Not-for-profit bulletin

Transcription

1 January 2013 Not-for-profit bulletin In this bulletin: Government releases corporate governance standards consultation paper Contact Paul Paxton-Hall Director Level 10, 15 Adelaide Street, Brisbane Qld 4000 Telephone:

2 Contents Government releases Corporate Governance Standards consultation paper... 1 Background... 1 What does the ACNC Act say about standards?... 1 Principles-based governance standards... 2 What happens if a charity breaches the governance standards?... 2 The governance standards proposed... 3 Draft governance standard 6: duties of responsible entities... 4 Summary... 5 Appendix 1 Possible governance standards... 6 w:\matter\270381\ doc Not-for-profit bulletin January 2013

3 Government releases Corporate Governance Standards consultation paper Background 1. As mentioned in my December 2012 not-for-profit bulletin, the ACNC Bill received Royal assent on Monday 3 December Chapter 3 of the ACNC Act deals with the responsibilities of registered entities. By that, the Act is referring to those charities which are registered with the ACNC. A key plank to Chapter 3 of the ACNC Act is provision made in Division 45 for the imposition of governance standards on registered charities. 3. In the outline to Division 45 of the ACNC Act, it is stated that the Act intends to create minimum governance standards that registered charities are required to meet as a condition of entitlement to continued registration as a charity under the ACNC Act (and with it all requisite tax concessions). The object of the governance standards is said to be the provision of a minimum level of confidence that charities will promote the effective and efficient use of their resources, will meet community expectations about managing their affairs and the use of public money, volunteer time and donations, and will minimise the risk of mismanagement and misappropriation. 4. As part of the negotiation process for the government getting the ACNC Act through the parliament, provisions were inserted in the ACNC Act obliging the government to consult broadly with the community and relevant stakeholders before governance standards were set. The release by the government in December 2012 of a further consultation paper on governance standards is part of that process. The consultation paper can be accessed at the following link: Consultation Paper 5. The closing date for submissions in response to the consultation process is 15 February Submissions can be ed to NFPReform@treasury.gov.au The new governance standards are intended to operate as a regulation to the ACNC Act. Governance standards are to commence on 1 July 2013 although certain transitional arrangements will apply for existing charities. What does the ACNC Act say about standards? 7. Key features of Division 45 of the ACNC Act are that: (1) there may be specific governance standards that apply differently to different groups of charities e.g. those charities structured as companies limited by guarantee who have members as opposed to those charities which are merely charitable trusts and so do not have members; (2) there may be governance standards that do not apply to specified kinds of registered entities; (3) governance standards will not apply to entities that are basic religious charities 2 ; and 1 A previous consultation paper on governance arrangements was released by the government on 8 December Refer to my December 2012 bulletin for a discussion on what amounts to a basic religious charity w:\matter\270381\ doc Not-for-profit bulletin January

4 (4) governance standards cannot prevent a registered charity from undertaking an activity where that activity furthers its purpose and the activity is advocating or attempting to change the law or government policy (in other words, specific provision is made in Section 45-10(6) of the ACNC Act to make it clear that political advocacy will be tolerated). 8. The current regime for assessing relevant governance standards for the charitable sector is confused and complicated to say the least. This is a function of what is largely state based legislation and the various traditional forms of charity. Of course in the early days, all charities were structured as trusts. In summary therefore to ascertain what governance laws applies to any particular charity one needs to have regard to: (1) whether the charity is incorporated or not (if it is then Federal or State-based legislation that will apply but if it is not then essentially common law intermingled with bits of State-based trust law are likely to apply); (2) the type of entity is the charity an unincorporated charity, which is the majority of endorsed charities, or a company limited by guarantee; (3) the jurisdiction in which the charity operates; (4) whether the charity is affiliated with a peak body which has an appropriate code of conduct for its members such as the Australian Council for International Development; and (5) the sector itself in which the charity operates for example, health and education sector charities are likely to have to run their own particular gauntlet for relevant governance arrangements particularly as they are imposed by funding arrangements. Principles-based governance standards 9. The consultation paper makes it clear that its governance standards are intended to be principles-based. This is evident when one reviews the draft standards which all identify a particular object that a standard is endeavouring to address and then spelling out what the standard is. The standards don't specify a mechanism to achieve an outcome working on the basis that it is up to individual charities to decide how best to achieve the outcome taking into account their own particular circumstance. The theory behind this is that this means of regulation allows for flexibility and the ability of organisations to make rules that best meet their needs. 10. The analogy is made in the consultation paper with the other classic example of principles-based regulation being the National Privacy Principles which most members of the not-for-profit sector will already have had to consider. What happens if a charity breaches the governance standards? 11. The consultation paper makes the point that once a charity is registered with the ACNC it will be responsible for assessing its own compliance with governance standards in much the same way as charities are technically required to assess their ongoing entitlement to income tax exemption as an endorsed charity. The ACNC will assume that a registered charity is complying with governance standards unless there is evidence to the contrary. This is where the ACNC will be emphasising w:\matter\270381\ doc Not-for-profit bulletin January

5 its educational and guidance role to facilitate and promote compliance with governance standards. 12. There are enforcement powers in the ACNC Act to address serious cases of non-compliance and persistent and significant non-compliance. The governance standards proposed 13. The consultation paper and draft governance standards annexed to it, identify 6 draft governance standards; namely: (1) purposes and not-for-profit character of a charity; (2) accountability to members (for those charities such as companies limited by guarantee (CLGs) who have members); (3) compliance with Australian laws; (4) responsible management of financial affairs; (5) suitability of responsibility entities; and (6) duties of responsible entities For those charities that are structured as CLGs or incorporated associations, it is most unlikely that the proposed governance standards are going to cause any practical difficulties. This is because relevant legislation (whether the Corporations Act or various State-based Incorporated Associations Acts or Corporations (Aboriginal & Torres Strait Islander) Act) already address the standards. The practical problem is going to be for those charities which are unincorporated or structured as charitable trusts particularly older charitable trusts which came into being at a time when life was a lot simpler and Australia's phobia for black letter law had not kicked in! 15. I have, for convenience, annexed to this bulletin what is Appendix 1 to the consultation paper. That annexure sets out each of the proposed governance standards and, with it, the respective object of each standard. 16. I do not intend to address each of the proposed standards at this juncture other than the last of the standards dealing with duties of responsible entities (although I prefer to use the term "responsible officers" as that is effectively what is meant by the term). It is in dealing with duties of responsible officers that the practical implications of the new standards are likely to be felt. 17. For corporate entities, the attendent duties of company officers which are set out in the Corporations Act will effectively be "turned off" when the governance standards commence operation. As a consequence, the director of a charity which is structured as a CLG will no longer look to the Corporations Act to ascertain directors' duties, but rather will be thrown back to the governance standards and how a particular charity intends to deal with each of those standards as they apply to their own organisation. 3 Responsible Entities is the term used in the ACNC Act to refer to the director of a registered charity which is a company or trustee of a charitable trust. w:\matter\270381\ doc Not-for-profit bulletin January

6 Draft governance standard 6: duties of responsible entities 18. The common law for many years has held that a person in a fiduciary relationship (which includes a company director) must be honest and careful in all their dealings on behalf of the entity and must always act in the entity's best interests. This basic tenet of the common law, coupled with the general charity law obligation that a charity must meet its objectives and use its resources only for its charitable purposes, are central to governance standard 6. In a practical sense this is very much the case for incorporated charitable organisations now. However, the draft standard is intended to ensure that responsible officers of registered charities are all subject to the following specific duties: to act with reasonable care and diligence in carrying out their duties; a duty not to improperly use information or position held; an obligation to disclose matters involving personal interests; an obligation in respect of related party transactions; a duty to act in good faith and in the best interests of the charity for a proper purpose; and an obligation not to allow the charity to operate while insolvent. 19. For charitable organisations that are structured as trusts, these general principles apply but the duty is in fact a higher duty because a trustee must exercise reasonable care and diligence and act as a prudent person would when investing trust funds. A similar requirement applies to private ancillary funds and public ancillary funds. The proposed governance standard will not detract from this higher duty for such organisations. 20. Whilst the various standards that apply for different sorts of organisations can be very fine to distinguish, it is here that I think some practical issues are likely to be encountered for a number of smaller charitable organisations mainly because of the likely concern that responsible officers will have about a perception of the imposition of new-found obligations. We all know how hard it is for many smaller charities to secure people to boards or management committees let alone highly experienced business operators. It will come to the legal issue of the need to document these standards in the organisation's constituent documents. In this regard the consultation paper makes the point that the need for a responsible officer to comply with relevant standards could be addressed in a director's letter of appointment or perhaps a board charter or code of conduct in addition to the organisation's constitution. 21. This is also a fine, but important, point to understand because incorporated organisations such as CLGs or incorporated associations are subject to legislation which statutorily provides that the constitution is a contract between the company officers and the company and other members. For unincorporated associations or trusts, there is no such statutory contract between the entity and officers. 22. Importantly subdivision 45-C of the draft regulations includes protections under governance standard 6 to apply if a responsible officer has taken all reasonable steps to ensure his or her compliance with the duties. These steps include: w:\matter\270381\ doc Not-for-profit bulletin January

7 the responsible officer has relied on information such as professional or expert advice in good faith; the responsible officer has effectively made a decision in good faith for a proper purpose without having any material or personal interest in the subject matter of the decision (generally referred to in the Corporations Act in the forprofit context as the business judgement rule); in the case of insolvent trading, the responsible officer had reasonable grounds to expect that the charity was solvent or otherwise took reasonable steps to prevent the charity from incurring the debt; and the responsible officer was ill or had some other good reason for not taking part in a management decision of the charity at the relevant time. 23. Of course education is going to be a big feature. The ACNC acknowledges that and is proactively pursuing that course in preparation for adoption of the standards. Summary 24. The consultation paper is an important document for all involved in management of not-for-profit organisations to consider carefully. Apart from anything else it provides in a lot of ways a very good summary of relevant laws particularly directors' duties. The real hope is that this does not turn people off and exacerbate current problems of getting good directors onto not-for-profit/charity boards. 25. It throws up the ad hoc nature of charity regulation and makes one think that if Bob Hawke had his way and the States were abolished, life would be much simpler for all. 26. The ACNC Act is designed to reduce red tape. Governance standards will certainly not be doing that at least in the short term. But on the other hand, reform of the sector is an ongoing one and is going to take some time and this undoubtedly is a step in the right direction but it is likely to cause some short term pain and cost. Please let me know if you have any concerns about the proposed standards. There are several weeks before submissions are required if you are thinking of making a submission. I would be most happy to assist. Paul Paxton-Hall 8 January 2013 w:\matter\270381\ doc Not-for-profit bulletin January

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