Good Governance – Decision-making Principles that PBOs should follow

In our first article in this series, the moral imperative for good governance of public benefit organisations (PBOs) was spelt out. In this article, we look at a few of the legal imperatives that are equally important.

The legal imperative for a PBO to practice good governance is set out in South African law. A leading principle is the implied fiduciary duty that the board of every PBO has. Fiduciary duty is said to be the highest duty known to the law. It requires a degree of care in decisions and in actions that does not allow any violation to go without exposing the violator to personal liability. A board member is expected, at all times, to act in the best interests of their organisation, its staff and, ultimately, its beneficiaries.

(A) fiduciary must act with the best interests of the beneficiary in mind at all times and must refrain from taking any action that could potentially harm the beneficiary or the beneficiary’s interests. – Christopher Stevenson[1]

South African tax law holds that a fiduciary board member may not directly or indirectly enhance their economic self-interest through a PBO, except to claim for reasonable remuneration for services rendered.

Similarly, your PBO should not allow itself to ever fall foul of its statutory requirements, such as those set out in the Promotion of Equality and Prevention of Unfair Discrimination, Act No. 4 of 2000, the Basic Conditions of Employment Act No. 75 of 1997 (BCEA), and the Children’s Act No. 38 of 2005 (CA), to name just a few. Should your organisation have voluntarily subscribed to the Nonprofit Organisations Act No. 71 of 1997 (NPO Act), its provisions would apply to how you govern your organisation as well. In short, your board must establish which laws are pertinent to its work, and ensure compliance at all times (e.g. acts relating to health, criminal justice, education, copyright, personal information, occupational safety and so on).

Taking inspiration from the OECD we suggest that the following five principles be applied to any governance decision that your PBO board takes, to help strengthen each decision, and in so doing, ensure the long-term sustainability of your organisation:

Transparency: Your board should be open (that is, not sit on information or try to conceal information that is relevant to any of its stakeholders), and keep its decisions, policies and regulations simple and user-friendly.

Accountability: Your board should be able to justify its decisions and be subject to public scrutiny. It is a “public” organisation after all, enjoying distinct privileges (such as tax exemption) afforded it by the public, for the public’s benefit.

Proportionality: Your board should intervene only when necessary. Remedies should be appropriate to the risk posed, and costs identified and minimised.

Consistency: Your organisation’s rules and standards, as set by your board, should be consistently compiled, not be contradictory, and should be implemented fairly.

Targeting: Each decision or policy put in place by your board should be focused on a defined problem. This makes it more likely that when addressing the problem, your organisation is better able to minimise any side effects arising out to the decision as much as possible.

Factoring these principles into all major board decisions, and the way they are implemented, will also help ensure that your PBO’s board remains ‘beyond reproach’. That is, the board will continue to enjoy the trust of its stakeholders and be able to mitigate against claims of being unfair, incompetent, uncaring or corrupt.

One of the most important policies for your PBO board to adopt, in light of these principles, would be a policy addressing conflicts of interest. This is the sort of policy you want written up carefully, and made available to all stakeholders. It would be good practice to have board members and staff commit to it annually. The policy should:

• Require those with a conflict of interest, or those who think they might possibly have one, to formally disclose this in writing; and
• Require board members with a conflicting interest in a matter to excuse themselves from voting on that matter. In the case of staff members with a conflicting interest, they should excuse themselves from officiating on the matter concerned (e.g. not be on the team that does the initial screening of applicants, for example).

An example might be when one of the bus services bidding for a transport contract your organisation has put out to tender happens to be owned by the cousin of one of your board members. If the board member does not disclose this relationship and participates in the selection process (whether they vote for this bus service or not), a competing bus service may well cry foul and litigate, claiming that the first bus service had an unfair advantage with a relative on the selection panel. Your board would no longer be “beyond reproach”. The board member should have disclosed their relationship and should not have participated in the selection process or decision.

We suggest that your board facilitates a discussion once a year where the types of hypothetical situations that could result in a conflict of interest are explored, and ways to manage these situations be agreed upon. This way, when a real conflict of interest arises (and they can be quite nuanced), your board will be better able to recognise and manage it.

In our next article, we explore two blind spots that your PBO board needs to watch out for, as it navigates uncertain futures, building the long-term sustainability of your organisation as it goes one fiduciary decision at a time.