Finding the way to good governance for public benefit organisations

November 1st, 2021
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Picture source: Gallo Images/Getty

‘A public benefit organisation (PBO) is an organisation (whether voluntary association, trust, non-profit company, or local branch of a foreign tax-exempt charitable organisation) that does not work for profit and is exempted from paying certain taxes because it undertakes public benefit activities (PBAs).

As a republic, [South Africa (SA)] is centred on the primacy of “the public”. The preamble to our Constitution explains that we are a country particularly encumbered by the legacy of an unjust past. I would argue that the primary benefit to our nation’s public are therefore those activities that:

  • heal the divisions of the past … ;
  • improve the quality of life of all citizens … ; [and]
  • lay the foundations for a democratic and open society in which government is based on the will of the people, and in which every citizen is equally protected by law … .

One should read the ninth schedule to the Income Tax Act No. 58 of 1962 [ITA], which specifically sets out what can be considered PBAs, in the context of this constitutional injunction. The list of PBAs is quite extensive and is divided into sections covering humanitarian and welfare activities; healthcare; education; land and housing; environment conservation and animal welfare; religion and belief; cultural, research and consumer rights; sport; and the providing of funds, assets or other resources.

The schedule provides a further level of specificity as to what kinds of PBAs would be considered under each of these themes, and includes activities such as:

  • “The care or counselling of, or the provision of education programmes relating to, abandoned, abused, neglected, orphaned or homeless children” (Welfare, under Part II);
  • “The advancement, promotion or preservation of the arts, culture or customs” (Cultural, under Part I); or
  • “Building and equipping of clinics or crèches for the benefit of the poor and needy” (Land and Housing under Part II).

It is quite easy to see how PBAs could directly contribute towards achieving the vision set out for us in the Constitution. Many do help improve the quality of life; others ensure that citizens are equally protected by law. Most PBAs chip away at inequality and steadily work towards social justice for all.

Every PBO’s North Star

However, it is not sufficient to say that undertaking a PBA is the same as supporting the Constitutional imperative. That imperative is only achieved if these activities are carried out with the Constitution clearly in view – holding it as the North Star guiding the PBA implementer each step of the way. Only then can we expect to see a PBA meaningfully contribute to the primary project of nation building. Without this North Star, it will quickly become evident that the PBA is merely a mediocre “ticking of a box”; one that will eventually distract more than contribute towards the national goal’ (Graeme Wilkinson ‘Good governance – every PBO’s North Star’, https://tshikululu.org.za, 8-10-2021).

Just because polo is considered a sport (a recognised PBA), does not mean a match at Val de Vie Estate is of itself necessarily nation building.

‘Indeed, a badly oriented PBA can be disruptive to the national effort, and even destroy that which has been built by others who are keeping the Constitution in their sights.

A badly governed PBO will also allow the trust placed in it by the public (and public officials … ) to slowly erode, and with it, the organisation’s relevance. Any irrelevant organisation, by choice or by circumstance, will eventually cease to exist’ (Wilkinson (op cit)).

Blind spots of a PBO

‘Mere compliance with the [ITA] is not sufficient to ensure long-term sustainability of your PBO. PBO status gets you the licence to run the race, but you still have to get out there and pound the asphalt. As with marathon running, the success of the run depends on numerous factors:  how fit your body is, who you may have chosen to partner with on the run and your mindset.

The way you are set up to govern your run is probably more important than all the practice you have put in before the race. You can never fully prepare for every moment of the race; what will eventually happen on race day is unknown. Each marathon race has its risks, and every PBO faces things that put its long-term sustainability at risk.

Two of the known risks that every PBO faces, and which could be lurking in your board’s “blind spot” are –

  • embezzlement, money laundering, fraud, corruption, tax evasion and terrorist financing; and
  • non-compliance with statutory requirements’ (Graeme Wilkinson ‘Good governance – PBO blind spots’, https://tshikululu.org.za, 8-10-2021).

In terms of the first, ‘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’ (Graeme Wilkinson ‘Good Governance – Decision-making Principles that PBOs should follow’, https://tshikululu.org.za, 8-10-2021).

‘[I] suggest that there are five [further] categories of abuse facing a PBO. These are:

  • Diversion of funds by people within your PBO or by external actors (such as a foreign partner or a third-party fundraiser);
  • Your PBO’s staff or board members knowingly or unknowingly maintaining an affiliation with a complex syndicate or terrorist entity, which may result in your PBO being abused for multiple purposes, including general logistical support … .
  • Abuse of programming – the flow of resources is legitimate, but your PBO’s programmes are abused at the point of delivery … ;
  • Supporting others’ recruitment efforts … or mobilisation for illicit activity … ;
  • Abuse through false representation in which other entities in your community start a “sham” PBO or falsely represent themselves as the agents of “good works” in order to deceive your staff, or even your board, into providing them support … .

The public expects your PBO’s board to protect your legitimate activities from these sorts of nefarious agendas’ (Wilkinson (op cit)). Increasingly, social investors and grant makers are asking applicant PBOs how they are monitoring and mitigating against these risks.

A PBO should not allow itself to ever fall foul of its numerous statutory requirements, such as those set out in the Promotion of Equality and Prevention of Unfair Discrimination Act 4 of 2000, the Basic Conditions of Employment Act 75 of 1997, and the Children’s Act 38 of 2005, to name just a few. Should a PBO have voluntarily subscribed to the Nonprofit Organisations Act 71 of 1997, this Act’s provisions would apply to how the PBO governs itself. In short, a public-benefit board must establish which laws are pertinent to its work and always ensure compliance.

Two laws I would like to highlight, and which every board needs to ensure its PBO is adequately capacitated to comply with, are the Financial Intelligence Centre Act 38 of 2001 (FICA) and the Protection of Personal Information Act 4 of 2013 (POPIA).

En vogue acronyms

The POPIA is now very topical as all PBOs have to be compliant as of 1 July 2021. A PBO needs, for example, a very specific reason, and permission, for requesting and storing the biometric details of its clients/beneficiaries. The widespread practice of keeping copies of beneficiaries’ identity documents on record will have to be reviewed as a photograph of a person’s face is regarded as biometric (and thus protected) personal information.

Not many PBOs are aware that FICA also has relevance to them. ‘While not designated as an accountable or reporting institutions under FICA, PBOs and their fundraisers are holders of the public trust, and so the Financial Intelligence Centre (FIC) does expect PBO’s full support and collaboration in relation to two scenarios:

  • PBOs that become aware or suspect that they are being abused for terrorist financing and/or money laundering purposes’ (Wilkinson (op cit)); and
  • PBOs that supports any person who acquires any property, provides financing, and/or other services and/or benefits to a person or entity listed in terms of s 25 of the Protection of Constitutional Democracy against Terrorist and Related Activities Act 33 of 2004 (see the FIC’s website at fic.gov.za) can be found guilty of an offence.

‘While [I] would like to believe that both of these scenarios are rare … the negative impact could be quite severe. [I] flag them here as potential “blind spots” for you [PBO] to be aware of. The last thing your [PBO] board needs while trying to rapidly respond to an emergency situation, is to be confronted with a non-compliance notice from the Information Regulator or FIC’ (Wilkinson (op cit)).

Decision-making principles that PBOs should follow

‘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’. ‘A board member is expected, at all times, to act in the best interests of their organisation, its staff and, ultimately, its beneficiaries’ (Wilkinson (op cit)).

Taking inspiration from the Organisation for Economic Co-operation and Development (OECD), which in turn took the lead from the United Kingdom’s Better Regulation Task Force, 1997, ‘[I] 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 [relevance and] 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: The 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: The organisation’s rules and standards, as set by the board, should be consistently compiled, not be contradictory, and should be implemented fairly.
  • Targeting: Each decision or policy put in place by the 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 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.

Addressing conflict of interest

One of the most important policies for your PBO board to adopt, in light of these principles, would be a policy addressing conflict 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 … .

[I] suggest that your [PBO] 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), the board will be better able to recognise and manage it’ (Wilkinson (op cit)).

Far horizon

This is certainly not a comprehensive list of governance risks that face local PBOs. I sought only to demonstrate that the risks must be ‘systematically itemised and worked through by each PBO’s board. It is imperative that your [PBO] board takes these risks into consideration and has developed plans to mitigate their effects on their organisation’ (Wilkinson (op cit)). In so doing, a PBO board is best able to manage whatever unknown eventualities its future might hold, while keeping its eyes firmly set on the promise of a stronger, democratic, and open society.

Graeme Wilkinson BA (Wits) BA (Hons: Development Studies) (Unisa) is a Social Investment Specialist at Tshikululu Social Investments NPC in Johannesburg.

This article was first published in De Rebus in 2021 (Nov) DR 30.

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