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Setting the foundations for good governance: why constitutions are crucial

Constitutions are crucial documents. At a national level, they describe how a country is governed. In democracies Prime Ministers and Presidents are elected to office following the processes described in a nation’s constitution.
The Australian parliament states that the “national
constitution is a set of rules for governing a country”.

Similarly, constitutions lie at the heart of associations and charities and provide their rules. Significantly, they define who the members are and the process by which the organisation is run and elects its leadership. A good constitution is paramount to successful outcomes for a not-for-profit organisation.

Purposes or Objects

The purposes or objects clause describe the legal reason why an organisation exists and influences taxation and charitable status. The organisation’s vision, mission, strategic plans and activities should be consistent with the purposes as stated in the constitution. If there is discrepancy between the purposes and what the organisation is doing in practice, which might be deliberate or arising as a consequence of mission drift, either the purposes should be updated or the plans and activities realigned to the purposes. This is particularly important for charities, as they must act in pursuit of their stated charitable purpose to maintain their charity status.

Members

Members are key stakeholders and play a significant role in governance by receiving reports at the AGM. At the heart of their role is electing or removing directors, appointing the auditor and maintaining or changing the constitution. Constitutions need to be clear about who the members are (surprisingly, this is not always the case) and specifically which members have voting rights. This is critical because, if constitutional change is required, it should be clear who has the right to vote on such changes.

Is membership a fundamental requirement of the mission of the organisation? The answer to this question is clearer for some organisations (e.g professional associations or industry associations) which exist for their members’ benefit than for others, (e.g health promotion charities or community service providers) that exist for the benefit of the community or society at large.

Though it should go without saying, it is well to remember that boards should review their organisation’s membership structures as defined in the constitution to ensure they have the right members and that the voting rights are clear.

General Meetings of Members

General Meetings are formal meetings of the members and are an inherent part of the governance process of not-for-profit organisations. It is often the only real time the members get the opportunity to communicate directly with the organisation’s directors or committee members. General Meetings provide the opportunity for members to vote to change the constitution and also choose the Board of Directors. The Annual General Meeting is the pinnacle of the compliance cycle where the Board of Directors, being accountable to members, must report to the members on specific matters.

While they are an uncontroversial part of the constitution, the importance of General meetings should not be lost on those who draft and interpret constitutions. They are at the core of providing transparency in the running of an organisation. In the case of registered charities at the moment, the holding of an AGM is not mandated. Despite this the AGM appears to be the ACNC’s preferred vehicle for charities with members for showing that the obligation to be accountable and to communicate is satisfied.

Constitutions must clearly state the processes regarding a General Meeting, many of which will be guided by the relevant law. Of note is the need for constitutions to clearly state that General Meetings may be held using technology both in hybrid settings and in a fully virtual format.

Boards of Directors

Whether called the Board of Directors, Committee or Council, constitutions need to explain clearly how the governing body is constituted and the process by which the people on it are elected or appointed.

In order to ensure governance structures are fit-for-purpose and aligned to the mission and current culture and practices, not-for-profit boards should review their composition at regular intervals. Reviewing board composition involves looking at the process in which directors are elected or appointed on to the board, including:

  • size of the board,

  • terms of office and the balance of continuity vs refreshing of the board,

  • mix of required skills, experience and perspectives and how to recruit directors accordingly.

Do not conflate a General Meeting with a board meeting

Some of the worst constitutions read by Governology are those that confuse the distinct roles of members with the role of the board. The major flaw in these documents is often that a board meeting is seen as being the same as a General Meeting of members. The role of these distinct meetings, the responsibilities of attendees and the processes are all very different. This is so even where the directors comprise all of the members of the organisation.

Changing your constitution

Constitutions are evolving documents and sensible changes are often required. Therefore, the change process needs to be done carefully otherwise there is an elevated risk of the changes not being accepted by the membership or in some of the worst cases - a member revolt resulting in an erosion of trust in the leadership.

Our suggestions include:

  • getting the right balance between undue haste and unnecessarily long timeframes that sap momentum

  • having the right members involved in the process at the right time

  • using different styles of documentation at different stages

  • respectful and open consultation throughout the change process.

Conclusion

The foundation of good governance relies on the constitution. Poorly drafted constitutions that are outdated, ambiguous or complex can hinder good governance and unnecessarily distract Boards and management. With the right structures and rules of governance in place, a not-for-profit organisation is better placed to achieve its mission.

Written by Kathy Nguyen, Senior Lawyer, Governology on 6 February 2023.

For more information, email Kathy at kathy@governology.com.au

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