Originally published by Domini Stuart on 1 December 2014 in Company Director Magazine (Australian Institute of Company Directors).
The next 12 months are expected to bring significant change, more challenges and place greater demands on the not-for-profit sector, writes Domini Stuart.
The Australian notforprofit (NFP) sector makes a massive contribution to the Australian economy. According to the Curtin Charities 2013 Report, it has a combined total income of more than $100 billion and employs nearly one million people – eight per cent of the Australian workforce.
It is also a sector under pressure. The 2014 NFP Governance and Performance Study conducted by research firm BaxterLawley on behalf of the Australian Institute of Company Directors, found that many of the sector’s directors feel hamstrung by the uncertainty surrounding possible reforms to government policy and legislation. Sixty two per cent of the 2,700 directors who responded also identified maintaining or building income as a high priority in the next 12 months.
“The NFP landscape is enmeshed with the current national and international economic situation,” says Marg O’Donnell AO FAICD, chairwoman of Breast Cancer Network of Australia (BCNA) and former directorgeneral of three Queensland state government departments. “On an international scale, events such as the global financial crisis are continuing to affect NFPs while, nationally, our federal and state politicians are talking about deficits and budget restraints in stronger terms than I have heard in all the time I have worked in government.”
Governments are continuing to divest themselves of many services and programs and encouraging the NFP sector to take them up.
“One example is breast care nurses,” O’Donnell continues. “They used to be funded by government but now the majority have both their training and their salaries covered by the McGrath Foundation. This is not just a recent phenomenon; there is more pressure for the NFP sector to pick up the tab and this creates a tension with the government. We want to offer good services, not struggle to cover services for which we do not have adequate funding.”
Community services organisation Mission Australia is facing growing demand for family and youth, housing, homeless and employment programs. “This is a reflection of the employment market and lack of affordable housing,” says Ewen Crouch AM FAICD, chairman of Mission Australia and a director of Westpac Banking Corporation and BlueScope Steel. “We are particularly concerned about the difficulty disadvantaged young people are facing in trying to find work.”
Government funding is usually tied to specific programs with complex accounting and stringent reporting requirements in grant acquittals. “Organisations need to be ready to meet these standards and demonstrate compliance with all funding agreement obligations,” says Sally Freeman GAICD, head of risk consulting at KPMG Australia.
NFPs can also be disadvantaged by the contestability model that pitches NFPs against forprofit service providers,” says Crouch.
“Having limited access to capital to expand and develop services is a significant challenge,” he says. “Access to capital is also an issue for community housing providers seeking to maintain and develop their affordable housing stock.”
However, Stephen Judd FAICD, CEO of agedcare charity HammondCare and coauthor of Driven by Purpose: Charities that make the difference, sees some opportunities in outsourcing, at least in the health space.
“I would argue that public health services should focus on acute patients and not be an ‘all singing, all dancing’ show where the public system does everything,” he says. “I would like to see things like ambulatory care and sub acute services being contracted out, and I think these are great roles for charities and other NFPs.”
Below are the major challenges that lie ahead for the NFP sector in 2015.
1. Fewer donations
Contraction does not stop at government funding. “In this environment the people we rely on – both individuals and businesses – are less likely to donate,” says O’Donnell. “Attracting new corporate sponsors is certainly much more difficult today than when I joined the board of BCNA 10 years ago.”
“These days, businesses want to form more strategic partnerships,” says Crouch. “They are looking for opportunities to provide valueadds other than cash.”
They may also expect to play a more active role in the organisation. “Funders, particularly if they are the primary funding stream for the organisation, can now veer towards being more prescriptive and seek to guide the NFP’s strategic direction,” says Freeman.
The recent spate of natural disasters both here and overseas also reduced the available pool of funds. “As a consequence, and as the industry evolves and matures, NFP executives are now having to focus on finding new sources of sustainable funding,” she continues.
The NFP sector includes more than 600,000 very disparate organisations. “At one end, the minority of large charities commands a substantial proportion of resources such as paid staff, volunteers and income,” says Susan Pascoe AM FAICD, commissioner of the Australian Charities and Notforprofits Commission (ACNC). “At the other end is the vast majority of small, volunteerbased organisations.”
Many of the smaller providers are buckling under the weight of increasing regulatory and governance obligations, community expectations and new funding models such as the National Disability Insurance Scheme (NDIS). Both governments and donors are also moving towards paying by outcomes and searching out economies of scale.
“Even wealthy philanthropists have decided it is time to give more substantial support to the real achievers rather than sprinkling fairy dust over a multitude of causes,” says Judd. “In this tougher environment, mergers and acquisitions make sense.”
Judd’s comments are supported by the NFP Governance and Performance Study, which found that consolidation is a hot topic in many boardrooms. It revealed more than 30 per cent of Australia’s NFPs have discussed mergers in the past year and around a quarter of those believe the process will be complete within two years.
3. Reducing red tape
The federal government has professed a commitment to reducing red tape. “In itself this is a good thing,” says Judd. “Any reduction in cost that does not involve reducing frontline services should be encouraged – for example, acquittals for various governmentsubsidised health and agedcare programs can cost an organisation like
HammondCare tens of thousands of dollars a year. We are also keen to share services that are not organisational differentiators, which would benefit from economies of scale. I think NFPs should be working with government to see how this agenda can be achieved.”
However, Judd does not believe that the proposed dismantling of the ACNC will further the cause. He is not alone – the latest Pro Bono Australia survey of 1,250 NFP leaders, volunteers and sector managers found that 82 per cent were in favour of keeping the regulator.
This is not surprising as the sector itself lobbied for many years for the introduction of an independent regulator to support and help build public trust in the sector. Ironically, the ACNC was also given the job of reducing red tape, though it had no empirical base from which to begin.
“We engaged Ernst & Young (EY) to provide independent research on the regulatory and reporting burden on charities,” says Pascoe. “They found that, overwhelmingly, red tape comes from government contracting and from the procurement processes, the requirements from data maintenance for the monitoring of those contracts and then the very detailed acquittal processes of those contracts. EY used the government’s own financial model and this showed that the ACNC only contributes 0.1 per cent to the red tape impost.”
The ACNC is also in the process of building a register of charities. “We’re making information on every registered charity freely available online so that anyone who interacts with charities, whether to provide donations or determine where they would like to volunteer, will be able to make an informed decision,” she says.
“To ensure that the information is highly credible the person who provides it has to legally attest to its accuracy and we then audit and check it.”
In what Pascoe describes as an outstanding piece of work, Curtin University has analysed the first 40,000 annual information statements to provide the first ever census information on charities.
“So far we have information on the sector in terms of its size, makeup and contribution to the economy,” says Pascoe. “We also expect the number of volunteers to be confirmed at more than two million when all of the data has been analysed.
“Next year, if we still exist, we will add financial and governance data so that governments and researchers will also have an accurate database to work from.”
The future of the ACNC is, indeed, hanging in the balance. The bill to repeal the organisation is before the Senate and is due to be debated in the final session before Christmas.
As Labor and the Greens are in deadlock with the Coalition, the outcome will be determined by how the crossbench senators and the Palmer United Party senators decide to vote.
4. Uncertain exposure
Many NFPs are struggling to anticipate the impact of reforms, or proposed reforms, to government policy and legislation; 78 per cent of respondents to Company Directors’ study called on the government to make a more stable operating environment a matter of priority.
“So much uncertainty makes it very hard to develop a strategic plan,” says O’Donnell. “It also makes it much harder to keep highcalibre staff. Staff retention is already a major problem because younger people generally tend to be more mobile. This can be a good thing in that we are constantly refreshed with new blood and new ideas but, at the same time, we are constantly losing corporate knowledge, history, experience and skills. Uncertainty exacerbates that.”
Social media has also created a new set of challenges. “NFPs are no strangers to stakeholder scrutiny,” says Freeman. “Most organisations operate with the expectation that they will be transparent and accountable to their philanthropic and government funders and also to the community.
“But over the last few years it has become increasingly common for members of the community to use various social media platforms as vehicles for activism. It is now very easy for them to judge the NFPs they support and feel they have a stake in [them] and then articulate their opinions in a very public way.”
Social media has also created an insatiable appetite for information. “You can’t operate as an NFP without a clever, accessible and understandable website that gives people good information,” says O’Donnell. “BCNA also provides chatrooms where women can talk to each other and get expert information. Providing a virtually continuous stream of information that’s relevant, accessible and uptodate presents another really serious challenge.”
A demanding time
The role of directors in the NFP sector has never been more demanding. “The stakes have increased, particularly for smaller organisations, as mounting regulatory obligations, governance and community expectations lead to heightened complexity,” says Freeman. “Today’s directors need to understand and oversee the key activities required to maintain their charity status, engage and meet the expectations of their funding bodies and proactively set strategic priorities in order to guide their NFP through these challenging times.”