Productivity Commission’s Report on the Contribution of the Not-for-Profit Sector

The Productivity Commission’s research report Contribution of the Not-for-Profit Sector was submitted to the Australian Government at the end of January 2010.

The report found there is a need for wide-ranging reforms to remove unnecessary burdens and costs faced by the not-for-profit (NFP) sector and improve its accountability. Finding better regulation, improved funding arrangements and enhanced opportunities for innovation would improve outcomes for the community and the public’s confidence in the sector.

The not-for-profit workforce

Key points from Chapter 10 of the report addressing the NFP workforce include:

• NFPs in the community services sector appear to experience the greatest challenges in attracting and retaining employees and volunteers. Addressing these challenges is vital to enhancing the efficiency and effectiveness of these NFPs, especially those delivering government funded community services.
• Over the past few decades many NFPs have engaged more professionally qualified employees and some appear to have replaced voluntary positions with paid positions. Complex tendering and accountability requirements have also required NFPs to recruit additional professional back office staff.
• In community services, demand for staff with higher level qualifications is expected to continue growing as clients present with more complex needs and community expectations of standards of care rise. The ageing of the population will place substantial additional demands on these labour intensive services.
• The small size of many NFPs can result in fewer career paths, contributing to high staff turnover. This, along with funding constraints, mean that many NFP employers are unable to sufficiently invest in training their staff. Staff training expenses are often not regarded by funding bodies, or the public, as a necessary part of service delivery.
• Most board members of NFPs volunteer their time and expertise. Greater training and support for boards would help enhance the effectiveness of NFPs.
• While this analysis concentrates on community services, many of these issues are relevant to other parts of the NFP sector, including sports, arts and culture.

Limited training for management and boards

Research participants raised concerns about the limited opportunities for management and board members to undertake training. As volunteers, board members may lack the skills required to conduct their duties. Similarly, management in the NFP sector is often made up of service delivery employees looking for career advancement who may not necessarily have sufficient management skills.
Leadership capacity can determine the success or failure of an NFP. BRI Ferrier (2009), a business reconstruction and insolvency firm, in a recent advisory paper listed a number of sources of organisational failure for NFPs: the big man (a dominating manager being allowed to take risks, or to claim rewards inappropriate to the NFP’s mission); the overly-optimistic committee (with burn-out as things cannot be achieved); micro-managers (meeting resistance from staff and volunteers), and the empire (accumulation of funds to expand scale without necessarily achieving the organisation’s goals). Most of these causes arise from inexperienced, weak or sympathetic supervisory groups, which points to the important role that boards play in ensuring good decision making in NFPs and exerting appropriate control over both paid and volunteer managers.

Governance in the NFP sector

The report found most NFP board members volunteer their time and expertise, and many are professionals with a long connection to the organisation or particular cause. Partnerships with business help provide board members to NFPs. A recent survey found that most medium-sized and all large NFPs have at least one corporate representative on their board (CCPA 2008).

Directors sitting on NFP boards can face significant exposure to liability if a personal breach of duty causes personal injury or damage to property. This liability may affect on the willingness of qualified business people to sit on NFP boards. Very large and complex NFPs, which have high risk profiles, may have difficulties attracting directors with the required level of abilities unless adequate compensation is available. For this reason some NFPs have moved to pay their board members. The Government has committed to reviewing directors liability given the potentially negative effects on board recruitment, retention and decision making. This has been encouraged by the Australian Institute of Company Directors, which strongly support the expansion of the business judgement rule (s180(1) Corporations Act (Cwlth), (sub. DR239).

The Charity Commission for England and Wales (2008) mandates that board members should not be paid for their services except in extenuating circumstances. Some of the reasons for advocating against payment of NFP board members are:
• long-term effects of reducing trust in NFPs
• potential for abusing the non-profit distributing constraint by excessive payment
• questions about the appropriateness of tax concessions.
Where NFPs pay board members for their services, beyond covering their basic expenses, they need to consider the benefits of doing so compared to the potential long-term impacts. A transparent disclosure process outlining payment to directors should be required to reduce the risks to the reputation of the NFP sector generally.

Building capacity of managers and directors

The report highlighted there is a perception that money spent on training is wasteful and makes organisations appear less efficient. However, the Australian Scholarship Foundation argues that:
… improved leadership and management capability is the critical difference in creating effective and efficient NFPs. (sub. 26, p. 3)

Many participants highlighted the important need for government support to invest in leadership and governance training. Carers Australia argued:
… that the Australian Government should provide access to subsidised leadership and governance training opportunities for volunteer Board members. (sub. 129, p. 5)

Some government departments already provide support for capacity building. BoardConnect is an initiative of Arts Queensland and consulting firm Positive Solutions, which provides continuous board development and governance support, specifically for arts organisations (Queensland Government, sub. 156).

Peak bodies (chapter 13) are a useful method of delivering support and training:
The [Victorian Council of Social Service] Training and Development Clearinghouse … provides a mechanism for [community sector organisations] to access low cost training opportunities. (VCOSS, sub. 164, p. 27)

A survey of NFP board members in Queensland found that greater development and training was needed in business planning, financial management and risk management. There was clear preference for training to be delivered ‘in house’, lasting for no longer than half a day (Nicholson, Newton and Sheldrake 2008). Board members may also benefit from training in the area of program evaluations.

 “Leadership capacity can determine the success or
failure of an NFP”

PRODUCTIVITY COMMISSION’s REPORT Contribution of the Not-for-Profit Sector 2010

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