Governance and Financial Sustainability of NGOs in South Africa (Part Two)

Friday, 26 June, 2020 - 12:22

A study focused on governance and financial sustainability of NGOs in South Africa was conducted as a doctoral thesis at the University of the Western Cape. The primary objective of the study was to evaluate existing governance and financial arrangements of NGOs, CBOs and CSOs with the view to developing alternative approaches to governance and financial arrangements with specific reference to lessons of experiences for South African NGOs.
Whilst the South African government encourages the registration of non-profit organisations, research has shown that local and international donors are also increasingly demanding that their grantees be registered as non-profit organisations, as evidence of compliance with basic criteria of authenticity as a bona fide organisation.
As the legal status of NGOs has proven to be an important aspect of good governance, the criteria of: the existence of a legal entity; an NGO registered as a non-profit organisation under the NPO Act 1997; an NGO registered as a PBO; a non-profit trust registered under the Trust Property Control Act 1998; an NGO registered as a Section 21 not-for-profit gain organisation under the Companies Act 1973, and an NGO registered for value added tax (VAT) are suggested for determining the status of an NGO in this respect
NGO leadership

Leadership is the process of establishing direction and influencing others to follow that direction. Often the leadership style adopted, for example, autocratic, people-orientated, participatory, and democratic or liassez faire, depends on the circumstances that prevail and the life cycle of the NGO.
As corporate governance is essentially about leadership, it is imperative for this concept to be assessed within an NGO. One of the key problems in many NGOs, contends Williams3 (2008), “…is the confusion between governance and management. By grouping all in terms of leadership, this confusion is exacerbated.” It is thus important to clarify the hierarchical relationship between the governing board and the CEO. To eliminate such confusion, NGO leadership in the context of this appraisal instrument refers to an NGO’s chief executive officer/director/manager or management, the operational arm of the organisation.
Charisma as an attribute is evoked by some commentators whenever NGO leadership is discussed. In the NGO context a charismatic leader is able to attract funding according to Indian, Kenyan and South African commentators, which in turn impacts on the organisation’s financial sustainability. A charismatic leader exhibits confidence, dominance, a sense of purpose and the ability to articulate goals. A charismatic leader is considered an exceptional person and, with his or her sheer presence and personality, is able to shape and influence the future of an organisation (Bass, 1990; Raelon, 2003).
Roles and responsibilities of executive management

An executive management team5, the operational arm of the organisation, that typically includes the CEO of the organisation, with clearly assigned roles, functions and responsibilities, should manage an NGO. How these roles and responsibilities are defined and executed determine the power relations, balance of authority and the extent to which an organisation will be run smoothly, effectively and professionally (See for example also Camay and Gordon, 2002; The National Association of Non-governmental Organizations in Zimbabwe, 2005).
Essentially, the executive management team combines human resources, material resources and financial resources into a productive system in which organisational objectives are attained (Odgers and Keeling, 2000). This requires an organisational structure, policies, systems and qualified and committed staff together with a facilitating institutional environment6.
The lack of skills or insufficient management capacity to oversee and ensure the successful implementation of NGO projects and the delivery of services was quoted as a key factor contributing to the problems faced by many NGOs (Saldanha, 2002). Refer to Section 3.4.5 of Chapter Three for further discussion.
The above suggests that it is imperative for the executive management structure of the organisation to have clearly defined roles and responsibilities.
Composition and skills of the board

The separation of governance and management involves a division of both duties and personnel. The usual rule is that management runs the organisation from day to day, while the board sets policy, oversight and strategically guides the organisation (Wyatt, 2004; Centre for African Family Studies, 2001; Block, 2001).
The King II Report (2002) suggests that the governing board seeks to ensure an adequate mix of skills, experience and diversity in demographics to enable them to operate effectively and efficiently. NGO governing boards may delegate responsibility to others including paid staff, but must accept ultimate responsibility for the governance of the NGO. Preconditions for the recruitment of new board members include identifying the governance needs of NGOs and discovering the characteristics, qualities and skills of potential board members commensurate with the needs of the organisation (Block, 2001; Camay and Gordon, 2002).
The Centre for Family Studies (2001) reports that where board members are friends and family, or intrinsically linked to the organisation, for example, board members are also founder members of the NGO, they cannot always act independently and in an unbiased fashion. Therefore, development theorists7 suggest that the governing board be composed of 50% internal membership and 50% external membership. In this way, an equitable distribution of power is ensured.
Extent to which principles of good governance are practiced

NGOs have the responsibility to think about governance practices. Good governance established at the outset encourages organisational stability and balanced decision-making.
Good governance consists of a number of characteristics, which forms the core of the next appraisal diagram. These characteristics according to Van der Walt (2004) are: participation, rule of law, transparency, responsiveness, consensus-orientated, equity and inclusiveness, effectiveness and efficiency, and accountability (Also see Section 3.2.4 for discussion). According to Van der Walt (2004), participation in the context of an NGO can be direct where staff provides feedback on the formulation and implementation of organisational policies. Good governance further requires fair organisational policy frameworks that are enforced impartially. Transparency in turn implies that decisions are taken and their enforcement is done in a manner that follows rules and regulations. Information pertaining to the organisation should be available and directly accessible by stakeholders.
Responsiveness requires that the organisation serve all parties (internal and external to the organisation) fairly and within an appropriate timeframe. Consensus-orientated decision-making requires recognition by the organisation of community needs. Accordingly, broad and long-term perspectives on how these needs could be addressed towards the attainment of sustainable human development should be formulated. Equity is paramount in the appointment of human resources and when services and resources are acquired externally. When it comes to accountability, civil society organisations must be accountable to the public and to their respective institutional stakeholders.
Sources of NGO funding

NGOs have generally been able to raise revenue through a variety of sources. Before 1994, South African NGOs had a multitude of funding options. The arrival of democracy saw the redirecting of funding away from NGOs to a new legitimate democratic government. Organisations such as the National Funding Agency (NDA), the National Lottery and the (Umsobomvu Fund) - now National Youth Development Agency - were created in an attempt by government to fill the funding gap. These organisations operated with little success. NGOs, accustomed to traditional sources of funding, struggled to diversify their funding base. The challenge, therefore, for South African NGOs is to devise a sustainable framework for financial resource mobilisation. It is within this context that the following assessment criteria become imperative.
Self-financing strategies

Self-financing is an alternative to the more traditional fundraising approaches used by non-profit organisations. Donor agencies such as German Agro Action, Enterprise Works Worldwide, the Roberts Enterprise Development Fund, the Aspen Institute and a number of other private foundations encourage NGO self-financing initiatives (Viravaidya and Hayssen, 2001). A number of self-financing methods or strategies exist which could be used by the NGOs to sustain themselves. These include, for example, fees-for-services, various loans and credit arrangements, membership fees, product sales and so on (Viravaidya and Hayssen, 2001).
Williams (2008) warns that South African NPOs should not generate more than 25% of their income from “service provision” in which they compete with the private sector for contracts10. TRAC, a non-profit organisation of which Williams is a director, reports in their fundraising proposal11 that in an attempt to develop capital reserves, a percentage of the income derived from the contract work, which TRAC-MP undertakes on occasion on behalf of the government, higher education institutions or the private sector, accrues to a capital reserve fund. Williams (2008) suggests that it is important for an NGO to build up capital reserves, particularly where delays in donor contributions may cripple the organisation financially.
It is the researcher’s view, contrary to Williams’ warnings, that South African NGOs should be allowed to generate 50% of their own income. In line with this proposition, assessment criteria have been devised. See appraisal diagram 1.7.

The reader is cautioned that self-financing strategies may differ from country to country and even between different communities (Academy for Educational Development, 2004).
Good practice in financial management

For NGOs to survive in a changing and competitive environment, managers need to develop the necessary understanding and confidence to make full use of financial information. Whilst there is no one financial model that suits all NGOs, good practice in financial management is achieved by designing appropriate systems and procedures
Organisations should be committed to the practice of good governance and should in every instance adhere to the recommendations of the King Commission Report?. An NGO’s management of funds should comply with the highest professional and ethical standards. It is thus essential for financial management systems to be in place to instil confidence in donor partners on how their funding contributions are being managed and expended within the NGO. South African NGOs, in particular, in accordance with South African statutes, should have a financial year ending in March. Audits should be conducted in an appropriate period of time. Reports to donor agencies are presented based on respective agreements either quarterly, every six months, biannually or annually12.
Financial control

Financial control13 is at the heart of financial management. Effective financial accounting and managerial control practices are as important to NGOs at they are to the private sector. Without properly executed financial control, the organisation’s assets and resources are at risk, funds may not be spent in accordance with the organisation’s strategic objectives or the wishes of funders, and the competence of managers and the integrity of the NGO may be called into question (Alin 2006; Herzlinger and Nitterhouse, 2001). Designing systems and procedures to suit the particular needs of the NGO enforce financial control. Accordingly, an overall financial policy should be formulated and implemented which pertains to donors, income, budgeting, expenditure, travel, auditing, petty cash, assets, salaries, staff loans and the opening and operation of bank accounts (Shapiro, n.d.).
Fundraising strategies

Fundraising14 is proactive and should be conceptualised and designed as a long-range programme. Very few NGOs have dedicated professional fundraising human resource capacity and a coherent fundraising strategy. Building NGO fundraising capacity requires the development of a fundraising policy and regulations, and a fundraising committee with clear job descriptions and mechanisms monitoring fundraising activities (Kraak, 2001; Alin, 2006). Williams (2008) notes that externally appointed fundraisers require a commission on the funds they raise on behalf of organisations. Many donors may refuse to pay such commissions. The latter commentator contends that, in many instances, funders may argue that if the NGO does not even have the internal capacity to draft a funding proposal, they may also lack the capacity to manage the financial resources of the organisation.
It is the researcher’s view that a fundraiser is essential within an NGO and that the cost to the organisation of such an incumbent should be recovered from the administrative categories of budgets of individual projects or programmes.

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