Some “Big C” Issues for Not-for-Profits

There are a number of current legal risks facing not-for-profits that those who govern and manage not-for-profits and their advisers should be aware of.

Celebrity risks

Celebrity endorsement of a not-for-profit may help build its profile and enhance its credibility, but celebrities also pose some potential legal risks that need to be considered and managed.  First, the fact that the celebrity’s other commitments may be unpredictable must be factored into the arrangements, and the issue of who is to meet any costs associated with the celebrity’s involvement (fees and expenses), precisely what a celebrity is expected to do, and the term of appointment must be considered, and the commitments clearly spelt out (essentially in contractual form).    Finally, there may be risks associated with the particular celebrity that could arise and those contingencies considered – if the celebrity fails to perform, if the celebrity becomes a reputational liability (for instance, imagine having Rolf Harris as a patron), or if the not-for-profit is “captured” by the celebrity’s agenda.

Change risks

Change is always with us, and there are some important changes coming in the next few years.  The new Accounting Standards framework alters the format of financial statements for accounting periods from 1 April 2015 (Financial Reporting act 2013 and External Reporting Board), and the current Accounting Infrastructure Reform Bill will alter audit or financial review requirements (an audit will be required if annual expenditure exceeds over $1M, an audit or review will be required if expenses are $500K – $1M, and there will be no audit or review obligation if expenses are less than $500K).

A new Incorporated Societies Act (which will also affect societies registered under the Charitable Trusts Act 1957) is expected to be passed in 2016, and incorporated societies will have a transitional period to get their constitutions (for instance, incorporating grievance, complaint and dispute procedures) compliant with the new statute.  In addition, there will be clear and explicit responsibilities for those in governance, and penalties for non-compliance.  Those providing pro bono advice to affected societies will need to consider the need to come up-to-date with the changes and also whether they will provide free services to review those society constitutions.

Society is changing ever more rapidly – and societies need to adapt and remain relevant to those they serve, including a changing and aging demographic.

Complicity risks

When things go wrong those in governance have sometimes difficult obligations to speak out, rather than “go with the flow,” and if they remain silent they are complicit in that behaviour.  That may require that people resist autocratic leaders, ensure that constitutional provisions are followed, that good administrative practices and financial protocols are strictly observed, that periodic independent checking of the finances is undertaken (whether or not an audit or review is legally required), and that hard or awkward questions are asked.  The mantra “be wholly trustworthy, but not wholly trusting” is good advice for those in governance.

In order of increasing seriousness, complicity may comprise being wilfully blind (not asking obvious questions or challenging suspicious actions), being corrupted (persistent and knowing wilful blindness), and being actively complicit (having actual knowledge of unlawful actions or criminality).

Complacency risks

Complacency is often characterised by adopting the “she’ll be right” approach, by accepting unquestioningly that “we’ve always done it this way,” by not having regular governance training, by assuming that all is well, by being blind to wrongdoing, and by not thinking strategically.  Being complacent risks being held personally liable for failures and losses.

Commitment risks

Just as in marriage, being in governance requires commitment in both good and bad times, and committing sufficient time to do a competent job.  Those who govern also need to realise that being in governance is not just good for the CV or an ego trip, and that “masterful inactivity” is unacceptable.  Failure to recognise and accept that commitment may result in personal risks and liabilities.

Compliance risks

There is also an increasing multitude of compliance requirements for those governing and managing not-for-profits; constitutional requirements (time limit, quorum, proxy, required majority, minimum meeting obligation, control of meetings, conflicts of interest, accuracy of minutes, etc issues), obligations imposed by statute (such as the Incorporated Societies Act, Charitable Trusts Act, and/or Charities Act, health and safety, employment, GST, paying tax on honoraria, etc.), local authority requirements (such as under the Resource Management Act, local government legislation, Building Act, etc.), and other general legislation (a recent statutory compliance review for a client identified over 100 possible legal instruments, most with multiple obligations).  Those in governance cannot simply leave it to managers – compliance is also a governance obligation, and those who govern need to satisfy themselves that the not-for-profit they govern is compliant with its obligations.

A not-for-profit may face investigation by the IRD, the Charities Board (either by random choice or after a complaint), the Serious Fraud Office or the Police, and in the event of liquidation there may be claims by liquidators against those in governance.

Being pro-active about legal risks in not-for-profits

Those in governance of, or advising, not-for-profits can and should be proactive in considering legal risks.  Some suggestions:

  • Be actively aware of the risks, in both governance and management.
  • Have a governance audit and risk management committee regularly reviewing activities, finances and the potential risks.
  • Involve people skilled in transformational governance to establish strategies and policies for active growth, and to “bed in” best practice in governance and management.
  • Seek (and be prepared to pay for) competent, specialist legal, accounting, governance, management and strategic advice.
This is one of a series of articles on societies and charitable trusts by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. 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.