Lessons from the banking royal commission for the NFP sector

By now, most people are aware that Commissioner Hayne’s final report on the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services sectors (commonly referred to as the “banking royal commission”) highlighted some serious issues with respect to governance and culture.

Whilst many of the issues discussed in the report were specific to those sectors, there were lessons for all governing boards and sub-committees including those of not-for-profit entities.

The report identified shortcomings with the respective boards in regards to the following:

  • sufficiently challenging management;
  • doing all they can to satisfy themselves that they are receiving the right information and inputs from management to make complex decisions;
  • monitoring, measuring and assessing the organisation’s culture and governance; and
  • providing rigorous oversight of risk including non-financial risks.

The complexity and risks associated with many not-for-profit entities may arguably be substantially less than those of banking and financial services organisations, however, all boards still need to ensure they are effectively fulfilling their roles and duties.

The presentation of a budget is a simple example of governance to work through. Whilst management may prepare the budget, boards can play a key role to ensure there is an appropriate level of rigour within the budgetary setting process.

Using the above issues from the Hayne Report, the following queries may be raised:

Sufficiently challenging management

  • Has the board sufficiently challenged management on key assumptions and estimates made in the budget?
  • How does the budget assist the organisation to achieve its objectives and strategies?

Doing all they can to satisfy themselves that they are receiving the right information and inputs from management to make complex decisions

  • Does the board understand the key assumptions and estimates and the key variables impact on the organisation’s ability to achieve the budget?
  • Has sufficient supporting information been provided to support key assumptions and strategies?
  • Has sufficient budgetary information been provided (ie does the budget clearly outline the impact on the organisation’s financial position and cash flows)?

Monitoring, measuring and assessing the organisation’s culture and governance

  • How frequently and closely is the budget monitored and measured against actuals?
  • Is the budget just measured against financial measures or are outcomes considered as well (is the organisation achieving its goals)?

Providing rigorous oversight of risk including non-financial risks

  • Whilst the budget may help reduce risk in terms of solvency, does it increase risk in other areas (ie cost cutting may result in greater occupational health and safety risks or severely restrict an organisation’s ability to effectively deliver programs)?

The above queries are clearly not exhaustive and have been used purely to demonstrate how the findings from the Hayne Report have something for all organisations to learn from.

Whilst it would be fair to say that many not-for-profit board members have a sound understanding of their duties and obligations, the same could also be said of those sitting (or who were sitting) on the boards of financial institutions that have come under such heavy scrutiny during the royal commission.

Factors such as having an experienced and competent CEO, board members juggling multiple roles in life (board/committee positions, work commitments, family time), minimal past issues and general complacency can result in boards not acting as diligently as they otherwise would. It is therefore necessary for boards to regularly review and reinforce their understanding of their role within the organisation.