Poor Governance – Lessons from a Polytechnic

According to a Dominion Post report (17 August) a police investigation has begun after more than $750,000 was drained from Whitireia Polytechnic Students’ Association funds over a 12 month period.  An audit report is said to show that huge cash payments were made to former Association executive members, that about $17,000 was spent through excessive use of mobile broadband modems to surf the Internet, that mobile phone bills of five members of the executive averaged $700 a month, and that in June last year $20,000 was taken out of the Association’s savings account in cash and a further $10,000 by cheque, with the auditor unable to find any explanation for the withdrawals.

In another story in the same issue, the Dominion Post reveals that the Vice-President of the Whitireia Students’ Association had convictions in 2007 for burglary and was convicted and discharged on more than 20 other charges, including 19 of peeping and peering and two of unlawfully being on a property. Arising from this second story, there must also be an issue about whether people convicted of crimes of dishonesty should be permitted to become involved in the governance and management of voluntary societies and trusts.

Somewhat predictably, the newspaper’s editorial the same day focuses on what I believe is a peripheral issue:  “Whitireia Independent Students’ Association is not the first student association to have trouble administering the fees it collects.  However, with $1 million missing from the association’s funds, it will add impetus to the campaign to make students’ associations truly voluntary. Good. There needs to be a good reason to take money from people compulsorily – and when it is, the money must be managed to the highest of standards. At Whitireia neither has been the case.”

The question of compulsory student levies is peripheral as this type of misconduct (or, if this be found to be the case, fraud) is all too common with voluntary societies and trusts – just the previous week there was a story about a Vice-President of Diabetes Manawatu Incorporated defrauding that entity and another Diabetes Trust of more than $119,000 in 15 months to fund his gambling, online pornography and sex chatroom addictions while also spending some of the money on others “because it made him feel good.”

The consequences of poor governance can be serious as committee members and trustees may be held personally liable for the consequences.  Such liability may arise from judicial scrutiny of an entity’s governance and management, while, on liquidation, both the Incorporated Societies Act 1908 and Charitable Trusts Act 1957 provide that Part 16 of the Companies Act 1993 applies to the liquidation of an entity incorporated under those Acts.  Members of committees and trustees may be personally liable on liquidation of the entity they have governed if it has suffered losses caused by the failure to keep adequate accounting records, by misapplication or retention of an entity’s money or property, or if they have been guilty of negligence, default, or breach of duty or trust in relation to the entity.

What the Whitireia Polytechnic Students’ Association stories illustrate is a common problem of many entities being governed and administered by people who fail to read and understand the entities’ constitutional documents, and who are simply incapable of doing a competent job.  This is not a new phenomenon (M Gousmett, in “Governance of Charities” [2008] NZLJ 109, records that as long ago as 1414 concern was expressed about the “unaccustomed government” of charities).  In more recent years, there have been a number of public scandals over poor governance and management of voluntary societies and trusts, with those responsible lacking the necessary skills, training, aptitude and/or mental attitude to do a proper job, with many misappropriating or misusing (often taxpayer) funds.

The New Zealand Rugby League was dogged by governance problems over a lengthy period, and a February 2009 Sport & Recreation New Zealand (SPARC) report commented that “The success of any organisation is dependent upon strong governance,” and identified an “absence of basic governance disciplines.”  The SPARC report observed that “Effective governance ensures the Board of Directors provide leadership, direction and oversight to the Chief Executive and management with respect to defining, resourcing and securing the strategic goals and agreed outcomes which will underpin the success of the sport,” emphasising the “need for strong, high integrity, experienced governance with transparent processes and modus operandi,” and confirming the need for directors who are “people with strong empathy for the sport code, but with the ability to bring business disciplines to the table.”  While those statements were made relating to a particular sporting code’s governance and management the principles apply to all voluntary community entities.  Separately, SPARC has produced a comprehensive guide to effective governance, “Nine Steps to Effective Governance; Building High Performing Organisations” applicable to any society or trust.

At least for charities, there is hope of improvement, mandated by statute as section 10(1)(c), Charities Act 2005, specifies that one of the functions of the Charities Commission is to “[E]ducate and assist charities in relation to matters of good governance and management, for example, . . . by issuing guidelines or recommendations on the best practice to be observed by charities and by persons concerned with the management or administration of charities:  . . . by issuing model rules: . . . [and] by providing information to charities about their rights, duties, and obligations under this Act and other enactments.”

With the statutes providing for the incorporation of societies and charities being, respectively, over a century or over half a century old, there should be Parliamentary attention given to enacting minimum standards of governance required of voluntary sector entities.

This article appears out of the sequence planned by me, but later articles will look at what may be done when things go wrong, as they appear to have with the Whitireia Polytechnic Students’ Association.

 

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) 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.