King III is Contentious in the Nonprofit Sector

In light of the recent headlines about retrenchments and closures in the nonprofit (NPO) sector, a key issue that emerges is that of good governance. Donors have real concerns about how organisations deal with governance and how their Boards oversee leadership, succession planning, financial planning, financial control and risk. It is therefore critical that the NPO sector enhances donor confidence by ensuring that they have effective governing boards that meet their fiduciary responsibilities.

When the draft of King III was released in 2009, Inyathelo: The South African Institute for Advancement made a submission signed by 57 organisations indicating that King III was inappropriate for the NPO sector as it functioned in a corporate paradigm. Sadly, the submission was neither acknowledged nor seriously considered. Certainly, there was no engagement with the NPO sector. When King III was finally produced, it decreed that it applied to all entities including all civil society organisations. This meant that every organisation, even tiny community-based organisations, had to apply (or explain) the 75 principles outlined in King III if they wanted audited financial statements.

In response, a group of NPOs met to consider the ramifications of this decree. They recognised the importance of good governance, but were of the view that King III was unsuitable for the nonprofit sector. Over the past two years, a major consultative process has taken place within the NPO sector resulting in the publication and launch of The Independent Code of Governance for Nonprofits in South Africa. This document has been hailed by the sector as an appropriate guide to good governance practice as it is based on the sector’s values which are vastly different from those of the for-profit sector.

Under some pressure, the King Committee finally accepted that there needed to be some guidance for the NPO sector to understand and apply (or explain) King III and the Draft Practice Note on the Application of King III for NPOs was released with a call for comment. There is a great deal that can be learned from these notes, but once again there has been no consultation with the civil society sector and they once again lean towards corporate speak.

Our two sectors by their definition and core purpose – nonprofit and for-profit – are very different. Perhaps the most obvious difference is that the corporate sector exists to achieve the maximum amount of profit, whereas the NPO sector has to channel its resources towards the benefit of the organisation, its work and its beneficiaries. Civil society often collaborates to form advocacy groups and even social movements, yet the corporate sector is competitive and every effort is made to undermine rivals and even destroy them (see the legal battles between Samsung and Apple – nobody is thinking about the good of the consumer).

The values of these sectors also differ. It is obvious that business cannot save the world because its values are not aligned with this objective. The idea that the concept of ‘social profit’ can be measured is bogus. If the nonprofit sector had to try and measure ‘social profit’ or ‘social return on investment’ thousands of worthy organisations would fail the test. Social change is not a product, it is a slow, messy and often unpredictable process and it is based on values. For example, the women’s movement has been a key driver of gender rights since the 1960s, yet these rights are still not secured in our world. The utterances of our own president, Jacob Zuma, about the need for all women to be married with children show how much work there is still to be done. Does this mean that this cause did not provide ‘social profit’? Has this cause failed? Will the number crunching auditors count this as a ‘social loss’? Is there no value in the existence of gender rights organisations? The irony, of course, is that many NPOs exist because of market failure and the inability of the market to care for our most vulnerable citizens such as the poor, the dying, the disabled and elderly.

But there are other differences in a more practical sense. Directors and trustees of an NPO voluntarily give off their time to fulfil an altruistic purpose; in the corporate sector, directors expect the highest possible remuneration. As well illustrated the world over – South Africa being no exception – such remuneration is sometimes astronomical in its largesse.

Another key difference is related to accountability. While King III indicates that Boards of Directors are accountable to their companies and through them to shareholders, the nonprofit sector has a different accountability framework. NPOs that receive tax benefits are public benefit organisations and have to act for the good of the public, not necessarily for the good of the organisation. The Board therefore undertakes a multi-tiered responsibility to a number of ‘constituencies’, in particular to donors and beneficiaries. The best interests of the NPO itself are not necessarily the ultimate focus, but public benefit is. An NPO might actually close its doors for the public good.

Of concern is that the corporate approach taken by King III makes demands on the NPO sector that could result in an unwillingness of people to volunteer their time as board members, thereby weakening this sector. The process of developing The Independent Code has led to considerable debate on governance within the NPO sector and this process has therefore strengthened the sector and created awareness of good, ethical governance together with the recognition that those who provide financial support should be reassured that the altruistic values of the sector are applied.

- Shelagh Gastrow, Executive Director of Inyathelo: The South African Institute for Advancement. Gastrow is also a member of the Working Group for Non-Profit Governance in South Africa. This article first appeared on the Inyathelo website. It is republished here with the permission of Inyathelo. 

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