Presenter: Adele Johns

Executive Officer: Community Compass Inc.

Research student: International Graduate School of Business, University South

Australia Director: Adssi Home Living Australia

Better Boards Conference 2013Board Complexities and the (dis)Engagement of Financial Data

Acknowledgement Acknowledgement to country

Introductions background, purpose, outcomes

Non profit sector in Australia is worth at least $70 billion

It is Australia’s principal employer with more than 600,000 employees

It is reported that charities employ about 7% of the workforce and account for 5% of gross domestic product – making the sector equivalent in size to agriculture

Not for Profit Productivity Commission Report 2010 – Peter Fitzgerald.

Setting the scene

Of the 59,000 non profits that are employers the CEO/Manager position works under the governance structure of a board.

Requires Executive positions to be held by the board, the financial executive position known as the Treasurer.

All board members have a legal fiduciary responsibility

Governance structure

Australian Charities & Nonprofit Commission:

“Governance is the process, activities and relationships that make sure your organisation is effectively and properly run.”

Governance for Good: The ACNC’s Guide for charity board members. www.acnc.gov.au/ACNC/manage/tools/ACNC/edu/tools

Governance Good Governance Guide - ACNC

Strategic planning – big picture thinking

Setting the Vision

Setting the objectives to meet the key purpose of the organisations existence

Ensuring sustainability and viability – ability to meet all pecuniary liabilities

Certify compliance and accountability matters of the organisation are adhered to

Role of Governance

Maintain effective record keeping and monitoring of organisational objectives

Audit requirements dependent on level of income received.

Australian Taxation obligations – Goods and Services tax, Withholding taxes Fringe benefits tax

Funders requirements – philanthropic or Government funds, State and Federal

Statutory Compliance

The purpose of this research is to highlight the complexities of board dynamics and engagement of financial management providing an insight as to ‘how’ boards are currently engaging in financial management practices and alternate models.

  To identify if Boards of non profit organisations are

insufficiently engaged with sound financial management practices.

  To observe Board members (lack) confidence in

asking appropriate questions regarding financial matters.

Determine the level of understanding of financial reports.

Research purpose

My observation is, the member of the board responsible for financial matters, usually called the Treasurer, presents a report which is only given moments of ‘air-time’, before the agenda is quickly whisked along to matters of general business.

The treasurers report and financial statements are either inappropriately set out, condensing financial data to meaningless reports/spreadsheets, rather than formal financial statements.

This could be the result of lack of interpretation and understanding of accounting standards and formats but there are a range of other issues including the capability of the board to deal with financial issues.

Research purpose

This research provides the opportunity to delve deeper into the complex nature of board, unveiling boardroom capacity in financial management matters

Observation of member participation in their engagement with financial data, report layouts and time allocated for exploring the financial performance and position

Recognise the human dynamics at play with the theoretical perspective of Ralph Stacey.-

Stacey, R. and Griffin, D., (2005). “Complexity and the Experience of Managing in Public Sector Organisations”. London, Routledge.

Method

How could non profit boards improve engagement in financial management?

Subsidiary questions… What issues/complexities arise due to the

relationship(s) between the CEO and the board?

The power of influence – Ralph Stacey – Complexity Theory.

The research questions posed…

Zahara and Pearce (1989) have stated, “There are countless lists of what boards

should do. Yet evidence of ‘what boards actually do’ is not well documented… there is a pressing need to document what boards actually do: (pp325 – 326).

Zahara, S.S & Pearce, J.A., (1989) “Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15,291-334.

Board members often lack skills in understanding financial management reports

Meaningless reports are being presented

Large asset purchase decisions being made by members with little understanding of the financial position or future forecast

Cash flow forecasts either being non-existent or provided with limited information and understanding

Current observations

Movement away from ‘Community’ based committees/ boards being replaced with ‘Skills’ based board membership

Agenda set and led by internal staff

Longevity of membership linked to ‘power’ by either board or staff depending on term.

Current observations

Strategic planning led by staff, with limited input by Board

Dominance of position linked to longevity

New members have silenced voices

Selection of board members led by CEO/internal staff

Current observations

Shielding - Lightbody M (2000) – agenda set by internal staff creating opportunity to shield information due to differentiating between operational and governance activity of the board.

Dominance and power observed through robust conversations, (or lack thereof), linked to longevity of membership and skill – Renz,D(2001),

Discussion

Ralph Stacey lens – the interplay of human dynamics and relating that are apparent around the board room table

To Stacey an organisation is not a system, but a set of inter-connections.

Complex nature of humans, a set of interactions and relations

Discussion

Two organisation observed – both Company Ltd by Guarantee reporting

compliance to Australian Securities Investment Commission (ASIC)

Further research to broaden the scope of services observed, diversifying entity type and governance models

Limitations of current research:

Investigate board member selection practices

Little research has been conducted into the composition of not for profit boards in Australia.

Limitations

Organisation 1 ( Org 1) Organisation 2 (Org 2)

Entity Type: Company Limited by Guarantee Company Limited by Guarantee

Reporting to: Australian Securities Investment Commission

(ASIC)

Australian Securities Investment Commission

(ASIC)

Financial Reporting compliance: Corporations Act 2001.

Australian Accounting Standards Board (AASB)

Australian Taxation Office (ATO)

Corporations Act 2001.

Australian Accounting Standards Board(AASB)

Australian Taxation Office (ATO)

Current Board Membership 7 7

Membership mix Staff representatives, Project Volunteers and

Community members

Directorship volunteer capacity – no

remuneration

Note CEO holds position of Company

Secretary

Community or Skills based board Mixed Transitioning from Community representatives

to Skills based board

Funding source 70% Government grants 77% Government grants

Total revenue $1,021,000 $8,254,000

Interest Income $14, 648 – 1.4% of total revenue $131,563 – 1.6% of total revenue

What is the future sustainability of the non profit sector when research identifies such gaps.

With accountability mechanisms and compliance increasing, coupled with a shrinking pool of funds/resources/volunteers – how will the development of government intervention – ACNC impact the sectors sustainability

How can boards strengthen their skills and understanding of financial management without loosing the value of community based membership?

Further research questions…

Bridging the gap.. Presentation of financial data Sources of income Risk – dependencies Outgoings Critical cost areas Monitoring and tracking trends

Data Analysis for effective decision making What is the ‘back-story’ the financial reports

reveal about your service

How do we portray this story to other members

Strengthening/empowering the board with informative data to aid in effective decision making

Where we are at….. The accounting concepts Balance sheet items Understanding the financial position of the

organisation Understanding the performance Inflow and outflows of funds…

vulnerabilities/reliance's/ diversifying income..

Moderating expenditure.. Maximising efficiencies

Where do we want to be.. Linking strategy to financial reporting…

How do we know what we want to measure…

Ratio analysis – snap shot of data, showing big picture outcomes..

Dashboard of key performance indicators

Presentation of financial data Pie charts Trends Ratio analysis

Key critical cost areas – what are we trying to measure / monitor ?

Are reports aligned with strategy Key critical sources of income How do we manage these ?

Project analysis

Category 1 Category 2 Category 3 Category 40

0.51

1.52

2.53

3.54

4.55

Series 1Series 2Series 3

Pie Chart/ Sources of Income

Sources of Income

Grant IncomeRoom HireFee for serviceInterest

Tracking Trends

Category 1 Category 2 Category 3 Category 40

2

4

6

8

10

12

14

ForecastCurrentLast Year

Ratio Analysis

Gross Profit Margin

Gross Profit Income

- % of each income dollar is gross profit - determines the adequacy of direct

income/selling price

Ratio Analysis Operating Expense Ratio

Total Operating Expense Income

Indicates the % of each income dollar absorbed by operating costs

Helps control operating expenses (Lower the better )

Ratio Analysis Wage cost ratio

Wages x 100 Income

Lower the better, indicates the level of wages to income

Ratio Analysis Current Ratio

Current AssetsCurrent Liabilities

Measures cash positionAssets available for every dollar of current

liability(Higher the better)

Ratio Analysis Liquidity or Quick Ratio

Current Assets less stockCurrent Liabilities less overdraft

Better measurement of cash measures liquid (cashable) current assets

(Higher the better)

Ratio Analysis Cash reserves in weeks

Cash – Grants in AdvanceTotal Expenditure / 52 (weeks)

Indicates how many weeks an organisation could continue to operate if all income was ceased immediately

Thinking differently about the presentation of financial data

Monitoring and review of critical income and cost area

Importance of governance and effective reporting to enhance/support effective decision making aligned with strategy

Importance of a robust induction process for new board members

Understanding the complex nature of board dynamics.

Take homes…

Tips and Tools available for download

www.betterboards.net www.communitycompass.org.au

Adele Johns Community Compass Inc adele@communitycompass.org.au

To wrap…