Not for Profit Boards – Why Do It?
It has never been harder to be a director of a not for profit (NFP) organisation than it is today. Unlike their for-profit cousins, directors of NFP’s are generally unpaid and do it for the love of the cause and/or to give something back to society.
However, the same risks exist for NFP directors as they do for their for-profit counterparts. Legally the duty of care remains, and the potential for reputational risk is as high in NFP’s as they are in for-profit boardrooms.
Some of the many issues that face NFP boards are:
- Financial oversight Managing a NFP’s financials is often a lot more precarious than a for-profit in that NFP’s are generally expected to run as close to breakeven as possible. Often a NFP organisation will maintain operating reserves, often set as a small percentage of overall expenditure, as mandated by the board as an effective cushion. They may not have the luxury of building up equity cushions that for-profits have. Their revenue sources are often contingent on the annual good grace of their donors and their ability to source financing in times of need are very limited. Therefore, they are more susceptible to changes in revenue even though cost bases are largely fixed. Hence the financial oversight required can be that much more difficult and onerous.
- Regulatory and compliance Many of the same regulatory and compliance demands for companies also apply to NFP’s. There is a real risk that many NFP’s become burdened with regulatory demands and their real purpose starts to disappear into a fog of regulatory and compliance demands. For example, the Notifiable Data Breaches (NDB) scheme under Part IIIC of the Privacy Act mandated how to respond to data breaches from 22 February 2018. This applies equally to for-profits. The problem for NFP’s are they don’t necessarily have the same level of resources as for-profit organisations to track compliance. As a result, compromises are often made to spend money on compliance related issues rather than in fulfilling their stated purpose.
September 24, 2018
Corporate Finance & Restructuring
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