Dr Michael Gousmett, Adjunct Fellow in the School of Humanities & Creative Arts (History) at The University of Canterbury and Independent Researcher and Public Historian at New Zealand Third Sector Enterprises Limited, provides an overview of governance standards of charities in New Zealand, Australia and the United Kingdom, in a two-part series for Legalwise News. In Part 1, below, he explores governance in New Zealand.
The concept of what is meant by governance is unclear and a myriad of ideas are placed under the umbrella of ‘good governance’. Noel Hyndman and Paul McDonnell “Governance and Charities” Financial Accountability & Management 25(1) February 2009 at 5.
Concerns about the governance of charities are not new. As long ago, in 1414, Henry V instigated a commission of inquiry into hospitals established “to sustain impotent men and women, lazars, men out of their wits and poor women with child, and to nourish, relieve and refresh other poor people,” due to “insoletnz govnance [Old Fr: insolent government]” resulting in the inquiry into “the manner of the foundation, estate and governance of the same.”
In 1572, Elizabeth 1 required examinations to be undertaken into how moneys “to the use of the poor, or for repairing or mending highways or bridges” had been applied. This was followed, in 1597-98, with an Act arising from concerns regarding the revenues of colleges, hospitals, and alms-houses. Then, in 1601, the famous statute from which the modern day concept of charitable purposes was derived was introduced, the Statute of Charitable Uses, often referred to as the Statute of Elizabeth, in the 43rd year of her monarchy, being but one of many enactments during her long reign of 44 years between 1558 and 1603.
While the Preamble to 43 Eliz 1 c. 4 (see Appendix) has become “[enshrined] as the fons et origio of all charity,” following Morice v The Bishop of Durham, what is often forgotten is that the Statute, An Act to redress the misemployment of lands goods and stocks of money heretofore given to charitable uses, was yet another commission of inquiry into alleged abuses resulting from the failure of the governance of those trusts. This was not a statute defining charitable purposes per se. However the Preamble to this centuries-old statute, which listed what were then considered to be activities charitable in nature, continues to have influence, through its “spirit and intendment,” as described by Lord Halsbury in the case that in 1891, in following the earlier case of Morice, as re-defined By Lord Macnaghten in Pemsel:
“[c]harity” in its legal sense comprises four principle divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads
PART 1: WHAT IS GOVERNANCE?
A question that often arises is what is governance and where are the boundaries between governance and management in the non-profit sector? Hyndman and McDonnell provide a very useful introduction to the concept of governance, based on its etymology:
[t]he word ‘governance’ comes from the Latin word ‘gubernare,’ meaning ‘to direct, rule or guide’ which was in turn derived from the Greek ‘kybernan,’ [meaning] to steer or pilot a ship. Using this definition, if one imagines an institution as a ship, then governance is the process of steering or guiding the ship towards its destination, or goal.
Hyndman and McDonnell consider that there are two aspects of governance: internal and external:
internal governance is comprised of boards of trustees, [which] may also have internal committees, and internal control mechanisms, such as internal audit facilities, [whereas] external governance exists in terms of accounting rules and reporting requirements, government regulation and external auditors.
Governance also has a role to play in managing reputational risk. Charities Services Annual Review 2018 reported that during the year ended 30 June 2018: 173 concerns were addressed; there are 35 ongoing investigations; 12 investigations were completed; two warnings were issued; there were two voluntary deregistrations; two letters of expectations were issued and there were two referrals to other agencies.
A further 1,069 charities were deregistered, of which 506 had failed to file annual returns and 563 voluntarily deregistered. Given that, as at 30 June 2018 there were 27,683 registered charities, the number of charities that had been subjected to close scrutiny by Charities Services appears to be quite low. Is that because there are high standards across the sector generally, or is it because of a lack of interest in how charities are governed – the sacred cow syndrome perhaps?
GOVERNANCE DEFINED: The governance-management interface
The nature of governance was aptly described by Robert S McNamara as: defining a clear objective; developing a plan to achieve that objective; systematically monitoring progress against the plan; and taking corrective action when and where necessary. The Association of Chief Executives of Voluntary Organisations (ACEVO) provides a very useful checklist:
- Have the trustees stated in writing:
- The mission of the organisation?
- The strategic direction that the organisation must take?
- The framework under which the organisation must operate?
- Has agreement been reached on:
- The responsibilities of the trustees, chair, and chief executive?
- The length of service for the trustees and chair, and methods of appointment and removal?
- Disciplinary and grievance procedures for the chief executive?
ACEVO describes governance as being “concerned with responsibility, guardianship, probity, strategy, vision and vitality. Trustees lacking knowledge in the application of those concepts are failing in their personal and legal responsibilities to the entity, as well as morally to its beneficiaries.” Governance is also concerned with the effective use of resources by the chief executive in working to implement the board’s policies, which in turn requires the monitoring of qualitative and quantitative activities against predetermined benchmarks.
Sport New Zealand’s (SNZ) publication, “Nine steps to effective governance” is an excellent publication on governance. SNZ describe governance as the process by which the board, in order to exercise its accountability to the organisation and its [stakeholders]:
- Ensures the organisation complies with all legal and constitutional requirements;
- Sets strategic direction and priorities;
- Sets high-level policies and management performance expectations;
- Characterises and oversees the management of risk; and
- Monitors and evaluates the organisations performance.
SNZ explain that:
[t]here is no universally agreed definition of governance. [This] definition identifies the key elements of governance, reinforcing the principle that the board’s job is an active one. It also implies a separation of roles between the board and management, and highlights aspects of the relationship between these two roles.
The SNZ 168-page publication provides a comprehensive framework of Nine Steps:
Step 1: Get the right people on board (see Appendix);
Step 2: Define and agree the board’s role;
Step 3: Employ and support a chief executive;
Step 4: Provide strategic leadership;
Step 5: Make board meetings count;
Step 6: Stay on top of the governance role; (“Don’t sweat the small stuff”)
Step 7: Develop the work plan;
Step 8: Regularly review the board’s performance;
Step 9: Provide purposeful director induction.
Some charities in New Zealand utilise the Carver Policy Governance Principles developed by John Carver and Miriam Carver. Now retired, John Carver has been described as “one of the most published thinkers on governance worldwide … in 2013 [he] was awarded the Marcos E. J. Bertin Medal by the International Academy for Quality in Governance.” His wife, Miriam, has also authored a significant number of publications on governance, as well as being a consultant and trainer.
The model used by charities in New Zealand is likely to be based on that developed for non-profit organisations by the Carvers. Carver and Carver note that “[while] managers have moved through PERT, CPM, MBO, TQM and many more approaches in a continual effort to improve effectiveness [,] [e]mbarrassingly, however, boards do largely what they have always done.” Citing a number of authors, one stands out: Drucker – “[t]here is one thing all boards have in common … They do not function.” Challengingly, Carver and Carver state, “[b]oards tend to be, in fact, incompetent groups of competent individuals.” Carver and Carver state:
… there is one central reason to have a board; simply put, the board exists (usually on someone else’s behalf) to be accountable that its organization works. The board is where all authority resides until some is given away (delegated) to others.
The Carver Policy Governance model is not a one-size fits all model; it does not propose a particular structure as “[a] board’s composition, history, and peculiar circumstances will dictate different structural arrangements … Policy Governance is a system of principles [that are] designed to be internally consistent, externally applicable … and logical.” These principles, of which there are ten, are:
Principle #1 The “Trust” in “Trusteeship”;
Principle #2 The Board speaks with “one voice” or not at all;
Principle #3 Board decisions should predominantly be policy decisions;
Principle #4 Boards should formulate policy by determining the broadest values before progressing to more narrow ones;
Principle #5 A Board should define and delegate rather than react and ratify;
Principle #6 End determination is the pivotal duty of governance;
Principle #7 The Board’s best control over staff means is to limit, not prescribe;
Principle #8 A Board must explicity design its own products and services;
Principle #9 A Board must forge a linkage with management that is both empowering and safe;
Principle #10 Performance of the CEO must be monitored rigorously, but only against policy criteria.
Before moving on, a word about leadership and Principle #10 regarding the performance of the CEO:
A Gallup study found that when people leave their companies, 65 per cent of them are leaving their managers. … Conservative estimates put the cost of losing a trained worker at one and a half times the salary of the outgoing employee, as measured by lost productivity and recruiting and training costs for the replacement.
This extract is taken from the book written by Captain D. Michael Abrashoff in which he explains the leadership skills he developed and implemented as commander of USS Benfold at the age of thirty-six – at that time the most junior commanding officer in the Pacific Fleet. Abrashoff inherited a ship with “exceptionally low morale, unacceptably high turnover and poor performance results.” Each chapter discusses the leadership principles based on his Grassroots Leadership and Leadership Map concepts – a book that every chair and CE should read:
- Take command
- Learn real leadership
- Lead by example
- Listen aggressively
- Communicate purpose and meaning
- Create a climate of trust
- Look for results, not salutes
- Take calculated risks
- Go beyond Standard [Operating] Procedure[s]
- Build up your people
- Generate unity
- Improve your people’s quality of life.
“At the core of [Abroshoff’s] leadership approach on Benfold was a process of replacing command and control with commitment and cohesion, and by engaging the hearts, minds, and loyalties of workers – with conviction and humility: ‘The most important thing that a captain can do is see the ship through the eyes of the crew.’” The relevance of this to the role of chairperson’s and CEO’s in developing governance and leadership capabilities is obvious – “[t]he price of dysfunctional leadership is … a dysfunctional organization.”
With thirty years’ experience in the charity sector, a background in secondary and tertiary education, as well as experience as a Company Secretary in the retailing and manufacturing sector, Dr Michael Gousmett, FCIS PhD BCom(Hons) BBS Dip CM Dip Tchg, is also an author and presenter nationally and internationally on charity sector issues. His Doctoral thesis, a study of the history of the charitable purposes exemption from income tax, is available via this link. He is a contributor to the New Zealand Law Journal, and the New Zealand Journal of Taxation Law and Policy; a contributing author on charity taxation in NZ Taxation; and a co-author with Sue Barker, and Ken Lord of The Law and Practice of Charities in New Zealand. Contact Michael at email@example.com or connect via LinkedIn.
Visitation and Reformation of Hospitals 2 Hen V c 1 (1414). See also M J Gousmett “Governance of charities” (2008) NZLJ 109-112.
An Act for the Punishment of Vagabonds, and for the Relief of the Poor and Impotent 14 Eliz c 5 (1572) at s 37.
An Act to reform deceits and breaches of trust, touching lands given to charitable uses39 Eliz. c 7 (1597-98).
An Act to redress the misemployment of lands, goods and stocks of money heretofore given to certain charitable use 43 Eliz 1 c 4 (1601).
 G. Jones History of the Law of Charity 1532-1827 (Cambridge University Press, Cambridge, 1969) at 122.
Morice v The Bishop of Durham (1804) 9 Ves. 399; (1805) 10 Ves. 522.
The Commissioners for Special Purposes of the Income Tax v John Frederick Pemsel  AC 531 at 583.
 Noel Hyndman and Paul McDonnell “Governance and charities: An exploration of key themes and the development of a research agenda” (February 2009) 25(1) Financial Accountability & Management 5-31 at 6.
 Hyndman and McDonnell, above n 10 at 7.
 Charities Services Annual Review 2018, at 7 <www.charities.govt.nz>.
 Charities Services, above n 12 at 8.
 Robert S McNamara In Retrospect: The tragedy and lessons of Vietnam (Vintage Books, New York, 1996).
 ACEVO Leading the organisation: The relationship between chair and chief executive (ACEVO, London, 2002).
 M J Gousmett “Governance of charities” NZLJ (April 2008) at 110.
 Gousmett, above n 17 at 110.
 Sport New Zealand (SNZ) “Nine steps to effective governance Building high performing organisations” (Third edition, undated) www.sportnz.org.nz.
 SNZ above n 19 at 13.
 SNZ above n 19 at 13.
 SNZ above n 19.
 Richard Carlson “Don’t Sweat the Small Stuff” (Hyperion, New York, 1999).
 See www.carvergovernance.com.
 Bibliographies: John Carver at www.carvergovernance.com.
 Bibliographies: Miriam Carver at www.carvergovernance.com.
 John Carver and Miriam Carver, “Carver’s Policy Governance® Model in Nonprofit organisations” at www.carvergovernance.com.
 Carver and Carver, above n 26 at .
 Carver and Carver, above n 26 at  citing Peter F. Drucker, Management: Tasks, Responsibilities, Practices (New York, Harper Collins, 1974) at 628.
 Carver and Carver, above n 26 at .
 Carver and Carver, above n 26 at .
 Carver and Carver, above n 26 at .
 BoardWorks International “Why is it that the Carver Policy Governance Principles can seem so hard to honour?” Good Governance #44 (March-April 2005) via www.hospice.org.nz.
 D.Michael Abrashoff It’s your ship Management techniques from the best damn ship in the Navy (Grand Central Publishing, New York, rev’d edn October 2012) at 3.
 Abrashoff, above n 33, at 227.
 Abrashoff, above n 33, Contents at vii.
 Abroshoff, above n 33 at 227.
 Abroshoff, above n 33 at 221. On leaving the Navy, Abroshoff co-founded GLS World with George A. Metanias, “a leadership development company dedicated to helping organizations and individuals deliver their best results in a challenging global environment.” See www.glsworld.com.