Risks for those in Not-for-Profit Governance in 2016

A “perfect storm” confronting those governing not-for-profits?

Several items of legislative reform, some already enacted, and one proposed, have created real concerns for those governing not-for-profits. This article discusses some of those issues, and seeks to provide some reassurance to those governing not-for-profits.

 

Not-for-profit organisations are essential for strong communities

The 2013 Law Commission Report, “A New Act for Incorporated Societies,” confirmed that a strong not-for-profit sector is important to the health of a mature and civilised society. The Commission asserted that “community organisations play a very important role in New Zealand society” and that they have “a direct impact on New Zealand’s social and economic development through the provision of services not provided by the other sectors and the development of strong communities.”

The Law Commission noted that New Zealand has over 23,000 incorporated societies spanning a diverse range of interests and purposes, with approximately 45 per cent being cultural, sporting and recreational bodies, and the remaining 55 per cent covering a broad range of community activities, including social service providers, religious groups, development and housing bodies, educational and environmental interest groups, and business and professional groups. The Commission also argued that largely voluntary space in which incorporated societies operate is an important part of New Zealand society and of the economy (and Commission’s observations would also apply to charitable trusts).

 

Legislative reform threatening the essential role of community organisations?

The Vulnerable Children Act 2014 (see Protection of Vulnerable Children) and Health and Safety at Work Act 2015 (see Health and Safety Issues) have caused significant disquiet amongst not-for-profit organisations (and the 2014 Act in schools), and the proposed new Incorporated Societies Act (see Overview of Proposed New Incorporated Societies Act), is causing those governing not-for-profits considerable discomfort. Although some of these concerns may well be justified, some are not well-founded.
Three points need to be made about these legislative reforms:

  • The abuse of children is a national scandal, and the Vulnerable Children Act is intended to reduce the abuse children may be subjected to in the community,
  • The Health and Safety at Work Act reforms were prompted by the Pike River disaster, and are intended to improve workplace safety and reduce workplace deaths and injuries, and
  • Most of the reforms in the proposed new Incorporated Societies Act are well overdue.

There would be few who would argue that such legislative reforms are unnecessary. The issue is whether or not such reforms bring with them unintended or unacceptable consequences for not-for-profits.

 

The challenges for not-for-profits

The Law Commission recognised that not-for-profit organisations faces numerous challenges, including competing for adequate resourcing and attracting competent leaders (most of whom are volunteers), and that it is important for not-for-profits “that the legal framework under which they operate offers the right balance of autonomy, flexibility and accountability.”

Much of the concern among not-for-profits about the Vulnerable Children Act 2014 and the Health and Safety at Work Act 2015 does not relate to the desirability of achieving the objectives of the legislation, but rather relates to the potential personal liability of those governing and managing not-for-profit organisations. That concern has been heightened because of what is proposed in the current Exposure Draft Incorporated Societies Bill.

Much of the criticism of the reforms (with respect to vulnerable children and health and safety, and as proposed to the Incorporated Societies Act) is somewhat misdirected as the reforms have and will not substantially change the risks faced by those in governance of trusts and societies but have, rather, served to draw attention to risks that already exist. The criticism is, however, valid insofar as the proposed Incorporated Societies Act reforms expressly impose duties (and, therefore, risks) on society officers which few societies will be able to afford to insure against and the proposals (if accepted) will prevent societies from indemnifying officers in respect of criminal liabilities (even if indemnity insurance was permitted the cost is likely to be prohibitive).

Providing explicitly for those in governance of incorporated societies (and trusts) to be potentially liable has placed those people in a spotlight that has not previously been so clearly focussed on them, but has probably not significantly increased the risks they face. However, a correspondent has expressed his feelings forcefully:

Community groups, sports clubs and volunteer groups exist to perform community good roles or support sports involvement in the community.
The very nature of community good is to supply service, skills or labour for no return except the satisfaction of having contributed to an improved situation for the community. The people involved often do not have qualifications for what they do but are generally multi-skilled and dedicated to the task. To confront them with culpability for the actions of other volunteers or people completing projects overseen by them and their committees is obscene and will result in most resigning or continuing at significant risk. … If what community volunteers get for their trouble is culpability for their or others’ action there will soon be no volunteers. It is simply unacceptable to expect others to take that kind of risk. … I believe this to be a show stopper for me.
… I am unsure why specific provisions are required within the [proposed new Incorporated Societies Act] when all the potential wrong doings must surely be covered by existing criminal law statutes.

 

A measured response to the reforms by not-for-profits

The recent reforms and those proposed, as discussed above, need to be considered rationally, and not emotionally.

The major risks faced by those in governance and management positions in not-for-profits are likely to be those relating to the health and safety of volunteers and contractors and those the organisation benefits in some way (including its members, clients, and members of the public) by providing facilities or activities, and possibly some financial risks relating to financial commitments made where the organisation may not have funds on hand to meet those commitments.

Essentially, each not-for-profit needs to assess the different types of risks associated with its activities (including the potential for death, injury or loss, and the consequences if any of those risks eventuate). In an ideal world, those in governance positions should obtain directors’ liability cover tailored to the circumstances of the not-for-profit. If such cover cannot be obtained economically then those in governance and management will need, calmly, to assess whether they should continue to run the risks (essentially because of their personal commitment to the work of the not-for-profit organisation) and whether there is some other way of mitigating the risks, or whether they should cease to be involved in governance and management.

If the not-for-profit organisation is already incorporated then ceasing to be incorporated does not provide a means for those in governance to escape potential liability, as those involved in planning and doing the unincorporated not-for profit’s work are still exposed to personal responsibility and accountability; whereas, if there is an incorporated society or trust those considering possible prosecutions may choose to prosecute only the entity and not those who govern or manage it.