Most not-for-profit (NFP) directors volunteer their time and expertise without the expectation of payment. However, as the risks and required level of knowledge and skill expected of directors continues to increase, more NFPs are choosing to remunerate their directors for a variety of reasons, including to incentivise engagement and participation and to attract more skilled directors.

While there is no blanket prohibition on director’s fees, NFPs that are (or are considering) paying Director’s fees should consider the following matters.

Governing document

It is important to check your organisation’s governing document. Many governing documents contain a clause that expressly prohibits the payment of directors’ fees or requires member approval to do so. If a NFP proposes to remunerate directors and its governing document prohibits payments to directors, the NFP will need to amend the governing document.

Use of the term “Limited”

In accordance with s 150 of the Corporations Act 2001 (Cth), companies limited by guarantee that are registered with the Australian Charities and Not-for-profits Commission (ACNC) are not required to use the word “Ltd” or “Limited” in their name provided the constitution prohibits the payment of directors’ fees and requires the board to approve all other payments the company makes to directors.

A company that proposes to remunerate directors will need to both amend its governing document and begin using the term “Ltd” or “Limited” in its name.

Funding agreements

It is common for philanthropic and government grants and/or contracts to impose conditions, which may include a condition that directors not be remunerated. All funding agreements should be reviewed to ensure they do not prohibit director remuneration.

Fundraising

Organisations that are authorised to fundraise in New South Wales must not remunerate their directors unless: the individual serves on the board by virtue of being a minister of religion or a member of a religious order or prior ministerial approval is obtained (section 48 of the Charitable Fundraising Act 1991 (NSW)).

Accountability and transparency

Registered charities must comply with the ACNC Governance Standards. Governance Standard 5 requires a charity to act in the best interests of the charity and to manage the charity’s finances responsibly. In order to comply with this standard, a charity must ensure that any director’s fees are not unreasonable, unauthorised or unjustifiable.

Governance Standard 2 requires a charity to be accountable to its members. In order to comply with this standard, a charity should present opportunities for members to raise any concerns about the payment of directors’ fees.

Public perception

NFPs may wish to consider the potential impact on public perception – that is, how the payment of directors’ fees may be viewed by the members of the public, supporters and donors. Some supporters and donors may view director remuneration as inappropriate in the context of the organisation’s financial position, mission, values or some other relevant consideration.

Personal liability

Volunteer directors enjoy slightly greater protection from personal liability than paid directors under work health and safety laws and civil liability laws, including industrial manslaughter.