Invitation to Comment on the Draft Practice Note on the Application of King III in the Non-profit SectorThe Institute of Directors in Southern Africa (IoDSA) invites all interested parties and stakeholders to submit written comments to the draft practice note that provides guidance on how King III should be applied in the non-profit sector.
The King Committee has convened a special subcommittee tasked with researching and making recommendations on how the principles and practice recommendations contained in King III will apply in non-profit organisations. The work of the sub-committee culminated in the drafting of a practice note that provides guidance to non-profit organisations on how sound governance could be achieved.
The subcommittee is chaired by Anton van Wyk, a member of the main King Committee and Ansie Ramalho from the IoDSA, and also includes the following representatives from the non-profit sector:
- Helen Starke, KDS Consulting
- Nicole Copley, N S Copley Consulting (NGOlawSA)
- Phiroshaw Camay, Co-operative for Research and Education (CORE)
- Tracey Henry, Tshikululu Social Investments
- Yogi Nambiar, African Social Entrepreneurs Network (ASEN)
The sub-committee reached the conclusion that many of the principles and practice recommendations as contained in the King III Report are applicable to non-profit entities. The non-profit sector, however, faces unique challenges and it is in recognition hereof that the King Committee wishes to give clear guidance on how King III is to be interpreted by non-profit organisations.
King III is recognised as the credible standard for corporate governance in South Africa. There are also other codes and practice guides specifically drafted for non-profit organisations and the sub-committee has incorporated these by reference in order to present a holistic and comprehensive view.
As non-profit organisations are not unique in needing to understand how to interpret and apply King III in their specific environment, the King Committee is extending the work it did on the King III Report to address the specific governance challenges that are faced by other sectors such as the public sector, medical schemes and pension funds. Further communication on this will follow in due course.
Your contribution to this process will be appreciated in the interest of improving governance in the non-profit sector.
Click here to view the draft practice note and here to submit your comments.
The deadline for submissions is Monday, 15 October 2012.
For more about the Institute of Directors in Southern Africa (IoDSA), refer to www.iodsa.co.za.
New Code of Governance for Non-profits
Two worlds are colliding and the results can only be fun.
I am sitting in the Impact Investing conference organised by the South African Network for Impact Investing (SAII) and hosted by the University of Pretoria’s Gordon Institute of Business Science (GIBS) and you can see it happening.
There are those of us from the nonprofit background (clearly visible as we don’t wear sharp cut suits or impossibly high heels) and those from the financial world, who talk a strange language of bonds and equity and use acronyms as if they are pronouns.
I often think that the jargon of business is designed to be intimidating so that those of us on the periphery are forever excluded, like little children not invited to the Top Dogs birthday party.
But this week, I had one of those moments where all became clear and suddenly it made sense. I missed the choir of angels and harps accompanying my epiphany, but it was no less dramatic.
We are all saying the same thing - just differently.
There are fund managers out there looking (yes – looking!) for social enterprises to invest in. This took a long time for the fundraiser in me to understand, as these moments are few in the nonprofit world.
These fund managers will take you through a rigorous process assessing your business, your future growth and your ability to survive independently of traditional grants and handouts. You are after all, a business. They do however, despite the sharp suits and high heels, seem to have a heart. They are just approaching us from a different angle.
So no longer can nonprofits assume that business does not understand the world of social service delivery. They bring new insights, which we must acknowledge and respect and vice versa.
So this is the Big Bang, where the world of for and not-for-profits collide.
It is a change in thinking.
We know that the traditional funding model - of dependency on finite grants, and hard-won subsidies - cannot last.
The financial stress and pressure that we all largely operate under means that we can never think ahead. We are always worrying about the now, rather than the where do we want to be.
Impact Investing may not be your thing, but the thinking of this new approach has to be explored and interrogated.
Because it encourages you to develop a social enterprise - a business wing that supports the delivery of social services. Because it is passionate about measurement and accountability. Because taking on financing forces you out of the cushioned security of grant funding and means you have to face up to your own organisational risk: ‘Will it work?’ takes on a whole new meaning when you have to pay the money back.
And let us be honest. This is exactly what the nonprofit world has been calling for. We have just been using different phrases that ask for new funding streams, greater accountability and transparency, as well as ownership by all.
So. Sparks will fly, as our worlds slowly collide. But Impact Investing has gravitational pull and its going to be hard to resist.
- Kerryn Krige is a freelance advisor in development. She has worked for some of South Africa’s leading non-profits as a fundraiser and programme manager. She started off as a journalist and moved into the non-profit sector in the United Kingdom, working for traditional charities and social enterprise. She has worked in East and Southern Africa and is passionate about building the capacity of the nonprofit sector. You can get in touch on email@example.com.
Annual Reports are excellent marketing tools for your nonprofit organisation
Your nonprofit organisation’s annual report allows you to share the story of your organisation and its successes with your various target audiences. It is through your annual report that you build and maintain support for your organisation’s brand. This is achieved by encouraging, inspiring, thanking and motivating current donors, volunteers your organisation’s staff. They are also wonderful marketing tools for potential donors, volunteers and staff.
There is a lot of talk around what makes a good annual report. Today, there is a focus on the report being used to tell a story showing the impact the organisation has in the community. This fresh new approach shows the return on investment and justifies he organisations existence.
Annual Report versus Board Report
It is important at this point to make a clear distinction between the annual report and the board report.
The annual report is a more focused on highlighting the achievements and successes in the year. Let it tell your organisation’s story through real human experiences so that your audience has clear understanding of what it is that you are doing and achieving. Make your language clear and easy to understand, give an explanatory paragraph or two for your financial statements so that non financial people can understand it. Your annual report should also be visually appealing so remember to include relevant photos with captions.
The board report or director’s report is where you share the more in depth facts, figures and administrative details. It is more the nuts and bolts of what needs to be communicated. Here you will share information like you implemented a new back office system and what the results were of that implementation from a more “technical” standpoint.
Annual Report Content
The following information/sections should be included in your annual report – how you lay it out is entirely up to you.
Remember to include your organisation’s basic information. For example, registration information with relevant regulators and contact details:
Your organisation’s vision and mission;
Governance - including:
- An introductory message by the chairperson as the leading authority of the organisation. This introduction is key as it highlights the activities of the past 12 months at the strategic level and also a way forward;
- A list of governing body members with their photographs and/or their background information detailing their individual roles within the organisation i.e. title and brief description. This should include members that resigned and joined the organisation during the course of the year. Qualifications and experience of each board member is important including other board involvements;
- A Governance Structure including activities (aligned to roles and responsibilities of Board) achieved by those structures including the number of meetings attended by the members of each committee and or at board level. Where your organisation does not have committees then the board may just state how it executes its responsibilities;
- Any major changes in your memorandum of association or trust deed or constitution;
- Risk Management including internal controls in place to give assurance that they have been considered and dealt with.
This report is prepared by chief executive officer, executive director or managing director. The operations report may be separated according to functions of the organisation or by strategic objectives lined out on the business or operational plan e.g.
- Organisational chart;
- Depending on the reliability of your data, you may even include a table which details staff compliments/components in terms of Employment Equity Act;
- Indication of permanent staff and volunteers. High impact changes, these should include; the number of new appointments versus dismissed or resigned;
- Awards of long service for volunteers including board and staff.
- Marketing programme summary including aims and objectives for that year and what was achieved;
- Targets for the upcoming year.
This outlines activities, projects or accomplishments carried out by organisation as per 12 months’ business or operational plan. It underscores mission related achievements.
The section covers the stated objectives of the service with a focus on the community needs. It is based on researched facts or management estimates. The achievements should focus on what the planned activities were versus what actually took place. It should also discuss the variances and the reasons for these variances as well as general challenges faced by the organisation. Rather than saying that funding is the biggest challenge - discuss what the funding will be spent on. This will encourage current donors to continue to donate and potential donors to see what is needed and heed the call to action.
Where there ad hoc services or duties were performed in the community, these should be included as new developments and be explained why they are relevant to the organisation’s mission and vision.
- The Need - Solutions to what is foreseen as challenges to achieve such (risk management);
- Estimated impact – pilot;
- What was the problem?
- What was the solution?
- Impact assessment.
Conclusion should include what the organisation intends to do the following. This should take account of future projections; manpower that may be required to accomplish these. The report should be prepared by the chief executive officer or executive director.
The introduction of this report may include the impact of economic (macro and micro level), socio economic indicators’ impact on the organization including the financials legal framework changes, etc. Keep this section short in the annual report. You can go into greater depth in your board report.
Information to include here:
- The budget and/or the actual and major variances clarified in each category of income and expenditure. This should find its basis on what is considered as being material to the board;
- Basic financial analysis of major changes;
- What was not achieved and lessons learned a fresh and approach for the future;
- Major future expenditures - this may be linked to future commitments on the financial statements;
- Audited Financial Statements (AFS).
Also keep this section to a minimum. You can include a link to the really in depth report, but for the annual report make sure that it’s easy to understand by including an introductory paragraph highlighting and summarising the important facts.
- Independent auditor’s report;
- Annual financial statements with notes.
This section should avoid categorising the donors by the amount they have given but rather list them in alphabetic order by government departments, companies, foreign funding and individuals.
Depending on the space; using company logos of company donors would be preferable. In the instances where individuals or companies do not want to be mentioned they can be grouped under anonymous donors.
If you have any questions about effectively creating your organisation’s annual report or how to ensure that your board is operating under good governance guidelines for nonprofit organisation, e-mail to firstname.lastname@example.org.
Blog first appeared on www.gadcs.co.za under articles.
One has now lost count of the number of fraud and corruption incidents that get reported in the media - almost daily. Most would agree that this indicates our corporate governance is collapsing, has completely collapsed or that it needs some serious re-vamp. The fact that fraud and corruption incidents do get reported, confirms that corporate governance still works – but mainly on the detective side. What about the preventative side? Until a balance is struck between preventative and detective controls, combating fraud and corruption will remain as elusive as ever or may even escalate. I have noted three key weak links in our corporate governance structure here in South Africa:
To come out of the quagmire of rampant fraud and corruption, South Africans need to agree on the following recommended minimum governance structure:
- We do not have minimum governance structure expectation from organisations. Until we do that, we will forever be chasing possible fraud and corruption perpetrators only after the action has been done;
- Organisations are not legally required to have internal audit departments. Those that have internal audit departments make such to suffocate within the organisations – adding very minimal value if any, to what they could potentially do to their organisations;
- The fact that organisations have an option to follow King III guidelines or not is a waste of resources - taking into account time and money invested in the research. What is the use if only say 10 percent of organisations follow the King guidelines? It simply means there are no corporate governance guidelines in South Africa.
Organisations should be expected to have the above structure as a minimum requirement - where internal auditors will be concerned with the future, external auditors with the past, board of directors very much concerned with the present, the audit committee with continuous risk assessment and monitoring and the shareholder with the overall performance and results of the organisation. (Governance structures are by no means precluded from interacting). All these governance bodies have direct access to the shareholder. How wonderful? Where can fraud and corruption get a chance with such tight governance? Admitted, it will never be airtight, but fraudsters will have to sweat to achieve what they want.
By allowing fraud and corruption cases to be reported at this rate without strategic countering, governance bodies such as the Institute of Internal Auditors and the Institute of Directors are partly to blame for the high incidents of fraud – not as active participants, but as passive participants. Most internal auditors are not comfortable with the position of internal audit in their organisation organograms, but are afraid to say it because it may have career limiting consequences. The institute of directors is quite aware that until King III guidelines are made legally enforceable, governance will remain poor - but they do not push for King Guidelines to be enforced. Why?
Internal audit is one function that could be relegated to the heap of history if it does not re-invent itself and position itself as a catalyst in the fight against fraud and corruption – through proactive systems and controls. Whenever fraud and corruption incidents are reported, one hears very little or nothing from internal auditors. Their role has become that of a lame duck or a toothless bull dog – bucking loudly, but unfortunately not able to bite.
To re-invent itself, internal audit has to fight for legal recognition. The current status is that organisations may opt to have or not to have internal auditors in their structures. We need legalised internal audit for these reasons:
In conclusion, the re-vamping of both the Institute of Internal Auditors as well as the Institute of Directors as effective governance structures will help achieve three goals at once; prevent fraud and corruption before it happens; help with continuous training; help create quality employment for the youth especially.
- Once given a legal standing, internal auditors should be elevated to report not to management but to the shareholder. This will give internal auditors the necessary muscle to do their work without fear of reprisal from management;
- Preventative controls will be entrenched in all organisations. The likelihood of fraud and corruption being reported once it has occurred will be significantly reduced;
- Inefficient, ineffective and uneconomical control environment will be discovered and reported sooner rather than later;
- On-the-job training for inexperienced youths could be housed in this department. With a well run internal audit department, managers have a pleasure to recruit from the internal audit department because recruitees would have had some exposure to business processes and procedures within the organisation;
- Like external auditors, internal auditors should have their reports included in the annual reports;
- If legalised, so many new quality job opportunities will be created for youths entering the market – this is where the job fund could come in handy.
- Kgosiemang Esau Moloko, Mobile: 084 700 4784
South Africa’s civil society sector, variously known as the nonprofit (NPO) or non-governmental organisation (NGO) sector, plays a vital and often unacknowledged developmental role. In spite of an enlightened Constitution, discrimination and inequity still abound in South Africa. Women, children, people of colour, indigenous peoples, migrants, gay and lesbian groups, and people living with HIV/AIDS, are among particularly vulnerable groups. Although there has been some progress in racial, ethnic, and gender equality since1994, South Africa remains a vastly unequal society, driven by all the worst consequences of pervasive poverty. These include health, education, welfare and human rights failures.
The civil society sector is dedicated to alleviation of these and other damaging socio-economic conditions. Over the past two decades the sector has increasingly filled gaps in government service delivery. It is no exaggeration to contend that without the efforts of organisations of civil society the suffering of the poor, the marginalised and the sick would be significantly more acute. In view of this it seems indefensible that this important sector is experiencing a sustainability crisis. While we do not have current and reliable statistics on funding to the sector, a variety of sources show that most organisations rely on a combination of (diminishing) international funding, corporate social investment, donations from individuals, and a degree of income-generation, often via government contracts. The support of government is erratic at best, as reflected in several recent media exposés. As a result, the sustainability of many important organisations is threatened and many have been forced to close or to drastically reduce staff and associated capacity. These circumstances are greatly exacerbated by the current uncertain economic climate.
With the intention of improving this situation, a group of organisations have published a new report: ‘Critical Perspectives on the Sustainability of the South African Civil Society Sector’. Including an assessment of the functioning of the National Lotteries Distribution Trust Fund (NLDTF) and the National Development Agency (NDA), the report represents the outcome of extensive research and consultation. The objective is to improve the practice of government grant-making and investment in the sector, and in the process contribute to an effective enabling regulatory environment for South African civil society.
The research revealed that the legislated ‘enabling environment’ for civil society requires review and strengthening. The NPO Directorate within the Department of Social Development has been unable to effectively implement its responsibilities in accordance with the Nonprofit Organisations Act. The NLDTF and the NDA have not managed to disburse funding effectively to the sector in accordance with the relevant legislation. The serious lack of current and reliable national data about the size, scope and activities of the sector negatively affects the ability of the sector and of government to support it. Statistics South Africa has not met its obligations in this regard. The sustainability and effectiveness of civil society to address poverty and inequality is compromised by these problems.
The report concludes with a number of practical conclusions and recommendations. Key among these is a call for the National Planning Commission to review the current dysfunctional regulatory environment in consultation with representatives of the sector. Piecemeal adjustments will not work – a cross-government systemic approach must be adopted in order to ensure that the various departments and state-related agencies function in accordance with over-arching developmental policies. The expected outcome of this recommendation should be a holistic framework for the location and effective functioning of the NDA, NLDTF, specific allocations from official development assistance, private philanthropy and corporate social investments, congruent with the developmental state.
Click here to read the full report.
For more information contact:
Colleen du Toit
Mobile: 083 646 8469
Mobile: 082 886 5886
Mobile: 083 443 0227
Charities Aid Foundation (CAF Southern Africa)
CIVICUS: World Alliance for Citizen Participation
Co-operative for Research and Education (CORE)
Southern African NGO Network (SANGONeT)
Legal Resources Centre (LRC)
National Welfare Social Service & Development Forum
To view other NGO press releases, refer to www.ngopulse.org/group/home-page/pressreleases.Date published:07/08/2012Organisation:Charities Aid Foundation (CAF Southern Africa), CIVICUS:World Alliance for Citizen Participation, Co-operative for Research and Education (CORE), Southern African NGO Network (SANGONeT), Legal Resources Centre (LRC), National Welfare Social Service & Development Forum
A proposed code of governance for non-profit organisations (NPOs) in South Africa has been released for public comment. The draft Independent Code of Good Governance for Non-Profit Organisations in South Africa aims to encourage best governance practice and was initiated by a group of NPOs at a Civil Society Consultative Forum meeting held in August 2010. They recognised the need for South African civil society to formulate and adopt its own distinct code rather than be regulated by government or corporate sector codes.
The Working Group mandated to develop a draft code has already consulted hundreds of NPOs across the country and individuals and organisations now have until the end of April 2012 to submit their final suggestions and comments. Various provincial workshops are also planned where the code will be further debated.
It is intended that the process should culminate in the formal adoption of the proposed new independent code by the end of July 2012.
The Working Group consists of Chris Mkhize, Chief Executive Officer, Uthungulu Community Foundation; Shelagh Gastrow, Executive Director, The South African Institute of Advancement: Inyathelo; Colleen du Toit, Chief Executive Officer, Charities Aid Foundation Southern Africa; Jimmy Gotyana, President, SANGOCO; and as legal adviser, Richard Rosenthal of Richard Rosenthal Attorneys.
The 18-page draft document proposes eight particular ‘values’ which are of special relevance and concern to the NPO sector, as well as six key leadership principles, and five statutory legal and fiscal principles.
Click here to read or download a copy of the initial draft of the proposed Independent Code of Governance for Non-Profit Organisations in South Africa.
Click here to read the official media release in support of the release of the draft code.
To submit your comments in response to the draft document and/or for more information about the planned provincial workshops, please contact Janine Ogle on email@example.com or Tel: 021 465 6981.
Joint Media Statement issued on behalf of a Civil Society Working Group nominated to draft an independent Code of Governance for Non Profit Organisations (NPO’s) in South Africa.
The Working Group was nominated at a Civil Society Consultative Forum held in August 2010, and includes Chris Mkhize (Chief Executive Officer, Uthungulu Community Foundation); Shelagh Gastrow (Executive Director, The South African Institute of Advancement: Inyathelo); Colleen du Toit (Chief Executive Officer, Charities Aid Foundation Southern Africa - CAF-SA); Jimmy Gotyana (President, South African National NGO Coalition - SANGOCO) and as legal adviser, Richard Rosenthal (Richard Rosenthal Attorneys).
A proposed code of governance for non-profit organisations in South Africa has been released for public comment. The draft Independent Code of Good Governance for Non-Profit Organisations in South Africa aims to encourage best governance practice and was initiated by a group of NPOs at a Civil Society Consultative Forum meeting in August 2010. They recognised the need for South African civil society to formulate and adopt its own distinct code rather than be regulated by government or corporate sector codes. The working group mandated to develop a draft code has already consulted hundreds non-profits across the country, and individuals and organisations now have until the end of April to submit their final suggestions and comments. It is intended that the process should culminate in the formal adoption of the proposed new independent code by the end of July.
Inyathelo Executive Director Shelagh Gastrow says the large and diverse non-profit sector in South Africa needs a code that reflects its unique values and principles. “NPOs are a special kind of institution in that they exist primarily to serve the common good and are not motivated or driven by profit-making or self-benefit. Although we recognise the importance of other governance codes, including the so-called “King III” Code devised under the auspices of the Institute of Directors, we have consistently argued that these do not adequately reflect the values and ethos of the NPO sector. In fact, some of the “King III” principles are completely impractical, unaffordable and unattainable for many non-profits, and they don’t accommodate the distinct principles and accountability requirements of non-profits which go beyond those of the corporate sector,” explains Gastrow.
President of SANGOCO Jimmy Gotyana says the the proposed independent code is intended to be voluntary and will not be imposed. “We believe compliance should be aspirational and supportive rather than prescriptive. Although the code will not have any official or legal status, it is widely supported by the donor community and has the support of the Non-Profit Organisations Directorate in the Department of Social Development. It brings together views and inputs from previous documents, including the SANGOCO Code of Conduct and Ethics. We want the values and principles outlined in the code to be widely understood and supported by NPOs and all sectors of society,” says Gotyana.
The 18-page draft document proposes eight particular ‘values’ which are of special relevance and concern to the NPO sector, as well as six key leadership principles, and five statutory legal and fiscal principles. Colleen du Toit, Chief Executive Officer of CAF-SA, says it represents a unique opportunity for the NPO community to publicly recommit themselves to certain core values and principles, including fidelity to purpose, democracy, transparency and accountability. “The code deals with how to handle things like conflicts of interest and self-dealing as well as the responsibilities of boards to ensure that scarce resources are spent appropriately in the public interest. There is also a section which affirms the independence and need for impartiality of NPOs so that they are not dictated to by any particular constituency or interest group. Leadership is also identified as an essential ingredient of good governance, and the Code includes six operational principles to facilitate the effective management of fundraising, sustainability and risk,” explains du Toit.
CEO of the Uthungulu Community Foundation, Chris Mkhize, says the working group will be hosting workshops in Cape Town, Gauteng, Durban, Port Elizabeth and Bloemfontein during March and April in order to get further input and encourage dialogue and debate around the draft independent code. “We really want to ensure the widest possible support so we encourage everyone in the NPO sector to attend the workshops or email or call with suggestions and comments. We are confident that collectively we can create a benchmark for good governance in South Africa to ensure NPOs become more effective and earn well-deserved donor support and public confidence,” says Mkhize.
Read and download a copy of the initial draft of the proposed Independent Code of Governance for Non-Profit Organisations in South Africa.
To find out more about the workshops or submit comments on the draft independent code, please contact Janine Ogle on Janine@inyathelo.org.za or 021 465 6981.
For interview requests, please contact:
Shelagh Gastrow – Executive Director, Inyathelo
Mobile: 082 494 2996
Colleen du Toit – Chief Executive Officer, CAF-SA
Mobile: 083 646 8469
Chris Mkhize – Chief Executive Officer, Uthungulu Community Foundation
Mobile: 082 692 6405
Jimmy Gotyana - President, SANGOCO
Mobile: 073 615 7665
To view other NGO press releases, refer to www.ngopulse.org/group/home-page/pressreleases.Date published:08/03/2012Organisation:Inyathelo
Governance Practices of National Non-Profit Bodies and National Networking Organisations in South AfricaThe Department of Social Development treats this report as a starting point in addressing the capacity needs of NPOs in South Africa. The report may be used as a tool to encourage and entrench good governance practices in the sector, not only to enhance functional ability, but also to meet the diverse service delivery needs of broader South African communities. The report recommends that government should work in partnership with the non-profit sector on a joint campaign to mobilise individuals in civil society and the private sector to offer their skills, experience and resources through service on NPO boards.
For more information, click here (PDF).
- 1. Introduction
The King Code of Governance Principles (the Code) and the King Report on Governance for South Africa were published on 1 September 2009 and became effective on 1 March 2010. Like the first and second reports, this third report is aimed at promoting good corporate governance in South Africa and was compiled by the King Committee under the chairmanship of Professor Mervyn E. King. The King Committee has received both local and international acclaim for its contribution towards corporate governance.
In its first two reports the King Committee did not make any effort to explain its relevance to civil society organisations (CSOs). The King Committee was noticeably more concerned with the governance of commercial companies. CSOs were left in the dark as to the relevance and applicability of the first two codes.
King III has now boldly declared that it applies to ‘all entities regardless of the manner and form of incorporation or establishment and whether in the public, private sectors or nonprofit sectors’.3 The principles contained in the report have purportedly been drafted so that ‘every entity can apply them and, in doing so, achieve good governance‘.4 The accuracy of this statement is questionable.
Although King III is a very important document in the history of corporate governance in South Africa, it must be recognised for what it is: a code suited for commercial entities that may find limited application in CSOs.
This article briefly explores the potential implications of King III on CSOs.
2. The development of the King Codes
In 1992 the King Committee was established with the specific aim of researching and making recommendations into corporate governance in South Africa. The first King report was published in 1994. King I recognised that companies do not act independent from society. For this reason the highest standards of corporate governance were encouraged through enterprise with integrity. This entailed that a wide range of stakeholders’ interests are to be considered as it relates to the fundamental principles of good financial, social, ethical, and environmental practice. The second King Report (King II) was released in 2002. Without deviating from the principles of its predecessor, King II was more focused on introducing the idea of corporate citizenship and the notion of a triple bottom line. The latter involved the exercise of the corporate governance function with due regard to the company‘s actions on people, planet, and profit.
Some of the recommended practices of the King II report were incorporated into the Companies Act 71 of 2008 and some have become regulatory prescriptions to companies listed on the Johannesburg Stock Exchange. King III now states that ―Good governance is not something that exists separate from the law and it is inappropriate to unhinge governance from the law. 5 The argument is that with time governance practices eventually becomes the standard against which the board is measured. Should a court have to look at an incident in respect of governance, such standard (governance practices) will be used to measure the conduct of directors. The insinuation is clearly being made that components of King III stand a good chance to attain the standard of law. King III further argues that: ― Corporate governance practices, codes and guidelines therefore lift the bar of what are regarded as appropriate standards of conduct. Consequently, any failure to meet a recognised standard of governance, albeit not legislated, may render a board or individual director liable at law.
There is no doubt that some of the principles contained in King III would eventually become law. This raises the question whether King III lays a proper foundation that could inspire legislation that will govern CSOs.
3. Is King III an appropriate standard for civil society governance?
King III is not legislation. The fact that King III suggests that organisations should ‘apply or explain’ why they are not applying it, creates the illusion that it has the same authority as legislation. Given this insistence that King III applies to all entities, some funders may view it as the standard of governance for all CSOs in South Africa. King III, whether appropriate or inappropriate for CSOs, can in effect play the role of a gatekeeper for donor support.
King III is heavily skewed, in language and meaning, towards the commercial sector. This is highlighted by the fact that the report speaks overwhelmingly to business and commercial enterprises and assumes that trading activities are the sole means of sustaining all entities. King III is seemingly unmindful of the fact that a large number of CSOs in South Africa do not generate their own income through trading activities. It can only be deduced that this assumption is a consequence of a neglected consideration of the nonprofit sector.
King III is heavily associated with the Companies Act. Throughout the Report consistent reference is only made to the Companies Act of 2008 as the Act regulating the establishment of entities in South Africa. Now, one can only deduce that the intention was to speak to the governance of companies that have been and will be registered in terms of the companies’ legislation.
Given these factors alone there is reason to be concerned with the impact that King III may have on the enabling environment of CSOs — in particular on community-based organisations, as the Cinderellas to our sector.
It is claimed that King III was necessary in light of the new Companies Act 71 of 2008 and changes in international governance trends. This poses two very important considerations. First, not all CSOs are established in terms of the Companies Act and King III is seemingly not cognisant of the tens of thousands of voluntary associations that operate in terms of common law in South Africa. Second, an increased expectation of a high level of sophistication has now been imposed by King III on smaller community-based organisations. This seemingly academic approach has placed less emphasis on the local context.
The more sophisticated NGOs would be better placed to keep in step with the latest tunes. That however is not the reality for the majority of community-based organisations, which comprise the overwhelming component of CSOs in South Africa.
The Nonprofit Organisations Act, No. 71 of 1997 (the NPO Act) is one of the key pieces of legislation for the non-profit sector in South Africa. It provides for the establishment of a Nonprofit Directorate which has, amongst others, the function “To ensure that the standard of governance within nonprofit organisations is maintained and improved.”7 It is clear that the King III report was compiled without involvement from the NPO Directorate. This is an important factor, as the NPO Act is in particular aimed at ― creating an environment in which nonprofit organisations can flourish.8
4. The implications of King III for civil society governance
It is not difficult to see how some CSOs would snugly embrace King III and would most probably gain competitive advantage in implementing it. The authors of King III claim that it has been prepared so that ‘every entity can apply them and, in doing so, achieve good governance‘. This is hardly evident from the Report. A number of principles contained in King III cannot realistically be applied to all legal entities. The following are such examples:
- Audit Committees: Principle 3.1 of King III recommends that the board should voluntarily appoint an effective and independent audit committee consisting of at least three members. It further suggests that ‘there should be a basic level of qualification and experience for audit committee membership’.9 This audit committee should collectively have an understanding of a wide range of issues, namely: integrated reporting, internal financial controls, external audit process, corporate law, risk management, sustainability issues, information technology governance, and governance processes within the company.10 This expectation is out of sync with the reality of most community-based organisations in South Africa. In addition, the preparation of audit reports is not a legislative requirement for all companies in terms of the Companies Act of 2008.11
- Internal Audit: Principle 7.1 of King III provides that the board should ensure that there is an effective risk-based internal audit. The Report further suggests that the internal audit function ‘should adhere to the Institute of Internal Auditors’ Standards for the Professional Practice of Internal Auditing and Code of Ethics at a minimum’.12 The implication is that all CSOs should introduce the standards of a professional practice as a minimum requirement into its internal audit function.
- Remuneration: Principle 2.25 of the Code states that ‘Companies should remunerate directors and executives fairly and responsibly‘.13 The Report further states that ―The Board should promote a culture that supports enterprise and innovation with appropriate short-term and long-term performance-related rewards that are fair and achievable.14 King III has not taken into account that nonprofit boards are, due to the nature of nonprofit organisations, predominantly volunteers and are not getting paid for serving. The payment of nonprofit board members may have detrimental consequences for the nonprofit sector.
- A lack of financial resources
- The availability of proficient board members to ensure compliance with King III.
- The additional financial burden or potential mission drift that may result from having to now also consider matters pertaining to business that do not form part of their main objective
- Many of the recommended practices ignore the fact that CSOs derive income through soliciting funding from a donor. Whether cash-strapped CSOs would be able to mobilise additional resources to implement King III remains to be seen.
King III has introduced a code on governance that largely considers governance practices from a market-based perspective. It has not taken into account that the nonprofit sector does not operate primarily on the premise of supply and demand. The Code accordingly lacks principles on key areas that are central to civil society governance.
King III has not mentioned the issue of resource mobilisation, being a key responsibility of nonprofit boards. It is premised on the assumption that business is a means of sustaining all entities. King III does not take into account that a large part of CSOs have come into existence due to market failure. Accordingly, a number of organisations caring for the poor and needy (who are unable to pay for services) have to rely on donations and fundraising.
King III provides no guidance on how CSO boards should go about recruiting new board members. Recruiting new board members to volunteer their time serving on a CSO board is very different from offering someone a salary to become a director of a commercial company. Nonprofit directors carry similar responsibilities as for-profit directors, but are ordinarily not remunerated. The motivation to serve on the board of a nonprofit is therefore different compared to a for-profit. The commercial director is motivated primarily by financial gain whilst the CSO director will not ordinarily receive financial payment. The recruitment of directors to serve on nonprofit boards is therefore a central component of nonprofit governance – an aspect that King III has simply ignored.
King III does not take into account that different models of CSO governance have evolved over time. King III has, however, impliedly given recognition to the existence of different commercial models. King III does not offer guidance on some of the governance challenges faced with different CSO governance models. In one CSO model, for example—the constituent model—board members are appointed with the mandate of representing a particular constituency on the board. This governance model is widespread in the South African CSO sector and is also being promoted by the South African government. One of the shortfalls of this governance model is that it is not aimed at ensuring individuals with diverse governance skills are represented on the board. King III is unmindful of these unique challenges and offers no guidance on them.
Developments in the marketplace continue to have impacts on the development of legislation affecting the nonprofit sectors across the world. Legislatures often do not take into account the implications of such legislation on nonprofit organisations. The confusion following the applicability of the Sarbanes-Oxley Act to nonprofit organisations in the United States, shortly after its introduction, is an example of this.
CSO accountability should be promoted through laws and codes. The intention of this article is not to argue for lesser standards of governance and accountability of CSOs, but for suitable standards. Governance standards should not be introduced on the assumption that marketplace standards are suitable for CSOs. This form of legislative development is detrimental to the unique character of CSOs and will corrode the values underlying the nonprofit sector.
At least two prominent institutions have blamed weak corporate governance arrangements for the current global financial crisis. The Organisation for Economic Cooperation and Development concluded that: ―...the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements. When they were put to the test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial service companies. 5 In a similar vein, the United Nations found that: ―...it is equally urgent to recognize the root causes for the [global economic] crisis and to embark on a profound reform of the global economic governance system.‖16 It is likely that the global financial crisis will result in further legislative and governance reforms. King III illustrates how commercial entities and CSOs can easily be thrown together and measured with one measuring tape. This is clearly inappropriate in the South African context and the consequences of it remain to be seen. A governance code aimed at promoting good governance will overburden and may potentially stifle the growth of CSOs.
1 Peter S.A. Hendricks was admitted as an attorney in 1999 in the Cape High Court of South Africa. He has numerous skills and wide experience in nonprofit law and governance. His law firm PSA Hendricks & Associates has a focus on service and support to nonprofit and commercial entities with a social mission.
2 Ricardo G. Wyngaard has provided legal advice, training, and assistance to the nonprofit sector since 2000. He has participated in a number of legislative reform and research initiatives on nonprofit legislation and is currently running a solo law practice focusing on nonprofit law and governance (www.nonprofitlawyer.co.za).
3 The King Committee, (2009) King Report on Governance for South Africa, Institute of Directors, p. 17
5 Ibid, p.7
6 Ibid, p. 8
7 Section 5b(ii) of Nonprofit Organisations Act, No. 71 of 1997
8 Section 2 (a) of the Nonprofit Organisation Act, No. 71 of 1997
9 The King Committee, (2009) King Report on Governance for South Africa, Institute of Directors, p. 57
11 The draft regulations of the Companies Act of 2008 are more in line with a threshold approached adopted by the California's Nonprofit Integrity Act of 2004 which requires charities with gross revenue of $2 million or more to appoint an audit committee, which amount excludes grants received from government.
12 The King Committee, (2009) King Report on Governance for South Africa, Institute of Directors, p. 93
13 Ibid, p. 48
15 The Corporate Governance Lessons from the Financial Crisis, Organisation for Economic Co-operation and Development, 2009
16 The Global Economic Crisis: Systemic Failures and Multilateral Remedies, United Nation
- This article first appeared in the International Journal of Not-For-Profit Law, volume 12, Number 2 February 2010. It is republished here with the permission of the authors; Peter S.A. Hendricks, PSA Hendricks & Associates and Ricardo G. Wyngaard, Ricardo Wyngaard Attorneys .
- The release of the King III Report on Corporate Governance on September 1 last year and its imminent application has rekindled and invigorated the national discourse on corporate governance and social responsibility. Although this is a positive step, there is a need to orientate the debate towards the responsibilities of the Non-profit Organisation (NPO) sector in a more meaningful way than has been hitherto by King III.
The problem with King III in its present form is that in failing to mention specifically the role of governance in the NPO sector, it inadvertently views NPO activities within the same prism as that of the corporate sector. This is a mistake given the vast inherent differences between the two sectors.
Indeed, it represents a misunderstanding of both the role of civil society organisations, as well as their footprint on the Southern African and global landscapes.
Perhaps the most obvious difference between the two sectors is that the corporate sector exists to achieve the maximum amount of profit possible, whereas the NPO sector, by definition has to channel any resources it generates towards the benefit of the organisation and the work that it does.
But there are other differences too. Directors of an NPO freely and voluntary give of their time to fulfil an altruistic purpose; in the corporate sector, directors do not freely give of their time, and expect the highest possible remuneration for their investment. As well illustrated by exposes the world over – South Africa being no exception – such remuneration is sometimes astronomical in its largesse.
The corporate sector could also generally be described as a more homogenous industry than the NPO sector. The latter ranges from small and informal community-based organisations (CBOs), to church and faith-based organisations, to so-called Big International Non-Governmental Organisations (BINGOs), which operate on a multinational level, utilising large budgets and exercising considerable control over policy formation and state action. In addition, the majority of NPOs are trusts and voluntary associations. The claim by King III that it covers all entities regardless of founding constitutions is spurious. Trusts and voluntary associations have their own body of law including aspects of common law as well as guidance from international principle and practice, especially taking into account the degree of funding of South African NPOs that comes from abroad.
A key issue in the non-profit sector is the general principle of participative decision-making. The sector is accountable to various constituencies including the general public (as NPOs are established for public benefit), to donors, to their beneficiaries and partners and in the case of voluntary associations – to their members. Hence, the sector would expect to be consulted before codes and measurement tools relating to its governance were established. The Institute of Directors represents its members whose profile does not resemble most organisations in the non-profit sector. It has a clear mandate to undertake its task for the for-profit sector, but has no mandate from the non-profit sector and nor has it been accountable to that sector.
Is there a need then to have an NPO governance framework? We at Inyathelo – the South African Institute for Advancement, a non-profit organisation aimed at building South African civil society, and many others with whom we work and have close associations, think that there is.
This is particularly pertinent considering the work NPOs do. Very often, this involves the provision of public services – the building of schools, for instance, or providing emergency access to medicine in natural disasters. Governance of the organisation and its funding are critical to donor and beneficiary confidence besides the necessary oversight of organisations by their boards on behalf of the public (as they are public benefit organisations).
There is therefore a need for the South African non-profit sector to explore the development of a Good Governance Code or Charter that speaks to, among others, the specific governance and risk management needs of NPOs. Such a Code needs to be aware of the multi-layered and multi-textured nature of NPOs. Different standards need to be set for CBOs with limited resources, to BINGOs which are effectively able to wield the same positive power that a group of governments could collectively maintain.
Besides the clear principles of good governance such as oversight of the organisation’s direction and affairs; fiduciary responsibility which recognises the duty to act for the good of others and ensuring the responsible and ethical management of an NPO, such a Code could gauge questions of local inclusivity and consultation in the design and implementation of NPO programmes and recommend access to information for those affected by the programmes.
This Code needs to be separate from a corporate governance framework that has, as its driving force, the interests of the commercial sector.
As we at Inyathelo have previously noted, procedures such as ‘integrated reports,’ ‘audit committees’, ‘corporate citizenship policies’ and ‘business rescue proceedings’ will not find place with small CBOs, which have neither the resources nor the technical know-how to discern which of the principles in King III apply to them.
It is futile indeed for NPOs to shape themselves solely into the governance mould required for the corporate sector. This is so because essentially NPOs have long since bypassed that mould.
For NPOs, social responsibility is not a question of ‘apply or explain,’ as it is for the corporate sector under King III. Rather, the application of altruistic values and the provision of social capital are inherently present.
The question is then how are NPOs applying these values, and it is this complex algorithm which needs to be solved through thorough input from the NPO sector and not the top-down approach that King III, with all its corporate and government muscle seeks to impose.
- Shelagh Gastrow is Executive Director at Inyathelo: The South African Institute for Advancement