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Governance Not For Profit Organizations

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Non Profit Organizations and Corporate Governance

The non-profit organizations sector is a sector with continued growing importance especially with globalization. The fact is that these sorts of organizations are usually much bigger than people’s perception.

In Europe, it is estimated that this sector constitutes about 40% of its GDP. Though there are not many available or verifiable statistics in Africa, with the ongoing trend, this sector is gradually growing in size and would become a major contributor to the GDP of Africa in the next decade.

With all this growth, there is the need for non-profit and non-government sector to define itself in a more constructive and accurate way. Many organizations are suggesting new terminologies to define the sector rather than use the “non” acronym in describing the various organizations under this sector. Some have used the term “civil society organizations”, whilst others have suggested the use of “citizens sector organizations”.

The challenge with use of these names to describe the sector comes from the fact that a lot of these organizations get their funding either from governments or from profit making organization.

To help us appreciate better, it is necessary to provide some definitions of non-profit organizations.

“A non-profit organization is one who has its objectives as the support or engagement in activities of public and/or private interest without any commercial or monetary profit”.

The distinguishing feature is that they are not in business to seek to provide benefits for the less privilege, rather that they do not seek to make a profit to return to their investors.

“A non-governmental organization NGO – this is a legally constituted organization that operates without the any participation or representation from government.

However where such NGO’s receive some of its funding from government either partially or fully, it will maintain its non-governmental status for as far as it excludes government representatives from the membership of its organization.

NGO’s fulfil a vital role in today’s society, by trying to fill the gap which is often left between civic responsibilities which are undertaken by government agencies and personal responsibilities that are often undertaken through the family system. As a result of this, the significance and role of NGO’s has risen accordingly and in other to commensurate with this, we have seen the large explosion in the number of NGO’s and a concomitant increase in the spheres of influence of such organizations and the roles they have claimed for themselves.

The reason for this explosion has been brought about by the retreat of the government in fulfilling their civic responsibilities. This retreat is gradually taking us back to the situation which existed in the mid nineteenth century where it was expected that the rich will give back some form of surplus to the poor, however there is a clear distinction between the deserving poor and the underserving poor.

Today it is believed that there are several millions of NGO’s in existence in the world. For example it is estimated that India has about 2 million NGO’s. Despite all this, one fact that has been deduced from all this is that while some of the organizations are local, some have become international household names and there are continuously new one coming up across all the continents of the world.

The establishment of an NGO is very easy; in some places there are practically no regulatory requirements and there are no controls exercised in setting them up. In some countries, the creation of an NGO is completely exempted from regulation.

All that is needed is to decide the purpose of the NGO and sometimes they can be very broad and general in nature or they can be very narrow and specific to particular purposes. What is necessary is that the NGO has a purpose and such NGO does not seek to make a profit. In reality, it is most times easier to set up a new NGO than it is to close an existing one.

The proliferation of NGO’s comes with its own challenges for this sector. However in order to discuss these challenges, there is the need to consider the nature of the sector.

The first thing we must consider about this sector is that it has no profit motive and the decisions taken are based on different criteria. With this sector, the emphasis is on the provision of service, which forms the main basis for the existence of an NGO.

It is also important to note that many a times in this sector, there is a disconnection between the acquisition of resources and the use to which these resources have being put. This is to say that the money provided to carry out these services do not come from the recipient of the service normally.

In most cases, the need for the service frequently surpasses the ability of the organization to satisfy those needs and as such continually operates under a situation of resource constraints.

Non-profit organizations can be classified into various types with each type serving a different purpose. Some of the classifications are as below;

  • Public Non-Profit Organizations – They are related to government in some ways and may include such organizations like local authority and health authority. They usually have the functions of providing service to the society and get their funding and powers directly from the government
  • Quasi-Public Non-Profit Organizations – They are also referred to as QUANGOS (Quasi autonomous non-governmental organizations). They either serve the public or civic purpose without any direct link and/or relationship with the government.
  • Educational Institutions – they serve an educational function and could include organizations such as schools, colleges and universities. They may be publicly or privately owned and their norms differ between countries.
  • Charities – They serve various purposes towards meeting either public or civic purpose in different areas of the society.

When considering governance for NGO’s, it is important to consider the motivation for its existence. This is because their motivations tend to differ from those of profit seeking organizations. In the first instance, NGO’s are motivated by some type of societal concern and this normally involves the provision of a service to some part of the society and this service provision is not usually related to payment for that service.

In view of the above, one of the major motivating factors for NGO’s is the acquisition of resources in order to enable them to undertake the various services. Thus there is a major concern with optimizing the utilization and allocation of these inevitably scarce and restricted resources. Another area of concern is the minimization of the cost of carrying out these services.

From the above, it is obvious that NGO’s are also faced with major decision making criteria for the allocation and utilization of scarce resources as their profit making counterparts. The difference between both however is in the way that such organizations measure the effectiveness of the resources allocated.

Due to the fact that such organizations do not operate based on profits, it throws up the challenge for motivating and rewarding managers for their performance and contributions to the achievement of the goals of the organization. The other thing to consider when dealing with the measurement of managers in these types of organizations is the question of who decides what is good performance.

This is because for the profit seeking organizations, the customers will decide and make a choice on whether they buy or not. This is not the case with NGO’s because there are usually no customers but beneficiaries and such beneficiaries’ don’t pay for the service received.

Based on the above, the determination of the performance measurement criteria becomes a very important aspect for these organizations. The same will go for setting the standards and the reporting of performance.

For NGO’s, they can do this through the development of major performance indicators. Some of the major indicators that can be used include the following:

  • Budgetary Control/ Cash Flow
  • Performance Indicators for the services to be provided
  • Non-financial measurement criteria
  • Qualitative Factors

Though NGO’s still need to ensure that they prepare their accounts, for the purposes of evaluating the performance of their managers, they should focus less relevance on the accounting measures and ensure that they look more into the non-financial measures.

This will however bring about its own challenge in the area of quantification and the necessity for deciding between the various alternative services. A good starting point for them should be the cost-benefit analysis. Here the emphasis should be in their ability to ensure efficiency by minimizing the cost that such organizations incur in administration.

It should be noted that the ability to manage administrative cost efficiency does not imply that such organizations manipulate accounting information; this is because efficiency will automatically lead to their ability to continually raise funds from both existing and new providers.

From all that has been discussed, it is obvious that there would be a number of issues facing managers who work for these types of organizations. The first major issue is concerned with the acquisition and utilization of resources. There is a lot of difficulty in getting the required resources and this invariably makes planning difficult. This is as a result of the fact that most of the projects being managed by NGO’s are mostly long-term in nature whilst the resource acquisition possibilities are short-term.

Another major issue is the setting of performance objectives and the measuring criteria for these performance objectives. A major consideration for setting objectives is dependent on the finance, budgeting and control functions of the organization.

As they usually don’t have customers, shareholders and investors, some of their stakeholders become very important and wield a great deal of influence. Some of these stakeholders include donors, recipients and sometimes the society at large.

Asides from the internal issues mentioned above, these managers are also faced with huge external challenges which are very critical to the success of such organizations. The first question for any of these types of organizations is to define and identify their market. This is essential towards ensuring that they plan their operations efficiently and effectively.

Also from the external perspective, due to the fact that they have a variety of stakeholders, there are different opinions and views as to how they all measure and evaluate performance.

The expectation would be that NGO’s would not be in competition with each other based on the conditions that they are service orientated and not profit seeking. But the truth is that there are several NGO’s providing the same service and sometimes rather than collaborate they compete against one another.

In earlier parts of this write up we have touched on the fact that NGO’s need to put in place proper budgets and plans, measurement and reporting performance structures and efficient and effective evaluation systems. Another important aspect to consider in terms of accounting for NGO’s are the time horizons for the execution of their projects. This is because most of their projects are long-term and continuous whilst the funding is usually short-term in nature.

As such what you see with most NGO’s is a long-term continuous expenditure pattern with short-term income or resource generation capabilities, thereby making planning very difficult for many of these organizations.

Another area of accounting to consider when dealing with NGO’s is the fact that when raising funds, they can either be for general purpose of specific purpose projects. Where funds have been raised for specific purpose projects such funds must be dedicated to such projects alone. Where the project has been completed and there is a surplus of specific funds, such funds must never be used unless otherwise authorized by the donors of such funds.

Another challenge with NGO’s accounting for their funds is the fact that many donors are willing to donate towards specific projects and never for general purpose administration. As such accounting for these organizations usually tends towards making as much of their expenditure direct expenditure rather than indirect.

All the factors stated above with regards to NGO’s have major implications as far as governance is concerned. Many a times it is usually assumed that when an organization exists as an NGO, then it must be socially responsible and demonstrate good governance.

This is not always the case. Governance is about how organizations conduct its operations and deals with stakeholders. As such with these NGO’s there is a different focus when it comes to governance and we would need to consider this in terms of governance implications. This can be addressed under the following areas;

  • Stakeholders – The ability and power of these stakeholders to convince the profit seeking organizations
  • Sustainability – This is in terms of doing more with fewer resources.
  • Accountability – This is a major issue with NGO’s as a lot of people do not think that they are very accountable
  • Transparency – With the variety of stakeholder groups, there is the need for transparency for these organizations to thrive efficiently
  • Disclosure – with the globalization of the business world, increased disclosure has become the norm. So as these organizations seek to satisfy their various stakeholders there needs to be increased accountability and transparency.

In conclusion, the environment in which these NGO’s operate is somewhat different but there are still governance implications that are mostly concerned with sustainability and accountability. Based on this the major features of these types of organizations which need to be addressed towards ensuring efficient and effective governance structures include;

  • Uncertain resource availability and its effect on the organization’s long-term planning
  • The power and involvement of the various stakeholders
  • Conflict of priorities
  • Legal environment in which they operate
  • Managing any form of ambiguity that might be seen to exist in their operations

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