Corporate Governance Workshops

Transcription

1 Corporate Governance Workshops Governance and Intermediaries - Issues in the non-profit organisation environment Speakers Ms. Nadia Almenoar Partner, Corporate Practice Group Rodyk & Davidson Mr. S Sivanesan Partner, Corporate Practice Group Rodyk & Davidson

2 Contents Part Part I Part II Part III Part IV Part V Title Introduction to non- profit organisations and governance Current legal framework Intermediaries Case Study I: NKF Case Study II: Ren Ci Part VI Part VII Case Study III: City Harvest Church Moving forward

3 INTRODUCTION TO NON-PROFIT ORGANISATIONS

4 What are non- profit organisations (NPOs)? Organisations that are established not for the purpose of making profits This includes charities and institutions of public character (IPCs)

5 What is a charity? Any institution which is established for exclusively charitable purposes No exhaustive definition, though the charitable purposes that are recognised are: 1. Prevention or relief of poverty 2. Advancement of education 3. Advancement of religion 4. Other purposes beneficial to the community

6 What is a charity? (cont d) Other purposes beneficial to the community have been recognised to be the advancement of: o Health o Citizenship or community development o Arts, heritage or science o Environmental protection or improvement o Relief efforts for those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantages o Animal welfare o Sport, where the sport advances health through physical skill and exertion

7 What is corporate governance? Corporate governance refers to the system by which companies are directed and managed. This involves a set of relationships between the company s board, management, employees, shareholders and other stakeholders. This also provides the structure through which the company achieves its objectives and provides accountability to stakeholders. Good corporate governance therefore is an effectual balance of promoting the long-term success of the company, and providing accountability and control systems which are symmetric with the risks involved. Risk Governance Guidance for Listed Boards, by the Corporate Governance Council (10 May 2012)

8 Corporate governance in the context of companies Elements of corporate governance: o Transparency o Accountability o Fairness

9 Should the concept of governance for listed companies apply to NPOs as well?

10 Fundamentals Why is governance necessary in the context of NPOs, and especially charities? o Governance is important because it affects how a charity is run and the services that the organisation provides. The Board of a charity is responsible for putting in place the principles and practices of good governance in the organisation. The Code also helps charities to be more effective, transparent and accountable to their stakeholders. Code of Governance for Charities & IPCs (by the Charities Council)

11 Fundamentals (cont d) How is corporate governance achieved in a charity? Is this actually being done? Who should be responsible?

12 Defining governance for charities Purpose of the charity o Charities can only carry out acts within their constitutional documents (e.g. trust deed, memoranda and articles of association, society s constitution) o Difficulties arise due to subjective or very broad interpretation How to best achieve the purpose of the charity o E.g.: strategic planning, fundraising practices

13 Defining governance for charities (cont d) Accountability for the charity s performance, its use of the funds that it raises from the public o Accountability to whom? (i.e. who are the stakeholders?) Donors Beneficiaries Regulatory authorities Public Ensuring that the charity abides by applicable legislation

14 Who is responsible for good corporate governance? Board? Trustees? Members? Regulatory authorities? Intermediaries?

15 Who is responsible for good corporate governance? (cont d) Everybody was sure that Somebody would do it. Somebody thought Anybody could do it, so Nobody did it. Everybody blamed Somebody when Nobody did what Anybody could have done.

16 CURRENT LEGAL FRAMEWORK

17 Legal framework governing charities Most common legal forms for charities are: o Trusts (Trustees Act Cap. 337) o Societies (Societies Act Cap. 311) o Companies limited by guarantee (Companies Act Cap. 50) All charities need to be registered under the Charities Act; failure to do so is an offence

18 Legal framework governing charities (cont d) Two- fold compliance by charities o Compliance with legislation governing legal form, e.g. Companies Act, Societies Act, Trustees Act o Compliance with charities legislation and its subsidiary legislation

19 Legal framework governing charities Hard law o Charities Act o Charities (Institutions of a Public Character) Regulations o Other subsidiary legislation governing the running of charities E.g. Charities (Registration of Charities) Regulations E.g. Charities (Accounts and Annual Report) Regulations Enforcement Powers of the Commissioner of Charities

20 Legal framework governing charities (cont d) Soft law o Code of Governance for Charities & IPCs o Not mandatory o Comply or explain o Not applicable to exempt charities and grantmakers that do not have IPC status Enforcement o Governance Evaluation Checklist

21 Categories of guidelines under the Code Board governance Conflict of interest Strategic planning Programme management Human resource management Financial management and controls Fundraising practices Disclosure and transparency Public image

22 INTERMEDIARIES

23 Who are intermediaries? Accountants/auditors Lawyers PR professionals Media consultants Interior designers/architects Consultants/advisers

24 Intermediaries and their duties Should intermediaries dealing with charities be held to a higher standard than intermediaries dealing with companies? Is there a moral obligation for intermediaries to ensure that charities use their monies in accordance with their objects/purpose?

25 Intermediaries and their duties How much effort should be made to know whether the client is operating within the rules? What about the associated increased costs? To what extent should intermediaries be able to rely on the management s word?

26 Reliance on intermediaries Directors of companies can rely on professional advisers when making decisions, to avoid liability (section 157C of the Companies Act) should there be similar safety nets for charities that are not companies?

27 Some statistics In 2010 the charity sector had a total income of $10.7 billion: o Of this sum, the religious and others sector received $1.6 billion (15%) from donations, government grants and fees for services o Religion ranked second behind the education sector (63.4%) Religious charities formed 59.5% of all the charities registered with the Commissioner of Charities Religion and the rules of charity - Straits Times, 14 July 2012

28 CASE STUDY I: NKF

29 Brief facts NKF sued SPH and Susan Long after the publication of the article The NKF: Controversially ahead of its time? in the Straits Times Within a day of trial, NKF through its CEO T T Durai, dropped the suit against SPH after Durai confessed to several allegations in the article Durai and the entire NKF board resigned, and a new board took over with Gerard Ee as chairman

30 Brief facts (cont d) The new NKF board commissioned audit firm KPMG to scrutinise the way the NKF had been run under Durai so as to bring in greater transparency and unearth any other misdeeds

31 Examples of lapses in governance Example 1: the Board and its powers The KPMG report found that the former NKF Board delegated all powers to the Executive Committee, which in turn delegated most, if not all, powers to the former CEO T T Durai The report noted that since the incorporation of NKF in 2001, it only saw two departures and the directors were never replaced The report noted that out of 21 members in the former board, only 8 attended the foundation's annual general meetings, and all of them sat on the Executive Committee ChannelNewsAsia, 19 Dec 2005

32 Examples of lapses in governance (cont d) Example 2: the Audit Committee According to the KPMG report, the Audit Committee was ineffective because it did not meet regularly It found that from June 2002 to January 2005, there was only one informal meeting in 2004 to discuss the revival of the Audit Committee ChannelNewsAsia, 19 Dec 2005

33 Examples of lapses in governance (cont d) Example 3: Inaccurate information in reports KPMG also found figures relating to the number of kidney patients, patient subsidies and treatment costs inflated or misleading NKF's report said that in 2003, 52 cents for every dollar raised went to beneficiaries and programmes for the year; but KPMG found that only 10 cents out of every dollar went to subsidise patients' direct treatment costs ChannelNewsAsia, 19 Dec 2005

34 Examples of lapses in governance (cont d) Example 4: Conflicts of interest It was found that multi-million dollar software contractors had not delivered, and the former NKF board and key management personnel were found to have interests in or were involved in companies with business relationships with NKF ChannelNewsAsia, 19 Dec 2005

35 Examples of lapses in governance (cont d) "It is not every regulator (who) had a carte blanche to deal with all the issues happening at NKF. There were bits of it in different places; it was not pulled together; and there was a lot of room for misunderstanding between the different bodies involved to make sure the regulation was effective. In theory, it might have been enough but in practice, there was a lot of room for misunderstanding as to who did what. Tham Sai Choy, auditor at KPMG ChannelNewsAsia19 Dec 2005

36 The role of auditors The external auditor s role is to express an opinion on the financial statements based on the conclusions drawn from the audit evidence obtained during the audit. He is required to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion and to consider the risk of material misstatement in the financial statements arising from fraud or error. However, it should be noted that an audit of the financial statements is not designed to identify all matters that may be relevant to those charged with governance. Media release by Institute of Certified Public Accountants of Singapore (ICPAS), 23 December 2005

37 Questions that arise To whom do the intermediaries owe duties? o The public? o The charities? (duty to client, confidentiality, etc.)

38 CASE STUDY II: REN CI

39 Brief facts In July 2006, after the NKF episode, the Ministry of Health appointed accounting firm Ernst & Young to carry out a general review of the operations at its 12 largest IPCs, including Ren Ci Hospital At the end of the review, Ren Ci was asked to split the role of board chairman and chief executive officer (both held by Venerable Shi Ming Yi) The MOH next got Ernst & Young to delve deeper into Ren Ci's operations, and discovered certain loan discrepancies A formal inquiry under section 8 of the Charities Act was initiated by the MOH to look into Ren Ci s affairs Asia One, 8 November 2007

40 Brief facts: the charges involved 1. Shi Ming Yi charged for engaging in a conspiracy with his personal executive, Raymond Yeung, to falsify a payment voucher, punishable under s477a read with s109 of the Penal Code; 2. Shi Ming Yi charged for criminal breach of trust by misappropriating $50,000, punishable under s406 of the Penal Code; Criminal Procedure, Evidence and Sentencing, Annual Review of Singapore Cases (11, 2010)

41 Brief facts: the charges involved (cont d) 3. Shi Ming Yi charged for knowingly providing false information to the Commissioner of Charities, punishable under s10(3) of the Charities Act (Cap 37, 2007 Rev Ed); and 4. Shi Ming Yi charged for engaging in a conspiracy with Raymond Yeung to knowingly provide the Commissioner of Charities with false information, punishable under s10(3) of the Charities Act Criminal Procedure, Evidence and Sentencing, Annual Review of Singapore Cases (11, 2010)

42 CASE STUDY III: CITY HARVEST CHURCH

43 Brief facts: the charges (cont d) 1 st and 2 nd charges: o Shi Ming Yi had instructed Ren Ci s finance manager to issue a cash cheque of $50,000 and a payment voucher reflecting a loan of the same amount from Ren Ci to Mandala Buddhist & Cultural Centre ( Mandala ). o However the cheque was later encashed and the cash was given to Raymond Yeung. This amount was reflected in Ren Ci s accounts as a loan to Mandala but there was no corresponding entry in Mandala s accounts showing receipt of the amount nor was the money given to Mandala. Criminal Procedure, Evidence and Sentencing, Annual Review of Singapore Cases (11, 2010)

44 Brief facts: the charges (cont d) 3 rd charge During the inquiry, Shi Ming Yi provided false information that the sum of $50,000 was a loan given to Mandala to purchase wood. 4 th charge The head of the inquiry then asked Shi Ming Yi to provide documentary evidence of the purchase of wood. Pursuant to this, a letter purportedly from Bei Jing Jing Hai Shan Artifact Co Ltd (China) was given to the Commissioner of Charities. The letter stated that it had delivered two statutes worth $16,000 to Mandala. This was not true as the statutes were in fact purchased and paid for by a different entity. Criminal Procedure, Evidence and Sentencing, Annual Review of Singapore Cases (11, 2010)

45 Questions that arise It may have been easy for these discrepancies to never have been discovered, had the inquiry not been initiated- why is this? Who should be checking the books of the organisation, etc? To whom is the organisation accountable? (apart from the COC under the charities legislation) Why were the auditors of Ren Ci not aware of these discrepancies?

46 The case so far In early 2010, the COC received complaints alleging the misuse of the charity s funds COC reported the matter to the Commercial Affairs Department (CAD), when it assessed that some of the charity s financial transactions needed to be investigated by the CAD for possible criminal wrongdoings COC and CAD commenced inquiry into CHC concurrently in May 2010 COC s inquiry was under section 8 of the Charities Act COC s Inquiry revealed misconduct and mismanagement in the administration of the Charity, particularly in relation to the funds that were in the Building Fund which had been raised and earmarked for specific purposes Inquiry into the City Harvest Church, MCCY

47 Findings from the COC s Inquiry Despite representations made to public and members, funds were used to fund the Crossover Project; executive members were not told of the actual purpose of these funds Used to fund the Crossover Project under the guise of donations to its affiliated church in KL, and these were then transmitted by CHCKL to support the Crossover Project in the United States Donations and tithes to the charity were transferred into a private fund known as a Multi Purpose Account (MPA), and monies in the MPA were used to fund the Project Inquiry into the City Harvest Church, MCCY

48 Findings from the COC s Inquiry (cont d) Selected donors were asked to transfer their donations from the Arise and Build campaign, to the MPA Apart from a few members the existence of the MPA was not made known to the charity s members Attempt to conceal the existence of the MPA by closing the joint bank account and dealing only in cash transactions Inquiry into the City Harvest Church, MCCY

49 Examples of governance issues arising from findings of the COC s Inquiry Disclosure of related party transactions o Kong Hee s company sold over S$3m worth of merchandise to the charity, and this was not disclosed o Eventually Kong Hee re-funded royalties to the charity arising from the sale of his merchandise, however these were later reimbursed to him from monies in the MPA and the CHCKL Inquiry into the City Harvest Church, MCCY

50 Examples of governance issues arising from findings of the COC s Inquiry (cont d) Board governance and control issues o Appointment of Investment Manager was not properly tabled and discussed by the charity s board o When he suffered financial difficulties, donations were re-funded to him in two tranches, Board approval for one being received 9 months after the re-funds were made Inquiry into the City Harvest Church, MCCY

51 Questions that arise Duties of intermediaries where there are complex structures to disguise the true substance of the transactions and monies Do intermediaries have adequate facts and information to give professional advice?

52 Questions that arise (cont d) Do donors insist that funds be used for specific purposes? Can donors change their minds? How can this be done? o Under the Charities (IPC) Regulations, if donors specify a purpose for their donations, this must be followed

53 MOVING FORWARD

54 Underlying consideration that has to be borne in mind: o Tightening restrictions and making regulation/ enforcement more stringent, vs. o Stifling the charity sector and driving away strong management and leadership individuals by making requirements and restrictions too onerous, discouraging volunteers who have altruistic intentions

55 Who are the stakeholders when it comes to charities? o Donors o Beneficiaries o The public- i.e. the entire community o Others? Do donors expect any kind of return? What makes them a stakeholder? What are the expectations of beneficiaries? How can different stakeholders interests be balanced?

56 Given the understanding of the three cases so far, what role do intermediaries play and how can they be made more effective? What happens if there are multiple intermediaries involved and not all have equal access to the relevant information?

57 Who else can play a part in preventing these problems? o Public o Management o Regulatory/enforcement bodies o Members

58 Should intermediaries whistle-blow? If so, to whom?