Ask NGOlaw
Dear ngoLAW can my brother-in-law/mother/husband serve on the same non-profit board as me? NGOs quite often begin as family affairs, in which some family members call on other (family) they know and trust, get some good stuff done, and then come to us to set up a legal structure to house, manage and fundraise for the work. Sustainable and credible NGOs cannot continue to be dominated by one family, however. Not only do they face the risks that family businesses do (when everything is going right it works well, but when things go south, family fallouts can be catastrophic for operations) but there is also a major issue with credibility with donors: donors will suspect that a family-led NGO is set up to feather the nest of the family members, and will be reluctant to donate. Then there are the legal restrictions: For tax exempt status, the Income Tax Act requires that a board has at least three people on it who are not “connected persons”.“Connected” includes relatives by marriage as well as blood (and adoption) and you are ‘connected’ if there are three or fewer people between you and another person, thus your adopted child’s wife’s brother is ‘connected’ to you. The Income Tax Act does not prohibit any family members from serving on a board together, but you have to make sure that there are at least three of you who are not related to any of the others. Therefore, if there are three of you are on a board and one resigns and the organisation wants to replace them with a family member of yours on the board, you can do this, but you would need to add another unrelated board member, to keep satisfying the SARS requirement. In case you thought that you could then have any number of family members on the board, as long as there are also at least three who are not related to any of you, we now turn to the requirements of the NPO Directorate: The NPO Directorate will not accept more than a total of two board members who are related to each other. So, in summary: SARS requires that at least three of the board are NOT related to each other; NPO requires that no more than two are related to one another; and Donors don’t like boards to be dominated by a family. Our advice is that if you have good reason to include related people on a board, make sure that you don’t go over the maximum of two, and that the majority of the board are not related to one another.
Dear ngoLAW: No-members NPC
Back when we were operating under the old Companies Act we used to be required to have members and once a year we would have an annual general meeting. It was a bit silly in that we would just close the normal board meeting and then open the AGM with the same participants, do the required things and close the meeting. Now that we are operating under the new Companies Act and have chosen not to have members, we have not been having a separate AGM. I’m fairly sure I was told that was correct. But as we have been working on funding applications there is often mention or a question on when we have our AGM. Do we legally still need to have an AGM? If not and we chose to have one anyway, just to help us in our applications, is there anything we need to be aware of and would you suggest that we do something similar to what we did before where we would just close a normal board meeting and then open the AGM for the formality of having one? Would the annual financial statements typically be signed at an AGM, as well as auditors appointed? No-members NPC Dear No-members NPC You are correct- without members, there is no legal requirement for an AGM to be held, in fact, it is legally not possible to do so, since an AGM is a meeting of members/shareholders. In fact, the new Companies Act defines an AGM as ‘the meeting of a public company required by section 61(7)’. As an NPC is not a public company, this section and definition do not apply. My suggestion is that, when funding applications ask for details of your AGM you fill in ‘not applicable’. If there is a narrative description of the meeting and what occurs to be completed, you could say something like: The non-profit company has no members and only a board of directors, and therefore it is not necessary or possible to hold an AGM. However, the Board does set aside a meeting in each year at which the typical agenda items for an AGM, are dealt with. Thus, at the meeting of the Board on …., the financial statements as presented by the auditors were considered and adopted, the appointment of auditors was confirmed, the Board considered and accepted the report by the CEO of the activities for the past financial year, and the Board dealt with any director resignations/appointments which were required.
Dictionary corner: “Ex Offico”- what does it mean?
This (widely misunderstood) term means “by virtue of another office held” and simply means that the person automatically becomes a board member because of some other position they are in. Those who serve ‘ex officio’ are not voted on, do not resign and are not subject to terms of office, as they are in when they are in the (other) office, and out when they leave. Please note that the “ex officio” status does not mean that they are non-voting on the board. If anyone (the CEO, the CFO etc.) is appointed to the board ex officio and the board wants the ex officio board member/s to be non-voting, the founding documents will need to specifically provide for this. However, we advise that you think through this carefully. Our view is that it is inherently unfair to put someone in a position of responsibility and then not give them the tools they need (their vote) to carry out the responsibility. If the Execs at the board meetings are not to vote, then we would rather suggest entrenching in the founding document a provision that certain specific (or at least one/two senior execs) attend all board meetings (except the parts of them where their service and performance may be discussed) but stop short of having them appointed to the board. Executives are appointed by and report to the board and will, if they are also on the board, often struggle with the switching of hats required by these dual roles. The trend towards including executives on boards ex officio can be traced back to the King governance codes, which support the ‘balanced board’ idea, meaning that there is an equal number of management and non-executives on the board. In our view this is appropriate in the for-profit environment, where all directors are appointed by shareholders and the directors often are shareholders themselves, but careful thought should be given to the issues of accountability and responsibility before applying this principle of King IV to a non-profit.
Difference between a with and without members NPC
With members Without members – The board governs, the members appoint the board and special resolutions are passed by members (same as shareholder role, but no ownership as no shares); – Checks and balances in place All authority in the board of directors, including special resolutions to amend the MOI etc, and also power of appointment of new directors. (Can adjust and give some of these powers to other parties or organisations) Members elect the board. Usually remaining board chooses replacement board members In the case of an impasse at board level or the board not performing or all resigning at once (!) the members can reconstitute/fix the board. If the board is ‘stuck’, or not performing, or all depart at once, there is no back-up plan or easy way to solve. Only requires one member and members can be organisations or natural persons. Advise a wider pool of members, for future of the organisation. Three directors minimum. Requires minimum three directors Members make special resolutions: amend the MOI, change the objects, and decide to close down. Also determine director remuneration. Governance, oversight, strategy, financial oversight, risk management, policies, structures, appointment of executive- All decisions made by the board AGM must be held No AGM Allows for growth to a bigger membership, and for these members to then elect a ‘fit for function’ board to govern. In cases where representation is key, as participation would only be through appointing a person to the board, growth in organisations involved could lead to a too-big board. Members must elect at least one third of the board each year (statutory minimum requirement) i.e. board rotation terms should be based on a three year cycle. It is advisable for board terms to be observed anyway, but they can be structured in any way.
Fiduciary Duty
DID YOU KNOW? Defined: Fiduciary Duty This is the general duty of trust which rests on anyone acting not for themselves but for another. Directors, trustees, committee members and employees of organisations are required to act with the level of care and diligence which could reasonably be expected of someone taking care of the affairs/money/property of another. This duty is owed to the organisation and also to its beneficiaries.
Founder syndrome
In his new article published on marcuscoetzee.co.za, Marcus Coetzee says: “ Founder’s syndrome occurs when a founder struggles or refuses to ‘change gear’ and adopt a new mindset, approach or skill set as the organization grows and as its strategic context changes. Rather than making way for a new leader to take the organization to the next level, the founder tries to hang on to power. The founder becomes unable to achieve the outcomes associated with effective leadership. The organization then becomes maladapted – inappropriately or poorly adapted to its environment”. Marcus’ insightful article diagnoses the syndrome and prescribes some treatments and also preventative measures. At ngoLAW we always advise those founding new organisations to think and build beyond themselves from the start, and we support the advice given by Marcus- read the full article here: https://www.marcuscoetzee.co.za/founders-syndrome-undermines-the-legacy-of-strong-leaders/
Governance concepts: some quick definitions-types of board members
We find that our clients are often confused by these terms- hopefully this brings clarity: Executive Those (on the board or not) who have management authority and responsibilities. The Managing Director, “Executive Director”, Chief Executive Officer, CFO, COO, etc are all executives. Non-Executive Those who serve on the board or any other structure of the organisation (advisory council, committees) who do not have any managerial responsibility for day to day running of the organisation Independent A non-executive board member who is not remunerated by the organisation for any services provided to the organisation (other than board fees, if applicable) and who has no personal connection to or financial interest in the organisation.(For contemplation: King IV states that once a board member has served for nine years, they are no longer truly independent anymore, in that they will have got too comfortable and familiar to be able to wield the sharp edge of independent perspective required) Ex Officio Those who are on the board automatically because of some other position they hold, either in the organisation or in another organisation.
Governance: Why and How
“Governance” is a word more likely to produce a (politely stifled) yawn than any excitement or interest. It does not sound like fun and many founders of organisations and those who go on to lead them treat it as an irritation and a hindrance, something that is a boring waste of time and money when there are (surely) more interesting and impactful things to do with funds and energy. In fact, good governance (which entails putting in place systems, limits and controls and a rigorous, ongoing adherence to them) is a crucial component of building an organisation which makes an impact, attracts support, draws in good board members and staff, and survives in the long term. Passion and drive are important for success but governance is the ‘yin’ to passion’s ‘yang’ – it is the foundation-stone and the central support. I may be getting a bit poetic here, but really believe that good governance is like the soft rain which falls all night, nourishing and feeding. It is hard enough to build a sustainable organisation which achieves its objects over the long term and survives in a world of ever-changing demands and pressures with good governance mechanisms in place – try to do it without a firm support structure, and you will find the work, the dreams and the people start to fray, to come apart at the seams, and rupture under strain. This view of the fundamental importance of governance is one we have arrived at after long years of experience with organisations. Over our next few letters, we will examine some of the important components of governance, and open spaces for conversation and learning. If you have any stories to share, and suggestions to make about topics and issues to discuss under the heading of ‘governance’ be sure to let us know on enquiries@ngolawsa.co.za or go to our website, and send us your suggestion in the ‘contact form’ on www.ngolawsa.co.za.
What are the limits in our founding document?
Every founding document defines the objects/mission of the organisation and 98% of founding documents will say that the efforts and the funds of the organisation may only be expended in pursuit of that defined object. This echoes the Income Tax Act requirements for tax exempt entities: activities and expenditure are strictly limited to those which further and support the objects of the organisation. The first step, then is to find your constitution/ trust deed/ memorandum of incorporation and have a close look at the objects clause. If your objects are fairly widely phrased and the new/additional work you intend falls within them, then you can go ahead. If, however, this is not the case, then you cannot proceed without first amending your founding document as those who serve the organisation are literally only empowered to do so in pursuit of the objects and any actions taken which fall outside of the pursuit of the objects will be unauthorised and could be called into question and be classed as a breach of duty by the individuals involved. Now, amending your founding document is a pretty, well, foundational thing to do, and will require: In the case of a voluntary association or an NPC with members, a vote by members and with a higher percentage of agreement required than ordinary resolutions (typically 75%); In the case of a trust, the Master will require all of the trustees to agree; and For a no-members NPC, the directors (and any other stakeholders who may be given powers to vote on this decision) will have to vote, and usually also 75% in favour is required. The practicalities of voting and signing are one current impediment, and will be dealt with in the next newsletter but a really important question is how soon is the decision effective, ie, how soon can the organisation start doing the new/added work? Nature of change When is it effective? Note: Reporting requirements Voluntary association The constitution of a voluntary association is a contract between the members of the VA. Changes are made by agreement, in terms of the rules set out in the document (notice period, quorum, votes required). The change will take effect from the date that the agreement is reached, or from any other agreed date. (Where an organisation may, by agreement of members, already have embarked upon the new work and now are following up with the formalities, the resolution to amend the objects clause could record the date upon which the members actually but informally consented to the change as the actual date of the change, if necessary) If the organisation has tax exempt status, a copy of the minutes/resolution and of the amended document must be sent to SARS Tax Exemption Unit (TEU). If the voluntary association is a registered NPO, then a copy of the amended constitution must also be lodged with the NPO Directorate along with proof of how it was validly adopted. Trust The trust deed is an agreement between trustees and named beneficiaries who have vested (enforceable) rights. Most charitable trusts do not name individual beneficiaries or, if they do, do not give that beneficiary an ongoing enforceable right to benefits. Therefore the trust deed is usually amended by the unanimous agreement of the trustees. It should be noted that, even where trust deeds record that a lower percentage of trustees may agree to changes, the Master still enforces the law on this and requires 100% vote in favour. Although the amendment to the deed must be registered with the Master, it is effective from the date agreed by the Trustees and, as with the voluntary association, that resolution could record a past date upon which consensus was actually reached and which is the effective date of the change. All trustees must sign an original amended deed and an original deed of amendment (resolution to amend) and these must be lodged with the Master of the High Court. Once the Master has confirmed that the amended deed is on record, a copy of that letter, the amended deed and the resolution should be sent to SARS TEU and to the NPO Directorate. NPC The Memorandum of Incorporation (MOI) of an NPC is a statutory document which is governed by the Companies Act. Any change to the MOI must be made in accordance with the procedures set out in the Act as well as any permitted variations from the Act which are contained in the existing MOI of the Company. The change is adopted by special resolution. The amended MOI is effective from the date that the amended document and supporting forms and documents are lodged with CIPC. Amendments to the MOI must be lodged with CIPC. It usually takes about a week or so for the amendments to be noted and registered. This notice from CIPC, the amended MOI and supporting documents should be lodged with SARS TEU and the NPO Directorate.
NPC advice: what is a ‘unique moi’ and do we need one?
Many NPCS which are registered in a hurry or without any understanding of the importance of the Memorandum of Incorporation (MOI) of an NPC are often established with the CIPC standard form MOI as their founding document. At ngoLAW we only register with a standard CIPC MOI as a short-term emergency measure when the NPC needs to be registered fast and it is felt that there is not sufficient time for the board to engage with the process of drafting a “unique” MOI. (“Unique” is what the Companies Act calls all MOIs which are registered and which are not in one of the standard formats available online at CIPC). There are sound legal and governance reasons for using a unique MOI: In terms of the new Companies Act, the registered MOI is always the ruling document(the previous Companies Act was different in this respect). This has made board charters (and-for PTYs- shareholders agreements) much less useful as they cannot override the provisions of the registered MOI. Under the previous Companies Act it was standard practice to use a standard-form Memorandum and Articles of Association and then just adopt a Board Charter or other set of rules which usually began with something like: “In the case of any contradiction between what is in this document and what is in the registered Memo and Articles, the provisions of this document will apply.” This is no longer possible or useful, as, in the case of any contradiction, the new Companies Act specifically says that provisions of the registered MOI will apply. So, in the case of any dispute about rules or governance processes, the board may be following the internal governance document to the letter but, if they act in contradiction to what is in the registered MOI, then they will be in breach of the actual rules. In our view, it is far simpler and safer to have a unique MOI properly drafted to reflect the actual ‘ground rules’ of the NPC, than to be continually referring back and forth or righting a contradiction between the MOI and document adopted by the board. Where it is felt that a board charter is still useful to articulate details of governance structures or processes which are more fluid and will not be entrenched in the MOI, then the MOI needs to be the constant reference point for the Charter, to be sure that they do not contradict each other. The standard-form NPC MOIs do not comply with Income Tax Act provisionsrequired to be reflected in the founding documents of tax-exempt organisations. SARS is permitted to and will grant PBO status to an NPC which has a standard form MOI, but (and look at your exempting letter to verify this) the status will be conditional upon the MOI being amended within a certain period (which has, by the time you read this, probably expired. Don’t panic, the exempt status remains in place until SARS tells you otherwise. But you do need a new MOI, and, while you are complying with SARS, we strongly suggest that you have a document crafted which is a useful, readable rule book for governance and which correctly reflects the structures and processes in the organisation.) The standard form MOI, as the ruling document of the company, is not a useful guide or reference point for governance of an NPC. It jumps back and forth between topics, is hard to comprehend and follow as a whole, and relies on references to sections of the Companies Act, instead of spelling things out plainly. As we have already advised, a plain language, concise but thorough and appropriate, specially crafted MOI will make everything clearer and easier.