Laws Affecting NFP Companies - Research

A collaborative project set up to examine the appropriateness of existing corporate legal frameworks as they apply to Not for Profit companies has delivered its preliminary findings as part of a three year study.

The Accountability and Corporate Governance in Not for Profit Companies Project has collated the responses of more than 1600 Not for Profit companies limited by guarantee to consider the issues of reporting and accountability to NFP stakeholders and how these stakeholders differ from those in ‘for-profit’ companies.

The survey was part of a collaborative project between the University of Melbourne and Philanthropy Australia.

This is the first time national, large-scale profile data on this group of companies has been collected. The researchers are Sue Woodward and Shelley Marshall.

Sue Woodward says the data provides a solid baseline for future reform and comparison. Understanding this data is a necessary first step in considering the particular (and often overlooked) needs of Not for Profit companies.

The main findings relate to appropriateness of their current legal structure, reporting responsibilities and some ambivalence to a new independent charities ‘regulator’.

As a preface, Melbourne University researcher Sue Woodward says the legal nature of NFP organisations is even more varied than in the ‘for-profit’ sector.

Woodward says many smaller organisations are incorporated under State based associations legislation. By contrast many of the large welfare organisations are church sponsored and have no clearly defined identity of their own.

Another significant group is incorporated as companies limited by guarantee under the Commonwealth Corporations Act.

Woodward says the complexity of the legal forms of NFP organisations has important implications for accountability, governance and regulation and is a key focus of the study.

The study looked at general company particulars such as size, income source, tax status, reliance on volunteers /membership.

It also asked respondents to explain the factors that led to their current legal structure.

The most significant findings concerning this question are:

•legal advice and taxation/financial advice received at the time were the two main factors – no doubt this advice would have taken into account a range of reasons including the other reasons listed in the question;

•over a third (34%) indicated that being a “national or multi-state organisation” was an important factor in their choice of a company structure;

•40% indicated that the “scale of trading activities” was an important factor, which is an area of debate and variation in the associations’ regime;

•almost a third (31%) identified a preference for Australian Securities and
Investments Commission (ASIC) “rather than State regulator” as an important
factor – supporting anecdotal evidence that many of the State regulators are under resourced and cannot cope easily with organisations that want to have variations to the prescribed model rules; and

•“public perception and status” was important to the majority (52%). This supports anecdotal evidence that ‘serious’ or ‘more sophisticated’ NFP organisations are companies rather than incorporated associations.

On the question of what information should be available to the public only 39% agreed that fully audited accounts should be available – that is on 39% agreed that they should have to disclose what they are currently required by the Corporations Act to disclose!

The majority (56%) were of the opinion that summary financial information was sufficient.

The survey found some dissatisfaction with the performance of the Australian Securities and Investment Commission (ASIC). While most agreed it had an important public information role to play, 70% thought that the Corporations Act was more appropriate for ‘for-profits’ than for NFPs.

In terms of a new regulator as suggested by the 2001 Charity definition Report recommendation, a clear majority showed they were in favour of some form of specialist regulator. However the survey found a large proportion of those responding with ‘not sure’ as to the exact type of new regulator.

Sue Woodward says that the data from the survey and its preliminary findings will be used to engender debate and they are looking for comments on the following issues:

a) new NFP company structure under Corporations Law:
Whether a company limited by guarantee is the most appropriate structure – is it time to introduce a specialist form of company structure instead of or in addition to incorporated associations? In 1995 the Industry Commission recommended a specialist form of company for “Community Social Welfare Organisations” and the United Kingdom Cabinet Office has recently recommended the establishment of two new types of company
(the “Community Interest Company” and the “Charitable Incorporated Organisation”). The myriad of legal structures for NFP organisations hampers accountability and regulation which, in turn, have implications for
donor confidence in the sector;

b) different company law reporting requirements for NFPs depending on their size and purpose:
Whether the extent and nature of the disclosure should vary depending on factors such as size, member-serving vs public-serving and taxation status?
The vast majority (91%) of NFP companies say they enjoy the privilege of income tax exemption. This gives rise to a public policy argument that, as consideration for this privilege, there should be a corresponding responsibility of public accountability and disclosure. But what is the balance between reporting obligations that meet the specific needs of NFPs and their stakeholders, and obligations that are unduly onerous or do not provide helpful information?

c) a new NFP regulator:
Who is the most appropriate regulator – there is a level of dissatisfaction with ASIC. Should a specialist unit be established within ASIC to deal with the particular needs of NFP companies? Should simple steps such as a
plain language guide for NFP companies and/or reduced fees be implemented? Is it time for the States to refer their powers over incorporated associations to the Commonwealth and rationalise the regulation of NFP
corporate bodies?

To comment please contact researchers, Sue Woodward and Shelley Marshal on 03 8344 6938 or via e-mail to law-notforprofit@unimelb.edu.au.

If you would like a copy of the preliminary findings in PDF format just send an e-mail to Pro Bono Australia at corpnews@probonoaustralia.com.au.

A full report of the data and recommendations for possible law reform will be complete by early 2004.