BEFORE JOINING A NOT-FOR-PROFIT’S GOVERNANCE GROUP

Should you get involved?

If you are thinking about becoming more involved in a community organisation you need to do some due diligence before your election or appointment. In particular, you should consider the organisation’s reputation, obtain and study the organisation’s constitution, look at the last year’s minutes and annual accounts, attend a meeting of the committee or board, and consider who you will serve with.

Most of those taking such office do so without first studying and understanding the organisation’s constitution, including its purposes and powers, how people become and cease to be members, the minimum frequency of general and governance meetings, how the organisation enters into contracts, the provisions for annual general meetings (when they are to be held, on what notice, and what is to be done at them), and how special general meetings are called and held. Few realise that the obligations of office require serious duties and obligations to be performed (never accept appointment or election as an “ego trip”), and few check that nomination and electoral processes are correctly followed (whether elected or appointed), or obtain material from outgoing officers.

Getting into the detail

Those who govern a society or charity have duties and responsibilities akin to those of company directors (the new Incorporated Societies Act will make this more explicit). That requires a thorough understanding of all sorts of things, some of which you may never have thought of before:

  • Governance is generally “learned by doing,” and involves setting the policies and strategies of an organisation. In larger organisations it will involve guiding and monitoring those in management, and in smaller organisations it may also involve managing (something which often causes a confusion of the governance and management roles).
  • Volunteers (who do a job without an expectation of or receiving actual reward) and paid staff all need job descriptions, and employees need employment agreements (signed before they start work). Any honoraria paid to members are taxable, and if there are paid staff all the legal requirements imposed on employers need to be met. Whether people who do the organisation’s work are paid or not, health and safety requirements (which are becoming clearer and tougher) need to be met.
  • Cash is king, and without cash, an entity will fail, but it is helpful to understand the contrasts between different types of entity:
For-profit entity

  • Realising the entity’s purposes or mission produces cash
  • Success in realising the purposes or mission is measured in cash earned, and retaining and growing the customer base
  • Without cash the entity fails
Not-for-profit entity

  • Realising the entity’s purposes or mission consumes cash
  • Success in realising the purposes or mission is measured in services provided and numbers of “clients” served
  • Without cash the entity fails

Most not-for-profits have annual obligations and you must ensure that those are met:

  • The entity’s constitution will identify many such obligations including requirements for annual meetings and accounts,
  • If the entity is a society is must lodge an annual report with Registrar of Incorporated Societies (the new Incorporated Societies Act will increase the amount of detail required), but a society registered with the Charities Services need not file a return with the Registrar, only with Charities Services, and
  • All registered charities must complete an annual report to Charities Services, and
  • If those statutory reports are not filed, the entity risks deregistration (i.e. losing the benefit of incorporation and/or registration under the Charities Act), and
  • There can be many IRD obligations, and if these are not met that can have serious personal consequences and potential liability for those who govern not-for-profits.

Changes in the Law

  • The new Incorporated Societies Act will spell out minimum requirements for society constitutions and specify the duties of those in governance, and there will be meaningful penalties for non-compliance with officers’ duties. This will also bring societies registered under the Charitable Trusts Act 1957 into the new Incorporated Societies Act regime.
  • A new “Accounting Standards Framework” alters form of financial statements (Financial Reporting Act 2013 and External Reporting Board) for accounting periods commencing from 1 April 2015.
  • The current Accounting Infrastructure Reform Bill proposes different levels of audit or review depending on an entity’s annual expenses (over $1M audit, between $500K – $1M audit or review, and under $500K none).
  • The new Health and Safety Reform Act enacted in 2015 in effect from 4 April 2016 will affect community organisations.

Protecting Yourself

First, and obviously, you must comply with the general law of the land, but in addition also with the not-for-profit’s constitution – and you can get into serious trouble if you have not read and retained a good understanding of the constitution. If you engage in communications with third parties that may involve some legal implications (particularly, contractual), you need to protect yourself by making it clear that you are an agent for the entity (but if it is not incorporated you may be personally liable – a good reason for incorporating!). Enhance your chances of being better protected by noting the fact of incorporation and any Charities Board number on all communications (letters, emails and financial).

You should seek to exclude any personal liability for the entity’s contracts, you should ensure that you are properly appointed, and if the entity is a charitable trust changes of trustees must be properly documented (and registered with Charities Services), and retiring trustees should seek to be released and indemnified against claims.

 

This is one of a series of articles on societies and charitable trusts. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.