NPOs and King III: How to Apply?

King III
Wednesday, 10 March, 2010 - 10:29

The King III report on Governance Principles for South Africa unintentionally overlooks the distinctive values on which the South African non-profit sector is based. It is not true that the King III report covers for profit and non-profit entities regardless of their founding constitutions. The non-profit sector should explore the development of a Good Governance Code or Charter that speaks to the specific governance and risk management needs of NPOs. Integrated reports, audit committees, corporate citizenship policies and business rescue proceedings will be meaningless to community-based organisations (CBOs) since they do not have the resources or the technical-know-how to distinguish which of the King III principles apply to them

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

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