This document discusses emerging trends in not-for-profit governance principles from various sources. It outlines 10 principles for nonprofit governance based on the Sarbanes-Oxley Act. It also summarizes proposed governance standards in Australia consisting of 10 principles addressing board roles, ethics, financial reporting, disclosure, stakeholder rights, risk management, performance, remuneration and interests. Finally, it discusses the OECD principles of good governance, focusing on disclosure/transparency and board responsibilities to provide strategic guidance, oversee management and ensure accountability. The document is intended to spark discussion among a board of directors on developing governance structures.

1. Emerging Principles of Governance
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2. Table of Contents
1 PURPOSE .............................................................................................................................................................. 3
2 EMERGING TRENDS IN NOT-FOR-PROFIT GOVERNANCE.................................................................. 3
2.1 TEN EMERGING PRINCIPLES OF GOVERNANCE OF NONPROFIT CORPORATIONS (BASED UPON THE SURBANES-
OXLEY ACT) .............................................................................................................................................................. 3
2.2 PROPOSED GOVERNANCE STANDARDS IN AUSTRALIA ..................................................................................... 5
2.3 OECD PRINCIPLES OF GOOD GOVERNANCE .................................................................................................... 7
2.3.1 Principle IV – Disclosure and Transparency .......................................................................................... 8
2.3.2 Principle V. The responsibilities of the board ........................................................................................ 9
3 CONCLUDING MATERIAL ............................................................................................................................ 10
3.1 FURTHER READING ........................................................................................................................................ 10
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3. 1 Purpose
This review is intended to provide background material for the ongoing development of
governance structures that will support the new strategic plan. This review is not
intended to be all encompassing nor should it be viewed as legal advice. The principles
and examples offered are intended to spark debate and discussion within the Board of
Directors in preparation for a governance development session.
As these principles and examples are reviewed, the reader is encouraged to reflect
upon how these principles might be used within the context of governing your
organization and what competencies might be required to support these principles.
2 Emerging Trends in Not-for-Profit Governance
Recent developments and scandals within the for-profit sector have encouraged closer
scrutiny of the governance within that sector. Numerous jurisdictions have responded
with new legislation (Surbanes-Oxley Act), particularly in the United States. Recent
Canadian developments have also increased the pressure within the Canadian context
to legislate increased accountability.
Governance trends within the not-for-profit sector tend to be informed by the
developments within the corporate sector. As a result, many look to these recent
legislative changes in an effort to predict the future trends that will affect the governance
practice within the not-for-profit sector.
2.1 Ten Emerging Principles of Governance of Nonprofit
Corporations (based upon the Surbanes-Oxley Act)
The following is an excerpt from an article written by Thomas Silk (Thomas Silk
practices law with Silk, Adler & Colvin, a San Francisco firm specializing in the law of
nonprofit organizations. He is the editor of Philanthropy and Law in Asia (1999), and he
has contributed chapters to Serving Many Masters: The Challenges of Corporate
Philanthropy (2003) and The Jossey-Bass Handbook of Nonprofit Leadership and
Management (2004). Copyright 2004 by Thomas Silk). He proposes a set of not-for-
profit principles that he believes will emerge from the environment of increased
corporate scrutiny.
1. The board of directors of a nonprofit corporation must engage in active,
independent, and informed oversight of the activities of the corporation,
particularly those of senior management.
2. Directors with information and analysis relevant to the board’s decision-making
and oversight responsibilities are obligated to disclose that information and
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4. analysis to the board and not sit passively. Senior management should recognize
and fulfill an obligation to disclose – to a supervising officer, to a committee of the
board, or to the board of directors – information and analysis relevant to such
person’s decision-making and oversight responsibilities.
3. Every nonprofit corporation should have a nominating/governance committee
composed entirely of directors who are independent in the sense that they are
not part of the management team and they are not compensated by the
corporation for services rendered to it, although they may receive reasonable
fees as a director. The committee is responsible for nominating qualified
candidates to stand for election to the board, monitoring all matters involving
corporate governance, overseeing compliance with ethical standards, and
making recommendations to the full board for action in governance matters.
4. Every nonprofit corporation with substantial assets or annual revenues should
develop and implement a three-tier annual board evaluation process whereby the
performances of the board as a whole, each board committee, and each director
are evaluated annually. The board should also develop and implement a process
for review and evaluation of the chief executive officer on an annual basis.
5. Each board of directors is responsible for overseeing corporate ethics. Ethical
conduct, including compliance with the requirements of law, is vital to a
corporation’s sustainability and long-term success. To establish an ethical
corporate culture, the board should consider the following actions:
a. Communicate to personnel at all levels of the corporation a strong, ethical
“tone at the top,” set by the board, the chief executive officer, and other
senior management, establishing a culture of legal compliance and
integrity;
b. Assign to the chief executive officer or other officer the specific task of
serving as compliance officer;
c. Adopt a Conflicts of Interest policy;
d. Include ethics-related criteria in employee qualification standards and in
employees’ annual performance reviews.
6. An independent auditing firm should audit every nonprofit corporation with
substantial assets or annual revenue annually. The corporation should change
auditing firms or the lead and reviewing audit partner periodically to assure a
fresh look at the firm’s financial statements. The audit committee should be
composed of completely independent directors and should set rules and
processes for complaints concerning accounting and internal control practices. It
is responsible for hiring, setting compensation, and overseeing the auditor’s
activities.
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5. 7. The chief executive officer and the chief financial officer of every nonprofit
corporation should review annual information returns filed by the nonprofit
organization with appropriate agencies.
8. Any lawyer providing legal services to a nonprofit corporation who learns of
evidence that the lawyer reasonably believes indicates a material breach of
fiduciary duty or similar violation should report that evidence to the chief
executive officer of the nonprofit corporation and, if warranted by the seriousness
of the matter, to the board of directors.
9. Every nonprofit corporation should adopt a written policy setting forth standards
for document integrity, retention, and destruction.
10. Every nonprofit corporation should adopt a written policy to permit and
encourage employees to alert management and the board to ethical issues and
potential violations of law without fear of retribution.
2.2 Proposed Governance Standards in Australia
The following guidelines have been developed with broad national input in Australia.
They are recognized as leading edge and have been proposed as a framework for
international standards. In the original form, these principles relate to for-profit
corporation. They have been modified below to inform the developments of not-for-
profit governance:
1. Lay solid foundations for management and oversight by recognizing and
publishing the respective roles and responsibilities of board and management.
The company’s framework should be designed to:
a. Enable the board to provide strategic guidance for the company and
effective oversight of management
b. Clarify the respective roles and responsibilities of board members and
senior executives in order to facilitate board and management
accountability to both the company and its members
c. Ensure a balance of authority so that no single individual has unfettered
powers.
2. Structure the board to add value by designing a board of an effective
composition, size and commitment to adequately discharge its responsibilities
and duties. An effective board is one that facilitates the efficient discharge of the
duties imposed by law on the directors and adds value in the context of the
particular company’s circumstances. This requires that the board be structured in
such a way that it:
a. Has a proper understanding of, and competence to deal with, the current
and emerging issues of the business
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6. b. Can effectively review and challenge the performance of management and
exercise independent judgment
Ultimately, the members elect the directors. However the board and its delegates
play an important role in the selection of candidates for member vote.
3. Promote ethical and responsible decision-making by actively promoting ethical
and responsible decision-making. The company should:
a. Clarify the standards of ethical behavior required of company directors
and key executives (that is, officers and employees who have the
opportunity to materially influence the integrity, strategy and operation of
the business and its financial performance) and encourage the
observance of those standards
b. Publish its position concerning the issue of board and employee ethical
behavior.
4. Safeguard the integrity in financial reporting. This requires the company to put in
place a structure of review and authorization designed to ensure the truthful and
factual presentation of the company’s financial position. The structure would
include, for example:
a. Review and consideration of the accounts by the audit committee
b. A process to ensure the independence and competence of the company’s
external auditors.
Such a structure does not diminish the ultimate responsibility of the board to
ensure the integrity of the company’s financial reporting.
5. Make timely and balanced disclosure. This means that the company must put in
place mechanisms designed to ensure that:
a. All members/stakeholders have equal and timely access to material
information concerning the company – including its financial situation,
performance and governance
b. Company announcements are factual and presented in a clear and
balanced way. “Balance” requires disclosure of both positive and negative
information.
6. Respect the rights of stakeholders and facilitate the effective exercise of those
rights. This means that a company should empower its stakeholders by:
a. Communicating effectively with them
b. Giving them ready access to balanced and understandable information
about the company and corporate proposals
c. Making it easy for them to participate in general meetings.
7. Recognize and manage risk. Establish a sound system of risk oversight and
management and internal control. This system should be designed to:
a. Identify, assess, monitor and manage risk
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7. b. Inform stakeholders of material changes to the company’s risk profile.
8. Encourage enhanced performance. Fairly review and actively encourage
enhanced board and management effectiveness. This means that directors and
key executives should be equipped with the knowledge and information they
need to discharge their responsibilities effectively, and that individual and
collective performance is regularly and fairly reviewed.
9. Remunerate fairly and responsibly. Ensure that the level and composition of
remuneration is sufficient and reasonable and that its relationship to corporate
and individual performance is defined. This means that companies need to adopt
remuneration policies that attract and maintain talented and motivated
employees so as to encourage enhanced performance of the company. It is
important that there be a clear relationship between performance and
remuneration, and that the policy underlying executive remuneration be
understood by stakeholders.
10. Recognize the legitimate interests of stakeholders. Recognize legal and other
obligations to all legitimate stakeholders. Companies have a number of legal and
other obligations to non-member stakeholders such as employees,
clients/customers and the community as a whole. There is growing acceptance of
the view that organizations can create value by better managing natural, human,
social and other forms of capital. Increasingly, the performance of companies is
being scrutinized from a perspective that recognizes these other forms of capital.
That being the case, it is important for companies to demonstrate their
commitment to appropriate corporate practices.
2.3 OECD Principles of Good Governance
In 1998, the OECD produced five principles of good governance, particularly:
1. The corporate governance framework should protect shareholders’ rights.
2. The corporate governance framework should ensure the equitable treatment of
all shareholders, including minority and foreign shareholders. All shareholders
should have the opportunity to obtain effective redress for violation of their rights.
3. The corporate governance framework should recognize the rights of stakeholders
as established by law and encourage active co-operation between corporations
and stakeholders in creating wealth, jobs, and the sustainability of financially
sound enterprises.
4. The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including
the financial situation, performance, ownership, and governance of the company.
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8. 5. The corporate governance framework should ensure the strategic guidance of
the company, the effective monitoring of management by the board, and the
board’s accountability to the company and the shareholders.
Although the OECD suggests that these principles can be readily modified to reflect the
realities of other than publicly traded companies, only the last 2 can be easily adapted
to the not-for-profit sector. The following outlines in further detail the last 2 principles,
again modified to reflect the not-for-profit sector.
2.3.1 Principle IV – Disclosure and Transparency
The corporate governance framework should ensure that timely and accurate disclosure
is made on all material matters regarding the corporation, including the financial
situation, performance, ownership, and governance of the company.
Disclosure should include, but not be limited to, material information on:
1. The financial and operating results of the company.
2. Company objectives.
3. Major share stakeholders
4. Members of the board and key executives, and their remuneration.
5. Material foreseeable risk factors.
6. Material issues regarding employees and other stakeholders.
7. Governance structures and policies.
Information should be prepared, audited, and disclosed in accordance with high quality
standards of accounting, financial and non-financial disclosure, and audit.
An independent auditor should conduct an annual audit in order to provide an external
and objective assurance on the way in which financial statements have been prepared
and presented.
Channels for disseminating information should provide for fair, timely and cost efficient
access to relevant information by users.
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9. 2.3.2 Principle V. The responsibilities of the board
The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders.
1. Board members should act on a fully informed basis, in good faith, with due
diligence and care, and in the best interest of the company and the shareholders.
2. Where board decisions may affect different shareholder groups differently, the
board should treat all shareholders fairly
3. The board should ensure compliance with applicable law and take into account
the interests of stakeholders.
4. The board should fulfill certain key functions, including:
a. Reviewing and guiding corporate strategy, major plans of action, risk
policy, annual budgets and business plans; setting performance
objectives; monitoring implementation and corporate performance; and
overseeing major capital expenditures, acquisitions and divestitures.
b. Selecting, compensating, monitoring and, when necessary, replacing key
executives and overseeing succession planning.
c. Reviewing key executive and board remuneration, and ensuring a formal
and transparent board nomination process.
d. Monitoring and managing potential conflicts of interest of management,
board members and shareholders, including misuse of corporate assets
and abuse in related party transactions.
e. Ensuring the integrity of the corporation’s accounting and financial
reporting systems, including the independent audit, and that appropriate
systems of control are in place, in particular, systems for monitoring risk,
financial control, and compliance with the law.
f. Monitoring the effectiveness of the governance practices under which it
operates and making changes as needed.
g. Overseeing the process of disclosure and communications.
5. The board should be able to exercise objective judgment on corporate affairs
independent, in particular, from management.
a. Boards should consider assigning a sufficient number of non-executive
board members capable of exercising independent judgment to tasks
where there is a potential for conflict of interest. Examples of such key
responsibilities are financial reporting, nomination and executive and
board remuneration.
b. Board members should devote sufficient time to their responsibilities.
6. In order to fulfill their responsibilities, board members should have access to
accurate, relevant and timely information.
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10. 3 Concluding Material
During a governance development session, the Board will reflect upon the examples
above and then develop governance principles. In addition, the Board will identify the
Board competencies and management competencies required to support these
principles.
3.1 Further Reading
The following links offer further commentary on the emerging trends in not-for-profit
governance:
1. Australian developments http://www.governance.com.au/
2. OECD developments
http://www.oecd.org/department/0,2688,en_2649_34813_1_1_1_1_1,00.html
Industry Canada also offers a primer for directors of Not-for-profit corporations at
http://strategis.ic.gc.ca/epic/internet/incilp-pdci.nsf/en/h_cl00688e.html.
Recent research in Canadian governance in the non-profit sector can also be found at:
http://www.cvsrd.org/eng/docs/Policy%20and%20Practice/National%20Study%20of%20
Board%20Governance.pdf
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