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Good governance is not just about compliance; it is critical to building trust with your stakeholders. Organisations, big or small, need to take care of these five elements to make governance a way of life.

The word governance means the action or manner of governing an organisation. It differs from leadership and management in that governance ‘manages the managers’. While managers run the organisation on a day-to-day basis, governance defines the boundaries within which they must operate.

In the development sector, good governance means leading the nonprofit or social business towards the purpose for which it was set up, with integrity and transparency.

Why governance is critical, especially in the social sector

For social organisations that are consumed with changing lives on the ground, their programmes and people are the things that matter the most. Implementing guidelines and best practices around governance might, therefore, seem like a nice-to-have task that can wait.

However, strong policies and internal controls are not just about compliance; they are critical to building trust with your donors, partners and even the people you serve.

Organisations that are not well-governed are likely to experience wastage of already-scarce resources, revenue leakages and a high risk of fraud. This, in turn, erodes trust in the organisation, both internally and externally. And once trust is broken and reputation damaged, it is almost impossible to rebuild.

Poor governance can lead to an erosion of trust in the organisation.

Governance is, therefore, critical. It establishes your credibility, which is particularly important to donors, helps in better decision making, improves transparency and ensures that your organisation carries out the work it was set up to do.

There are five essentials for good governance. And they are fairly easy to implement, even if you are a smaller nonprofit with limited resources.

1. A governing body

Usually a board–either the board of trustees or a board of directors–its role is to direct and control. There are two important things to bear in mind when you set up your board:

  • Your board members must be made aware of their roles and responsibilities so that they can discharge these effectively
  • Your board must be of the ‘right’ size; ensure a good mix of the skill, competence and experience required to help your nonprofit create the impact it desires. While the minimum number of members/trustees required by law is two, the size of the board really depends on the size of the organisation and the range of inputs it requires to perform well.
There should be a board evaluation every three years.

You should hold regular board meetings and ensure that the members/trustees are provided with adequate information to enable informed decision making.

There should be a board evaluation every three years to ensure that your board stays effective and relevant. This can be done either internally or by an external agency.

2. Policies and procedures

The starting point for this is a well-articulated purpose, mission and value statement that provides direction and clarity to your employees on what the organisation stands for, and ensures that your team is always aligned to the mission.

Photo courtesy: Nick Youngson

However, that alone is not enough. There has to be a set of clearly written policies and procedures to guide the day-to-day running of operations.

Policies lay down the principles for managing important aspects of an organisation, such as human resources, financial management, expenses, procurement, delegation of authority, conflict of interest.

Procedures lay down detailed instructions to implement these policies–for example, how to claim expense reimbursements, how to seek leave, how to settle cash advances, etc.

Policies and procedures, together, are important to ensure consistent behaviour and good practices amongst all your employees and stakeholders.

3. Internal control

Effective internal control systems establish protocol, prevent and detect frauds and errors, help in risk management, and ensure accuracy in financial data. Controls also give your board confidence in how your organisation is being managed.

One of the fundamental elements of internal control is segregation of duties. It is essential to identify potential fraud-prone sets of activities and, where possible, assign these functions to different individuals.

A key element of internal control is to identify potential fraud-prone sets of activities, segregate them and assign them to different people.

An example of this is the separation of the finance and procurement functions. The person negotiating the contracts with your vendors must necessarily be different from the person releasing money to them in order to ensure that there are no irregular dealings between the vendor and team approving payments.

In smaller teams, however, executives end up doing multiple activities within a process. In such cases, a stronger monitoring and review mechanism should be established, maybe in the form of a senior manager or director approving the activity.

4. Roles and responsibilities

One can never speak enough about the importance of outlining the roles of your employees and establishing an organisation chart early on. Roles should be defined, lines of communication and reporting clearly laid down and documented.

This ensures that employees know what is expected of them; it also holds them accountable for their functions and tasks. For instance, the cashier will ensure that cash transactions are recorded correctly because they will be held responsible for the cash balance at the end of day.

5. Financial reporting and transparency

Finally, good governance is directly correlated to the level of transparency demonstrated by your organisation.
If your nonprofit reports material facts and financial information accurately at timely and regular intervals, the confidence of external stakeholders—such as donors, partners and media—only increases.

Financial reports should provide an indication of progress towards your impact objectives.

While financial reporting tends to focus more on numbers such as income, costs, fees and so on, you can also use it to disclose qualitative aspects and describe the activities of the organisation that lead up to these numbers.

Financial reports, therefore, not only enable your stakeholders to understand the financial health of your organisation, but, through meaningful comparison with past performance, also provide an indication of growth and progress towards your impact objectives.

In conclusion, there is more than a case for making governance a way of life at your nonprofit. Trust, after all, is no small reward.

Disclaimer: Sandhya sits on the board of India Development Review.

Sandhya Rao

Sandhya Rao

Sandhya Rao is a Chartered Accountant and finance specialist with 18 years of experience across corporate and development sectors. Having worked at RSM & Co, EY, Pricewaterhouse Cooper and Dasra, she has developed deep insights on how businesses are run and their impact on finance and accounts. During her stint in the social sector, Sandhya developed and monitored organisational and program budgets, was responsible for board and donor reporting, and managed donor audits. She also helped set up and strengthen processes and systems around governance and embedded controls and consistency across departments.

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