Special issues for consideration in the governance of not-for-profits
The non-profit sector includes a wide range of entities including those serving disability, welfare, education, health, professions, industries and occupational groups. While most need to develop and maintain sufficient financial and organizational capacities to support their missions, these usually relate to the pursuance of non-financial goals.
Most incorporated nonprofits are structured as incorporated associations or companies limited by guarantee. Equity or shareholdings are therefore not present as would normally be the case in commercial organizations, where dividends are distributed to shareholders as returns on capital invested, voting rights (including for the election of directors) are bestowed, and entitlements distribution of capital on winding up exist.
An important distinction within the sector is that between member-serving and communityserving organizations. While the line between these is often blurred, the former more easily designates rights of 'membership' which may be reflected in areas such as voting rights and entitlements to receive services. For community serving organizations, the groups upon which these rights of membership may be conferred are less easily identified and may be constituted from any combination of the following:
- Donors.
- Other supporters.
- Members by application (including or excluding payment of a fee).
- Members by invitation from existing membership or boards.
- Governments.
- Service recipients.
- Family members.
- Former service recipients.
Membership may be comprised of classes from different groups, each of which may enjoy different entitlements, such as entitlement to vote for board representatives from particular classes.
The above may give rise to potential conflicts of interest, with board members holding office as representatives of interest groups, but with a need to consider their underlying fiduciary duties.
Not-for-profits often exist due to failure of markets to address needs. In these cases, such as may be the case in charitable organizations, the recipient of the goods or services supplied may be separate and independent from those paying for them. The influence of markets, which in a commercial organization would quantify the interests and entitlements of customers, may not exist. For board members, this may introduce further potential for conflicts, between an organization’s interest, and those of its clientele, donors and government funding bodies. The need to balance the needs of a broad range of interested parties is necessary, including staff, customers, suppliers, governments and the community at large is more evident in many non-profit environments.
In many small and medium sized businesses, there is little or no separation between the roles of shareholder, director and manager. For proprietary companies, this lessens the level of formality, and therefore cost, of corporate governance systems. Most not-for-profits on the other hand, even very small ones, operate in an environment where separation between management, board and membership exist. Many of these entities lack the financial resources and organizational capacity to establish and maintain strong systems of governance.
Most members of not-for-profit boards act in a voluntary or honorary capacity. While many take their responsibilities seriously, others may see themselves as just ‘helping out a worthy cause’, leaving many of the governance responsibilities to the Executive. Directors of not-for-profits need to be aware of their governance responsibilities which are not diminished by the lack of remuneration.