DECIPHERING THE CODE OF GOVERNANCE FOR CHARITIES AND IPCS DR LAN LUH LUH CO-DIRECTOR, CORPORATE GOVERNANCE & FINANCIAL REPORTING CENTRE

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1 DECIPHERING THE CODE OF GOVERNANCE FOR CHARITIES AND IPCS DR LAN LUH LUH CO-DIRECTOR, CORPORATE GOVERNANCE & FINANCIAL REPORTING CENTRE 1

2 BACKGROUND The Charity Council developed a draft Code of Governance for the charity sector in June 2007 to seek feedback and comments. The final Code is likely to be released at the end of The main principles of the Code are intended to be relevant to registered charities and institutions of a public character (IPCs) across all sectors. 2

3 Question 1:Why a CG Code? Charities and IPCs solicit donations from the public, and these donations enjoy double tax deductions. Therefore, they owe a duty to the general public and their respective beneficiaries to ensure that they are properly governed and to account and disclose how the resources are being used. To allow the general public to make an informed choice in their decision to support any charitable cause. 3

4 Question 2: Does the Code have any legal effect? It is not a piece of legislation. Although it is only a best practice guide and noncompliance without explanation will not lead to criminal sanctions (e.g. fines etc.), persistent defaulters may be asked to explain to sector administrators why compliance or explanation is not possible. In the extreme case, the authority may want to review the organization s charity or IPC status. 4

5 Question 2: Does the Code have any legal effect? Non-compliance may lead to contraventions of other relevant legislation e.g. NKF saga If the Code was in place at that time, the NKF Board might have breached certain principles in the Code (e.g. BOD was not independent, conflict of interest etc.) NKF -- Singapore largest charity. Its reserves as of 2005 was $262 million. 5

6 National Kidney Foundation (NKF) In July 2005, following the collapse of a defamation trial brought by NKF against SPH, it was revealed that there were instances of gross mismanagement of donor s fund, conflict of interest and misrepresentation by the then CEO, TT Durai. Legal issues involved New NKF Board sued the Chairman and the Finance Director of the old Board, other than Durai etc. for gross negligence and breaching their duties as directors Former staff and board member Matilda Chua was found guilty of falsifying company accounts with intend to defraud, corruption etc. Durai was also found guilty on several counts of criminal offences. 6

7 National Kidney Foundation (NKF) In May 2007, NKF board members Richard Yong and Loo Say San were each fined the maximum $5,000 after being convicted of dereliction of their duties as directors of the charity. Yong and Loo were also barred from holding directorship in any company for 4 and 3 years respectively. In mitigation, their lawyer, Mr Chia Boon Teck, urged the court to be lenient, stressing that both Loo and Yong had been working for the NKF as unpaid volunteers and that they had not been dishonest. District Judge Jasvender Kaur still ruled that they had breached their duty as directors: 'Directors must not only act honestly, but also exercise reasonable diligence...directors also have a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's affairs to enable them properly to discharge their duties as directors...in this day and age, the demands made of directors are more exacting and the community has come to expect more from them. 7

8 National Kidney Foundation (NKF) In addition, because Yong and Loo etc. were unable to pay the damages to NFK as a result of the civil suit, they were declared bankrupted by the High Court on 17 th May

9 National Kidney Foundation (NKF) Later, it was revealed that Yong and Loo were suspected to be involved in elaborate plans to hide their assets from NKF. Yong even left the country as a bankrupt but was arrested in Hong Kong and brought back to Singapore. On 18 th September 2007, he was sentenced to 15 months jail. His wife was also charged with money laundering. Yong was supposed to share in the S$12 million (US$9 million) worth of claims filed against him and Loo, Chua and Durai by the NKF. Although it was not a small sum of money, the price (jail term, loss in reputation etc.) he had to pay for evading his liability cost him dearly. 9

10 Question 3: What is meant by "Comply or Explain? This means that charities and IPCs should use their best endeavor to comply with the Code guidelines. However, in areas where it may be difficult to comply with the Code (e.g. religious polity reason etc.), the relevant organization should explain why deviation is necessary. Understanding and following the letter and the spirit of the Code. 10

11 Question 4: Is it necessary to comply with all parts of the Code? This depends on the nature of the organization. All IPCs and charities must seek to comply with the Basic Section of the Code. Whether an organization needs to comply with the Enhanced and Advanced sections will depend on its IPC status and the size of the charity. The specific Code guidelines are tiered as follows: Basic Section - Applicable to all charities and IPCs; Enhanced Section - Applicable to all IPCs and large charities with gross annual receipts of $10 million or more2; and Advanced Section - Applicable to large IPCs with gross annual receipts of $10 million or more. 11

12 For example: 1.2 Operations Plan Basic The Board shall ensure adequate resources for the operations and programmes of the charity, and that such resources are effectively and efficiently managed. Enhanced The Board shall approve a strategic plan for the charity to ensure that the activities are aligned to the charitable objectives (such as an annual work plan, two to three year plan etc). The Board shall review the plan on an annual basis... Advanced The Board shall ensure that there is a current and updated plan on developing the capability of the charity and shall monitor the progress of this plan. It shall also measure the overall organisational performance of the IPC. 12

13 Question 5: What areas of concern are covered in the Code? 9 main areas: Strategic Planning Board Governance Conflict of Interest Programme Management Human Resource Management Financial Management Fund-Raising Practice Disclosure and Transparency Public Relations and Corporate Communications 13

14 Question 6: Who has the responsibility to ensure that the Code is being complied with? The Board (council or committee responsible for the governance of the organization) of the Charity or IPC The Board is basically the trustee of the assets of the organization. All members of the board have a collective duty to ensure that the organization is being run in a proper and well-governed manner. 14

15 Question 7: How to ensure compliance with the Code? The board should find out the status of the organization, i.e. which category does the organization fall under? Study the guidelines in the Code carefully and formulate a checklist; form an internal committee to run through each item and see if the organization is able to comply with the listed item. If not, state the reason and whether it is able to comply (e.g. by changing organizational structure etc.) in the near future. If there is no way the organization can ever comply with the guidelines (or if certain portions of the guidelines are not applicable), then a good reason should be recorded. 15

16 Question 7: How to ensure compliance with the Code? There is no need to rush to achieve 100% compliance with the Code however, a systematic approach towards compliance should be formulated in the long run 9 areas can be divided into 3 categories:- Internal Strategic Planning, Board Governance, Human Resource Management, Conflict of Interest Financial Program Management, Financial Management, Fund-Raising Practices. External Disclosure and Transparency, Public Relations and Corporate Communications Putting in place a good governance system is a continuous process and not a job to be done just before the submission of the annual reports to the various sector administrators. 16

17 Eight Pieces of Advice for a Director 17

18 Eight Pieces of Advice One: A director should be aware of his duties under the relevant pieces of legislation and the constitutive documents that govern the organization. This will depend on the legal nature of the organization: company (e.g. NKF and some of the larger IPCs), society, trust etc. 18

19 Eight Pieces of Advice Two: The law uses an objective standard to gauge if a director has discharged his duty adequately. Question asked is : Whether he had exercised the same degree of care and diligence as a reasonable director found in his position? There is no fixed standard but it really depends on the nature of the organization, the role of the director, the size and scope of the organization and the activity in question etc. 19

20 Eight Pieces of Advice In the NKF saga, NKF and Forte had signed an agreement, valued at US$1.61 million, in September 2001 to deliver the software management system to NKF by 15 January The system was to be ready in two phases, the second being on 15 January 2003, which was the test date. NKF paid an advance of US$320,000 as a sign-on payment in November Although it was not ready by the agreed date (15 January 2003), Forte was paid a total of more than US$800,000 in three payments, the last on 22 October The additional amount of US$722,160 was paid to Forte in December Even though the system was never ready, the Board nonetheless approved the large payout to Forte. This amounted to gross negligence on the part of the Board. 20

21 Eight Pieces of Advice Three: Mere incompetence does not mean that the director has breached his duty. However, the director may technically have breached certain provisions under the relevant Acts e.g. failure to submit accounts or annual report Companies Act. Four: A Director is not responsible for the debts of the organization. As long as a director act prudently and within the laws, he will not be personally liable for the debt of the organization. Exception: if a director personally guarantees the debt of the organization; the organization does not have a separate legal entity etc. 21

22 Eight Pieces of Advice Five: Delegation of powers to qualified personnel is permitted. provided this is done in the absence of circumstances that would excite the suspicion of a reasonable man. A director is not negligent merely because the person he trusted turned out to be a rogue. Therefore, he cannot be held liable for being defrauded. However, delegation does not mean total abrogation of duty and the director must ensure that there is a proper system of supervision of the delegated powers (e.g. NKF saga). 22

23 Eight Pieces of Advice Six: A director should ensure that he remains relevant to the organization he serves. The Board and its members should constantly keep themselves abreast of the latest developments, happenings and information relevant to the organization in order to ensure that they are not performing at a sub-optimum level. 23

24 Eight Pieces of Advice Seven: A director should constantly review whether he is putting in enough time and energy for the works of the organization. This is especially relevant to directors who may hold multiple directorships in both profit and not-for-profit organizations. Just because he/she may be an unpaid volunteer is not a good excuse for negligence (e.g. NKF saga). The director must be aware of what the organization is doing there may be incidents of conflict of interests 24

25 Eight Pieces of Advice Eight: There is no a set of hard and fast rules as to director s duties. Passion alone is not sufficient to be an effective volunteer for a charitable organization. A director needs to be vigilant and be aware of the changing landscape. Be ready to ask when one does not know the answer; always consult an expert when in doubt. 25

26 THANK YOU 26