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King III should incorporate non-profits’ unique needs

The non-profit sector (NPO) in South Africa has a long and proud history of serving a disparate number of communities. These have ranged from traditionally charitable institutions, such as homes for children and the aged, to socio-political and economic non-governmental organisations (NGO).

The wide array and large number of NPOs — estimates put the number in South Africa at about 100 000 — have had an astonishing impact on South African life. One need think only of the seminal influence by organisations like the United Democratic Front, Black Sash and SA Council of Churches in the tumultuous years leading to the end of apartheid to appreciate that the democracy in which we now live has much to do with the role played by non-profit organisations.

The role of non-profits has not ceased in the post-1994 era; indeed they have increased in some cases. All of these non-profits, past and present, need funding to function. Many of them obtain their finances from abroad as well as locally. No accurate estimates exist of the huge amounts of money that have been brought into the country, thus enriching its economy, over the years, but it amounts to many millions of rand.

Every non-profit needs to be governed and usually has a board to do so. In this respect NPOs are similar to business enterprises, which also have boards. The main difference between the two entities, however, is that the primary objective of a commercial business is to make a profit — the antithesis of the primary purpose of a non-profit organisation whose very name clearly indicates that profits can never be generated.

It is thus surprising that the King III Report on Corporate Governance has studiously ignored the unique needs of the non-profit sector. It seems to suggest, in its omission of specific guidelines applicable to the non-profit sector, that it should merely fall in line with the guidelines which commercial business should follow. Perhaps this is a hangover of the antediluvian attitude that still exists in some quarters, namely that non-profits should be funded on the smell of an oil rag, with below-par salaries paid to its executives and staff members, who are nevertheless still expected to be fully accountable and perform with sheer brilliance.

Those days are gone — or should be anyway.

It is appropriate to note some basic tenets which non-profits follow. Non-profit boards are usually entirely non executive, a far cry from their business enterprise cousins, who are paid. Directors of non-profit boards give freely of their time, donating their skills and other resources because of their commitment to whatever cause it is that a particular organisation promotes.

The outputs of a non-profit organisation are not usually measurable in the same way as those of commercial business. They are, after all not toothpaste factories or banks. While certain principles and practices are common between both entities, such as good human resource practices and financial controls, it is the social value and focus of an NPO that is the over-arching driving force that ensures the organisation obtains the results it sets out to do. As I indicated earlier these can be as dramatic as bringing about fundamental socio-political change, as our country experienced in the 1980s and 1990s, or caring for children who are terminally ill. In seeking to meet objectives such as these, an organisation has to adapt to changing external environments which can be as wide-ranging as state incursions into the freedom of movement (such as Black Sash had to deal with in the pre-1994 era) or the state’s policy and practice in relation to the treatment of HIV/Aids (such as some organisations have had to do in recent years in South Africa).

The issue of ownership is also germane. King III is based on the premise that shareholders and directors have vested private interests in commercial entities. NPOs are not constituted on this basis, however, as members and office bearers do not have ownership rights to property in an NPO. Consequently the governance of NPOs should not be based on the premise of ownership or vested private interests, as King III does.

Mission drift

Added to these considerations is the fact that a non-profit board has to guard consistently against the temptation to go into mission drift. For example, a non-profit whose major objective is nature conservation may find that it cannot raise sufficient money, locally or overseas, because its donors wish to concentrate their giving on HIV/Aids projects. The organisation thus faces the temptation to tweak its conservation model so that it dovetails with the requirements of the donor, but in the process moves away from its central objective. Of course this does not mean that an organisation can’t apply its aims and objectives in a broad way, but its board has to incessantly be on the lookout to ensure that in so doing, the organisation does not go off the rails.

King III simply does not realise that in an NPO the board is the organisation, not the executive members of staff. It is the board’s role to ensure that the organisation is funded and remains viable and sustainable. It is the board’s responsibility to be financially accountable and its members are answerable for the organisations well-being. Staff don’t have the same fiduciary long-term accountability responsibilities as their counterparts in a business organisation.

These, and many other considerations, make for a situation in which a non-profit board faces vastly different challenges to that of a for-profit board.

It is encouraging that since the publication in 2004 of its Guidelines for Corporate Law Reform, the Department of Trade and Industry has made a notable effort to take into account the views of the non-profit sector on corporate law reform. The department has set an example by taking into account the views and submissions of the non-profit sector and by producing legislation that reflects that process. King III could further build on that process and give more dedicated attention to NPOs.

It is questionable whether superficial changes will sufficiently address the shortcomings of King III in respect of NPOs. King III has an ideal opportunity to give special consideration to the governance of NPOs in order to make a long-lasting beneficial impact on the non-profit sector.

King III has done excellent work hitherto. But its omission in respect of non-profits is regrettable. The interests of South Africa, and the non-profit sector in particular, would be well served if King III were to look in greater depth at the unique requirements of the NPO sector in the interests of good corporate governance.