All articles in Volume 13 Issue 23

NFPs seek harmony with government

NFPs seek harmony with government

Not-for-profit (NFP) directors have called for more collaborative relationship between governments and the NFP sector, with nearly half giving the government a fail for understanding the sector’s needs.

This was one of the key findings of the 2015 NFP Governance and Performance Study conducted by research firm BaxterLawley on behalf of the Australian Institute of Company Directors.

On average, directors gave the Commonwealth Government a score of 4.6 out of 10 for understanding NFPs, with nearly half (48 per cent) awarding it a score of less than five. Directors reported they felt a “big gap between government’s understanding of NFPs and the reality, and also a lack of awareness of the different issues facing each part of the sector”.

The study found that financial stability remains the major concern for NFP organisations, as mergers in the NFP sector gather pace due to major policy reforms and a drive for efficiency.

Speaking at the launch of the study yesterday, Murray Baird, Assistant Commissioner of the Australian Charities and Not-for-profits Commission (ACNC), agreed that there was certainly a challenge for government agencies to understand the sector’s unique needs.

“It is a challenge, but the encouraging thing is that there is an alignment of NFP directors and the ACNC on the commitment to cutting red tape and the desire to have greater harmonisation on the requirements of NFPs for reporting and general obligations,” he said.

The study reports that directors understand the desire from government for an efficient NFP sector, and that sufficient gains in efficiency have been seen in recent times. However, it found that these gains are not reflected in government processes or policies, which are constraining the sector from delivering more innovation.

Baird observed that the ACNC’s work to get traction on red tape reduction slowed for some time because of uncertainty about the future of the ACNC. This uncertainty has been reduced recently, with the Australian Government’s budget papers making provision for funding the national charity regulator until 2019.

“The ACNC is working with other government agencies, including Commonwealth, states and territories, to identify and drive out duplication in regulation,” he said. “We’re looking at solutions such as ‘report once, use often’ reporting framework, the online charity passport, and issues such as the challenges of harmonisation of fundraising and consistent definitions of charity across the federation.”

According to Baird, the ACNC is using surveys such as the NFP Governance and Performance Study to work with NFPs to build the strong, mature and collaborative relationship that the sector desires.

He said that directors in turn could help build the relationship with the ACNC by understanding their regulatory environment and supervising the compliance of their organisation.

For more information, read the 2015 NFP Governance and Performance Study.

Companies don’t disrupt; people do

Meet Whitney Johnson – former Wall Street investment banker and top-ranked media and telecom analyst, entrepreneur and now author of Disrupt Yourself: Putting the power of disruptive innovation to work (2015).

Johnson, who co-founded investment firm Rose Park Advisors with Harvard Business School professor, Clayton Christensen, has found through her own professional journey that the power of disruption lies with the individual.

“We give a lot of airtime to building disruptive products and services, to buying and/or investing in disruptive companies, and we should. Both are vital engines of economic growth. But, the most overlooked engine of growth is the individual,” she says.

Indeed, when we think of market disruptors, we think of companies who up-end an entire industry by a stroke of creative, unprecedented innovation – take digital streaming service, Netflix for example.

Disruptive innovation
Disruptors secure their initial foothold at the low end of the market, offering inferior, low-margin products. They then evolve, improve their product and expand their market share – effectively stealing competitors’ customers from under their noses.

While “disruptive innovation” – a term coined by Christensen – is a popular way of thinking about innovation-driven growth amongst leaders of small, entrepreneurial companies, for Johnson, she faced the most significant “disruption” when she made the dramatic decision to leave her job on Wall Street.

“Notwithstanding the considerable career and financial risks involved, it was time to leave my comfortable perch and become an entrepreneur, a move that to others may have seemed nonsensical.

“But for me, I was at the top of the learning curve – I was making as much money as I could, there weren’t opportunities for advancement. There’s this human imperative to move forward, and I knew it was the moment for me to jump to a new curve.”

As a leading thinker on driving innovation through personal disruption, Johnson now works with executives and organisations to apply the theory of disruptive innovation to their own firm.

“Directors want to drive innovation in their organisation. I see the best way to drive that innovation is through personal disruption. You not only need to consider, is your organisation taking on competitive or market risk, but are your people? How is your business and how are your people playing to their strengths?”

Johnson shares some of her lessons learned along the way:

If it feels scary and lonely, you’re probably on the right track

“We all want to start a disruptive company or invest in disruptive ventures, but in reality an innovation that takes place at the low-end of the market or where there is no market (yet) is just not that sexy.

“When you make a decision to take on market risk, to ‘play where people aren’t playing’, whether it’s your company or a personal career move, there are going to be times when it feels lonely and scary and you don’t know what your identity looks like.”

Your odds of success will improve when you pursue a disruptive course

“What Christensen found in his analysis of the disk drive industry (which is discussed in The Innovator’s Dilemma, and is foundational to our investing), is that firms seeking growth via new markets are six times more likely to succeed than firms seeking growth by entering established markets, and the revenue opportunity is 20 times greater. When we start in a place where no one else wants to play, where the scope of the opportunity appears limited, the odds of success actually improve.”

Gender diversity is crucial to innovation

“One of the reasons that women tend to be good disruptors is that almost by definition they have had to play where other people aren’t playing and build networks outside of the traditional hierarchy. They intuitively know how to think disruptively. So, for example, when the door of investment banking was closed to me, I walked through the equity research door instead.

“What a disruptor says is, there’s a competitive risk here, and I may not be able to get funding, so I will figure out how to take market risk and do a crowdfunding campaign. If you have women helping to lead your organisation, they’re going to be able to help you look for disruptive opportunities.”

There are times for disruption, but there are times for execution as well

“My whole premise is that companies don’t disrupt; people do. That doesn’t mean that you disrupt all the time, everywhere, in every circumstance. There’s a time to jump to a new learning curve and a time to scale the curve. Those who can surf the S-curve waves of learning – and mastering – have the edge.”

VW saga: Lessons for Australian boards

As the recent Volkswagen (VW) emissions scandal continues to attract headlines, several commentators have taken aim at the carmaker’s corporate governance and culture.

In September 2015, VW admitted to installing illegal software which falsely showed better performance on emissions outputs during testing than on the road. The scandal has led to internal and regulatory investigations, which has seen some board-level executives within the VW group temporarily suspended, and revealed a number of issues with the carmaker’s governance and corporate culture.

Commentators have suggested that the lack of independent directors on VW’s supervisory board may have increased the risk of “entrenchment” and that power struggles between its shareholders and worker representatives may have led to the board’s monitoring function being compromised.

It has also been claimed that VW’s corporate culture “fostered a climate of fear” among its employees. Former chair, Ferdinand Piëch, was known to favour an autocratic style of leadership while former CEO, Martin Winterkorn, was said to have used “high pressure management methods” and aggressive sales targets. VW engineers have recently admitted to manipulating fuel emission data because of the alleged “unreasonable demands” set by Winterkorn.

The scandal highlights the critical importance of good governance and corporate culture and provides a number of key lessons for Australian boards:

  1. Reconsider board composition: The lack of independence on VW’s supervisory board may have hindered its oversight of management. Australian boards should consider whether their directors have the appropriate mix of skills, expertise and independence.
  2. Consider the importance of ESG: Following the scandal, it is likely that stakeholders will place additional scrutiny on governance arrangements as well as disclosure of environmental data. Political pressure on disclosures of environmental, social and corporate governance (ESG) data is also likely to increase in the lead up to the UN Climate Change Conference in Paris next month.
  3. Check for conflict between the chair and CEO: VW’s former chair, Piëch, resigned from Volkswagen’s supervisory board in April 2015 after a failed attempt to oust its former CEO Winterkorn. Boards should consider whether underlying conflicts are hindering board decision-making or organisational culture.
  4. Set the tone from the top: Some commentators have suggested that enhanced whistle-blower policies may be an effective way to monitor issues within a company. However, a good organisational culture set by the management and board may deem this unnecessary. “At the root of corporate crisis is culture”, says Lady Barbara Judge, chair of the Institute of Directors in the UK. “If you train your employees to do the right thing they will, but it starts from the top.”

For more information, visit the Governance Leadership Centre.

Merging your NFP

Ahead of the AICD’s inaugural Australian Governance Summit, ACNC Commissioner, Susan Pascoe AM FAICD, considers the rapid changes in the not-for-profit (NFP) sector and how NFPs have to adapt, survive and thrive in this new landscape.

The NFP sector is changing, perhaps faster than ever before. At board tables around Australia, NFPs are asking how to adapt, survive and thrive in this new landscape, and many are wondering whether mergers are the silver bullet they are looking for.

The ACNC respects the autonomy of charities and board members in making decisions about running their charity and determining how to best achieve their charitable purpose.

Decisions about merging or winding up are strategic decisions for a charity’s board to determine, and the ACNC provides guidance on the administrative processes for charities that do decide to merge.

The Australian Institute of Company Directors’ (AICD’s) 2015 NFP Governance and Performance Study reported that one third of NFP boards had discussed mergers in the previous 12 months, but only half of this number have undertaken mergers.

Mergers in the NFP space are unique in character. NFPs must not only consider the governance and logistical challenges of mergers between two or more entities, but also consider their purpose and the interests of the community they serve. For NFPs with vulnerable beneficiaries, service continuity is paramount, and many provide specialised services at the local level, the effectiveness of which for some may be diluted through undertaking a merger.

The ACNC’s role is in providing support to NFP boards, assisting them in making prudent and well-informed decisions around mergers. This is achieved through the provision of robust governance frameworks and providing access to reliable data in order to guide decision-making.

NFPs must undertake the same level of rigour in governance and due diligence in their merger process (or, in their process for deciding not to merge) as for-profit entities. They must ensure strong fiduciary oversight, prudent financial management and robust decision-making by the board. NFPs should also be seeking out and interpreting high-quality, reliable data to inform decision-making when reviewing opportunities and potential candidates for merger.

The ACNC’s 2015 Public Trust and Confidence in Australian Charities report and data-set provides valuable insights into the shape of the NFP sector in Australia. Indeed, in many cases, the expectations the community has of NFPs is higher, which reflects the extraordinarily high level of trust and confidence that the public has in this sector.

However, NFPs must also ensure that, even in merging, they stay true to their mission and, for charities, their charitable purpose. This goes beyond identifying a (willing) partner agency or agencies with appropriate alignment in purpose. The mission of an NFP is shared with its members and supporters, and successful NFP mergers require the proper and meaningful engagement of all stakeholders, and broad consensus and support for a merger must be achieved. NFPs carry an enormous amount of goodwill within the community, and the protection of this valuable asset is paramount during mergers.

Want to know more? Susan Pascoe AM FAICD will be discussing NFP mergers and acquisitions at the Australian Governance Summit on 3-4 March 2016. Visit the Australian Governance Summit website to register.

ASIC focus for December reporting

The Australian Securities and Investments Commission (ASIC) will be reviewing 31 December 2015 financial reports of listed entities and other entities of public interest based on a “risk-based criteria” as well as through random selection.

In a recently released announcement, ASIC Commissioner John Price stated, “Directors and auditors should continue to focus on values of assets and accounting policy choices.

“We continue to see companies using unrealistic assumptions in testing the value of assets or applying inappropriate approaches in areas such as revenue recognition,” he said.

ASIC has reiterated its advice that “[while] directors do not need to be accounting experts, they should seek explanation and advice supporting the accounting treatments chosen and, where appropriate, challenge the accounting estimates and treatments applied in the financial report.”

According to the announcement, directors should also give consideration to the appropriateness of the following in their financial reporting:

  • Asset values – including impairment of goodwill and other assets, reasonableness of cash flow estimates and the appropriateness of models, assumptions and inputs used to calculate fair values attributed to financial assets;
  • Accounting policy choices – including appropriateness of policy choices for off-balance sheet arrangements, revenue recognition, expense deferral and tax accounting;
  • Material disclosures – including assumptions supporting accounting estimates, significant accounting policy choices, and the impact of new reporting requirements.

For more information, see:

Seizing Australia’s competitive advantage

The future of multilateral trade systems are "in deep trouble", according to the latest report from the Committee for Economic Development of Australia (CEDA), Global networks: transforming how Australia does businessThe report examines the impact of digital transformation on the effectiveness of trade agreement regimes, and identifies opportunities for Australia to gain from the free movement of ideas and people.

According to the report, “In the face of rapidly changing global markets, the trade system is in deep trouble. The current multilateral system of trade governance may be too slow and cumbersome to remain relevant”.

The report states that the arguments of protectionism versus free trade have become stale and irrelevant. Markets for goods, money and labour are already integrating across borders and beyond the control of national jurisdictions, accelerated by communications, technological innovation and consumer demand.

Meanwhile, global production is still outpacing global trade. Trade in services, in particular, critically needs liberalisation, but negotiations are far too slow at a time when the service and knowledge-driven economy is already a reality. With technological change threatening to radically upend traditional approaches to business, it is more important than ever that Australia is open to the evolution of the global economy.

CEDA states that the next phase of trade liberalisation should position Australia as a key contributor to global value chains and allow the nation to form key links with the sources of future innovation.

The report suggests that it would be helpful if Australia published a formal trade policy strategy that included, among other things, options for multilateral, bilateral and non-discriminatory reductions in trade barriers.

The CEDA report makes several recommendations:

  1. A new trade policy statement
    1. A formal trade policy statement that sets out how individual agreements fit within a single strategic framework.
    2. Clear differentiation between Australia’s free trade and foreign policy objectives.
  2. Free-trade agreements that strengthen policy
    1. Rules of origin, and other administrative aspects of these agreements, need to be streamlined and harmonised to reduce costs and complexity for business.
  3. Strategic engagement and simplified labour exchange
    1. Australia should seek to adapt the Trans-Tasman Travel Agreement to one with Singapore, that is, replicate the spirit of the agreement as one that is not a prescriptive and detailed agreement between governments, but a set of procedures independently implemented by both governments working together towards a common aim.
    2. After achieving a free-travel agreement with Singapore, Australia should seek to extend these arrangements with other suitable countries.

Commenting, Tarah Barzanji, engagement manager at strategy advisory business AlphaBeta, said: “The globalisation of labour is not a new phenomenon. For at least 50 years, many companies have viewed their labour pool as global. But while the physical mobility of labour is nothing new, we are now adding virtual workers into the mix. Australia needs the right policy settings to both retain our highly skilled labour and attract high skilled labour from abroad.”

For more information, read Global networks transforming how Australia does business.

Lamb joins 100% Project

Hilary Lamb GAICD has been appointed chair of the 100% Project, a not- for- profit organisation that aims to address gender inequality.

Lamb has more than 20 years experience in human resources and holds concurrent roles as managing director of CROSSMARK HOST and director, people and culture for CROSSMARK Asia Pacific.

Lamb began her career in the UK in sales and marketing, before moving into learning and development and human resources.

The board of the Financial Planning Association (FPA) has announced that senior FPA executive Dante De Gori MAICD will take over as CEO when the current CEO Mark Rantall MAICD steps down from the role to focus on non-executive director positions at the end of February 2016.

The appointment of an internal candidate is a first in the FPA’s history. De Gori will be the second CEO to hold the certified financial planner designation in the FPA’s history after Rantall.

Rantall has led the team for five years and has tirelessly campaignined to ensure both members and consumers benefit from proposed industry and government reforms. De Gori has worked as the FPA general manager of policy and conduct since 2010.