- Proposed new governance standards to apply to all registered charities, except basic religious charities, are proposed to take effect 1 July 2013.
- However, a Senate motion to disallow the regulation which sets those governance standards has been postponed until 20 June. If that Senate motion to disallow is rejected, charities and their directors will have a very short window in which to implement the standards before 1 July 2013.
- Two of the standards take a novel approach to governance regulation in imposing obligations on charities themselves to regulate directors’ duties and take responsibility for accountability to members.
- Charity boards should begin taking steps now to ensure their governance rules and processes are best practice compliant. We suggest some measures to consider implementing below.
The federal government has introduced five new proposed governance standards (Governance Standards), which are proposed to apply to charities with effect from 1 July 2013. The standards would establish a minimum level of requirements for governance, which charities must comply with to remain registered with the Australian Charities and Not-for-Profit Commission (ACNC).
Some of the Governance Standards take an unusual approach to governance. Two standards require charities to take responsibility for their own governance and accountability, including ensuring directors meet specified duties, by essentially setting up a self ‘regulatory’ regime.
Faced with the dilemma of potential commencement on 1 July, charities should review and amend their governance rules, processes and procedures, including, as a first priority, considering the introduction or amendment of board charters to cover the potential new requirements as to duties.
What is the current status of the Governance Standards?
The Australian Charities and Not-for-profits Commission Amendment Regulation 2013 (No 1) (Regulations), which contains the Governance Standards, is currently subject to a motion to disallow (Motion). Yesterday consideration of the Motion was postponed until 20 June 2013. If the Motion is rejected by the Senate, charities will have a very short window before they will need to meet the Governance Standards.
This short time-frame is far from ideal. In these circumstances, we suggest charities aim for best practice in governance and begin taking action now to ensure compliance with best practice standards. This will ensure compliance with the Governance Standards if and when they take effect. We discuss this in more detail below.
What are the Governance Standards?
Standard one: Purposes and not-for-profit nature of a charity
A charity must be a not-for-profit entity and work towards its charitable purposes. The charity must be able demonstrate this to the ACNC via governance rules or other means. The charity must comply with its purpose and character and make information about its purpose available to the public.
Standard two: Accountability to members
Charities with members, such as incorporated associations and companies limited by guarantee, must take reasonable steps to be accountable to their members and provide adequate opportunities to their members to raise concerns about how the charity is governed.
The Governance Standards do not provide a definition or explanation of accountability. There is currently some uncertainty as to what exactly will be required of charities to meet this standard and whether there are differing requirements for accountability, based on a charity’s characteristics such as size, financing and number of members. We suggest measures charities could consider taking, having regard to this uncertainty, below.
Standard three: Compliance with Australian laws
A charity must not engage in conduct that is an indictable offence under any Australian law or punishable by a fine of $10,200 (60 penalty units) or more.
Standard four: Suitability of directors
Charities must take reasonable steps to be, and remain, satisfied that their “responsible entities” are not currently disqualified from managing a corporation under the Corporations Act, nor have been disqualified by the ACNC Commissioner at any time during the preceding 12 months. “Responsible entities” are:
- directors (including committee members of incorporated associations), if the charity is incorporated;
- committee members or other members of a charity’s controlling body, if the company is not incorporated; and
- a trustee, if the charity is a trust, including the directors of the trustee where the trustee is incorporated.
In this news alert we have focused on the application of the Governance Standards to directors.
Charities must take reasonable steps to remove directors that do not meet the suitability requirements of standard four. This may require a change to the constitution or letter engaging the directors or at least a change to a charity’s Board charter.
Standard five: Duties of directors
Charities must take reasonable steps to make sure that directors are subject to, and comply with, the following duties:
- exercise powers and discharge duties with the degree of care and diligence of a reasonable person in that position;
- act in good faith, in the best interests of the charity and to further its purpose;
- not misuse their position;
- not misuse information obtained in the performance of their duties;
- disclose perceived or actual conflicts of interest;
- ensure the charity’s financial affairs are managed responsibly; and
- not allow the charity to operate while insolvent.
All directors of charities are already subject to fiduciary duties pursuant to the common law but the directors’ duties under the Corporations Act, which would otherwise impose duties on directors, are being ‘switched off’ with effect from 1 July - the idea being that the charities will instead regulate their directors’ conduct. The duties provided in governance standard 5 also go further than the Corporations Act or fiduciary duties. We consider how best to comply with this standard in more detail below.
Defences to breach of standard 5
A charity will be deemed to have taken all reasonable steps to ensure compliance with the duties required by governance standard 5 if one or more of the following four protections apply.
- Protection 1 – reliance on information or advice provided by others
Reliance on information, including advice, in good faith, which is given by an employee, professional adviser or expert, another director, or authorised committee, where the charity had made an independent assessment of the information.
- Protection 2 – business judgement rule
A director will not be in breach of the duty of care and diligence if the decision was made in good faith, for a proper purpose, on proper consideration and in the best interests of the charity.
- Protection 3 – reasonable grounds that charity is solvent
A director will not breach the duty in respect of insolvent trading if:
- he or she had reasonable grounds to expect and did expect that the charity was solvent and would remain solvent if it incurrent a debt; or
- he or she took all reasonable steps to prevent the charity from incurring the debt.
- Protection 4 – non-participation in charity management
If a director could not take part in the management of the charity, at the relevant time, due to illness or some other good reason.
What do charities need to do?
The Governance Standards are “principles-based” and specify the outcomes to be achieved, rather than prescribing what a charity should do, and how they must do it, to meet the Governance Standards. While this affords charities flexibility, it also leads to a level of uncertainty as to what is required to meet the standards. This is especially the case with respect to governance standard 2 and governance standard 5, which introduce concepts that go beyond the current regulatory regime.
In these circumstances, and in light of the current status of the Governance Standards, we recommend charities take this opportunity to review and rework their rules to aim for best practice in governance – rather than minimum compliance with the Governance Standards. As the standards are “minimum level” requirements, meeting best practice standards will ensure compliance with the standards.
Best practice measures which charities could consider implementing or undertaking include:
introducing board charters, or reviewing and amending existing board charters, so the documents incorporate best practice governance. A charter should detail:
The board charters should be signed by each director;
- board composition and process, including notifications required if the director becomes disqualified as well as a requirement to resign;
- board role and responsibilities, including the new directors’ duties;
- the relationship and interaction between the board and management;
- the authority delegated by the board to management and board committees; and
- board procedures.
- creating procedures regarding vetting and ongoing review of directors – this should include at least annually searching the disqualified directors register, conducting a working with children check (if applicable) and reviewing and considering the desired or ideal skills and experience of directors;
- board and management training on the new Governance Standards, especially standard 5; and
developing, or reviewing and amending, processes and procedures regarding:
- provision of information to members about the charity’s purposes and finances; and
- avenues for members to raise concerns about the operations or governance of a charity,
in order to be accountable to members.
What will the ACNC’s approach to enforcement be?
The ACNC has recognised that many charities may not as of yet had time to consider the proposed Governance Standards and has announced that (if the Regulations are not disallowed) the ACNC will take a staged approach to monitoring compliance with the standards. For the first two years, ACNC’s focus will be on serious or deliberate breaches of the Governance Standards and on providing information and guidance to charities, to assist the with compliance.
However, subject to the Senate not agreeing to the Motion, as a matter of law, the Governance Standards will be compulsory from 1 July 2013 for all registered charities. As such, charities may wish to consider taking action now to ensure their approach to governance is best practice.
Where to next?
Following Senate consideration of the Motion on 20 June 2013, the Governance Standards (as currently drafted or in an amended form) will either take effect from 1 July 2013, or the Governance Standards will be rejected and will not come into force.
The ACNC had stated that it is currently developing guidance on each Governance Standard to assist charities. A high-level guidance note is expected to be released in June 2013 and more detailed guidance is expected later this year.
If the Senate rejects the Motion and the Governance Standards take effect on 1 July, Herbert Smith Freehills will be delivering a training seminar on the Governance Standards. We will provide further information on this presentation closer to the date.