Directors' Duties in Focus: Directing a Not-for-Profit (‘NFP’) Organisation

I am often asked by clients whether directing a not-for-profit (‘NFP’) organisation is any different to directing a company operating for profit.  In short, the answer is yes.  The role of director of a NFP organisation is rather special.  It often requires directors to have the ability to be a ‘jack of all trades’.

What defines a ‘Not-For-Profit’?

A NFP is an organisation that does not operate with the aim to increase revenue, to increase shareholder returns or for personal gain.  However, simply branding an organisation as being ‘not for profit’ will not necessarily make it one!

There are certain requirements that must be complied with for it to be regarded as NFP by the law.  For example, the Australian Taxation Office (ATO) accepts an organisation as being ‘non-profit’ where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people.  This is the case both while it is operating and when it winds up.  The documents must also contain the essential clauses indicating the not-for-profit character of the organisation.  These clauses may include the non-profit and the dissolution clause.

Are NFP’s prohibited from making profits?

An organisation may still be considered as a NFP even if it undertakes activities for the purpose of obtaining profits.  So long as the profits are obtained by it by the conduct of its activities and are used in furtherance of the purpose for which it was created, an organisation may still be considered an NFP.

The organisations governing documents must prohibit the organization from distributing profits to members or to a particular class of persons.  The beneficiaries of the NFP are key.

Roles and Responsibilities for Directors of NFPs

The responsibilities of an NFP director are usually provided in its constitution or by-laws.  The roles the directors are expected to undertake will depend on the purpose for which the NFP organisation was established.

Ideally, a NFP director must actively promote and advocate the mission of the organisation.  Although not essential, it is advisable that a director has a track record of the advocacy that is consistent with the vision and objectives of the organisation.

The board of directors’ duty lies in promoting the interests of the organisation in accordance with its vision and mission.  The general functions of the board of directors often include:

  • Determining and safeguarding the vision, purpose and values;

  • Determining and approving of strategies;

  • Fundraising for the organisation;

  • Determining and approving of annual budgets;

  • Appointment, performance evaluation and termination of its officers;

  • Managing risks;

  • Ensuring the organisation is compliant with legal and financial accountability;

  • Evaluating the organisations activities to ensure that it is properly undertaken; and

  • Effectively communicating with stakeholders.

Clearly Defined Roles

It is absolutely vital for the specific roles and responsibilities of the directors to be clearly outlined in the originating documents of the NFP.  This prevents any overlapping of functions among the directors.  The documents serve as a guide to proper function for a director, as well as a check to ensure that a director has not overstepped the scope of their authority.

Usually, the roles and responsibilities of directors are concisely stated in the initial Letter of Appointment.  The Letter will normally set out:

  • How the director was nominated and appointed and from what date;

  • The director’s role and expected responsibilities and duties;

  • The term of appointment and any conditions or limits (e.g. tenure under the constitution);

  • Expectation in relation to their governance role, potential advocacy, fundraising and any operational or public profile activities; and

  • Any induction process (if NFP is large enough to have one).

In the Best Interests of the Organisation

An individual director is bound to act in the best interests of the organisation.  The director must have the appropriate skills to make the right decisions, experience or general understanding of the nature of a directorial function in an NFP.

Fundraising events lie at the heart of a NFP.  Fundraising ensures the continued financial support of the programs run by the organization.  They also help to involve members of the community and to build interest in the continued welfare and mission of the NFP.

Normally, two of the key functions of a director in a NFP are networking and fundraising.  The director should have the ability to effectively distribute workload among the organisations employees.  This will ensure that there are ongoing fundraising efforts distributed throughout the financial year, as well as scheduled activities to bring the mission of the organisation to the forefront of local communities.  A strong director will ensure the financial health of the NFP through effective networking opportunities.

Implications for Directors

When becoming a director of a NFP, be clear about the nature, mission and purpose of your organization.  Make sure you fully understand the expectations the organization has of you and clarify your role before you commence your term in office.

What Should I Do Next?

Contact us if you would like further legal advice on issues with a Not for Profit organisation.  Our lawyers at You Legal will be happy to assist you in whatever way we can.

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* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.

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