Remunerating directors

Should not-for-profit enterprises pay fees to board members?  Three industry leaders share their views.

Linda Lavarch
Former Chairman of the Not-for-profit sector reform council and a former Attorney General of Queensland

Generally speaking I have no problem with not-for-profit (NFP) non-executive directors being paid either by way of a director’s fee or an honorarium. Instead of a blanket assumption of board volunteerism, the decision to pay or not to pay directors should be a matter entirely for each organisation. Respecting the autonomy of NFPs means accepting each NFP is the body best placed to decide whether paying non-executive directors fits within its organisational mission and values.

There is a growing trend in remunerating NFP directors with reported remuneration rising from 8 per cent in 20011 to 19 per cent in 20132. This change from the traditional experience of voluntary boards to remunerating boards may reflect difficulties in attracting and retaining the right skill mix for the board without offering fees, or it may be a move to compensate the complexities of governing large NFPs, especially given the current incidence of mergers and amalgamations. It would not be surprising to see these percentages continue to increase over the next decade and remuneration of directors becoming the norm for large NFPs.

Nevertheless, in seeking to move from a voluntary board to paid directors, NFPs should make a fully-informed decision that takes into account all legal implications, any funding limitations, disclosure arrangements and how the internal and external politics will play out. Some examples of legal implications include, the national model work health and safety laws which give immunity from prosecution to voluntary officers but not paid officers; section 150 of the Corporations Act 2001 which permits not using the word “limited” in a charity’s name inter alia if the constitution prohibits payment of fees to the directors; and section 48 of the Charitable Fundraising Act 1991 which requires charities to apply for ministerial approval before remunerating directors.

Consideration of the politics surrounding remuneration is equally important given that the internal democratic processes of many NFPs may be disturbed by changing the voluntary nature of the board and by external reaction from funders, major donors or the general public. All in all, I would counsel to hasten slowly towards any move to remunerate.

Peter Winneke
Head of Philanthropic Services
Myer Family Company

Often the key to the success of our for-profit corporates is the board. Readers of this publication are well versed in the board’s key roles. The success of the planning and implementation of these issues by the board will usually determine whether the mission is achieved. NFPs are tackling some of the most important issues that our community is facing; so why do we expect a bunch of volunteers to maintain the helm of the board? In addition, most NFPs have tax concessions. As they are managing taxpayer-funded resources, they need directors of the highest calibre.

Many of us have seen the “star-studded” NFP board; the board with an array of talented board members, over-achievers, who individually have had successful corporate careers and have brilliant resumes. Unfortunately, this often means that they are in demand and have insufficient time available for their NFP position. They are trying to find time to fulfil their NFP board responsibilities among many competing priorities such as their paid employment, family and social commitments. The danger is that the NFP receives the lowest priority as it is for “unpaid service”, compared to paid employment or paid board positions. Their conscience is appeased by the knowledge that they are not receiving remuneration for their effort. Of course, this is fraught with danger as legally they have similar responsibilities as for-profit boards.

Being on a NFP board is often more difficult than a for-profit board. You are likely to be tackling significant social issues with limited resources and few options to raise capital, and where outcomes measurement is difficult. With payment should come greater commitment to professionalise NFP boards, greater focus on outcomes and also measurement of board performance. Payment would provide a stronger sense of contract. Shouldn’t we demand the best board members for our NFPs? And pay them appropriately?

Of course many NFPs do not have the balance sheet to support paying board members. If you can’t afford to pay for board members, or find funding partners to assist, then clearly it would be foolish to do so. A step in the right direction would be arming our NFP boards with the best talent in the country and paying them appropriately.

Anne Robinson FAICD
Principal Prolegis Lawyers

The suggestion to directors of charities that they be remunerated, would I think be greeted by the vast majority with a mixture of puzzlement and offence. Why? Because they give their time to provide the governance function of the organisation as committed supporters of the cause.  The idea of these directors being paid runs directly contrary to their intention to contribute to the purpose of the charity.

So why is the question even being raised? Two reasons. First, charities have moved way beyond “volunteerism” in the unfortunately pejorative sense of being run by unpaid, part-time amateurs rather than highly professional and competent paid employees. And some are also questioning the assumption that the governance function should be provided by unpaid volunteers, albeit they are for the most part highly experienced and professional directors.

Second, in some specific parts of the charity sector it is becoming increasingly difficult to find the kind of committed directors who have the skills, experience and time necessary to govern the larger, more complex and highly regulated enterprises that charities have become.

Directors are not always unpaid. Payment of directors has been the practice in a few specific kinds of charities – in health, for example. However, in my experience this is still not at all the norm in Australia. Payment is not expected where there is an active community of interest and commitment that makes up the supporter base and to whom the directors are accountable. It is probably more easily justifiable by directors where they are self-appointing and they are not accountable to a larger member or supporter base. This is the case particularly where the income of the organisation comes predominantly from grants and government funding rather than supporter donations.

This is not at all to imply any criticism of directors who do decide to remunerate themselves, because it is essential that boards attract the right talent. After all, we do not have the same sensitivity about remuneration of employees, provided that is not excessive. Payment of directors may attract a wider range of skills, age and socio-economic profile, which would be a positive outcome. While this is desirable, I am still ambivalent. I can’t help thinking something will be irrecoverably lost.