IMHO: Is the incorporated societies model right for your organisation?

The Incorporated Societies Act was first passed in 1908. After a reform process kicked off in 2011 and after many years of delays, a new and updated Act has finally received Royal Assent. Changes focus on improving the governance framework and modernising the provisions that apply to this form of entity.

With about 23,000 entities registered as incorporated societies with the Companies Office, and an estimated 9,000 of those being registered charities with Charities Services, many groups will be affected. Because there must be a minimum of 15 members of an incorporated society under the 1908 Act, a lot of people should be interested in this change. And yet how many of us can relate to the occasional difficulty in securing a quorum for the AGM? As with any requirement to revisit the foundation constitution of an organisation, which this new legislation will require, we think this is an excellent time to ask some bigger questions of incorporated societies. Some such fundamental questions might include:

• is there still a need for our organisation?
• is a membership organisation the most appropriate structure?
• should we merge or join another organisation to be more impactful? and
• should we be structured as we currently are? For example, should we have branches?

When we purchase a car we think about what we will use it for – convertible, or off road? In the same way, the ‘legal vehicle’ we use to achieve our purpose may need updating from time to time. This is the perfect time for incorporated societies to ask themselves questions about their legal structure.  Many are also nearly as old as the 1908 Act. The world and how we do things has moved on. So, is the incorporated society in question still fit for purpose to carry on successfully and sustainably into the future? 

With so many of these entities in existence, they clearly have a part to play, particularly for member-based groups like sports clubs. However, the requirements introduced by the new Act provide the chance for such organisations to revisit their structures. This is because the new legislation will require every incorporated society to re-register and update its constitution as well as ensuring its officers meet the requirements to hold their positions. If a group is going through that process, then it might also be timely to ask the bigger question at the same time: is this structure best?

Operating in this area we have seen a trend in recent years of incorporated societies shifting to become charitable trusts. With officers who are elected, the member-based approach of an incorporated society tends to become far more political than a charitable trust structure. The president of an incorporated society might call to say there are rumblings of discontent from a small but vocal minority and they will let us know how the AGM goes. The next week a new voice might be on the end of the line, saying he or she was the new president and the direction of the incorporated society has drastically changed. Elections can also be disputed, with a newly-elected set of officers unable to obtain the bank account information and logins from former officers who claim the election was not valid and they are, in fact, the ones still in charge.

While some incorporated societies are small, others have significant amounts in their accounts. Resolving such situations takes time, results in damaged relationships and is costly.  Crucially, this activity and the energy it demands also detracts from the actual core business that the incorporated society was established to deliver. It will be appropriate for most incorporated societies to simply continue on with revised constitutions but for some a switch to a charitable trust structure may be better. Charitable trusts often have a more stable governance board with less risk of politicisation or being taken over. If a group chose to go down this path, it could still keep its registered charity number and tax donee status, a fact that many are not aware of. However, the new charitable trust that takes on the legacy of continuing the purpose of the incorporated society would be a new legal entity, meaning contracts, employees and insurance must be moved across before it is wound up. Organisations are established to deliver on a specified purpose. Their choice of legal entity can have considerable impact on their effectiveness and efficiency at doing this. 

Also see resources, guides and seminars to support Incorporated Societes under the new Act on the Parry Field Lawyers website.

This article was original published by ADLS.

About the authors

Steven Moe MInstD is a partner at Parry Field Lawyers based in Christchurch and works in corporate law providing advice to companies, not-for-profits and social enterprises.  He is a director of two companies and for one is chair - Community Finance which has raised $93 million for social housing.  He is a member of the Edmund Hillary Fellowship and hosts Seeds - a podcast on governance, leadership and entrepreneurship. Steven is also a facilitator on the Company Directors Course.

Craig Fisher CMInstD is a former audit partner and chairman and now consultant with RSM specialising in governance, audit and assurance advice. He also assists with restructuring, growing, and developing organisations. He is a recognised specialist in the not-for-profit and charitable sector.  Craig has a strong interest in good governance and is an Associate with Boardworks Aotearoa. He holds a range of governance roles including chair of the External Reporting board’s Advisory Panel, an independent Councillor of ADLS, chairman of the Fred Hollows Foundation NZ, and a trustee of Sustainable Coastlines Charitable Trust and the Wise Trust, and independent risk, assurance and audit committee chair for Ngati Whatua Orakei.

The views expressed in this article do not reflect the position of the IoD unless explicitly stated.

Contribute your perspectives and expertise on an area of governance to the IoD membership and governance community. Contact us mail@iod.org.nz