NFPs: The buck stops with the board

Not-for-profit boards need to up their financial literacy

Not-for-profits might well have the best intentions, but lack of financial acumen could be undermining them.

Is financial literacy an issue for boards in the not-for-profit (NFP) sector? This was a question put to delegates in February this year at CPA Australia’s Not-for-profit conference in Melbourne, which covered the key challenges affecting the sector.

Perhaps unsurprisingly, a show of hands indicated it is indeed a key issue and there is need and scope for improvement. Granted, a straw-poll of a small cross-section of those involved in NFP is anecdotal and not necessarily representative of the sector as a whole. However, it does seem to reflect a general view that the overall level of financial literacy among NFP boards is low and that it needs addressing.

There is no question that many NFP board members are highly talented and skilled. To occupy top spot and have responsibility for the governance of an organisation, they have to be. Invariably, they are also highly dedicated to the cause they represent which, needless to say, is any NFP’s reason for being.

But a board comprising talented and dedicated individuals may not be enough to assure a NFP’s financial health, and with that its ability to continue to meet its core objectives.

It is equally important to have a deep understanding and appreciation of the entity’s finances, as well as an ability to recognise and react to the risks and opportunities that go hand-in-hand with financial stability.

It is neither counter-intuitive nor unreasonable to expect all NFP boards to be astute in the management of their entities’ finances. In this respect, having a few members with previous board-level experience in the corporate “for profit” sector can be a great value-add.  Such individuals will almost certainly have had extensive exposure to corporate governance issues and financial management disciplines, where the primary success driver is financial return.

It is clearly important that NFP boards assess the skills and experience each member brings to the table, and ensure a right balance of talent. A “board skills matrix” can often assist in identifying the skills mix present, and identify gaps that need to be filled.

Change is the only constant, and as with any organisation, a NFP can also change.

In the case of NFPs, growth and change can turn on a number of reasons. For example, it is fast becoming clear that government funding is no longer a growth industry, and NFPs have to diversify their funding models to adapt. Invariably, the organisation will look to the board for strategic direction.

When change is the only way to remain viable, board members must consider whether they have the necessary skills to drive that change, and recognise and accept their own limitations. In these circumstances, they should consider up-skilling, but if that’s not possible have the courage to selflessly step aside to make way for someone with the right skillset.

Often, board members tend to provide their services voluntarily on a pro-bono basis, which can lead to a misconception that because they are being provided for no reward or remuneration, there is a commensurate reduction in the level of responsibility. This is never the case: the buck always stops with the board.

Whether through applicable laws, funding contracts or governance documents, a NFP board will more often than not be ultimately accountable for the organisation’s actions and its success or failure. As such, it is vital that the board as a collective recognises its responsibilities and ensure it possesses the necessary financial literacy – combined with other skills – needed to competently govern the organisation.

Ram Subramanian is CPA Australia’s Policy Adviser – Reporting and Auditing.

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