Transcript Complexities of board dynamics of non profit organisations


Presenter:
Adele Johns
 Executive Officer: Community Compass Inc.
 Research student: International Graduate
School of Business, University South Australia
 Director: Adssi Home Living Australia






Acknowledgement to country
Introductions
background,
purpose,
outcomes

Non profit sector in Australia is worth at least
$70 billion

It is Australia’s principal employer with more
than 600,000 employees

It is reported that charities employ about 7%
of the workforce and account for 5% of gross
domestic product – making the sector
equivalent in size to agriculture

Not for Profit Productivity Commission Report 2010 – Peter Fitzgerald.

Of the 59,000 non profits that are employers the
CEO/Manager position works under the
governance structure of a board.

Requires Executive positions to be held by the
board, the financial executive position known as
the Treasurer.

All board members have a legal fiduciary
responsibility



Australian Charities & Nonprofit Commission:
“Governance is the process, activities and
relationships that make sure your
organisation is effectively and properly run.”
Governance for Good: The ACNC’s Guide for charity board
members.
www.acnc.gov.au/ACNC/manage/tools/ACNC/edu/tools

Strategic planning – big picture thinking

Setting the Vision

Setting the objectives to meet the key purpose
of the organisations existence

Ensuring sustainability and viability – ability to
meet all pecuniary liabilities

Certify compliance and accountability matters of
the organisation are adhered to

Maintain effective record keeping and monitoring
of organisational objectives

Audit requirements dependent on level of income
received.

Australian Taxation obligations – Goods and
Services tax, Withholding taxes Fringe benefits tax

Funders requirements – philanthropic or
Government funds, State and Federal





The purpose of this research is to highlight the
complexities of board dynamics and engagement
of financial management providing an insight as
to ‘how’ boards are currently engaging in
financial management practices and alternate
models.
To identify if Boards of non profit organisations
are insufficiently engaged with sound financial
management practices.
To observe Board members (lack) confidence in
asking appropriate questions regarding financial
matters.
Determine the level of understanding of financial
reports.



My observation is, the member of the board
responsible for financial matters, usually called
the Treasurer, presents a report which is only
given moments of ‘air-time’, before the agenda
is quickly whisked along to matters of general
business.
The treasurers report and financial statements
are either inappropriately set out, condensing
financial data to meaningless
reports/spreadsheets, rather than formal
financial statements.
This could be the result of lack of interpretation
and understanding of accounting standards and
formats but there are a range of other issues
including the capability of the board to deal with
financial issues.




This research provides the opportunity to
delve deeper into the complex nature of
board, unveiling boardroom capacity in
financial management matters
Observation of member participation in their
engagement with financial data, report
layouts and time allocated for exploring the
financial performance and position
Recognise the human dynamics at play with
the theoretical perspective of Ralph Stacey.-
Stacey, R. and Griffin, D., (2005). “Complexity and the
Experience of Managing in Public Sector Organisations”.
London, Routledge.




How could non profit boards improve
engagement in financial management?
Subsidiary questions…
What issues/complexities arise due to the
relationship(s) between the CEO and the board?
The power of influence – Ralph Stacey –
Complexity Theory.

Zahara and Pearce (1989) have stated,
“There are countless lists of what boards
should do. Yet evidence of ‘what boards
actually do’ is not well documented… there is
a pressing need to document what boards
actually do: (pp325 – 326).
Zahara, S.S & Pearce, J.A., (1989) “Boards of directors and
corporate financial performance: A review and integrative
model. Journal of Management, 15,291-334.

Board members often lack skills in
understanding financial management reports

Meaningless reports are being presented

Large asset purchase decisions being made by
members with little understanding of the
financial position or future forecast

Cash flow forecasts either being non-existent or
provided with limited information and
understanding

Movement away from ‘Community’ based
committees/ boards being replaced with
‘Skills’ based board membership

Agenda set and led by internal staff

Longevity of membership linked to ‘power’ by
either board or staff depending on term.

Strategic planning led by staff, with limited
input by Board

Dominance of position linked to longevity

New members have silenced voices

Selection of board members led by
CEO/internal staff


Shielding - Lightbody M (2000) – agenda set by
internal staff creating opportunity to shield
information due to differentiating between
operational and governance activity of the board.
Dominance and power observed through robust
conversations, (or lack thereof), linked to longevity
of membership and skill – Renz,D(2001),

Ralph Stacey lens – the interplay of human
dynamics and relating that are apparent
around the board room table

To Stacey an organisation is not a system,
but a set of inter-connections.

Complex nature of humans, a set of
interactions and relations



Two organisation observed
– both Company Ltd by Guarantee reporting
compliance to Australian Securities
Investment Commission (ASIC)
Further research to broaden the scope of
services observed, diversifying entity type
and governance models

Investigate board member selection practices

Little research has been conducted into the
composition of not for profit boards in
Australia.
Organisation 1 ( Org 1)
Organisation 2 (Org 2)
Entity Type:
Company Limited by Guarantee
Company Limited by Guarantee
Reporting to:
Australian Securities Investment Commission
Australian Securities Investment Commission
(ASIC)
(ASIC)
Corporations Act 2001.
Corporations Act 2001.
Australian Accounting Standards Board (AASB)
Australian Accounting Standards Board(AASB)
Australian Taxation Office (ATO)
Australian Taxation Office (ATO)
Current Board Membership
7
7
Membership mix
Staff representatives, Project Volunteers and
Directorship volunteer capacity – no
Community members
remuneration
Financial Reporting compliance:
Note CEO holds position of Company
Secretary
Community or Skills based board
Mixed
Transitioning from Community representatives
to Skills based board
Funding source
70% Government grants
77% Government grants
Total revenue
$1,021,000
$8,254,000
Interest Income
$14, 648 – 1.4% of total revenue
$131,563 – 1.6% of total revenue



What is the future sustainability of the non profit
sector when research identifies such gaps.
With accountability mechanisms and compliance
increasing, coupled with a shrinking pool of
funds/resources/volunteers – how will the
development of government intervention – ACNC
impact the sectors sustainability
How can boards strengthen their skills and
understanding of financial management without
loosing the value of community based
membership?






Presentation of financial data
Sources of income
Risk – dependencies
Outgoings
Critical cost areas
Monitoring and tracking trends



What is the ‘back-story’ the financial reports
reveal about your service
How do we portray this story to other
members
Strengthening/empowering the board with
informative data to aid in effective decision
making
The accounting concepts





Balance sheet items
Understanding the financial position of the
organisation
Understanding the performance
Inflow and outflows of funds…
vulnerabilities/reliance's/ diversifying
income..
Moderating expenditure.. Maximising
efficiencies

How do we know what we want to measure…

Ratio analysis – snap shot of data, showing
big picture outcomes..

Dashboard of key performance indicators







Pie charts
Trends
Ratio analysis
Key critical cost areas – what are we trying to
measure / monitor ?
Are reports aligned with strategy
Key critical sources of income
How do we manage these ?
5
4
Series 1
3
Series 2
2
Series 3
1
0
Category 1
Category 2
Category 3
Category 4
Sources of Income
Grant Income
Room Hire
Fee for service
Interest
14
12
10
8
Forecast
6
Current
Last Year
4
2
0
Category 1
Category 2
Category 3
Category 4

Gross Profit Margin
Gross Profit
Income


- % of each income dollar is gross profit
- determines the adequacy of direct
income/selling price

Operating Expense Ratio
Total Operating Expense
Income



Indicates the % of each income dollar
absorbed by operating costs
Helps control operating expenses
(Lower the better )

Wage cost ratio
Wages x 100
Income
Lower the better, indicates the level of wages
to income

Current Ratio
Current Assets
Current Liabilities
Measures cash position
Assets available for every dollar of current
liability
(Higher the better)

Liquidity or Quick Ratio
Current Assets less stock
Current Liabilities less overdraft
Better measurement of cash measures liquid
(cashable) current assets
(Higher the better)

Cash reserves in weeks
Cash – Grants in Advance
Total Expenditure / 52 (weeks)

Indicates how many weeks an organisation
could continue to operate if all income was
ceased immediately





Thinking differently about the presentation of
financial data
Monitoring and review of critical income and
cost area
Importance of governance and effective
reporting to enhance/support effective
decision making aligned with strategy
Importance of a robust induction process for
new board members
Understanding the complex nature of board
dynamics.






Tips and Tools available for download
www.betterboards.net
www.communitycompass.org.au
Adele Johns
Community Compass Inc
[email protected]