The Problem
Over a career of almost 30 years in the Not for Profit (NFP) sector working with Schools, Churches and charities of all shapes and sizes, there have been dozens of cases where we have seen organisations “crash and burn” in their governance. Just a few examples of the kinds of failures include:
The board with a majority of members that stay on for decades leading to a death of vision being carried into the next generation;
The moral owners are a closely held group such as a family or group of pioneers connected to a common cause and rarely plan governance past their own generation;
The board that inherits or elects a dictatorial Chair who rules the rest of the board to pursue a personal agenda, essentially replacing or becoming the CEO;
The board that dictates to management or micro manages, making poor decisions without taking into account the core values, core purpose or needs of stakeholders;
So why doesn’t governance work in these situations? Failures of character or an inability to be objective is certainly a major factor in many of the failures of boards, but in these and many other cases boards that fail are made up of men and women that have high integrity and personal character but for some reason in the boardroom they behave badly? And more importantly, when these behaviours occur how are they allowed to go on for long periods of time without any apparent mechanism to step in and hold the board accountable?
Moral ownership
This brings us to the question of moral ownership and the purpose of this article. Since 2005, Resolve has been teaching NFP boards and management around the concept of accountability of boards to a moral ownership group using our Community Governance framework tool [1]. The Community Governance framework is impacting NFP’s in more than 57 countries and is available in four languages, and addresses the need for accountability of boards to a moral owners group.
In a For Profit enterprise the board is ultimately accountable for their performance to shareholders. If the shareholders are unhappy with the direction of the enterprise they can, in extreme cases, vote to replace the board. A For Profit enterprise that ignores its shareholders does so at its own peril.
We believe that the same principle holds true for the NFP. Resolve contend that in order for a NFP to stay healthy over the long term it needs an accountability group. This moral ownership group don’t hold shares as such, but they should have genuine authority as an accountability group as well as providing a pool of future board members. It is important to understand the limits of authority of the moral owners group. The moral owners don’t govern, or they could end up replacing the board itself. They are instead a safety valve to make sure that the board and the NFP stay true to the core values and core purpose of the organisation.
Typically, a moral owner group will meet at least annually to hear from the board and CEO about the mission of the organisation, and to elect new board members (the annual general meeting). When things go wrong, the NFP’s Constitution will outline processes for the moral owners to call a meeting to help resolve issues of board accountability that arise (special general meetings). In the ordinary course of a NFP’s life the moral owners would rarely if at all call a special general meeting. In our experience, just having this structure in place motivates most boards to take action to be accountable to this group and to keep the moral owners informed annually in relation to how the NFP is being governed and how the vision is being implemented.
Accountability to moral owners
There are many different types of moral owner groups that we have seen in operation around the world. Some of the more popular are:
The NFP operates in a corporate structure like a Public Company Limited by Guarantee and the members of the company act as moral owners;
The NFP has a church or diocese as its moral owner;
The moral owner group is an extension of the board over time – with new moral owners being appointed by the board from past board members as they cycle off the board;
The moral owners are a subset of the beneficiaries of the NFP, such as parents of a Christian School who subscribe to the statement of beliefs, core values and core purpose of the School.
In recent years globally there have been increasing instances of governance failures in business, NFP’s and government. In Australia, this has resulted in increased attention to the NFP sector and the formation of regulators and associations including the Australian Charities and Not for Profits Commission (ACNC) and the CMA Standards Council.
Standard 2 of the 5 ACNC governance standards is accountability to members. The ACNC recognises that transparency and accountability are key to a healthy NFP governance framework. However, the ACNC does not take the step of requiring accountability to an independent membership group.
Under incorporation legislation there is no requirement for members of a NFP to be independent from the board of the NFP. There is also no recommended best practice or comment from the ACNC about this situation (where the members of the NFP are the same people as the board members). The self perpetuating board model (where members and board members are the same people) is a very popular governance model in operation globally, and essentially cancels out the benefits of a moral owner group and any real accountability. The ACNC is silent on this issue.
The CMA Standards Council is operated by Christian Ministry Advancement in Australia. It lists 9 principles for best practice governance, one of which is transparency and accountability. The CMA Standards Council goes a little further that the ACNC. Whilst not recommending a preferred moral ownership framework that results in genuine accountability, they do have 8 standards listed within the principle of transparency and accountability. These standards include greater transparency, such as producing an annual report that is available to members, donors, staff, volunteers and members of the public. The problem however remains – the board may behave badly and, if their legal structure allows them to remain independent from a separate moral owner group, they can and often do ignore the cries of the wider stakeholder groups.
Implementing a moral owner framework
If you are reading this and serving on a NFP board that is self perpetuating (the board are the only members) you might be asking the question “well what can I do about this – this is the legal structure and we are bound to it ?”
The good news is that you can do something, and the first step is to have a discussion about the issue at a board meeting. Increasing numbers of boards are taking the role of moral owners seriously, and changing their governance documents or constitutions to do something about it. Growing a group of moral owners and establishing a formal membership for the NFP to be accountable to is a process that many NFP’s working with Resolve have undertaken.
The important decision by a board to establish a genuine, independent moral ownership group we believe will have lasting benefits for generations to come. Set up correctly, a moral ownership group becomes the caretaker of why the NFP exists, and becomes the key group that the board report to at the annual meeting about how they have used their authority to further the vision of the organisation consistently with the core values and core purpose. In this way the moral owners become the keepers of the purpose, and they elect future board members to carry on the important work of governance.
Want to find out more?
Resolve have been helping equip, develop and sustain healthy Not for Profit organistions’ since 2004 and would love to talk with you further about how they can help your organisation prepare for tomorrow. Contact Resolve at resolve.consulting or email the author David Bartlett – david@resolveconsulting.net
[1] Community Governance, a framework for building healthy Not for Profit organisations, you can purchase using this link