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Responsible Financial Governance in Not-for-Profits

Ensuring Accountability and Sustainability in India's NPOs through Good Governance

India is home to an estimated 3.2 million non governmental organisations (NGOs), ranging from small community-based groups to large-scale organisations that tackle issues such as education, healthcare, and environmental sustainability. These organisations, many of which are essential in addressing the country's socioeconomic challenges, rely heavily on donations, grants, and Corporate Social Responsibility (CSR) funds to operate. In the financial year 2023-24, Indian companies spent over C29,000 crore on CSR activities, with a significant portion funnelled into the not-for-profit sector. However, the use of CSR funds has not been without controversy, with several instances of misuse stemming from governance issues both within NGOs and corporates alike.

By maintaining a balance between compliance and long-term planning, boards can protect their organisations from misgovernance while advancing the greater good.

In this environment, financial stewardship emerges as a critical aspect of governance in not-for-profits. It involves the responsible management and safeguarding of an organisation's financial resources to ensure long-term sustainability and fulfilment of its mission. The board of directors, as stewards of these resources, plays a vital role in overseeing financial management, balancing compliance with the law, and ensuring that the organisation delivers positive outcomes for societal development. In India, the governance framework developed by the Ministry of Corporate Affairs (MCA), particularly under its CSR laws, provides a solid foundation for financial stewardship within not-for-profits. Yet, even with such a framework in place, the potential for financial misgovernance remains, requiring vigilant oversight and strategic governance from boards.

Financial stewardship vs. financial governance

While financial governance primarily focuses on compliance, risk management, and ethical standards, financial stewardship adds a broader responsibility. Stewardship involves prudent financial planning, resource allocation, and sustainability to ensure that the organisation's mission is not only fulfilled but continues over time. This means that boards of not-for-profits must make decisions that go beyond mere compliance to secure the long-term financial health of their organisations, ensuring a sustained societal impact.

In India, financial stewardship is deeply connected to the management of CSR funds. CSR activities are governed under Section 135 of the Companies Act, 2013, which mandates that companies with a net worth of 500 crore or more, a turnover of 1,000 crore or more, or a net profit of 5 crore or more, spend 2% of their average net profit over three years on CSR. This law integrates an element of financial stewardship into corporate strategy, emphasizing that CSR funds must be managed responsibly to serve their intended purpose. The Ministry of Corporate Affairs has outlined guidelines for CSR allocation and reporting, helping boards align with both governance and stewardship principles by requiring them to monitor the effective use of financial resources over time.

One of the key pillars of this governance framework is transparency. The MCA guidelines require companies to disclose their CSR activities in their annual reports, including details of the projects supported, amounts spent, and the outcomes achieved. This ensures accountability and provides a mechanism for stakeholders to evaluate whether the funds have been used appropriately.

"The foundation of good governance is a solid, honest, and transparent financial system that earns the trust of the people"
- Shri Narendra Modi
Hon'ble Prime Minister of India

CSR fund misuse: Examples of governance failures

Despite these safeguards, misuse of CSR funds remains an issue, often leading to significant consequences for the organisation and its stakeholders. Let us look at some of the examples of governance failures in corporates and not-for-profits.

1. Misallocation of funds: The case of IL&FS
One of the most high-profile cases of corporate governance failure in India was the IL&FS (Infrastructure Leasing & Financial Services) scandal. Although IL&FS was primarily an infrastructure company, it was mandated to undertake CSR activities, including education and environmental sustainability programs. However, investigations revealed severe financial mismanagement, including the misuse of CSR funds. Funds earmarked for societal development were diverted to cover operational expenses and debt repayment, violating both governance and CSR guidelines.

2. Diversion of CSR funds: Sahara group
The Sahara Group, another major corporate conglomerate in India, was found to have misallocated CSR funds. The funds, which were meant for social projects like health and education, were allegedly diverted to support the group's real estate ventures. This misgovernance was part of a larger pattern of financial mismanagement that led to legal action by the Securities and Exchange Board of India (SEBI).

3. Misuse of CSR Funds Allegation: Goonj NGO
Goonj, a well-regarded Indian NGO, faced allegations of CSR fund misuse when certain corporate donors found discrepancies between reported activities and actual ground-level impact. While the organisation maintained transparency in its reports, questions were raised about whether CSR funds were being used effectively to create measurable societal benefits.

These allegations highlight the challenges companies face in balancing growth and financial accountability.

The board's role in addressing financial misgovernance

In light of these examples, it is evident that robust governance, regular auditing, and transparency are essential to prevent the misuse of CSR funds and other financial resources. Boards must take proactive steps to prevent financial misgovernance, including:

• Strict financial controls: A common issue in not-for profits is the misallocation of funds, where resources intended for societal development are used for unrelated purposes. For example, funds earmarked for a specific CSR project might be diverted to cover unrelated administrative costs. To prevent this, the board should implement strict financial controls, including requiring detailed budgets for each project and regular audits to ensure that funds are used as intended.

• Independent audits and regular reviews: Fraud, such as embezzlement or falsification of financial records, is a serious form of financial misgovernance that can severely damage an organisation's reputation. The board should establish a whistleblower policy and ensure that there is an independent audit committee to investigate any allegations of fraud. Additionally, regular internal audits should be conducted to detect and prevent fraudulent activities.

• Transparency: A lack of transparency in financial reporting can lead to mistrust among stakeholders. For instance, if an organisation fails to disclose how CSR funds are utilized, it may raise suspicions of financial mismanagement. The board should ensure that the organisation's financial reports are clear, accurate, and accessible to stakeholders. This includes providing detailed information on how funds are allocated and the outcomes of CSR activities.

• Compliance with legal requirements: Failure to comply with legal requirements, such as those outlined in the CSR framework, can result in penalties and damage to the organisation's reputation. The board should ensure that the organisation is fully compliant with all relevant laws and regulations. This includes regularly reviewing the organisation's compliance status and seeking legal advice when necessary.

• Diversifying revenue stream: Over reliance on a single donor or revenue stream can be risky, particularly if the funding source dries up. The board should ensure that the organisation diversifies its revenue streams to reduce financial risk. This might involve exploring new fundraising opportunities or developing income generating activities that align with the organisation's mission.

Conclusion

Financial stewardship, particularly in the context of CSR funds, is a cornerstone for not-for-profits to achieve their mission while maintaining long-term sustainability. Failures in financial governance can have devastating effects not just on organisations but on the societal initiatives they support. The board of directors must remain proactive and vigilant, implementing strong governance practices and ensuring that CSR funds are used responsibly and transparently. By maintaining a balance between compliance and long-term planning, boards can protect their organisations from misgovernance while advancing the greater good.

Author


Ms. Sarita Bahl

Ms. Sarita Bahl

She is an Independent Board Director, and a credentialed Coach and Mentor from the International Coaching Federation (ICF) & European Mentoring and Coaching Council (EMCC). She is on the board of BharatRohan and Etherwire.Ai, and is also an advisory board member of Pepperdine University, California. She has been the Chairperson of the Board of Bayer Foundation India and is a founding board member of Global Women in PR (GWPR) India.

Owned by: Institute of Directors, India

Disclaimer: The opinions expressed in the articles/ stories are the personal opinions of the author. IOD/ Editor is not responsible for the accuracy, completeness, suitability, or validity of any information in those articles. The information, facts or opinions expressed in the articles/ speeches do not reflect the views of IOD/ Editor and IOD/ Editor does not assume any responsibility or liability for the same.

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