The financial Reporting Council of Nigeria recently released a harmonized code of corporate governance applicable to three key sectors – public, private and non-profit sectors. The unified code is coming on the heels of the identified need to infuse and standardize healthy corporate governance practices for the various sectors and strengthen accountability and transparency in their operations. In a previous post, we considered some of the key highlights of the code for private sector. This post will highlight some of the key provisions in the code of corporate governance for the non-profit sector.
To begin, the code states that the need for corporate governance in non-profit organizations is to foster good governance and orderly succession in such organizations considering the volume of funding they attract both locally and internationally. Indeed in recent times the issue of corporate governance has gained prominence across jurisdictions. Moreover, there has been increased efforts globally to combat money laundering and terrorism. To this end, the Financial Action Task Force (FATF) has released a number of guidelines to help countries ensure that non-profit organizations do not become a conduit for laundering dirty money or supporting terrorist activity.
The code is applicable to all non-profit organizations within Nigeria irrespective of the name or description. Categories of non-profit organizations covered by the code are charitable, educational, literary/artistic, professional & scientific, religious, political, social and recreational clubs/associations, trade unions, and other organizations with similar missions not captured in any of the aforementioned categories.
A controversial provision of the new code is the limitation of the tenure of founders and leaders of non-profit organizations. A “Founder” is defined in the code as the person who originally founded the organization or entity to which the code applies while a “Leader” is defined as the person who has assumed the headship of an organization to which the code applies in the absence or demise of the Founder. This provision is rather novel in a system where founders and leaders of non-profit organisations are usually attached to such organisations and generally never hand over till their demise.
The code seeks to address the conflict with founders and leaders of non-profit organizations who tend to dominate decision making and governance of such organizations thereby reducing it to a sort of personal venture. This does not align with the fact that a duly registered organization takes on a legal personality and as such should be distinct from the promoter or founder. Thus, the code provides a term of 20 years for founders and leaders of non-profit organizations. Alternatively, a founder or leader is expected to retire at the age of 70 years.
It is pertinent to note that term limit for founders and leaders of non-profit organizations would have no negative impact on such organizations if they are well structured and have a system that allows for accountability, transparency and orderly succession. The main purpose of the non-profit organization should be to achieve its aims and objectives as an organization and not to be used as a shroud to advance the personal interest of the founder or leader. To this end, the code respects the place of founders and leaders of non-profit organizations and does not take away their advisory and leadership role, provided that this is not abused.
The code sets out the organizational structure of non-profit organizations – General Assembly, Board of Trustees, Governing Board, Management Committee; and provides details of the roles each officer is expected to carry out. The officers include Chairman of Governing Board, Chief Executive officer, Secretary, Treasurer, Executive Directors and Non-Executive Directors. It also provides the duties of directors and committees that non-profit organizations should establish. The code also provides for the position of an External Auditor with the requisite skills. Non-profit organizations are also expected to have whistle blowing framework to check unethical practices under the new code and an effective communication policy. Financial statements and audited accounts are to be prepared at least annually and made available to all stakeholders of the non-profit organization. Full disclosure is expected on all matters provided in the new code and annual corporate governance evaluations are required to be made by a duly registered independent external consultant.
Compliance with the code is not mandatory unlike the code for private sector. Rather, organizations are enjoined to comply or justify non-compliance. With the comply or explain model of corporate governance, an organization that fails to comply with the provisions of the code is expected to justify such failure to comply to the satisfaction of the regulator. The question is: where the reason for failure to comply is not acceptable what happens? It is not certain what this model of corporate governance would achieve especially considering the fact that regulation of the non-profit sector in Nigeria has hitherto been insignificant. Nevertheless, the step taken so far is commendable; at least it should give all concerned the notice that the era of a largely unregulated non-profit sector is gradually being phased out.