This subject has focused to date on the governance of listed companies due to the availability of information contained in annual reports, other compliance information and their websites. If governance principles remain a standard, they should also apply to non-listed entities.
Governance of Family Owned Private Companies
Private companies do not offer shares to the public and are not listed on stock exchanges. They are not subjected to the same rigorous disclosure and reporting standards either. The majority of private companies are owned by families and sometimes founders. Around 95% of companies in Asia, India and Latin America are family-owned, according to Tricker (2019)[1]. There are some advantages to the governance of a family-owned company because the executive and the board are one and the same, according to Larcker and Tayan (2020, p. 3)[2], which include:-
- In their capacity as owners and executives, the family members have considerable interest in the organisation’s success. In public companies, this is not the case;
- Family owners focus on the longer term, with succession plans to pass the organisation on to their children. Public company executives focus more on the short term of their tenure;
- Because of the family nature of ownership, governance, management, strategy and other company components are tightly controlled and watched.
Naturally, there are also disadvantages which can include:-
- Disproportionate control through personality domination compared to ownership stake;
- Private benefits can sometimes be taken advantage of at a cost to minority owners.
- Owners could be excessively risk-averse or have a very high-risk tolerance.
Private companies can grow, of course, and board structures change as additional skills are required. Governance must grow in line with growth so that the two are in harmony.
The video suggests that governance is increasing in private companies to counter the growing risk in areas such as cyber and compliance. Some are bringing in independent directors with these skills. This can also bring more objectivity and diversity to the private company.
Governance in Not-For-Profit (NFP) Organisations
Not-for-profits do not exist to create wealth for their members but rather for what they can contribute to society’s social, economic or environmental good. In the words of Tricker (2019, p. 292)[1], NFPs “are working for the benefit of society rather than the benefit of shareholders”. NFPs operate extensively in many sectors, and like corporate entities, they require good governance to ensure maximum benefit to their stakeholders.
NFPs generally operate with volunteer boards, and where directors are paid, it would be lower than a for-profit company. Debate is currently taking place in Australia about the payment of directors on NFPs. Paying NFP directors can result in encouraging diversity, attracting people who would not have time to serve otherwise and can also mean the NFP can expect higher levels of engagement Australian Charities and Not For Profit Commission 2022, according to Remunerating charity board members | ACNC, [3]
Governance quality on NFP boards can vary considerably. Many directors are unaware of their responsibilities or the time commitment required to do the job effectively. Additionally, is community organisations, there can be an attitude of “she’ll be right mate” and that it has always been done this way.
The Effective Not-for-Profit Board – A value-driving force (deloitte.com) is a note containing an article about Effective NFP Boards.
Ethics
It is reasonable to assume that because NFPs are working for the good of the community, the ethical standards would be higher than a for-profit company. However, according to Bezboruah and Carpenter (2020)[4], several examples of fraud and financial mismanagement have been found and are more common than in for-profit organisations. It is imperative that NFPs have appropriate policies in place that clearly define the expected behaviour of directors. The reputational damage and fallout from unethical behaviour in NFPs can be destroying. Rhode and Packel (2022)[5] suggest that the common areas around ethics are the grey areas of fraud, conflicts of interest, incorrect allocation of resources and a lack of accountability and transparency.
One aspect of ethics worth raising is the utilisation of funds. The public expects that money raised by community groups will be expended to fulfil the purposes of the community organisation. Some community groups, however, measure their success on the amount of money they have in the bank as opposed to how many projects they have completed. You can read more about this issue in the article HOW MUCH MONEY IS IN YOUR COMMUNITY ORGANISATION’S BANK ACCOUNT? | by Ric Raftis | Nov, 2022 | Medium
Regulations and Legalities
If an organisation is an incorporated association, it is governed by State law under the respective Incorporations Act. Some associations may also have charity status and must report to the Australian Not-For-Profit and Charities Commission (ACNC). Some charities may also have Deductible Gift Recipient (DGR) status granted through the Australian Taxation Office (ATO), which can create a further layer of obligation for such organisations. Companies that are Limited by Guarantee are registered under the Corporations Act and regulated by the Australian Securities and Investment Commission (ASIC). Then there are Indigenous Corporations which are regulated by the Office of the Registrar of Indigenous Corporations under the Corporations (Aboriginal & Torres Strait Island) Act 2006. Cooperatives, where the members of the Cooperative own the organisation, are subject to the laws in the state or territory where they are registered. The governance standards required will depend on the organisation’s legal structure. Either way, good governance standards should always apply.
Summary
This is the final module in the Corporate Governance subject. I can certainly understand the emphasis placed on the corporate level as it flows all the way down to not-for-profits and community organisations. My personal interest is at that level and achieving good governance in such organisations. The final assessment is now all that is left to be worked on to complete the year of study. It has been one exciting ride covering six subjects over 42 weeks of study. I am now looking forward to next year and finalising my MBA.
References- Tricker, B 2019, Corporate governance : principles, policies, and practices, 4th edn, Oxford University Press, Oxford ; New York, Ny.[↩][↩]
- Larcker, D & Tayman, B 2020, ESG and Stakeholders, CGRI Quick Guide Series, Stanford Graduate School of Business, viewed 17 November 2022, <https://www.gsb.stanford.edu/faculty-research/publications/esg-stakeholders>.[↩]
- Acnc.gov.au, viewed 22 November 2022, https://www.acnc.gov.au/tools/guides/remunerating-charity-board-members.[↩]
- Bezboruah, KC & Carpenter, HL 2020, Teaching nonprofit management, Edward Elgar Publishing Limited, Cheltenham, England.[↩]
- Rhode, DL & Packel, AK 2022, Ethics and Nonprofits (SSIR), Ssir.org, viewed 22 November 2022, <https://ssir.org/articles/entry/ethics_and_nonprofits#>.[↩]
