NFP Benchmark Survey Report

2017

ContentsExecutive summary 2

Highlights 3

Strategy and operational effectiveness 4

Governance 6

Financial sustainability 7

Compliance and risk 8

People and engagement 10

Respondents 12

About the surveyRussell Kennedy Lawyers and Pitcher Partners launched our first not-for-profit (NFP) survey in 2015 to research the sector and allow us to create some sector benchmarks. We have now repeated the survey in 2017. The aim of the survey is to let NFP organisations and charities benchmark themselves against their peers across a range of governance and operational metrics. Our survey research covers topics such as governance, strategy, fundraising, risk management and the use of volunteer and professional resources.

Thank youWe wish to thank all respondents for participating in and contributing to the survey. We hope you find our report and analysis to be a valuable contribution to the NFP sector as it evolves.

Yours sincerely,

Michael GortonPrincipal Russell Kennedy Lawyers

Mark HarrisonPartner/Executive Director Pitcher Partners

1

CHALLENGES NFPS ARE FACING

CONVERTING INTERNAL CULTURE TO BE MORE COMMERCIAL, ESPECIALLY IN RELATION TO INCOME STREAMS

BEING STRATEGIC ABOUT UTILISING FINANCIAL RESERVES

CONVERTING FIXED COSTS TO VARIABLE COSTS IN RESPONSE TO

REVENUE CHANGES

MAINTAINING THE NFP CULTURE IN THE FACE OF COMMERCIALISATION

TRANSITIONING TO MORE COMMERCIAL ARRANGEMENTS

Executive summaryA commercial and agile NFP sector is a thriving sectorAs roles traditionally managed by government are transitioned to the NFP sector there is great opportunity as well as challenge.

For NFPs to evolve and thrive in a rapidly changing environment, they need to review their governance and financial frameworks. Only then should they consider how they meet their increasing levels of compliance requirements.

Major issues affecting the sector:

• increased need for strategic plans, financial plans and risk management frameworks to be implemented

• a need to both preserve culture and evolve it to a more commercial one

• fragmentation of the broader NFP or ‘giving’ sector

• need for less reliance on Government funding

• increased compliance requirements

Board members are becoming more skilled and specialised, and NFPs will need to consider recruitment methods that draw on a broader pool of talent.

The NFP sector provides a wide array of social and community benefits and remains highly relevant and necessary. The Australian Charities and Not-for-profits Commission, having seen through uncertain times, is now perceived as valuable due to its involvement in activities such as striking off charities or calling to account rogue operators.

NFPs appear to be on the right path, with frameworks and plans on the rise, a greater level of external auditing and increases in executive personnel to better manage outcomes.

There remains scope for a greater appetite for measured risk to meet funding requirements and community expectations.

Compliance is becoming more expensive and, whilst necessary, diverts funds from programs.

2

NFP Survey 2017 Highlights

19%OF BOARDS ARE REMUNERATED

IS THE CEO ON THE BOARD OF YOUR ORGANISATION?

How many executives/senior managers do you have?

12% 0-2

33% 3-4

33% 5-7

16% 8-12

6% 13+

24% YES(VOTING)

What percentage of your funds come from government?

41%0-25%

5%25-50%

23%50-75%

31%75-100%

43% YES(NON-VOTING)

33% NO

HOW OFTEN DO YOU REVIEW

PROGRAM DESIGN & DELIVERY?

8%REVENUE FROM

COMMERCIAL ACTIVITIES

67%REPORT ABOVE & BEYOND REGULATORY

& FUNDING REQUIREMENTS

How often do you update your strategic plan?

10%AD HOC

32%1 YR

12%2 YRS

35%3 YRS

11%4+ YRS

Data collected from a benchmarking survey conducted by accounting firm Pitcher Partners and legal firm Russell Kennedy during 2017 for their clients in the NFP sector. Responds to the survey, identified trends in governance, strategy, fundraising, risk management and the use of volunteer and professional resources.

17%HALF YEAR

25%AD HOC

4%2 YEARS

47%1 YEAR

7%2-3 YEARS

3

Strategy and operational effectiveness

There has been substantial change in the NFP sector over the past three years and there is at least another two years of change to come. Strategic and operational planning has never been more important. NFPs are sitting on shifting sands of changing funding streams, stakeholder engagement requirements, increasing private and public competition and technological disruptions. Strategic plans are critical roadmaps that set goals, outlay how they will be achieved, and document the collective thoughts of management and the Board.

Despite this environment, there are surprisingly fewer organisations undertaking annual strategic reviews, with those proactively planning dropping from 37% to 32% over the past two years.

A review every three years is still the most common review cycle. It’s possible that this apparent lack of increased strategic action is a result of the confusing and fast-paced NFP environment, with most organisations aware of the changes going on around them, but there being too much to respond to.

There are no funding streams to support smaller organisations to satisfy compliance requirements.

4

Program reviewsWith about half (46%) of respondents reviewing the design and delivery of their programs annually, this remains the most common approach. We expect to see this figure change in the coming years as NFPs adopt more agile approaches to programs.

What this means for you• Make sure your strategic plans

relate to your purpose and are relevant to your stakeholders

• Strategic plans must be realistic, measureable, trackable and outcome focused

• Work to have strategic plans owned by the entire organisation not just management

• Strategic plans start and end with culture and leadership at their core

There is major identified change occurring in the sector and the compliance burden is certainly not decreasing. 75% of those surveyed feel that the compliance burden is increasing in their organisation. While most organisations (96%) recognise the value that arises from compliance and oversight functions, and respect the importance of presenting a clean bill of health to stakeholders (92%), the findings suggest that one of the ACNC’s key objectives, ‘to promote the reduction of unnecessary regulatory obligations on the Australian NFP sector’, requires further work.

The simple task of proving operational effectiveness creates an additional burden. 67% of respondents report their current reporting obligations exceed their regulatory and funding obligations.

While financial numbers matter, the reporting obligations on NFPs to their stakeholders often goes further, requiring qualitative and quantitative data across differing time periods, stakeholder dissections across demographics and more.

In short, stakeholder reporting is often far more onerous than regulatory requirements. This raises the question of how relevant, reliable or comparable this additional data is, and may support the need for future guidance on the compilation of service level reports.

One noticeable change is an increase in executive level employees among survey respondents. On average, there was an increase by at least one senior executive per organisation to cope with the changes and challenges the sector is facing.

17%HALF YEAR

25%AD HOC

4%2 YEARS

47%1 YEAR

NFPs undertaking the hardest work for the least reward may start to compete for easier work leaving the most challenging work – to who?

7%2-3 YEARS

5

Substantial change in the NFP sector continues to drive changes to board governance. Mergers within the sector result in boards that must manage large, complex, diverse NFP operations across larger regions. This shows up in our research as increased meeting and committee workloads, increased size of senior management, and an increased compliance burden.

Board sizeOur research shows that for NFPs, the average board size remains steady at nine board members. This typically strikes an acceptable balance between a breadth of skills and diversity of viewpoints, whilst being collegiate and agile, and allowing for succession.

Anecdotally, NFPs changing their board governance are all reducing their board sizes. It can take several years to phase in these reductions, so we expect to gradually see a reduction in the average board size.

The most common method for recruiting board members continues to be personal referrals (used by 77% of respondents). Word of mouth continues to be a powerful recruiting tool for NFP organisations, and the recruitment pool needs to be broadened to attract specialised and skilled talent. There has been a slight increase over the past three years of CEOs having a position on the board, with 64% having a role up from 53% three years ago. Contrary to best practice governance, 24% of these CEOs have voting rights.

We remain concerned at the number of NFPs with larger boards. Such boards can be unwieldy in terms of scheduling meetings, continuity of debate, ability for board members to contribute, and resourcing/remuneration. Every board member has a personal responsibility to exercise independent judgement, and not simply follow his or her fellow board members on a large board.

What this means for you• Critically assess the size of your

board. Think about whether there is a good justification for your board to be larger than the ASX200 average of 7.5 directors

• Make sure new board members join regularly to facilitate board succession

• Review and report regularly to stakeholders on your board members’ attendance and committee contributions

• Regularly evaluate whole board and individual board members’ performance. Think about what you do with these findings

Governance Most commonly used legal structures by NFPs

37%INCORPORATED ASSOCIATIONS

63%COMPANIES LIMITED

BY GUARANTEE

Being a statutory authority, there is significant process and hurdles to overcome to be financially sustainable.

6

More respondents (27%, up from 19% in 2015) reported a higher proportion (> 50%) of revenue gained from commercial activities. This is pleasing, as the reducing government wallet and fickle nature of grants has been a significant risk for the sector for some time. It must however be acknowledged that some of this shift to apparent greater independence may be self-fulfilling as sectors such as aged care and disability move to contestability and client directed care.

While many respondents remain heavily reliant on Government funding (30% relied on government for three quarters or more of their funding) this has dropped by 7% since 2015 showing a gradual move away from this reliance. Examining those at the other end of the spectrum, 30% of respondent organisations are dependent on government for more than 75% of their income. This is a decrease from the last survey of 36%.

In 2017 there was a decrease in the number of organisations engaging in fundraising activities (47%, down from 54%). This reduction, coupled with a reduced reliance on Government funding, indicates increasing use of commercial activities to generate revenue.

Of the organisations that did engage in fundraising activities, approximately 38% performed this through the traditional methods such as appeals/donations, direct requests and philanthropic trusts.

For those NFPs continuing to fundraise, the net is being cast further.The 2017 results showed an increase in the number of fund raising respondents registered in a multiple of states and highlighted that many charities fundraise beyond their state boundary – hence the need for commonality and simplification of fundraising rules nationally.

What this means for you• Make sure your strategic plan is

commercially minded

• Base your financial plan on operational actions rather than aspirations

• Capture data to allow for performance assessment at a mIcro level

• Be able to compete on outcomes, rather than intention or mission

Financial sustainability

Financial partnerships are on the decline, and fundraising is becoming increasingly more difficult.

Financial sustainability in times of market and regulatory change has shone a spotlight on the NFP sector.

2017

2015

Revenue from commercial activities

27%19%

7

Despite historically being viewed as a burden and anecdotally of little value, the important role of oversight and compliance is now recognised by many survey respondents. Appreciation of the ACNC has doubled among respondents. The perception of increased value could be a function of the ACNC ‘settling into’ its role, having been established just prior to the last survey. Its visible enforcement activities, such as the striking off charities, or calling to account some rogue operators, as well as the support services it offers to smaller charities, appear to have had a positive impact.

In 2015, over half (70%) of respondents thought that compliance was important to their funders, donors and partners. This figure has increased to 76% but interestingly 9% of respondents do not think compliance matters.

15%SOMETIMES IMPORTANT

56%USUALLY IMPORTANT20%

ALWAYS IMPORTANT

9%NOT IMPORTANT

Compliance and risk

8

What this means for you• Separate commercial outcomes

from compliance, understand it is ok to experiment and fail

• Make sure your compliance is linked to your organisation’s outcomes

• Embed compliance in existing processes so it is everyone’s responsibility and does not slow the organisation down

• Review your reporting to make sure you are not reporting too often to too many stakeholders

• Seek out the opportunities within each risk area

• As long as risks are recognised and accepted they are not on their own an excuse to avoid a decision

Most respondents thought that compliance requirements had “increased somewhat” (53%) or “increased significantly” (22%) in the last financial year. The remaining quarter (25%) of respondents thought that there had been no change. Very few respondents thought that compliance requirements had decreased somewhat or decreased significantly.

Unsurprisingly, reputation management remains of critical importance to most organisations, as is the need to present a perfect compliance record to funders, stakeholders and donors. NFPs are proactively managing compliance, with an almost 50% increase in the number of respondents with a Risk Management Framework (now 88%). This commitment is supported with risk registers being monitored and revised at least quarterly in almost 50% of organisations.

External audit remains the key method of external oversight, with most surveyed organisations being audited. In contrast, use of an internal audit function is down by 15%. One contributor to the decrease of internal audits is the level of change in the sector, such as increased market competition, reduced block funding, new regulators and the need to revise systems, processes and staff skills in response.

There is little management capability to manage and facilitate internal audits, and so they’re reducing accordingly. The NFP sector appears to value the relationship with external auditors with an increase in respondents having engagement periods of up to six years. There is comfort in the consistency of auditor oversight through a period of change and disruption. Oversight in times of change, such as now, is both a challenge and a risk.

Changes in compliance requirements

9

People and engagement, skills and remuneration

What this means for you• Develop and review your NFPs

strategy for engaging with clients and broader stakeholders

• Review your communication channels to reach these people and see how effective they are

• Understand and review the role (if any) your members and volunteers wish to play in the governance of your NFP

Founders syndrome is also plaguing the sector.

People and engagementAs the NFP sector changes, there is an increasing need to operate in a more commercial and business-like manner. This is particularly highlighted by the transition to the National Disability Insurance Scheme and the competitive market for disability supports. In this context, our research indicates that volunteer contributions are reducing. Traditionally, volunteers would also become members of the NFP. It is therefore not surprising to also see that the role of membership (excluding NFPs that are professional associations) continues to decline.

At the same time, NFPs are committing substantial resources to communicating online and through social media. They are engaging with stakeholders in new and innovative ways, and reaching a broader audience than ever before. This expanded base of friends, supporters and clients is rapidly replacing the traditional “membership”.

We see NFPs needing to spend more time and effort attracting and retaining clients in a competitive market. This necessitates doing business with clients in a more friendly and accessible way, and being ultra-responsive to client needs to maintain competitive advantage.

10

SkillsBoards of large NFPs are increasingly becoming the domain of professionals and highly skilled individuals. It has become essential for board members to skill up and for expert board members to be recruited, with any remaining skills gaps being supplemented by purchasing advice. Traditionally, NFP boards were elected by and from the membership. With the increasing need for skills, we now regularly see one third of board positions being reserved for specialist skills regardless of whether the appointee is a member. Robust recruitment and selection processes are being put in place, to the exclusion of the accidental, well-intentioned volunteers lacking the requisite skills.

At the forefront of this trend are NFPs which are changing their board structures to require a majority of board positions to be filled based on the board member’s skills and experience.

The most common – and consistent from survey to survey – method of recruiting new board members was personal referrals. The next most common were public advertisements, external nominations and the Australian Institute of Company Directors referral service.

As boards are seeking greater diversity in their numbers, especially with the trends moving towards specialised and skills Board members, an evolution of the preferred recruitment methods will be interesting to watch in the coming surveys.

NFPs will need to think innovatively about how else they can draw from a broader pool of talent.

What this means for you• Determine the critical mix of

skills your board needs

• Consider whether these skills can be brought in some other way, e.g. purchasing services, advisory committees

• Think about how you will communicate to members/stakeholders that the right skills mix is in place

• Review current and develop appropriate mechanisms for your NFP to identify and prepare potential future board members

• For national NFPs, consider whether regional/sector/consumer representation is essential at board level

• For professional associations, consider whether you need skills from other professions to govern your NFP

RemunerationAs NFPs move to skills-based boards, it becomes increasingly difficult to attract and retain good quality board members. By their nature, highly skilled and motivated board members will be time poor and have competing professional and personal demands.Our research shows the volunteer spirit remains alive and well at the board level, with almost 4 in 5 boards volunteering their time. However, NFP board remuneration is increasingly common, and our research indicates that remuneration levels are on the rise. Remuneration can encourage professionalism, but at the risk of fostering self-interest.

Many NFPs increasingly see remuneration as an essential tool for attracting more talented board members. With director pay controversies gaining extensive media coverage, it will be important to remunerate in a transparent way that is sympathetic to the NFP culture of fairness and giving.

What this means for you• Understand the views of your

members and stakeholders on remuneration

• Conduct competitive analysis as to whether similar organisations in your sector remunerate board members. Think about the data you will need to justify the proposed remuneration amount

• Find out from prospective board members whether lack of remuneration is a barrier to becoming a board member

11

RespondentsNATURE OF ENTITY

37%INCORPORATED ASSOCIATIONS

63%COMPANIES LIMITED

BY GUARANTEE

NUMBER OF EMPLOYEES

16%<10

10%10-19

10%20-49

11%50-99

53%100+

REVENUE

91%>$1M REVENUE

19%AGED CARE

20%EDUCATION & RESEARCH

14%HEALTH

11%DISABLITY

32%OTHER

4%POVERTY & UNEMPLOYMENT

9 AVERAGE BOARD SIZE

NUMBER OF BOARD MEETINGS PER ANNUM

NUMBER OF COMMITTEES REPORTING TO THE BOARD

54%12

33%6

13%4

27%<2

57%2-4

16%5+

SECTOR REPRESENTATION

12

About Pitcher PartnersPitcher Partners is the most client-centric firm of our size in Australia and has a wealth of experience in assisting NFP clients to implement sound financial management practices. Pitcher Partners was founded on the principles of openness, honesty, business excellence and personal trust. We are deeply committed to client care and are a pragmatic partner, ensuring cost effective client outcomes. We are a caring employer, providing an environment that allows our team to reach their potential, meet challenges and achieve recognition for their services outside the firm.

Our commitment to care for our clients and staff extends to the wider community and we have a long history of community involvement, overseen by our Corporate Social Responsibility Committee.

About Russell KennedyAt Russell Kennedy Lawyers we are committed to providing exceptional legal strategies and solutions to our clients in the NFP sector, consolidating Russell Kennedy’s desire to make a difference. We have acted in the nor-for-profit sector for almost 30 years and understand how legal and compliance issues impact on their ability to provide services which assist, support, guide and inform the community sectors in which they operate.

As a mid-tier law firm operating out of Melbourne and Canberra, we contribute to creating positive and lasting changes within our community through various programs and pro-bono work.

The backbone of Russell Kennedy is the strong, lasting relationships we build with our clients and our people. We provide the right people and resources to help our clients achieve their objectives, maintaining a diverse list of clients from a range of industries, across multiple states and countries.

STRUCTURING ADVICE AND LEGAL DOCUMENTATION

CORPORATE GOVERNANCE

REGULATORY COMPLIANCE

RISK MANAGEMENT

IP PROTECTION STRATEGIES

COMPETITION REQUIREMENTS

GRANT APPLICATIONS AND FUNDING AGREEMENTS

FUNDRAISING

SERVICE DELIVERY REQUIREMENTS

CHARITABLE GIVING AND STRUCTURING

PROPERTY AND COMMERCIAL TRANSACTIONS

TAXATION ENDORSEMENT AND CONCESSIONS

SUBMISSIONS TO GOVERNMENT

EMPLOYMENT AND WORKPLACE HEALTH AND SAFETY

LICENSING AND ACCREDITATION

DISPUTE RESOLUTION

ACCOUNTING

INVESTMENT ADVICE

INTERNAL AUDIT AND RISK MANAGEMENT

ASSET PROTECTION

EXTERNAL AUDIT

STRATEGY AND ORGANISATION

TAX CONSULTING AND COMPLIANCE

CORPORATE FINANCE

13

2017_NFP_170802

Disclaimer Copyright © 2017 Russell Kennedy and Pitcher Partners. All rights reserved. This report is provided by way of general information and commentary only. The information and commentary is not intended to be advice and should not be relied upon in any particular circumstance. Without limitation, the report does not constitute legal, financial or professional advice. Specific professional advice from a qualified professional should be sought before taking any action in respect of any matter discussed in this report. This report is not a substitute for obtaining appropriate advice. Neither Russell Kennedy, Pitcher Partners nor their related entities, nor any of their representatives, accept any liability whatsoever for any loss or damage suffered or caused by the use or distribution of this report. Without limitation, liability for any loss or damage resulting from any error or omission in this report or commentary is excluded.

Mark Harrison MELBOURNEPartner

+61 3 8610 5136mark.harrison@pitcher.com.au

Tom Verco ADELAIDEPrincipal

+61 8 8179 2800tom.verco@pitcher-sa.com.au

Ian Jones BRISBANEPartner

+61 7 3222 8435ijones@pitcherpartners.com.au

Wayne Russell NEWCASTLEPartner

+61 2 4911 2000wayne.russell@pitcher.com.au

Jaimie Godden PERTHPartner

+61 8 9322 2022goddenj@pitcher-wa.com.au

Michael Gorton AM MELBOURNEPrincipal

+61 3 9609 1505mgorton@rk.com.au

Joe Shannon SYDNEYPartner

+61 2 8236 7865joe.shannon@pitcher.com.au

Solomon Miller MELBOURNEPrincipal

+61 3 9609 1650smiller@rk.com.au

Jonathan Teh MELBOURNESenior Associate

+61 3 9609 1587jteh@rk.com.au