Reforming the Not-For-Profits Statutes – Governance Questions

My last article closed with the assertation that of all the questions posed in the Law Commission Issues Paper June, those covered in this article (relating to constitutional issues) were probably of most regular practical significance for many societies and those that advise them.   The questions discussed in this article are almost as significant.

Question 18:Do you agree that the new Act should provide a ‘code’ of duties that committee members must observe in their decisions?

Question 19:If so, what duties ought to be included in the code?

Question 20:In what respects might the Companies Act obligations need to be altered if included in a new Incorporated Societies Act?

The problem of committees becoming laws unto themselves, acting dictatorially, and becoming a clique remote from many members is common, but that does not highlight a failure of the legislation.  Rather it is a consequence of factors such as member apathy, lack of understanding of good governance practice, and failures of accountability and transparency.

It is not possible to legislate for good behaviour, but some form of code might be useful if it is combined with some improved dispute resolution procedure (discussed below and in my next article).  A company director’s obligations are set out in sections 131-137, Companies Act, and include requirements to act in good faith and in the best interests of the company, to use powers for a proper purpose, not act in contravention of the Companies Act or the company’s constitution, not run the company recklessly or at substantial risk to creditors, and to exercise reasonable care, diligence, and skill taking into account the nature of the company, the nature of the decision, the position of the director and the nature of the director’s responsibilities.  At present those common sense responsibilities are not found in legislation relating to not-for-profit organisations.

My view is that question 18 should be answered affirmatively, and that a code based on the Companies Act responsibilities would be useful.

Question 21:Our preliminary view is that some minimum standards of conflict of interest rules ought to be part of the new statutory regime, as they are in the Companies Act. Do you agree?

Question 22:Do you agree that there should be a requirement for the disclosure of financial interests? Do you agree there should be a further requirement to disclose other material personal interest?

Question 23: What should be the consequences of a disclosure of either financial or other material personal interest? The Companies Act requires disclosure only, but there are other options: recusal from voting, or recusal from the meeting. Which do you consider appropriate, and why? Should there be different types of consequences, depending on whether the matter disclosed is financial, or other material personal interest?

Question 24: What are your views on the criminalisation of failure to disclose a conflict of interest? Might civil penalties be preferable, for failures under the Act that do not amount to deliberate dishonesty?

Question 25: Does there need to be a general prohibition on the “dishonest use of position”?

A generation ago few would have realised the significance of conflict of interest issues for voluntary organisations.  It is now common to find conflict of interest declarations on meeting agendas and conflict of interest registers adopted as current good current governance practices.  As many believe that only financial interests need to be declared I would prefer to have the requirements more broadly spelt out.  While my own preference is to avoid having criminal law sanctions hanging over those governing community organisations, I have found that many society and trust problems do involve the “dishonest use of position,” so a prohibition would be useful.

Question 26: Would it be useful to allow courts to consider banning individuals from being committee members of incorporated societies in the same way as individuals can be barred from being directors?

Where the Courts end up dealing with disputes in community entities the conduct of those in governance is commonly scrutinised with some rigour.  Being able to seek a banning order as one of the remedies in civil proceedings would be enable Courts to impose sanctions where conduct falls below minimum standards.

Question 27: Would enabling the Registrar to take actions on behalf of the society to recover compensation or seek an account of profits be appropriate?

One of the most troubling issues when those involved in a dispute find themselves in Court is the costs that divert funds from community use, which suggests that this question should be answered “yes.”  However, while having the Registrar act as policeman is an attractive idea, it would come with costs which the Government is unlikely to impose on taxpayers.

Question 28: Does there need to be greater rigour than currently, around requirements for auditing and appropriate accounting standards? If not, why not? Do you agree that the new Act should provide for the imposition of audit and accounting standards by regulation that might be varied in accordance with the size on the society, and how ought that size be judged?

I discussed the value of audits or reviews of accounts in Issue 152 (28 January 2011), and for most community organisations I seriously doubt the value of a formal audit.  A review of the accounts and of governance practice is likely to provide better value for money for the organisations.  For larger community societies and trusts (perhaps set on the basis of an arbitrary annual income limit, such as $1,000,000) an audit requirement would, however, seem reasonable.  If those helping to fund a voluntary organisation want more assurance that their funds are being properly used they can always require an audit as a pre-requisite of making grants.

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.