Building trust in NFPs: applying the lessons from Royal Commissions

Whilst financial success is a potent draw card for corporate organisation’s to attract investors, for NFPs, attracting donors and new members is a matter of trust.

The sustainability – and indeed viability – of NFPs into the future rests not just on operational and mission success, but firstly on the trust factor.

The recent Royal Commissions and their findings highlight that all organisations need to look closely at their integrity and ensure they’re meeting community expectations and building trust, in addition to complying with legal and regulatory obligations.

This is especially critical for NFPs though who essentially trade in trust – public trust is fundamental for not-for-profits and charities and, indeed, underpins their business.

For organisation’s with a significant reliance on public donations, there is significant risk of being materially impacted if there’s a failure to withstand public scrutiny.

Certainly there has been an erosion of trust in organisations of all sectors and industries.

Research analysts at McCrindle report two in three Australians (66%) state their knowledge and trust of an organisation is the most significant motivator in their decision to get involved with a certain charity or NFP.

In their report Three Trends for NFPs to watch in 2019, McCrindle places the importance of trust as the first priority.

Directors on NFP Boards should approach their duties with a sharp focus on the issue of trust and their role in protecting and building it.

Using the findings and recommendations from the two most recent Royal Commissions, NFP directors will be well placed to meet this duty.

Questions NFP Boards should be asking

The two recent Royal Commissions – that in relation to Institutional Responses to Child Sexual Abuse and that into Misconduct in the Banking, Superannuation and Financial Services Industry – have given directors of every sector an insight into how they can, and should, better approach the issue of trust.

This starts with Boards ensuring they ask the right questions.

Commissioner Kenneth Hayne, in his findings into the finance sector, said every entity must ask itself the following questions:

•  Is there adequate oversight and challenge by the Board of emerging non-financial risks?
•  Is it clear who is accountable for risks and how they are to be held accountable?
• Are issues and risks identified quickly, referred up the management chain and then managed and resolved urgently?  Or does bureaucracy get in the way?
•  Is enough attention being given to compliance?  Is it working in practice? Or is it just ‘box ticking’?
• Do remuneration practices recognise and penalise poor conduct?  How does remuneration apply when there are poor risk or customer outcomes?  Do senior managers and above feel the sting?
• What are our dominant cultures of practice?  What do we want it to be and how will we get there?
• Have we got the right structure and assignment of accountabilities?
• Do the senior managers overseeing non-financial risk have the necessary capabilities?

He noted these questions direct attention to three areas:  culture, governance and remuneration.

Assessing culture

An organisation’s culture impacts directly – either positively or negatively – on reputation and trust. It will either be improving an organisation’s community standing, or damaging it.

Borrowing a phrase from a Group of Thirty Report, Commissioner Hayne describes culture as ‘what people do when no-one is watching’. He noted culture can both drive or discourage misconduct.

Culture was also an area of fundamental concern arising out of the Royal Commission into Institutional Responses to Child Sexual Abuse. The final report noted:

Many institutions we examined did not have a culture where the best interests of children were the priority. Some leaders did not take responsibility for their institution’s failure to protect children. Some leaders felt their primary responsibility was to protect the institution’s reputation, and the accused person.

Poor culture can undermine any strategy which the Board may have, so despite it being something that can be difficult to grapple with, it’s critical Boards make a sustained effort to ensure an organisation has an appropriate culture.

Boards and senior management must accept they have primary responsibility for culture.  They are responsible for driving culture and for selection and monitoring of the CEO who generally has the biggest influence on culture within the organisation.

According to Commissioner Hayne, culture requires adherence to the following six basic norms:

• obey the law;
• do not mislead or deceive;
• act fairly;
• provide services that are fit for purpose;
• deliver services with reasonable care and skill;
• when acting for another, act in the best interest of that other.

For Boards looking to assess culture, some metrics which may be used include:

• detailed assessment of staff turnover by reporting lines, location and gender;
• undertaking truly anonymous staff surveys;
• thorough review of material customer or stakeholder complaints;
• implementation  of an appropriate whistleblower reporting regime, with disclosure on a confidential basis to the board;
• encouragement of compliance with values (for example, as a threshold issue for award of discretionary remuneration) and calling out of behaviour inconsistent with values.

Using governance to build trust

Seeking information and challenging management

Commissioner Hayne emphasised it’s incumbent on Boards to be fully aware of significant matters arising within the business by asking for the right information.

He noted this is not about directors receiving more information, but about ensuring the board receives quality information.

Commissioner Hayne noted the fundamental importance of Boards receiving the ‘right information’ so that the Board may challenge management on significant issues that have the ability to affect the interests of customers, relations with regulators and reputation more broadly.

He encouraged Boards and management to keep considering how to present information about the right issues in the right way.

Whilst it’s critical to ensure the line between management responsibilities and Board oversight isn’t blurred, the Board needs to challenge management assumptions and recommendations and be prepared to intervene when management decisions aren’t in the best long-term interests of the organisation.

The right information includes not just financial information, but non-financial matters such as whether KPIs for executives have unintended consequences, how customers, employees, suppliers and other stakeholders are dealt with and whether the culture is appropriate.

This may ultimately involve introduction of a KPI for the Chief Executive Officer to produce clear, concise and comprehensive board packs. Boards are often involved in establishing templates in this regard.

The style of the Chair and the expertise of directors significantly influences the ability of the board to effectively challenge senior management and board composition, as discussed subsequently, is particularly relevant in this context.

Accountability and conflicts

Commissioner Hayne said: “Notions of accountability lie at the heart of governance.”

It’s fundamentally important that organisations make clear who is accountable for what is done or not done and what consequences follow when things go wrong.

The key message from this is that organisations must ensure there are proper processes for identifying who is accountable for all risks – whether financial or non-financial – and how they are to account for it and be held accountable.

Commissioner Hayne noted that where possible, conflicts of interest and conflicts between duty and interest should be removed. There must be recognition that conflicts of interest and conflicts between duty and interest should be eliminated rather than ‘managed’.

The impact of remuneration on trust

The Hayne Royal Commission highlighted the intrinsic link between remuneration policies and culture:

… remuneration and incentives tell staff what the entity values. Remuneration both affects and reflects culture. As the Commission’s work has shown, and is now not disputed, poor remuneration and incentive programs can lead, and have led, to poor customer outcomes.

Commissioner Hayne noted that every entity must ask the questions:

• Do compensation, incentive or remuneration practices recognise and penalise poor conduct?
• How does the remuneration framework apply when there are poor risk outcomes or there are poor customer outcomes?
• Do senior managers and above feel the sting?

Often what is missing at the Board table is information regarding how the remuneration system is being applied in practice and whether it’s having the desired outcomes.

Remuneration structures require review and amendment at least annually and directors need to consider if the structures address performance in managing non-financial risks including ensuring compliance and preventing misconduct.

As a guide, directors of NFPs should consider:

• investigating the enhancement of board reporting on risk management performance and remuneration;
• investigating if the structure includes rewards for doing the right thing; and
• is the remuneration structure in alignment with the organisation’s core values.

For NFPs who work with children

Although the subject matter was fundamentally different, many criticisms regarding failures of governance and culture were also made from the Royal Commission in relation to Institutional Responses to Child Sexual Abuse.

That investigation revealed widespread, systemic failings of institutions to protect children and to respond appropriately to child sexual abuse, including serious governance failures.

The Royal Commission had both direct and indirect impacts for not-for-profit organisations working with children and young people and its recommendations highlighted the importance of governance, culture and leadership in ensuring that children are protected from harm.

The Royal Commission found the structure and governance of religious institutions may have held back organisations from effectively responding to allegations, and there were a number of common elements contributing to the occurrences of child sexual assault in religious institutions including a combination of ‘cultural, governance and theological factors’.

It found: “Independent, autonomous or decentralised governance structures often served to protect leaders of religious institutions from being scrutinised or held accountable for their actions, or lack of action in responding to child sexual abuse.”

The final report noted: “concern for a school’s reputation and financial interests; hyper-masculine and hierarchical cultures; a sense of being part of a superior and privileged institution; the unquestioning selection of ex-students for employment; and long-serving principals in governance structures with little or no accountability in the area of student wellbeing and safety” increased the risk of abuse in non-government schools.

The Royal Commission also found: “Good governance processes [would] ensure that every school and its leaders understand their obligations to keep children safe,  and are held accountable if they do not.  Risk is created by complex and opaque governance, leadership that fails to notify school boards of child sexual abuse, inadequate recordkeeping and limited information sharing.”

The link between child protection and trust is intrinsic.  For directors of NFPs working with children, there is a need to ensure an institution’s reputation although critical, is second to the expected societal norms which must be met to earn and keep the community’s trust.

The matters highlighted by Hayne apply equally to all NFP’s, including those who work with children, and are essential for building trust in NFPs.