Good Governance and Effective Boards

pp. 392, Rs. 350, Centre for Advancement of Philanthropy Publication

The governance of voluntary/non-profit organisations becomes increasingly important as organisations grow and develop. Although most organisations have governing boards, motivating and channelling them wisely is often a challenge. As the non-profit establishes itself and diversifies its operations and programs, the work of the board takes on new meaning. An engaged and deliberate board can make the difference between an organisation that is merely surviving from day to day and one that approaches the future with vision and determination. 

Board Source, a Washington, DC-based non-profit, is one of the few in the world devoted exclusively to the governance of voluntary/not-for-profit organisations. Board Source, in association with Centre for Advancement of Philanthropy, is committed to enhancing the effectiveness of the Indian non-profit sector through the work of governing boards of various philanthropic organisations.

This book is an Indian adaptation of the internationally popular 'Board Source Governance Series'. The Centre for Advancement of Philanthropy is grateful to Boardn Source for allowing use of its valuable resource material. Special thanks are also owed to Ms. Aarti Madhusudan of Give Foundation, Dr. Marilyn Wyatt and Ms. Kate Pearson of Board Source for assisting the undersigned with the adaptations and editing.

With the rapid growth and development of the non-profit sector in India, the publication of this book is both timely and necessary. But before we plunge into the details, it would perhaps be useful to study and understand the Indian backdrop.
 
Types Of Non-Profits In India
In India, there are generally five types of non-profit organisations:
(i) trusts;
(ii) societies;
(iii) companies;
(iv) co-operatives;
(v) trade unions.
 
The characteristics common to the first three types are:
(i) they exist independently of the state (i.e., they are autonomous in their management/governance, though they may be financially supported by the Government) ;

(ii) they are self-governed by a 'board of trustees' or 'managing committee' or 'governing council' which comprises individuals who generally serve in a fiduciary capacity;

(iii) they produce benefits for others, generally outside the membership of the organisation;

(iv) they are 'non-profit making', in as much as they are prohibited from distributing a monetary residual to their own members.

The term 'not-for-profit' or 'non-profit' does not mean that profits cannot be generated by the organisation. Rather, the term implies that the organisation is 'non- profit distributing' in nature.

Also, the entity called 'not-for-profit' or 'non-profit organisation' is not recognised in Indian statute books. Non-profits in India are usually registered as 'trust', 'society' or 'company'.
 
(i) Trusts
A public charitable trust has, for the purpose of its objects, the members of an uncertain and fluctuating body.

In ascertaining whether a purpose is public or private, one has to see if the class to be benefited, or from which the beneficiaries are to be selected, constitute a substantial body of the public. Hence, trusts which lack the public element, such as trusts for the benefit of workmen or employees of a company, however numerous, have not been held to be 'public charitable'.

A 'trust' is defined as "an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by him for the benefit of another".

A trustee of a public charitable trust must not, in any way, make use of the trust property or of his position as trustee for his own interest or private advantage, nor may he enter into engagements in which he has, or can have, a personal interest which conflicts, or possibly may conflict, with the interest of those whom he is bound to protect. A trustee may remain trustee for life, unless there is a scheme for election in the trust deed of the trust.

Often, trustees appoint among themselves a chairperson (who generally presides at board meetings) and/or an executive/managing trustee. The board of trustees however is jointly and severally responsible.

It is an accepted principle that a trustee of a religious or charitable trust should take proper care of the trust property just as a man of ordinary prudence does, in respect of his personal property.
 
(ii) Societies
Societies have legal personality and can thus sue and be sued. The liability of their members is limited and, unlike trusts, their private assets cannot be confiscated to satisfy the society's liabilities.

Also, unlike trusts, societies have a more democratic set-up. There is usually a scheme of election for members of the governing council/managing committee. The founders of the society can continue to remain members of the governing council/managing committee, subject to their being elected to the same, from time to time. In rare cases, one or two founder members may be permitted to remain as permanent/life members on the governing council/managing committee.

The managing committee may also elect among themselves office bearers such as president, vice-president, secretary and treasurer, with specific duties.

Members of the general body enjoy voting rights and the right to demand the submission of accounts and the annual report of the society.

A society can be wound up if the objectives for which it had been established, have been fully achieved.  
 
(iii) Companies
Although the Companies Act is primarily intended to govern profit-making entities, a section of the Act (section 25, in India) allows the possibility of obtaining non-profit status for certain companies.

A not-for-profit company is a company with limited liability which may be formed for "promoting commerce, art, science, religion, charity or any other useful object", provided no profits (if any) or other income in promoting the objects is distributed by way of dividend, etc., to its members. Such a company is not permitted to suffix the term 'limited' or 'private limited' to its name.

A not-for-profit company enjoys certain advantages over a public charitable trust or society, in terms of operational freedom.

Incidentally, the Income Tax Act gives equal treatment to trusts, societies and not-for-profit companies, as far as various tax exemptions are concerned.
 
(iv) Co-operatives
Although there is no clear legal definition, a co-operative may be defined as an institution which aims at the economic and social betterment of its members and an enterprise which is based on mutual aid conforming to co-operative principles. All states and union territories have their own laws governing co-operatives, and institutions registered as co-operatives are expected to abide by these laws, which can vary considerably from state to state.
 
(v) Trade Unions
Trade unions are governed by the Trade Union Act, which defines a trade union as a temporary or permanent institution formed for regulating the relations between workers and employers, among workers, or among employers. The Act also allows for a federation of two or more unions. In contrast to all other forms of non-profit organisations, trade unions are allowed to use their general fund to remunerate their members and staff, to fund legal procedures, educational activities and the general welfare of its members. Trade unions are also allowed to have separate funds for promoting the civil and political interests of their members.

There is no single body of law for entire classes of non-profits; instead, as specified above, there are specific laws, legislation and regulations for each major type. In other words, different legal provisions exist at the national and state level.
 
Boards And Why We Need Them
In India, boards generally constitute:
a) 'trustees' in the case of a 'charitable or religious trust';
b) ‘managing committee' or 'governing council' in the case of a 'society';
c) 'board of directors' or 'managing committee' in the case of a non-profit company.
Boards are necessary from a legal and governance point of view.
 
Legal necessity:

1. legally, the funds, properties and assets of the organisation vest in the board;
2. legally, the onus of advancing the 'aims and objects' is on the board;
3. boards cannot derive personal benefit from the organisation and hence, their involvement in the organisation is fiduciary;
4. boards are jointly and severally responsible and hence, duties and responsibility are shared by the team;
5. boards are required to approve and sign the audited accounts;
6. policy is set by the board through the process of periodic meetings and resolutions.

 
General Requirements / Duties / Responsibility of boards:

1. provide leadership / vision;
2. give the organisation a sense of direction;
3. set standards of efficiency, accountability and transparency;
4. hold the organisation together;
5. motivate staff;
6. mobilise resources;
7. build and nurture an ethical, sensitive, motivated and responsible team;
8. discourage exaggerated or misleading claims;
9. provide the necessary 'check and balance'.

 
Prevailing Non-Profit Governance Models In India
a) Boards of Trusts
Generally, two or more trustees may manage a trust. The charter or trust deed generally specifies the minimum and maximum number of trustees that the trust may have. Unless specified in the trust deed, the trustees may remain trustees for life.

Trusts generally do not have a general body of members and, as such, there is no necessity for annual general meetings or annual reports for members or periodic elections.

Trustees may lay down office by merely putting in a resignation letter before the board. The surviving trustees may appoint new trustees by invitation.

The management of a trust or, rather, who manages the trust (i.e., members of one particular family, etc.) does not determine the public nature of a trust. What is essential is whether it enures to the benefit of the public, not who controls it.

All the properties (movable and immovable) of the trust legally vest in the trustees and all trustees are jointly and severally responsible.

The board of trustees generally meets as often as required. Ideally, the board may meet four to six times a year. However, this may vary.

Often, procedures for calling and conducting meetings are laid down in the trust deed. Fifteen days prior notice is generally adequate. The chairman presides over all meetings of the board and usually enjoys a casting vote.

A trustee cannot delegate any of his duties, functions and powers to a co-trustee or any other person though, as a general rule, executive acts may be delegated. However, where a trustee has to exercise discretion, he must exercise the discretion personally and cannot delegate it.

In principle, a trustee cannot buy the property of the trust himself and he cannot sell any of his properties to the trust either - the mischief in both the cases being the likelihood of a conflict between his interest and his duties as a trustee.
 
Trustees, as a general rule, must administer the trust gratuitously, voluntary service being the foundation underlying all trusteeship.
 
b) Societies
Seven or more members of the managing committee/governing council may manage it society. A society is structurally more democratic than a trust. A society must have a general body of members with the power to vote at general body meetings, elect members of the managing committee or remove them if their performance is unsatisfactory, call for special meetings and demand examination of accounts and other records.

Members of the managing committee may hold office for such period of time as may be specified under the by-laws of the society. They may also stand for re-election.

Members of the managing committee may meet as often as required, and they must call a general body meeting once a year. Procedures regarding meetings are generally specified in the society's by-laws.

Members of the managing committee generally serve in a fiduciary capacity and usually appoint among themselves a president, secretary and treasurer.

Managing committees are usually headed by a president who chairs all meetings, a vice-president, a single secretary or joint secretaries who keep/s all records, call/s meetings, set/s agendas, keep/s minutes dated and a single or joint treasurers who handle/s all overseas accounts and financial matters.

Membership of a society may be open to either individuals or institutions or both.

A society may also offer various categories of membership (e.g., patron, institutional, associate, life and ordinary) with different fees/subscription structures and rights and privileges.

Applications for membership may be made in writing in a prescribed form and the managing committee usually reserves the right to reject any application for membership without assigning any reason.

The managing committee may also close membership (i.e., stop accepting new applications) from time to time.

The general body of members delegates the management of the day-to-day affairs of the society to the managing committee.

Issues arising at meetings of the society are usually decided by a majority of votes of the members present and in the case of equality of votes, the chairman of the meeting usually has a second or casting vote.

Societies usually lay down the minimum number of members necessary for a quorum at either the managing committee or general body meetings. It is usually the duty of the secretary to keep a record (minutes) of the various meetings.

The business at annual general meetings is usually to receive and adopt the audited statements of account, the report of the managing committee, appointing the auditor and fixing his/her remuneration, elect members of the managing committee and discuss the general work, policy and future programmes of the society.

Notice for all meetings must be sent well in advance specifying the date, time, venue and business. A meeting may be adjourned if there is no quorum.

By-laws of a society may be amended from time to time by the members of the general body.
 
c) Companies
The internal governance of a not-for-profit company is quite similar to that of a society.
 
Types Of Boards
As a general rule, there are three types of boards, especially in India, depending on individual and collective motivation:

1. where members are involved with a sense of commitment, purpose and direction and who consider the involvement as a responsibility taken on as a labour of love;
2. where members drift in routinely or by hereditary succession, on request of other "friends" on the board;
3. where members consider such positions as a ladder for social mobility, gaining contacts, wielding power, gaining publicity and, generally, to further their own interest.

 
Recent Trends
In recent years, there is a growing sense of awareness in India concerning good governance of non-profits. With increasing resources (both regional and international) and public attention, there seems to be considerable interest in the functioning of these organisations and their effectiveness. Of late, there have been many critiques and questions raised in the media by social and political commentators and from within the non-profit sector itself about the quality, effectiveness and nature of functioning of non-profits.

There are efforts to strengthen the capacity of non-profits to improve, systemize and enhance their governance mechanisms and processes through national level workshops and conferences. Some of the recommendations made at these conferences are given below.
 
Good boards:

1. have reasonable understanding and interest in the work of the organisation;
2. have commitment to the organisation's aims and objects;
3. have reasonable intelligence and competence;
4. comprise board members who are individually and collectively respected in the community and by all stakeholders;
5. have capacity for growth;
6. are sensitive to change and new issues affecting the community;
7. have the ability to work in concert with others;
8. stand up to individual convictions;
9. treat staff as partner;
10. respect the right of other board members and staff to differ/disagree;
11. dissent, if necessary, but accept with grace the majority decision or step down;
12. effectively mobilise and properly channelize resources.

One of the key issues in non-profit governance in India is lack of uniformity and standardization. Since 'charity' is a state and not a federal subject in India, some states have excessive regulations, while others have virtually none at all. For example, in India, in the states of Maharashtra and Gujarat, the charity commissioner requires regular 'change reports' to be filed, as also prior permission for buying and selling of immovable property. On the other hand, the capital of the country does not have a charity commissioner. Nor do certain states in the north-east. It is therefore not surprising that in India, many new non-profits attempt to seek registration in New Delhi.

Another factor is the diversity in legal choices. One may literally choose a type that requires the least accountability. While societies and non-profit companies require a modicum of accountability with regard to annual general meetings and annual reports for members, trusts are exempt from this requirement. Also, while societies and non-profit companies require periodic rotation on boards by a process of nomination and election, trust boards are usually static. Trusteeship is usually for life and new trustees are appointed by surviving trustees.

In India, it is not uncommon to find boards that are remunerated for their service. The law generally allows 'reasonable remuneration'. However, this is an ambiguous provision, subject to contention and debate. It also raises ethical questions and debate. Boards of Northern non-profits usually provide their services gratis.

The relationship between boards and the chief executive is also an issue that merits deeper attention and understanding. Sometimes, it is the CEO who drives the organization while the board remains static and, at other times, it is the reverse. Both situations are undesirable. There should be healthy respect, communication, interaction and a system of 'check and balance'.
 
How Do Indian Non-Profit Boards Differ From Western Ones?
There is a higher degree of transparency and accountability among western non-profits and their boards, as compared to Indian non-profits and their boards. For example, trustees of trusts in India are not bound by law to provide copies of the trust's annual accounts and returns to stakeholders other than the registering authorities like charity commissioner, registrar of societies, home ministry, etc. Societies and non-profit companies are required by law to provide these details only to their subscribing 'members'. Obtaining these details even from the registering authorities is difficult.

On the other hand, such information is quite readily available in the North. For example, in the U.S.A., all not-for-profit organisations (except those with under $25,000 in annual gross receipts, churches and certain religious organisations) are required by law to file an information return in IRS Form 990. This is easily available from the IRS to any member of the public wanting information on any non-profit. It is also available from the Form 990 website.

Form 990 serves as the fundamental data source for not-for-profit sector research and it provides data in a relatively uniform, consistent format. Most of what we know about America's not-for-profit sector is based on information from Form 990. It covers both qualitative and quantitative data and when prepared accurately, completely and truthfully, is a treasure trove of information. Being a public report that is easily available to the public, it becomes a powerful means of ensuring and demonstrating accountability.

Boards of western non-profits also set their own "Standards for Excellence" incorporating therein the organisation's mission, vision and stated policy on 'conflict of interest', 'human resource', 'financial accountability', 'fund raising', 'public affairs' and 'public policy'. Many of these terms are unheard of among Indian non-profits, let alone their adoption as a policy for implementation.

Most western non-profits insist on a written conflict of interest policy. Board members, staff and volunteers are required to provide a 'conflict of interest' statement disclosing (at the time of joining and annually thereafter) any known financial interest which the individual or a member of the individual's immediate family has, in any business entity which transacts business with the organisation.
 
What Can We Learn From Corporate Boards?
An important lesson one can learn from corporate boards is the quality of reporting, transparency and timeliness of communications with shareholders. This helps the shareholder in making economic decisions and in correctly evaluating the management. The level of participation of all stakeholders determines the number of new ideas being generated in optimum utilisation.

Today, terms like 'disclosure', ‘transparency' and 'shareholder value' are buzz-words in corporate circles, thanks to international agencies like the World Bank, IMF and the OECD which insisted that improved corporate governance standards was the key to helping emerging markets rebuild competitiveness, restore investor confidence and promote sustainable economic growth. Indeed, 'disclosure', 'transparency' and 'stakeholder value' is also the key for non-profits to promote sustainable development, welfare and growth.

A number of committees on Corporate Governance (e.g., the Sir Adrian Cadbury Committee, Mervyn King's Committee, Greenbury Committee, Hampel Committee, etc.) as also the CACG Guidelines, have suggested policies for improved corporate governance.
 
Many of these recommendations and guidelines are relevant to non-profits as well, e.g.,

• chairman to be separate from chief executive;
• non-executive directors to bring an independent judgement to bear on issues of strategy;
• audit committee to have minimum three members, written terms of reference and authority to investigate;
• service contracts of executive directors not to exceed three years and pay to be subject to recommendations of remuneration committee;
• observance of highest level of business and professional ethics;
• accounting standards in line with international standards;
• ensure that the organisation communicates effectively with all stakeholders;
• ensure that no one person or block of persons has unfettered power and that there is an appropriate balance of power and authority on the board;
• regularly review processes and procedures to ensure the effectiveness of its internal systems of control, so that its decision-making capability and the accuracy of its reporting and financial results are maintained at a high level, at all times;
• regularly assess performance and effectiveness as a whole and that of the individual directors, including the CEO;
• appoint the chief executive officer and at least participate in the appointment of senior management, ensure the motivation and protection of intellectual capital intrinsic to the organisation, ensure that there is adequate training in the organisation for management and employees and a succession plan for senior management;
• identify key risk areas and key performance indicators of the enterprise and monitor these factors.

 
Governance vs. Management
Clearly, boards of non-profits must learn to:
GOVERN (macro - manage) MORE and
MANAGE (micro - manage, i.e., day-to-day routine affairs) LESS.
 
January 2005                                                                        Noshir H. Dadrawala
Executive Secretary
Centre for Advancement of Philanthropy