Poor Governance – Lessons from a Polytechnic

According to a Dominion Post report (17 August 2010) a police investigation was instigated after more than $750,000 was drained from Whitireia Polytechnic Students’ Association funds over a 12 month period.  An audit report is said to show that huge cash payments were made to former Association executive members, that about $17,000 was spent through excessive use of mobile broadband modems to surf the Internet, that mobile phone bills of five members of the executive averaged $700 a month, and that in June 2009 $20,000 was taken out of the Association’s savings account in cash and a further $10,000 by cheque, with the auditor unable to find any explanation for the withdrawals.  [Update: A Google search in April 2021 located the original story, but nothing about any subsequent prosecution.]

In another story in the same issue, the Dominion Post revealed that the Vice-President of the Whitireia Students’ Association had convictions in 2007 for burglary and was convicted and discharged on more than 20 other charges, including 19 of peeping and peering and two of unlawfully being on a property.  Arising from this second story, there must also be an issue about whether people convicted of crimes of dishonesty should be permitted to become involved in the governance and management of voluntary societies and trusts.

Somewhat predictably, the newspaper’s editorial the same day focused on what I believe is a peripheral issue:  “Whitireia Independent Students’ Association is not the first student association to have trouble administering the fees it collects.  However, with $1 million missing from the association’s funds, it will add impetus to the campaign to make students’ associations truly voluntary.  Good.  There needs to be a good reason to take money from people compulsorily – and when it is, the money must be managed to the highest of standards.  At Whitireia neither has been the case.”

The question of compulsory student levies is peripheral as this type of misconduct (or, if this was found to be the case, fraud) is all too common with voluntary societies and trusts – just the previous week there was a story about a Vice-President of Diabetes Manawatu Incorporated defrauding that entity and another Diabetes Trust of more than $119,000 in 15 months to fund his gambling, online pornography and sex chatroom addictions while also spending some of the money on others “because it made him feel good.”

Consequences of poor governance 

The consequences of poor governance can be serious as committee members of societies and trustees of charitable trusts may be held personally liable for the consequences.  Such liability may arise from judicial scrutiny of an entity’s governance and management, while, on liquidation, both the Incorporated Societies Act 1908 and Charitable Trusts Act 1957 provide that Part 16 of the Companies Act 1993 applies to the liquidation of an entity incorporated under those Acts.  Members of committees and trustees may be personally liable on liquidation of the entity they have governed if it has suffered losses caused by the failure to keep adequate accounting records, by misapplication or retention of an entity’s money or property, or if they have been guilty of negligence, default, or breach of duty or trust in relation to the entity.

The Whitireia Polytechnic Students’ Association stories illustrate a common problem where many entities are governed and administered by people who fail to read and understand the entities’ constitutional documents, and who are simply incapable of doing a competent job.  This is not a new phenomenon (M Gousmett, in “Governance of Charities” [2008] NZLJ 109, recorded that as long ago as 1414 concern was expressed about the “unaccustomed government” of charities).  In more recent years, there have been a number of public scandals over poor governance and management of voluntary societies and trusts, with those responsible lacking the necessary skills, training, aptitude and/or mental attitude to do a proper job, with many misappropriating or misusing (often taxpayer) funds. 

Improving the governance of not-for-profits

A February 2009 Sport & Recreation New Zealand (SPARC) report commented that “The success of any organisation is dependent upon strong governance,” and identified an “absence of basic governance disciplines.”  The SPARC report observed that “Effective governance ensures the Board of Directors provide leadership, direction and oversight to the Chief Executive and management with respect to defining, resourcing and securing the strategic goals and agreed outcomes which will underpin the success of the sport,” emphasising the “need for strong, high integrity, experienced governance with transparent processes and modus operandi,” and confirming the need for directors who are “people with strong empathy for the sport code, but with the ability to bring business disciplines to the table.”  While those statements were made relating to a particular sporting code’s governance and management the principles apply to all voluntary community entities.  Separately, SPARC has produced a comprehensive guide to effective governance, “Nine Steps to Effective Governance; Building High Performing Organisations” applicable to any society or trust. 

Statutory provisions relating to the governance of not-for-profits 

At least for charities, improvement is mandated by statute by section 10(1)(a), Charities Act 2005, which specifies that one of the functions of the Chief Executive of the Charities Board is to “[E]ducate and assist charities in relation to matters of good governance and management, for example, . . . by issuing guidelines or recommendations on the best practice to be observed by charities and by persons concerned with the management or administration of charities:  . . . by issuing model rules: . . . [and] by providing information to charities about their rights, duties, and obligations under this Act and other enactments.”

With the statutes providing for the incorporation of societies and charities being, respectively, over a century and over half a century old, I stated in 2010 that Parliamentary attention should be given to enacting some minimum standards of governance required of voluntary sector entities.  Since then the Law Commission, in Report 129, A New Act for Incorporated Societies, produced in June 2013, recommended a replacement Incorporated Societies Act with provisions intended to improve the governance of incorporated societies, and an Exposure Draft Bill was subsequently produced, on which comments closed on 30 June 2016.  

 A new Incorporated Societies Bill was introduced to Parliament on 17 March 2021 – and the new act should be enacted by the end of 2021.  Its provisions relating to governance are closely aligned to similar provisions found in the Companies Act 1993, and will require those governing incorporated societies to improve their practices and generally “up their game. 

For specific advice about governance issues in a society or charity, please contact Mark at mark@nfplaw.co.nz.

This is one of a series of articles on societies and charitable trusts by Mark von Dadelszen, a lawyer and author of Members’ Meetings, 3nd Edition, 2012, and Law of Societies, 3nd Edition, 2013 (both texts being in the course of editing for 4th editions to be published after the new Incorporated Societies Act is enacted).