When may a charity board member be paid for their services?
July 2017 | Article |
The distinction between the nature and scale of a charity’s operations is central to consideration of whether and when it may be appropriate to remunerate the board or committee members for their service as ‘responsible persons’.
A one-size-fits-all approach is inappropriate. Each charity must consider its own circumstances in determining whether the remuneration of some or all of its board members is in the best interests of the charity.
Trends in remuneration
Charities come in all different shapes and sizes. Some start with a few individuals committed to a common mission for the public benefit, rely heavily on the support of volunteers, receive a significant proportion of their income from donations and bequests and maintain relatively small scale operations responsive to their core mission. Other charities are established with a more expansive mission or scale-up over time. These larger charities may have external funding arrangements, including with Government, and operate in highly regulated sectors. For these charities, their operations are complex and their ongoing viability and success requires significant board engagement and oversight.
The Australian Institute of Company Directors (AICD) reports that approximately 15% of directors in the not-for-profit (NFP) sector are remunerated for their services as directors. Relevantly, there is a strong correlation between the size of the NFP and remuneration of directors. AICD research showed that close to a third (29%) of directors from NFP organisations with annual income over $20 million are remunerated compared with less than 2% of directors from organisations with annual income under $250,000, reflecting “the level of complexity and sophistication in governance between organisations of different size and the associated expectations of directors”.
ACNC Guidance about board member remuneration
The Australian Charities and Not-for-profits Commission (ACNC) has recently released a guidance note: Remunerating charity board members (July 2017). The Guide identifies key considerations that may be relevant in deciding whether to pay board members for their services. It emphasises that the appropriateness of board remuneration depends on the unique circumstances of each charity. Charities should approach the decision to pay board members with care and diligence. A charity must also ensure that it appropriately manages any conflicts of interest that arise in connection with relevant remuneration approvals.
The decision as to whether to remunerate the board must be made with reference to the obligation to comply with the ACNC’s Governance Standards, including the requirement that a charity’s board members act in the best interests of the charity and manage a charity’s finances responsibly. A charity that has members must also take reasonable steps to be accountable to their members and provide them with adequate opportunity to raise concerns about how the charity is governed. This obligation requires a charity that pays its board members to be transparent regarding remuneration and to present opportunities for its members to raise any concerns about payments. For medium and large sized charities, disclosures of related party transactions in the financial statements must cover key management personnel which may include board members (see AASB 124 – Related Party Disclosures).
The Guide highlights that any payments to the board that are unreasonable, unauthorised or unjustifiable may mean that the charity is not complying with the Governance Standards. A charity that fails to comply with the Governance Standards puts at risk its charity registration.
The ASX Corporate Governance Principles and Recommendation, principle 8 ‘Remunerate fairly and responsibly’, makes recommendations for listed companies which may nevertheless be relevant for larger charities in setting its remuneration policy, particularly those charities that operate in sectors where they compete with ‘for-profit’ listed entities. The AICD has also developed a Director Tool which addresses many of the practical issues relevant to director remuneration and specifically identifies some of the issues faced by not-for-profit companies. These publications should be read in light of the ACNC’s recent guidance and in the context of the unique circumstances of the charity.
Prolegis Lawyers has considerable experience advising charities and not-for-profit entities on the considerations relevant to the remuneration of ‘responsible persons’ including the constraints that may exist under the entity’s constitution; legislation (including the Corporations Act, State fundraising laws; restrictions for certain non-government schools); and contractual constraints under certain third party funding arrangements. We are also able to provide advice regarding compliance with the ACNC’s Governance Standards, managing conflicts of interest and identifying the reputational issues that may be relevant to a proper consideration of the remuneration issue.
We encourage all registered charities and not-for-profits that remunerate their ‘responsible persons’ or are considering whether to do so to have regard to the new ACNC Guide. Should you require further advice regarding the unique circumstances of your charity, including your compliance with the ACNC Governance Standards, please contact us.
 Should more NFPs consider paying directors?” Ryan,L. Senior Policy Adviser, AICD, 8 March 2017