Grant Thornton and Probono Australia have launched their Not-for-Profit Financial Literacy Survey Results, in a document entitled: Not for Profits: Are you Ready for the Future?
The survey looked at directors’ and managers’ perceptions of whether not-for-profit boards are financially literate to deal with current situations and future change.
Simon Hancox from Grant Thornton is the author of the survey which was sent out through the Pro Bono mailing list of 45,000 and received 1065 responses. Most of this post is a summary of Simon’s recent presentation of the results of the survey.
The key question that the survey wanted to address was “how does a board provide financial leadership through times of change and what is the perceived level of financial literacy in not for profit boards”. The survey included just under 30 questions, and 84% of the respondents were from charitable organisations.
Grant Thornton wanted to analyse whether there were differences between the views of management vs boards, smaller and larger organisations, paid vs unpaid boards and whether the method of director appointments made a difference to perceptions of financial literacy. Overall they found that there were not significant differences.
What they found was that management and board generally agreed and that 59% of respondents felt that the standard of financial literacy was adequate to meet current needs, but that only 40% felt that their boards had the right level of financial literacy to meet future needs. The third key finding was that director education could play a role in bridging this gap, and that there is a challenge to improve the financial literacy of boards.
The survey examined eight characteristics or skills of financially literate boards – being:
1) prepared – board reads and understands financial information provided by management
2) informed – board understands nature of key income and expenditure items and factors which may affect them
3) balanced – board has a clear understanding of respective roles of board and management
4) strategic – board has clear understanding of how budget supports strategic plan and risks associated with it
5) critical – board critically evaluates financial performance of the organisation
6) reactive – board promptly reacts to changes in financial performance to mitigate any potential risks to the organisation
7) cost aware – board understands costs of providing services/programs
8) legally aware – board members understand the legal responsibilities and potential liabilities of acting as a director
The survey then compared the importance of these criteria to the perceived performance of the boards (see page 7 of the report). The survey noted a stronger performance in all areas from larger organisations (which is to be expected) but not a huge amount of difference across the whole sector. However, it is worth noting that no boards performed better than 4 out of 5, even where the criteria were considered more important. The survey also found no difference in performance between paid and unpaid boards.
The survey also identified that 22% of director respondents said that they were entirely reliant upon a subgroup (such as a subcommittee) for financial expertise, and 22% of all respondents relied completely upon management. This clearly leaves much room for improvement.
In looking at the future financial sustainability of not for profit organisations the survey found that all the characteristics were important and examined the ability of boards to understand revenue streams and effective methods of investment.
The survey also found that only 37% of organisations included financial literacy training in board induction.
The survey’s conclusions were that while there is a reasonable perceived level of financial literacy in not for profit boards to deal with current situations, there is a level of concern about the preparedness and ability of these boards to deal with future changes and challenges. Organisations have a large responsibility to work with their directors to close this knowledge gap.
Following on from Simon’s presentation of the survey findings there was a panel discussion with Karen Mahlab AM, Murray Baird, Assistant Commissioner and General Counsel for the ACNC and Paul Wappett, Chair of Berry Street.
The level of discussion was good so I am going to record some of it here.
Q: “Why do boards fail and how can we protect ourselves from this?”
A: Paul – things come up which might be unexpected – for example Berry Street is dealing with the Royal Commission into Institutional Child Sexual Abuse, there are changes in government funding and policy, boards are volunteers who offer their time after hours and are often working for the not for profit organisation at night – often financial oversight is not the top priority when other strategic matters come up.
A: Simon – organisations need to understand the time constraints placed on their board members and boards need to balance those who are doing the heavy lifting and detailed analysis – eg finance sub-committees with developing the knowledge in all board members to ask the right questions
A: Murray – board failure relates to role – the board must constantly remember what purpose it is there for. Murray noted that 72% of complaints to the ACNC related to the board being asleep at the wheel (and entertained us with car and driving analogies for the rest of the morning). However, once the board’s role is clear it needs to have in place processes which enable accounts to be available and for there to be time for them to be examined, addressed and interrogated.
A: Karen – it is concerning that the survey showed that 22% are reliant on others. The Board Chair needs to understand the balance sheet.
Q: “Do boards need a compulsory level of training?”
A: Karen – that would deter many volunteers from participating on boards – what is needed is better board induction rather than just handing over a huge governance folder. Boards need to be future focussed and perhaps the finance person needs to step up more within boards, particularly with the introduction of the NDIS and changes in access to revenue such as impact investing.
A: Murray – you need proportionality – some boards have extensive inductions, but some boards might not be operating at a level which needs this.
A: Paul – it is important for the board to self-evaluate its own skills and the Chair needs to take an active role and change the board composition if necessary.
Q: “How important is it that management provides financial information to the board in a way that the board can understand it?”
A: Paul – the reports need to have good commentary, visuals and graphics
A: Karen – numbers don’t speak to the mission of the organisation – what the finances need to show is how do numbers reflect what the organisation does.
A: Murray – boards should be able to ask any questions to allow information to come out and should not be afraid to ask. While full understanding is not required, you still need to know when to ask a question (back to the car analogy – when you look under the hood you might not understand your car’s computer system – but you need to know whether it is plugged in or not). Not every board member needs to have the same skill level.
Murray also suggested that external advisers can be useful as while you may have a lawyer on your board, their area of expertise might not necessarily cover what you need to know. The board needs to be sponsored by the Chair to ask seemingly dumb questions.
A: Paul – cautioning against over-reliance on external advisers and to be sure to ask open ended questions – so if they have not addressed something specifically there is space for them to bring things up eg – Is there anything else we need to be aware of?
Q: “What about risk aversion?”
A: Murray – yes there are changes – for example the NDIS will call on not for profits to raise capital and this will be a huge challenge as traditionally reserves have been held in conservative bank accounts (eg at a low interest rate of 1%) – so how can organisations deal with the need to raise more revenue or invest more seriously.
A: Karen – there is a need for more entrepreneurial skills. The NDIS is asking organisations to act on a business basis – while there has been a rise in social enterprises, 50% of small businesses fail in the first five years – so what does this mean for new social enterprises? With impact investing and taking on debt – these are different skills for boards who are used to dealing only with service delivery.
A: Paul – the risk/reward ratio needs to be considered – taking on debt adds to level of complexity
A: Simon – changes in consumer directed funding models and the implications of this.
Q: “Is the not-for-profit business model broken – and if so, how do we fix it?”
A: Murray – NO – the model is just taking off. No- for-profit boards are no less capable than commercial boards. Not-for-profit organisations need to make a social impact.
A: Karen – NO – not-for-profit organisations are an expression of need in our community. The model is not broken but it needs to change – absolutely. The way government works with not-for-profit organisations is broken and we need to work out how to do things differently.
A: Murray – the ACNC is registering 100 new charitable organisations a week so there are clearly still needs and a will to engage with them.
Q: “What about dashboard reporting and pie charts and should the finances be placed earlier in board meetings” (NB the author particularly liked this question especially knowing how much work goes into changing reporting formats)
A: Paul – yes the placement of items in the agenda is important
A: Simon – dashboards and charts need to be tied to the strategic reasons for doing them
A: Karen – finance is not all about financial reports – it is about investment in the organisation and creativity
A: Murray – don’t leave strategy till 10pm at night.
(In response to a question about the number of new charitable organisations registered by the ACNC, Murray was asked how many charitable organisations are being removed from the register) – the ACNC is currently clearing out 5,500 organisations (many of whom had been inactive for some time) and expects to get to a point of equilibrium where new organisations equal the numbers of those closing down and deregistered.
Q: “Finances are backward looking – how do we keep the board awake?”
A: – coffee, cheese and biscuits – don’t underestimate the importance of the physical environment and always relate finances back to the mission of the organisation to maintain engagement.
What are your thoughts on financial literacy in not-for-profit boards ? Could your board do with training, induction, formal courses?