The Governance Standards for Charities and Non-Profit Organizations in Australia

Charities in Australia are required to meet the ACNC’s Governance standards in order to be registered as well as to remain registered with the Australian Charities and Not-for-profits Commission (ACNC). Only a limited class of charities in Australia are exempted from following the governance standards posed by ACNC and they are known as the “Basic Religious Charities”. However, the charities do not have to submit any sort of documents to the ACNC but need to have evidence to prove that they are following the Governance Standards laid by ACNC. The Governance standards can be described as the sets of core standards which deal with the activities, processes and relationships on the basis of which the charities in Australia run. The charities need to make sure that they comply by the standards of size, activities and purpose, for instance, the larger charities need to fulfil a few more steps in comparison to the smaller charities (Australian Charities and Not-for-profits Commission, 2018). The essay will present a critique of the governance standards laid by ACNC for the charities and non-profit organizations in Australia. It will comment on the legal status of the Governance standards and what is the major purpose of each of the governance standard within the developed framework. The essay will also use a few theories and governance principles to explain the status of governance standards.

The five governance standards are-

GS 1: “Purposes and not-for-profit nature”

The charities must work for non-profitable and charitable purposes. They must also be able to provide information to the public about their purposes and demonstrate it through its acts (Australian Government, 2013).

GS 2: “Accountability to members”

The charities need to ensure their accountability to their members and to provide them with sufficient opportunities for raising concerns about the ways in which the charity is governed and what improvements can be made in the process (Australian Government, 2013).

GS 3: “Compliance with Australian laws”

If the charities are indulged in a serious offence such as fraud or law breach, a proper legal procedure must be carried against them under the Australian Law and they must be penalized with a minimum amount of 60 penalty units, equivalent to $12,600 or even more depending on the seriousness of the offence (Utz, 2013).

GS 4: “Suitability of Responsible Persons”

Charities must take suitable steps to ensure that its Board members, trustees or committee members did not fail in managing any corporation under the Corporations Act 2001 or disqualified from fulfilling the responsibilities as a responsible citizen (Utz, 2013).

Legal Status of Governance Standards for Charities and Non-Profit Organizations

GS 5: “Duties of Responsible Persons”

The Charities need to take measurable steps to ensure that the Responsible people of the charity understand and carry out all the duties as mentioned in GS 5 (Ramsay & Webster, 2017).

The unexpected changes in the corporate governance have always been a topic of debate in the business circle of Australia. It is also associated with the judicial interpretation. The Australian Charities and Not?for?profits Commission Act 2013 (Cth) was amended by the Australian Government on 1^st July, 2013 and the Australian Charities and Not?for?profits Commission Amendment Regulation 2013 (No. 1) (Cth) (Regulations) came into force. One of the major effects of the Regulations as mentioned in the amended version was to insert the Division 45, i.e., the governance standards into the Regulations, which came to be known as the “Governance Standards”. All the charities in Australia are bound to abide by the 5 Governance standards in order to remain functioning. The ACNC is authorised by the Australian Government to regulate the charities and non-profit organizations in the country as per the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (Law Institute of Victoria, 2018)

In a simplified manner, it can be stated under section 45.1 of the Regulations that the governance standards support the registered charities and non-profit organizations in Australia to fulfil their objectives by providing the least level of assurance that they will meet the expectations of the community in terms of how a registered entity needs to be managed” (Dundas Lawyers , 2013).

The ACNC aims at expanding the ACNC Act provisions through these Governance standards to improve the accountability of non-profit entities to the beneficiaries, donors and the public. It can be said that the provisions placed by ACNC can be considered to be adequate in “maintaining, protecting and enhancing the public confidence and trust” under the section 15-5(1) (a) of ACNC Act. However, ACNC may face some legal and practical glitches in expanding the provisions as it shifts the overall focus of ACNC Act towards ‘donor accountability’. The five principles of governance are widely acclaimed across Australia and the people who are found to be breaching any of the Governance standards have to go through trial under Australian Law (Law Institute of Victoria, 2018).

The charities need to register themselves with ACNC in order to receive the concessions from Australian Taxation Office and other benefits from the Commonwealth. The charities need to maintain the operational records as well as financial records to explain their transactions and performance and the operations such as meetings, charity activities and such others. The records can be checked by the ACNC officers any moment to detect any incidents of fraud or breach of the governance standards. There is a need to maintain the annual records as well which contains the basic non-financial information of the charity. The NPOs and charities do not have to submit their reports to ACNC until; they are asked to do so (Arts Law Centre of Australia, 2013). They need to maintain a public information portal to ensure that the operations of the charity are transparent and are in public interest. They also need to follow the governance rules and the external conduct guidelines as passed by the Federal Government. The governance standards being followed by the charities must be consulted with the public and need to be approved by both the houses of Australian Parliament before they can be passed. Thus, the Governance standards of the ACNC are bound with both political and legal standards. Thus, it can be said that they are legally acclaimed and any breaches in the standards will be dealt in an equal manner as the breaches in other legally acclaimed governance standards in business organizations in Australia (Community Council for Australia, 2018).  

Purpose and Compliance Requirements of Each Governance Standard

This standard ensures that the charities have good and valid reasons for getting entitled to the tax concessions and other benefits. The charities must work towards the welfare of the society with no focus on the profits. They must also demonstrate the purpose of their existence to the society and public. There are a few common steps which the charities in Australia need to take to meet this governance standard. The first step is to include the non-profit clauses and the purpose of charity in the governing documents. These governing documents need to be uploaded to the ACNC register with the help of ACNC charity portal to make them public so that the public gets all the required information on the portal. The charity also needs to provide information about its legal affiliation and purpose through the social media and website. The charities need to ensure that all the tasks are carried out for charitable purposes and welfare of the society. For this, they may also set up the processes which control and protect all the donations or profits that are made by the organization (Australian Charities and Not-for-profits Commission, 2018).

This governance standard laid by ACNC can be compared to the corporate governance principles 3 and 4 of the ASX principles of corporate governance. The Principle 3 of ASX states that “A listed entity should act ethically and responsibly”. The reputation of an organization is of prime importance and can be counted as one of the most valuable assets and if it is damaged once, it is very difficult to restore it. Thus, the members of any registered organisation must act responsible and ethically. The governance standard 1 also states the same thing. It says that the organization must stick to its objectives to work for the welfare of the organization. It also focuses on keeping all the organizational processes and information transparent so that the public can know whether the charitable organization is accomplishing its purpose of public welfare or not (Australian Security Excahnge, 2007). The principle 3 focuses on the fact that the information of the organization must be recorded and disclosed as per the legal considerations. The Governance standard 1 can also be related to the ASX principle 4 of corporate governance. According to this principle, the corporate entity must possess the rigorous and formal processes which safeguard and verify the integrity of the corporate reporting. As discussed above, the charities and the non-profit organizations need to prepare the financial reports, operations report and the annual reports and need to include all the necessary information in them regarding the operations of the organization. The charities, however, do not need to submit these reports to ACNC on a regular basis but, they can be asked to submit these reports any time on demand. These reports promote the ethical functioning of the organization and helps in maintaining its reputation (ASX Corporate Governance Council, 2014). The virtue ethics theory can be compared to this Governance standard. This theory focuses on the goodness, moral excellence, good character and chastity of the firm and the charitable trusts are all about these (Abdullah & Valentine, 2009).

Comparison with Corporate Governance Principles

This governance standard promotes the accountability to members. This standard ensures that all the charities take effective steps to be accountable to their members and all the members take sufficient steps to raise concerns about how a charity is run. The main purpose served by this standard is that make the members of the charity aware of the way a charity acts and uses its resources. The charity needs to be accountable and open to its members. The standard helps the members to raise questions about the operations of the charity. For meeting the requirements of this standard, the members of the organization need to conduct regular meetings with their members and provide the information about the finances and activities of the organization. The charities need to appoint a board of Responsible Persons for setting the governance principles (ACNC, 2018). This standard of ACNC can be compared to Principle 2 of ASX corporate governance. The principle 2 of corporate governance states that a listed entity must hold a board of responsible people with an appropriate size, skills, commitment and composition for enabling it to discharge its duties in an effective manner.  The board allows the organization to represent the best interests of the registered organization as well as the interests of the individual members of the organization. The principle also states that the board members must be allowed to ask questions regarding the activities and finances of the organization to ensure that the organization does not suffer any risk. It also promotes the practice of reporting the organizational operations from time to time (ASX Corporate Governance, 2018). In the similar manner, the Governance standard 2 also focuses on development of the board and reporting the activities in a timely way so that all the members are well aware of the conditions of the organization. The business ethics theory can also be applied in this case which states that the charities must be able to identify the ethical issues inside them and understand the rights and wrong. They must follow the rights and take effective measures to mend the wrongs. The stakeholder theory is also relevant here, as the Board of Directors of charitable organizations must work towards the benefit of the stakeholders (Abdullah & Valentine, 2009).

The third standard of governance laid by ACNC focuses on the legitimate functioning of the charities and non-profit organizations in Australia as per the Australian Law. If the charity acts in a way which is illegitimate as per the guidelines of State or territory law or Commonwealth, it will be charged as a breach of law and can face a penalty of $12,600 or more. Acting as per the law, the charity can protect its reputation, assets and people. The ACNC is responsible for carrying out the legal procedures in case the charities breach any Australian Law (ACNC, 2018). This standard of corporate governance can be compared to the ASX principle 3 and 6 of corporate governance. The third principle focuses on the ethical functioning of the organization. The standard also promotes the idea of charities functioning under the guidelines of Australian law and in an ethical manner. The principle 6 of ASX says that an organization must respect the rights of their security holders and provide them appropriate information as well as facilities in order to allow them to exercise the rights of being a member effectively. For this, they must be shown the annual or other performance reports of the firm on a regular basis to make them aware of all the operations and finances of the company. The Standard 3 also promotes the same idea and binds the charities legally to be transparent with their members (ASX Corporate Governance Council, 2014). In this case also, the business ethics theory can be applied.

Compliance and Accountability for Charities and Non-Profit Organizations

This standard of Governance focuses on the suitability of the responsible persons. It instructs the charities to take required steps to ensure that the Responsible Persons of its Board are not disqualified from being a Responsible person as per the guidelines recommended by ACNC Commissioner within last 12 months or from managing a business corporation under the Corporations Act 2001 (Cth). These measures act to ensure that the charities are well governed and meet the legal obligations as posed by the Australian Law (ACNC, 2018). This Governance standard can be compared to some extent with the principle 1 and 2 of ASX Governance standards. The principle 2, as discussed above, instructs the organizations to possess a board of directors who are highly skilled and possess qualities comparable to the job. In the case of GS 4, the Board members need to be free from any claims made under the Corporation Act 2001, which can be seen as one of the qualities of the Board members.

This standard focuses the distribution of the duties of the Board. The duties of the members of the board include acting honestly in the best interests of charity as well as its charitable purposes; acting with diligence and reasonable care; managing the financial resources of the charity efficiently and not allowing the charity to operate when it is in the state of insolvency as per Corporations Act 2001. The roles of the Responsible Persons must be distributed in a way that they satisfy the above duties. This Governance standard can be compared to Principle 1 of ASX Corporate Governance Principles. The Principle 1 allows the organizations to choose a management or board which meets all the requirements and is as per the obligations made under the Australian Law. It says that the roles and responsibilities of the Board must be distributed effectively and need to be monitored on a timely basis (ASX Corporate Governance, 2018). However, the process of monitoring their role has not been mentioned elaborative in Governance standard 5.

This Governance standard can also be related to the stewardship theory of corporate governance. This theory promotes the idea that the Board of responsible persons in the organization must work towards the welfare of the entire organization, not just for fulfilling their personal interests. Here also, it can be seen that the ACNC binds the Board of the charities to work for the accomplishment of the charitable purposes of the organization (Chambers et al., 2013).

Conclusion

In my opinion, all the governance standards laid by the ACNC are suitable for maintaining the perfect functioning of the charitable trusts and non-profit organizations. All the corporate governance standards highlighted by them are comparable to the corporate governance codes laid by ASX Corporate Governance Council, which is considered to be the prime organization for managing the duties and activities of the Board of Directors (ASX Limited , 2018). The best part I found about the governance standards laid by ACNC is that they have been modified to suit the needs of the non-profit organizations. They have included only the principles considering the ethical behaviour and practices and the responsibilities of the Board to ensure that welfare is being done for the people in need (Community Council for Australia, 2018). They have not considered the principles which are aimed at maintaining good financial performance of the organization. For instance, the principles which are related to the remuneration of the board are missing. The only thing which I found missing in the standards is the method of monitoring the performance of the Board of directors. The performance of the board must also be monitored through a developed protocol to ensure that the Responsible persons work for the welfare of the society and are not indulged in any sort of fraudulent behaviour.

Conclusion

The above assignment focuses on establishing the relevance of the Governance standards provided by Australian Charities and Not-for-profits Commission. The five standards are well crafted to suit the needs of charitable organizations. They focus mainly on the ethical behaviour and responsibilities of the Board of Responsible persons. The standards are comparable to ASX principles of Corporate Governance and theories of Corporate Governance. Hence, it can be said that the standards are highly reliable.

References

Abdullah, H. & Valentine, B., 2009. Fundamental and Ethics Theories of Corporate Governance. Middle Eastern Finance and Economics, 2009(4), pp.88-96.

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ACNC, 2018. Governance standard 3: Compliance with Australian laws. [Online] Available at: https://www.acnc.gov.au/for-charities/manage-your-charity/governance-standards/3-compliance-australian-laws [Accessed 30 October 2018].

ACNC, 2018. Governance Standard 4: Suitability of responsible persons. [Online] Available at: https://www.acnc.gov.au/for-charities/manage-your-charity/governance-standards/4-suitability-responsible-persons [Accessed 30 October 2018].

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Utz, C., 2013. Up to their standards: Governance Standards for ACNC registered charities made. [Online] Available at: https://www.lexology.com/library/detail.aspx?g=266c33b2-072d-4066-b020-d8bf6d730074 [Accessed 30 October 2018].