survey of 1,250 NFP leaders, volunteers and sector managers found that 82 per cent want to keep it,” says Murnane.

Rising demand for services

Looking ahead, shifting demographics mean many NFPs are anticipating a significant rise in demand. “The economic slowdown is sending shockwaves through the community,” says Marshall. “Job losses and employment uncertainty impact on families in many ways.”

The aged care sector may well face the toughest challenge as growing numbers of ageing Australians require far more services. Dementia, for example, is now the second leading cause of death in this country and there are currently around 342,000 people living with the disease. According to predictions, this figure will rise to 900,000 by 2050.

“These are huge numbers, and they represent an enormous impact on families, carers and the community as well as the consumers themselves,” says Carol Bennett, chief executive officer (CEO) of Alzheimer’s Australia.

“They will also have a phenomenal effect on the economy. It’s crucial that we invest in prevention and early intervention because, when support isn’t put in place early, people are far more likely to end up in the hospital system, acute care or residential aged care. All of these are far more expensive, and often far less conducive to living normal lives, than managing people in the community,” she says.

The impact of the NDIS

The National Disability Insurance Scheme (NDIS) is still in the testing phase. When it takes full effect in a couple of years it will completely transform the NFP disability sector.

“The government has been delivering block funding to NFPs which they can use to distribute services to disabled people,” says Murnane.

“The NDIS will put the money directly into the hands of consumers who can then decide where they want to spend it. NFPs will also be forced to compete with for-profit organisations without having access to capital, so they will have to be much more aggressive in their marketing.”

Bennett believes that empowering individual consumers to make decisions about their own care is, in general, a good principle to work with. However, when those consumers have dementia, it is important that the carer or support person is involved throughout the journey.

“Unfortunately, the NDIS doesn’t take account of that and, as a result, we have some concerns about its capacity to manage clients with dementia,” she says. “These aren’t people who would willingly put themselves forward for a package of pre-determined services or support. It can take many years to diagnose dementia and people who have the disease are often in denial. We’re very concerned that the NDIS model will lead to later diagnosis and a much higher demand for acute and residential care.”

The case for rationalisation

As more charities compete for funding the inevitable duplication of overheads and services reduces the productivity of the sector. “The trend for for-profit providers to enter the service space that was traditionally held by NFPs is also going to increase, leading to even more competition,” says Lynn Wood FAICD, chairman of Good Beginnings, which provides free early childhood and practical parenting programs. “Ensuring their organisation can compete is another challenge for NFP boards.”

Many NFPs and community organisations in particular, are finding it increasingly difficult to recruit directors with appropriate abilities and experience. “Passion is important, and there are a lot of people who would love to be involved in something like a sporting club or a performing arts group but lack the skills that are needed in every boardroom,” says Nyunggai Warren Mundine MAICD, chairman of the Prime Minister Indigenous Advisory Council, NyunggaBlackGroup and the NAISDA Foundation.

“There are also people who would make very good directors but are discouraged by the complexity of the regulatory environment, the demands of corporate governance and their personal legal liabilities,” Mundine says.

The problem is particularly severe in regional, rural and remote areas of Australia. “Sometimes there just aren’t enough qualified people to fill the empty seats,” Mundine continues. “Competition for good directors can be intense, with some agreeing to sit on a number of boards because they’re concerned for the future of organisations that play a vital role in the community.”

Resourceful responses

The boards of NFPs are nothing if not resourceful and they are responding to the challenge in a variety of ways. Consolidation through mergers and acquisitions (M&A) is emerging as a significant trend; the latest Australian Institute of Company Directors NFP Governance and Performance Study found that 30 per cent of the 2,700 directors who responded had discussed or taken action to merge their NFP with another organisation in the last year.

“NFPs have traditionally been resistant to M&A but funding pressures and the need for scale will start to force this activity,” says Wood.

“Other models of co-operation such as joint ventures and strategic alliances are also becoming more common due to the increasing influence of communities. In practice, this may mean that an organisation is involved in multiple joint ventures and alliances, all responding to the different needs of different communities. I think we may start to see new governance models, such as co-operative structures, start to emerge,” Wood adds.

One positive trend that is developing is an increase in high net worth philanthropy. “Wealthy families are recognising that their lives and legacies will be enhanced by a higher contribution to charitable causes, and corporates are realising that doing good is good for business,” says Wood.

Philanthropists and organisations are more inclined to use social finance or impact investing to make their capital work harder. They are looking at different ways to finance the work of NFPs, such as interest-free loans. And giving circles are also gaining popularity around the world.

“A giving circle, such as a chairman’s circle, pools donations in order to leverage their impact,” says Fiona Maxwell, Queensland manager of Philanthropy Australia. “Donors can also benefit by coming together with like-minded people and getting closer to the inner workings of an organisation they feel passionate about.”

Boards need to understand emerging trends in philanthropy and in an increasingly competitive environment, to be aware of what philanthropists expect from the organisations they fund.

“The first is a really strong value proposition,” Maxwell continues. “Funders want to know what impact your organisation is having and how you are measuring that – preferably against publicly-available statistics. Funders are also looking for a collaborative approach. They understand the need to fund administration but they don’t want to pay for unnecessary duplication.”

Directors as donors

Sophie McCarthy, executive director of McCarthy Mentoring, runs an annual national philanthropy mentoring program with Creative Partnerships Australia to help arts organisations increase their philanthropic revenue.

She also sits on the board of the Griffin Theatre Company in Sydney and when they needed almost $2 million for extensive renovations, the directors took it for granted that they would all make a contribution they could afford.

“I think it would be hard to persuade other people to donate if you haven’t given anything yourself,” she says.

Maxwell agrees that directors should be the lead donors. “Your approach will be much more compelling if you can say: ‘My fellow board members and I are the founding donors of this program and we’d love you to join us’,” she says.

McCarthy believes we’re moving towards the American model of “give, get or get off”. “Some people don’t feel comfortable raising funds and feel they’re doing enough by donating their technical skills but I think, increasingly, boards need to be engaged in the philanthropic work of the organisation,” she says. “It’s vital that would-be directors have a very candid conversation with the chairman about what will be expected of them before they decide to join an NFP board.”

Director education is also another development in the sector, as more emphasis is placed on investing in people. The ASF is an example. It funds and facilitates education, training and mentoring scholarships for NFP directors.

“I co-founded it because, for many decades, I’d been concerned about the lack of investment in the people side of NFPs by governments, donors and the boards themselves,” says Murnane. “However good the programs, their success depends on the people who deliver them. It’s essential that we keep investing in their skills and experience so that they can do the best possible job.”

The ASF has awarded close to 2,500 scholarships to over 2,000 NFPs across the country. “There’s a particularly high demand for leadership training and we’re over-subscribed three or four times for every scholarship we offer,” Murnane continues. “I think this is a good indication of directors’ commitment to their role.”

Crowdfunding

Another trend that continues to grow in the NFP sector, and throughout Australian industry more broadly, is crowdfunding. “Crowdfunding in the Australian NFP sector has grown dramatically in the last couple of years,” says Prashan Paramanathan, founder and CEO of Chuffed.org, a charitable crowdfunding platform.

“Our campaigns raised over $1 million in the 11 months following our October 2013 launch. We raised the next million in five months and we’re on track to raise the third million in three and a half months.”

Chuffed.org has run over 650 campaigns, mostly for small to medium-sized organisations.

However, there’s growing interest from larger organisations such as LandCare Australia and some corporations are using the platform to showcase their social impact projects.

“Donors are increasingly showing a preference for the level of engagement they get in crowdfunding and as the community around the crowdfunding platform grows, bigger charities will follow the donors,” Paramanathan continues.

“At the moment, online donations account for just 7 – 10 per cent of total public donations but directors should be aware that this figure is likely to rise. It would be prudent to start thinking about a strategy for raising funds online before it gets much higher,” he adds.

However challenging the times, it is critical that NFPs remain true to purpose. “At Alzheimer’s Australia, we make sure that our purpose underpins every decision,” says Bennett. “We have just had a strategic planning session where we looked at how we can approach some of the issues into the future. We have to be adaptive, flexible and proactive in responding to the current climate and we have to be responsible in a business sense.”

She continues: “But, fundamentally, we’re an NFP and we’ve got to be able to deliver in terms of leading the prevention agenda and valuing and supporting people with dementia in our communities. Like every other NFP we’re about purpose, and we need to be able to meet that in the most strategic way we can in changing times.”