Governance in charities

An opportunity to raise the standards of governance in charities

Charity and not-for-profit (NFP) governance are of core interest to the IoD, with 51% of our members serving on a NFP. In May, we submitted on the Department of Internal Affairs’ discussion document on modernising the Charities Act 2005, the first public consultation on the Act in 14 years.

This review is one of many relevant to the NFP sector (eg trusts, Te Ture Whenua Māori, incorporated societies and education reforms). Reform of the Charities Act should take into account these wider reforms to ensure that there is cohesion across the sector, and NFPs will need to refocus their attention on their governance arrangements.

The review of the Charities Act is limited in scope and some stakeholders in the sector have called for a more comprehensive review to be undertaken by the Law Commission. We supported this in our submission, but we still see the current review as an opportunity to help raise the standards of governance in charities.

Charities in New Zealand

The Charities Act provides a registration, reporting and monitoring system for over 27,000 charities in New Zealand. Charities spend around $17b annually, manage $58b in total assets, and are supported by more than 230,000 volunteers and 180,000 paid staff.

We understand that 3.5% of charities are companies, 25% are subject to the Incorporated Societies Act 1908, 38% are subject to the Charitable Trusts Act 1957, and most of the remaining charities are unincorporated societies and trusts.

New Zealand has significantly more charities per capita than other similar commonwealth countries such as Australia and Canada. This adds to the challenges in the sector around competition for resources, funding and service provision.

Key challenges for charities

A recent Charities Services’ survey highlighted the following key challenges for boards and committees (beginning with the biggest challenges):

• obtaining funding
• strategic planning for the future of the charity
• identifying people with the right skill mix to come on boards
• compliance with requirments from government
• managing risk to the charity
• recruiting staff and managing volunteers
• understanding health and safety obligations
• difference between the board's role and management/volunteers
• how to keep and report financial information
• how to run a meeting 

Should New Zealand introduce governance standards?

The Department asked in its consultation whether governance standards would help charities to be more effective and whether the Australian governance standards could be adapted to work in New Zealand.

In Australia, charities must meet core, minimum governance standards that essentially require them to remain charitable, operate lawfully, and to be run in an accountable manner. They are set out in law and are relatively high level. The Australian charities regulator can take action against charities for breaching standards.

New Zealand doesn’t have governance standards or a code specifically for charities or not-for-profits and is out of step in this regard with other similar jurisdictions. However, there are several governance codes in New Zealand relevant to NFPs including the FMA’s Corporate Governance in New Zealand: Principles and Guidelines and the IoD’s Code of Practice for Directors.

In our submission, we said that there is considerable benefit in introducing governance standards through a specific governance code for the charitable/NFP sector that is fit for purpose and value adding to help raise the standard of governance.

A key challenge will be to balance raising standards without burdening organisations and deterring people from getting involved in leadership.

Rather than having legislative governance standards, we support the establishment of a voluntary governance code. This can provide flexibility and more comprehensive guidance (for instance through principles, recommendations, commentary and examples). It would be important to strongly promote take up of the code and charities that adhere to the code would have the considerable benefits of improved governance including through recognition from stakeholders (eg funders).

Submission on modernising the Charities Act

As part of assessing what would be most effective in New Zealand, we encouraged the Department to consider the effectiveness of charity/NFP governance standards/codes in similar jurisdictions overseas including the following.

Key considerations for a New Zealand code include whether it should:

• be solely for charities, or other NFPs and impact/ purpose driven organisations and
• have differential requirements for large and small organisations (eg as in England and Wales)

A new governance code for charities and/or NFPs may be able to address some other issues highlighted in the discussion document for example, in relation to the accumulation of funds and managing conflicts of interest (which we discuss further in our submission).

Should there be greater restrictions on who can be officers of charities?

The Department asked whether people with convictions for serious offences (eg serious drug offences, murder, or sexual offences) should also be disqualified from being officers (eg board members). In our submission, we supported the Department looking at options to strengthen who can be officers including disqualifying people who have been banned from governance roles overseas from being officers of charities in New Zealand.

Is a new 'micro entity' reporting tier needed?

Charities have annual reporting obligations to Charities Services and data shows that many charities are not complying with minimum reporting requirements and especially Tier 4 charities (who must attach performance reports to their annual return).

Some stakeholders have proposed that a new micro-entity reporting tier should be created for charities with $10,000 or less operating expenditure under which they wouldn’t need to comply with the current XRB reporting standards (eg they could just complete a fill-in-the-box financial statement).

There are good reasons for the standard of compliance in the current regime, including the need for transparency and accountability for public funds. However, this needs to be balanced against other factors including the compliance time, cost, capability and risks to the sector. On balance, we thought that there is merit in creating a new reporting tier with simpler reporting requirements for the smallest charities.

View IoD’s submission