Governance and Regulation of Charities

In this session Rosemary will present the results of, and draft recommendations arising from, her detailed comparative and empirical research into governance and enforcement in the charitable sector in Australia. This research was undertaken as part of a three-year project, funded by the Australian Research Council, entitiled ‘Restoring Public Trust in Charities - Reforming Governance and Enforcement’. This has included aspects such as comprehensive investigation of the reasons for complexity and incoherence in the duties of those who govern charities (known as ‘responsible persons’); comparative analysis involving jurisdictions such as Germany, England and Wales, Scotland, Northern Ireland; extensive empirical research in Australia and in England and Wales in relation to how charities deal with conflicts in a practical sense and how those who govern charities understand their obligations; critical evaluation of  the enforcement powers, enforcement approach and enforcement activity of the Australian Charities and Not-for-Profits Commission (ACNC); and development of options for legislative and policy reforms to improve the effectiveness of regulation and enforcement by the ACNC. Rosemary welcomes feedback on these results and draft recommendations.

This paper sets the scene for discussions in other presentations. It contextualises an international reform agenda centred on charity commissions. The international reform environment is canvassed first. The legislative environments in the following countries are briefly reviewed: Canada, England Wales, Hong Kong (and China), Ireland, New Zealand, Northern Ireland, Scotland, Singapore, South Africa and the United States of America. As most of these countries enacted charity commission legislation at a similar time, country specific factors driving the reforms are identified before a more detailed analysis of the developments in Australia are taken as a case study. As the legislation usually had identical or similar objects, looking at these commissions through the lens of their legislated purposes provide a third perspective. As the approach taken by a charity commissioner to achieving the objects, not just the wording of the objects, is critical consideration of the administrative approach taken from a theoretical perspective provides a fourth perspective. Overlapping themes emerge from these different perspectives so some questions that invite further research and discussion close the paper.

Traditionally, in Australia the state Attorneys-General, representing the Crown as parens patriae, have been responsible for the regulation and enforcement of charitable trusts. Under both the general law and statute law, the Attorneys-General have had various powers to protect charitable purposes, including the power to seek relief in the case of a breach of trust. Statutes giving powers to the Attorneys-General have broadened the range of persons who may commence proceedings with respect to any breach of a charitable trust. The introduction of the Australian Charities and Not-For-Profits Commission Act 2012 (Cth) and the Charities Act 2013 (Cth), changed the regulatory environment even further. In particular, the legislation establishes a national regulator, the Commissioner of the Australian Charities and Not-for-profits Commission (the ACNC). In this paper we investigate potential gaps, overlaps and inconsistencies in the oversight of charitable trusts by these distinct but overlapping modes of oversight, with particular focus on NSW (due to recent cases in that jurisdiction). In analysing the challenges faced in NSW, we also draw upon and consider the regulatory environments in other states and territories of Australia where relevant and suggest areas of reform.

In this presentation, I explore some basic conceptual questions that bear on charity governance. First, I look at the interpretive question of how to ascertain the purposes of a charity, in light of its articulated objects and its activities. Secondly, I consider the various forms that a charity might make, and implications for charity governance. Thirdly, I explore the role of offices and institutions in charity governance, including the courts and regulatory bodies. Finally, I consider the conceptual character of the enforcement of governance duties in charitable settings. I hope to demonstrate that a sound account of charity governance depends in important ways on a clear understanding of these basic questions.

Corporate not-for-profit structures within Australia are formalised and governed by both federal and state legislation. The most desirable structure for a not-for-profit organisation that operates across state and territory boundaries is a company limited by guarantee (NPCLG) registered under the Corporate Act 2001 (Cth). Statutory governance of this federal not-for-profit body corporate has long been based on the for-profit corporate model, which has overlooked the unique nature of a not-for-profit corporation. Following sector-wide reform efforts to assimilate the governance of an NPCLG with other forms of not-for-profit body corporates, the Australian Charity and Not-for-Profit Commission (ACNC) now has regulatory oversight for those NPCLG registered with the ACNC. Under this arrangement, an NPCLG is subject to a dual regulatory and legislative arrangement. The awkwardness with this arrangement resides in the general scope of the corporate law treating and responding to NPCLG as a corporate business (without share capital), while the governance of the NPCLG’s altruistic purpose is subject to not-for-profit law.

Canada and the United Kingdom are two jurisdictions that have simplified this arrangement by removing not-for-profit body corporates from their respective corporation Acts. The introduction of standalone legislation for not-for-profit body corporates reflects an understanding that a NPCLG should not be a mere extension of company law. The United Kingdom has gone one step further by expanding the corporate body concept with the introduction of a charitable incorporated association (CIO). The starting point of my workshop presentation will briefly outline Australia’s NPCLG legislative framework. From here I will discuss and compare Canada (federal) and the United Kingdom’s not-for-profit body corporate structures and its legislation to advance the idea that Australia should implement similar legislation and an CIO structure.

Board expertise diversity has been widely embraced by nonprofit organisations as a critical foundation for quality board decisions. In conjunction with legal mandates requiring each individual board member to be able to ‘read and understand financial statements’ (i.e., director financial literacy), it is assumed that expertise diverse boards are well placed for striking an appropriate balance between mission and margin. A recent QUT research study tested this assumption by investigating how board expertise diversity influences individual and board financial monitoring.  The study involved testing the financial capability of 96 nonprofit board members and conducting follow-up exploratory interviews with 14 test-takers. Although each test-taker reported being conscientious in performing their board role, less than 15% demonstrated they understood financial statements to the extent necessary for meeting the minimum legal threshold for director financial literacy. Follow-up exploratory interviews revealed the presence of several individual and group factors encouraging board members to focus on the collective outcome (making efficient board level decisions) to the detriment of applying individual level due care and diligence to board matters outside the area of expertise for which individuals were recruited to the board. Apart from board financial experts, these factors also inhibited the development and use of individual board member financial capability. Overall, these research findings challenge the prevailing view that expertise board diversity is associated with effective board performance and the efficacy of legal mandates requiring each board member to be at least director financial literate.

Charities frameworks are increasingly restrictive in the face of increasing authoritarianism around the world. Drawing on developments in a number of jurisdictions, this session asks whether purpose-based governance might assist in developing a more enabling framework, and if so, how?

The Australian Charities and Not-for-profits Commission (‘ACNC’) reports that charities in Australia are responsible for over $350bn in assets.  The vast majority (<65% by number) of these are classified by the ACNC on the basis of their annual revenue as extra small, small or medium sized.  For these charities, income from investments forms a higher proportion of their revenue when compared to large, very large and extra large charities. Most would qualify as wholesale investors for the purposes of the Corporations Act 2001 (Cth), but few maintain investment portfolios of a size to warrant dedicated regulatory supervision of the type applied to other types of institutional investors.  In the case of charitable trusts, for instance, although the principles of Equity and the State Trustee Acts will apply, the mechanism of supervision by the State and Territory Attorneys General is not well-suited to oversight of the investment activities of charitable trusts absent some catalyst.  The challenge, then, is to ensure that the investment assets held by charities are employed efficiently and properly.  This paper considers a small suite of measures that might contribute to promoting that objective, recognising the unique circumstances of the sector.

Governance of charities and other organisations are often viewed through a Western lens.  By contrast, Indigenous ways of being often rely on the understanding that everything in the world is related and inter-connected which flows into law, leadership and governance. What would Indigenous views offer us for consideration if we looked at governance from a “kincentric” perspective?  Starting from and discussing that philosophical place, in this session we will be asking questions such as how a kinship with the Earth itself impacts the decision making process, who is sitting at the table and how we relate with each other, other organisations and the land.

The Japanese law of nonprofits and fiduciary governance is characterised by its mixed nature. For historical reasons, the basic organizational structure of Japanese nonprofits follows the German model of foundations and associations. Common law influence arrived late, and charitable trusts were introduced by statute in 1922, and a new corporate form known as NPO corporations was introduced in 1998. This did not resolve the persistent criticism of nonprofit abuse, and it ultimately culminated in a major legislative reform of nonprofit legislation in 2006, which introduced broad fiduciary principles and UK-style Charity commission. In recent years, a number of voluntary governance codes have been proposed in some discrete sectors of nonprofits.

Whether this showcasing of governance measures have successfully curtailed abuse can be debated. Nonetheless, there are two more questions that must also be taken seriously. Have not the past reforms been overly restrictive in a way that hampers well-governed nonprofits’ ability to secure sufficient financial basis and strategically deploy the resources for public benefit? Have not these reforms been too limited in scope, on the other hand, so that various entity forms that operate in different sub-sectors continue to operate under idiosyncratic governance rules?

Fifteen years after the 2006 reform, another round of debates on nonprofit governance is taking place. Various blue-ribbon panels have proposed new sets of reforms, and most importantly in the area of education, schools and universities. Just in time, a scandal erupted in Nihon University, and the chairman of Japan’s largest private university was arrested for tax evasion and is suspected of receiving bribe from the contractors. While the need to hold such corrupt nonprofit fiduciaries accountable is unquestionable, the scandal-driven debate on organizational reform involves certain risks. It will be argued that more streamlined but effective governance measures should be considered in a way that harmonises with national and international good practice of increasing diversity, transparency, and meaningful communication with stakeholders.

Since the Korean legal system is a civil law system, which differs from the common law system, the scheme of the trust has not been popular. However, the Charitable Trust Act (hereinafter “the Act”) was enacted in 2015 to encourage donation by using the scheme of the trust. Even though the Act on Collection and Use of Donation to handle donation and the Act on the Establishment and Operation of Public Interest Corporations to deal with incorporated charitable entities had been enacted before the enactment of the Charitable Trust Act, why did the Korean government make endeavors to add the Act?
This can be attributable to the peculiar aspect of the charitable trust in terms of expedience and governance. The charitable trust is supposed to be less interfered with by the authorities concerned than the incorporated charitable entities. Fiduciary duty can be imposed on the trustee of the charitable trust, whereas it is not clear whether fiduciary duty can be imposed on the director of the charitable entities. Fiduciary duty can function as a deterrent against self-dealing and conflict of interest. One of the characteristics of the Act is the mandatory appointment of the trust administrator. Since no beneficiary exists who supervises the trustee’s act, the trust administrator supervises the trustee’s act and has the standing to sue for the wrongful act of the trustee.

This presentation will make an extensive review of the theoretical aspect of the Act including the governance issue and its implication. Also, it will deal with whether the Act turns out to be a successful approach to pursue both encouragements of the donation and enhancement of transparency.  It should be noted that focusing on the donation without considering the private interest of the donors would lead to being unsuccessful in encouraging the donation. The donor is supposed to make as much of his or her own private interest as public interest, and thus the ideal model of the charitable trust might be a mixture model to satisfy not only private interest but also the public interest such as the charitable remainder trust and the charitable lead trust.

Whereas state regulation of charities, which often take the form of comprehensive statutory regulation and an introduction of state supervisory organ, is seen as the preferred model of governance of charities, the legal and political environment of Hong Kong provides a counter-example. This paper analyses the regulatory regime of charity governance in Hong Kong and argues that although a comprehensive charities statute and regulator will bring about a more consistent regulatory framework, they are unlikely to be the preferable model of governance in light of the current context of Hong Kong’s unique political and legal environment. Instead, a better way forward is to identify more limited regulatory reforms and self-regulatory initiatives in specific areas of need. The Hong Kong experience highlights factors that influence the interplay between state and self-regulatory regimes and may provide a useful reference to policymakers from other jurisdictions in deciding the best model of charity governance.

Despite the increased importance and the tax advantages provided by the legislator in favour of the third sector, there are only few regulations that are specially tailored to the requirements that non-profit organisations place on accounting, public register disclosure and corporate governance. Other jurisdictions are ahead of German legislation here. This article addresses the question of whether such a regulatory regime is necessary and, if so, how it should be structured. In addition, reference is made to the latest developments that have already addressed these concerns.

This paper will consider the importance of accountability in charities: what it means, to whom it is most often given and by whom. It will be seen that the answers are not always straightforward and certainly not uniform. As charities continue to play an increasingly important role in society, the need for accountability is greater than ever. Whilst the existence of multiple stakeholders often enhances accountability, it can sometimes lead to conflict.  Substantive as opposed to formalistic accountability is not always easy to achieve.

During this session the panel will answer questions on regulation of charities, followed by an opportunity to ask questions. Discussion will include aspects such as the nature and burden of charities regulation, the role of the register, the evolving nature of charities regulation and the nature and powers of charity regulators.

In this session, Danielle will present a comparison of the strengths and weakness in the governance and regulation of charities in Australia and England & Wales. Having worked in both jurisdictions as a senior charity lawyer, Danielle will share her unique perspective and depth of understanding of charity practice in both places and globally. This session will include a whistle-stop tour of the surprising or illuminating similarities and differences in approaches to charity regulation, legal forms, governance and evolving legal concepts. It will explore the policy and practical implications of these differences and insights into what each jurisdiction can learn from the other.