Hello everyone and welcome to our webinar on the meeting the ACNC governance standards.
I am April Kitchenham from the ACNC’s Education team and with me is Zane Worthington from the ACNC’s Advice team. We will be presenting today’s webinar.
[Hi from Zane]
We also have Anne Duffy and Carolyn Doyle answering any questions you may have along the way.
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The purpose of this webinar is to explain what the ACNC governance standards are, how they apply and what charities can do to make sure they are meeting them.
We will cover these four important topics:
- To begin, we will look at what we mean by governance and briefly explain what it looks like for charities.
- We will then talk through each of the governance standards and what they require of charities. We will consider some examples developed from a range of real cases that demonstrate some of the challenges charities have with meeting them.
- We will also provide some examples of steps you can take to meet the standards,
- And finally, we will look at some of the common issues that our compliance team has observed with charities over the last couple of years.
What do we mean when we talk about ‘governance’?
There are many different definitions proposed for the meaning of governance. The ACNC suggests that ‘governance refers to the processes, activities and relationships of your charity that make sure that your charity is effectively and properly run.”
Governance plays a central role in the life of charities, but how it looks in practice will vary. Some of the common examples of governance activities charities are involved with are:
- Holding meetings to make sure that your members are kept informed about your charity’s activities,
- Setting a strategy and monitoring the work of an organisation to ensure that it aligns with the strategy, and
- Documenting roles and responsibilities of the people involved with the organisation.
Now, let’s look at the ACNC’s governance standards.
The governance standards are the minimum requirements for charity governance. The standards help charities to operate responsibly and to continue to do their charitable work. They also help to build public trust and confidence in the charity.
They are not a description of ‘best practice’ in governance, but rather a set of minimum standards that all charities must meet.
Charities must meet the ACNC’s governance standards to register with the ACNC and to remain registered. The governance standards are set out in the ACNC Regulations.
These standards are additional to other requirements your charity might have. For example, the ACNC governance standards don’t require incorporated associations to hold annual general meetings, but other state or territory laws may do so.
Also, meeting these standards aren’t the only obligations of registered charities. The ACNC has other requirements, such as submitting an Annual Information Statement and keeping records of activities and finances. You should make sure that you are aware of all the obligations and that your charity is meeting them.
It is worth pointing out that there is a very specific category of charities that are not required to meet the governance standards called ‘basic religious charities’. To be considered a ‘basic religious charity’ an organisation must meet some very specific requirements. It is a very small category and most religious charities don’t fit into it. We won’t go into the details of being a ‘basic religious charity’ here, but there is detailed information on our website at acnc.gov.au/basicreligiouscharity.
Now let’s look at each of the governance standards…
April, can you take us through governance standard 1?
The first governance standard is about the purposes and not-for-profit character of a charity.
This standard requires charities to:
- demonstrate that their purposes and character are not-for-profit
- comply with their purposes and character, and
- Provide information about their charitable purposes to the public.
What does it mean to be not-for-profit?
A not-for-profit is an organisation that does not operate for the profit, personal gain or other benefit of particular people (for example, its members, the people who run it or their friends or relatives).
Your charity’s purposes and character may be demonstrated in its governing documents. For example, if a charity’s constitution stated that it had the purpose of relieving poverty and it pursued that purpose, the charity would satisfy this part of the standard. However, some charities may not have conventional governing documents and may need to demonstrate their purpose and character through other means.
You must show your charity is complying with its purposes and not-for-profit character. This means that you need to be able to show that your charity is doing what it claims to be doing and operating as a not-for-profit should. The steps you must take to comply with this depend on factors such as your size and the extent to which you receive donations, grants and money from the public. For example, if your charity collects donations, the ACNC would expect it to have accounting systems in place to ensure the money is directed at your charitable purposes. If your charity is making payments to responsible persons or their associates for services, the ACNC would expect it to be able to show the payments are at arm’s length and not excessive.
If your charity is transferring significant amounts of money overseas to provide humanitarian aid, for example, it must demonstrate that the assistance was delivered as intended. That is, that the assistance went towards its charitable purpose and in a not-for-profit manner. It must show that it wasn’t diverted for purposes such as private benefit or, at the extreme, to fund terrorist activities.
Finally, you must make information about your purposes public. The ACNC requires all charities to publish their governing documents on the ACNC register. Doing this will satisfy the relevant part of this standard.
Zane, can you take us through a case study on this standard?
I just want to remind you that while the case studies we will give in this webinar are inspired by real cases, they are not de-identified examples of compliance cases. They are examples only.
Take, for example, a medium-sized charity that is fundraising in several different states and territories in Australia.
Through its fundraising, it generates a significant amount of money. The charity did not appear to be undertaking any charitable activities, but was making significant payments to the charity’s responsible persons – the members of its board.
We were alerted to this issue and, through our investigations, determined that the charity was not complying with its purposes and character as a not-for-profit. It was in breach of governance standard 1. It appeared that the charity’s true purpose was to raise money to provide payment to the charity’s board members.
This is not to say that a charity cannot pay its responsible persons – it can, but it must be able to show that these payments are not excessive and are made at ‘arm’s length’. This is so that the ACNC can be confident that the charity only exists for a charitable purpose and that it is meeting the requirements under governance standard 1.
Now we will look at governance standard 2. This standard requires charities to be accountable and transparent to members.
This standard only applies to charities that have members, for example, incorporated associations and companies limited by guarantee. It does not apply to charitable trusts.
If a charity is already meeting the requirements of incorporated associations legislation in a state or territory, it will also be complying with this standard.
If a charity is a company registered under the Corporations Act 2001 and meets requirements under that Act, it would be complying with this standard.
In fact, because those Corporations Act obligations are now switched off for charities, this standard increases the flexibility of charities that are companies to decide how best to be accountable to their members. For example, charities that are companies no longer have to hold annual general meetings (although you may still decide to hold meetings to comply with this standard, or your governing document may require you to hold AGMs).
Zane, we had questions from people when they signed up to attend this webinar about whether charities that are companies registered with ASIC still need to comply with the Corporations Act or just the governance standards.
Can you clarify that for us?
With the introduction of the ACNC Act and the governance standards, a number of provisions in the Corporations
Act no longer apply to registered charities that are incorporated as companies. These generally relate to obligations under the Corporations Act which have equivalent or similar obligations under the ACNC Act.
Broadly speaking, there are four obligations in the Corporations Act that no longer apply to charities:
- One - Charities are no longer required to provide certain notifications to ASIC when they change their constitution, company address or directors. Similar or equivalent obligations now exist to the ACNC
- Two – charities now report their financial information (if required) to the ACNC, rather than to ASIC.
- Three – certain civil directors duties in the Corporations Act have been switched off, and instead, the governance standards require charities to make sure its directors are subject to, and comply with some equivalent duties.
- Four – and finally - the requirements in the Corporations Act relating to meetings of members have been switched off. Instead, governance standard 2 requires a charity to be accountable to members – but does not stipulate exactly how this must be done.
That's a very quick rundown of the changes in the Corporations Act. The ACNC has a factsheet for companies limited by guarantee which goes through this in a lot more detail and explains exactly which obligations have moved from ASIC to the ACNC. You can find this at acnc.gov.au/CLG
Some things you could do to meet governance standard 2 are:
- Hold meetings with your members, such as annual general meetings or special general meetings.
- Ensure that members have the opportunity to ask questions and raise concerns about the way a meeting is run
- Make sure that your are providing suitable notice periods before meetings so that everyone involved in your charity has a reasonable opportunity to attend
- Have a minimum quorum for meetings – that is, a minimum number of people that must be present in order for a meeting to go ahead
- Run fair and transparent elections for the appointment of the members of your charity’s responsible persons, and
- Provide members with an Annual Report that includes financial information and information about a charity’s work towards achieving its purpose.
Let’s consider another case study.
This time, a charity that runs a centre for people who are experiencing homelessness.
The charity was brought to our attention because its members had concerns about the governance of the charity.
The charity’s website had been taken down by a former responsible person (a board member). This person resigned, but had the login details for the charity’s website and took it offline. After that, almost no information about the charity was available to members.
Through our investigation, we found that the board was working hard to get the website back online and was making changes to improve governance within the charity. The charity was taking positive steps, but it was failing to
keep its members informed of their activities. This highlights how important it is to be accountable to your members, especially in difficult circumstances or if a charity is undergoing a period of change.
Governance standard 3 requires charities comply with Australian law.
Note that a charity does not need to be actually charged with an indictable offence or given a penalty to be in breach of this standard.
For example, if the ACNC reasonably believes it is more likely than not that a charity has engaged in an offence of fraud, the charity would be in breach of this standard. The ACNC could take action (for example, by issuing a formal warning) without the need for a prosecution to be completed. This allows the ACNC to protect a charity from potential ongoing misuse while legal proceedings are finalised.
Governance standard 4 requires charities to ensure that the people on its governing body – that is, its board or committee – are suitable.
This means that they must not be:
- Disqualified from managing a corporation, or
- Disqualified from being a responsible person by the ACNC
Although the ACNC and ASIC can disqualify people, and will list these persons on their respective registers, people can also be automatically disqualified from managing corporations. When this occurs, they will not necessarily be listed on the ACNC or ASIC registers.
Two examples of matters that will result in automatic disqualification are:
- If the person is convicted of an offence in contravention of the Corporations Act 2001, or of an offence involving dishonesty and is punishable by imprisonment of at least 3 months, or
- If the person is an undischarged bankrupt.
It’s important that you are aware of how someone can be automatically disqualified and consider what impact this might have on the eligibility of your board members to be responsible persons.
There are a number of steps you can take to make sure your charity is meeting governance standard four.
As a first step, you should check the ASIC and ACNC registers of disqualified persons to ensure that none of your charity’s responsible persons appear.
It may also be a good idea to ask your responsible persons to sign a declaration which states that they are:
- Not currently disqualified from managing a corporation (as mentioned, there are some things that may automatically disqualify you), and
- That if they become ineligible, that they will notify the charity.
Of course, if any of your responsible persons do not meet these requirements, you will need to take steps to remove them. It’s a good idea to start with asking them to stand aside, but if not, it may be necessary to take further steps.
Our last standard - governance standard 5 - is the most significant of the standards for what it requires charities to do, and due to the number of issues we see in charities.
This governance standard requires a charity to make sure its responsible persons follow 7 duties.
Zane, I’ll let you take us through these duties.
These duties come from the common law and they have well-established meanings.
- The first duty requires that responsible persons exercise a degree of care and diligence in their roles. This may include reading the charity’s papers, turning up for meetings on time and making sure that they are appropriately informed about any matter on which they are required to make a decision.
- Duty number two requires that a responsible person always acts honestly and fairly, and importantly, in the best interest of the charity. When you become a board member for a charity, you accept a duty to act in its best interests. You must ensure that you are always doing so when acting as a board member, and that you do so in a way that is consistent with your charity’s charitable purpose.
- The third and fourth duties require that a responsible person does not use their position or any information gained from their position in a way that is improper. For example, if you gain access to confidential information in the course of your work as a board member, this must only be used for the purposes of informing any decisions you make on that board.
- Under the fifth duty, a responsible person must disclose conflicts of interest. This means that a responsible person who has, or may appear to have, a ‘material conflict of interest’ in a decision should tell the other responsible persons about it before the decision is made. Once the other directors are told about the interest, the charity may also need to take steps to ensure that this conflict is managed appropriately.
- The sixth duty of a responsible person is to ensure that the charity’s financial affairs are managed responsibly. This means understanding the charity’s financial position and making decisions which will not endanger its financial health. This duty is not intended to discourage you from being innovative or taking risks, but rather to encourage charities to maintain appropriate financial systems and procedures to ensure its ongoing financial sustainability.
- Finally, the seventh duty: responsible persons must ensure that their charity does not operate while it is insolvent. This means that the charity must be able to pay its debts when they are due.
April, it may be worth explaining what level of financial literacy a board member should have to make sure the requirements are met. Can you explain what the sixth and seventh duties require?
Generally speaking, a responsible person is required to have an understanding of financial concepts and financial literacy that will enable them to make informed decisions about a charity’s finances.
At the very least, a responsible person should be able to determine whether their charity is solvent and the impact that any decision is likely to have on its financial health.
A responsible person is required be informed about matters on which they will make a decision. They cannot make informed decisions about a charity’s finances without an understanding of the financial concepts that relate to them.
Of course, responsible persons can seek and – up to a point – rely on the advice of an expert. But they must not do so blindly.
Responsible persons must have enough knowledge to question any professional advice they are given, recognise any inconsistencies, and identify any problems with the answer. Professional advisers play an important role within charities, but these duties require that responsible persons still question information when receiving advice.
Of course, the amount of understanding required will vary depending on the complexity and size of a charity’s finances. What would be expected of a charity with a very small budget would be different to the expectations on a responsible person for a charity with a multi-million dollar budget.
In the end, the financial knowledge must be reasonable for the circumstances of the charity. Consider the charity’s nature, the scale of its operations, the complexity of its finances and ask what financial knowledge would be needed to make informed decisions.
Some of the other things a charity can do to make sure its responsible persons meet the duties in governance standard 5 are:
- Providing a letter of appointment to your responsible persons that sets out what their duties are under this governance standard. A letter such as this can also be a great way to set out any other expectations of board members.
- Many charities provide information to their board members that will help them understand and meet their duties. There are a number of useful guides available which explain the duties in detail and how they apply to responsible persons. You could also consider arranging training for responsible persons if required.
- And, of course, if responsible persons do not know their duties or are not meeting them, take action. The members of a charity’s board should feel comfortable openly discussing their duties and should hold each other to account for ensuring that they are met.
Let’s consider a case study on the duties of responsible persons. April, can you take us through it?
We recently came across a charity that operated nationally online which allowed them to raise funds in several different states and territories. It was alleged by one of the charity’s volunteers that some of the money the charity raised was being made available as interest-free loans to the responsible persons.
In our investigations, we found that this was indeed occurring. We determined that the charity’s responsible persons were failing ensure the charity’s assets were put towards its charitable purpose. They failed to act in the best interest of the charity.
In this case, instead of acting in the best interests of the charity, the responsible persons were acting in their own interest and using these assets for their own private benefit. As such, the responsible persons were failing to meet their duties.
The ACNC released a Compliance Report in 2015 which reflects on the lessons learned from ACNC compliance activities in the period of 2012-2014. Governance is an underlying theme in the report - almost three quarters of substantiated concerns related to breaches of the governance standards.
Concerns raised with the ACNC range over a number of topics, but the three most common issues raised in cases that the ACNC sees are:
- Record keeping – where a charity has poorly organised, incomplete or, in some cases, no records whatsoever. Poor record keeping is a common indicator of broader governance concerns, but it can also raise problems by itself. For example, poorly kept records can make it difficult to identify and prevent fraud at charities. It can represent a major concern.
- Failing to meet the requirements of being a not-for-profit is also a recurring theme in our compliance cases. These are the cases where we see inappropriate private benefit or where charities are working towards purposes that are not charitable.
- And finally – failing to demonstrate accountability to members is also a common theme in the cases we investigated.
These issues are common for many of the compliance cases we encounter and could be useful indicators of more significant governance problems within a charity.
As the ACNC continues to receive more information about charities through the Annual Information Statements, we are building a better picture of the charity sector. We will use this information to proactively identify non-compliance in the future and help more charities to comply
We know that charities often have questions about the governance standards. There is a lot of information available on our website on the governance standards, and on all the obligations that registered charities have to the ACNC.
I’ve included links on this slide to most of the information we covered today – but we will also ensure that these links are sent to you all in the follow-up email. You will be able to watch the webinar in a couple of days on our website.
The links here will take you to pages about:
- The governance standards
- The ongoing obligations of registered charities
- Governance tools – which include some quick tips and templates you can used
- Basic religious charities – the category we discussed earlier – a special type of charity that is not required to meet the governance standards
- Companies limited by guarantee – or “CLGs” – which we mentioned in today’s presentation, and
- The ACNC’s compliance report – which Zane just spoke about. This provides information about some of the ACNC’s work in compliance over the last couple of years.
You may also be interested in our guide Governance for Good, which explains some of the central concepts in governance and how they relate to charities. It is available for download on our website.
If you do want to get in touch – you can do so in a number of ways.
You can view previous ACNC webinars and register for upcoming webinars at acnc.gov.au/webinars.
Call us on 13 ACNC – which is 13 22 62. Our phone lines are open between 9.00 am and 6.00 pm – and they are staffed by helpful people who understand the charity sector and can provide advice on how charities can meet their obligations to the ACNC. Our staff are trained to give general advice on a range of topics related to the regulation of charities. You can also email them at firstname.lastname@example.org – this is a particularly good idea if your issue is complex or if you think it will need detailed consideration.
And, of course, we’re active on social media – so you can find us on facebook, Twitter and YouTube.
And that brings us to the end of our webinar.
Thank you for joining us today and thank you for your questions. We hope that this has been useful to you and helped you to further your understanding of the governance standards.
We are always looking for ways to improve our education products and so we would appreciate it if you took the time to let us know what you thought.
If you have any additional comments, questions or suggestions, you can get in touch with the ACNC Education team directly at email@example.com.
Well, that’s it from Zane and me. Thank you to Anne and Carolyn for answering questions.
Thanks to everyone who participated and we’ll see you next time.