Governance Bites #90: incorporated society constitutions, with Stephen Upton

In this episode, Mark Banicevich talks to Stephen Upton about incorporated society (not-for-profit) constitutions. They start by discussing the organisation's purpose, how this can proliferate, and keeping it concise. They talk about the components of a constitution, changes required by New Zealand's Incorporated Societies Act 2022, and the challenges in updating a constitution. Stephen also shares advice he would give to a new incorporated society director. 
Note that the Companies Office has a Constitution Builder, https://isb.companiesoffice.govt.nz/constitutionbuilder/startscreen, and useful information about incorporated societies, https://is-register.companiesoffice.govt.nz/.
Sport New Zealand cheat sheet on incorporated versus unincorporated: https://sportnz.org.nz/media/oqlp0sz1/1-sport-nz-guidance-note-incorporated-unincorporated-or-hybrid-002.pdf
Stephen Upton is Chair of Touch NZ, and led the organization through revising its constitution when the Incorporated Societies Act 2022 came into force. He is also a past President of the Swiss Touch Association. Stephen’s primary career is in funds management. He is Chief Operating Officer at fund manager and KiwiSaver provider Kernel, and was Chief Operating Officer at NZX-owned Smartshares (now Smart) before that. 
#governance, #leadership, #corporategovernance, #boardcraft, #decisionmaking, #makingadifference, #governancebites, #boardroom , #cgi, #charteredgovernanceinstitute, #director, #notforprofit, #constitution, #incorporatedsociety

Transcript

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Hi, I'm Stephen Upton. I'm the chair of Touch New Zealand. At least, that's my evening job, or the way I like to call it. For my day job, I'm co-founder, director, and Chief Operating Officer at Kernel Wealth, which is an investment platform and KiwiSaver manager. Today's topic is not-for-profit constitutions. Hi, welcome to Governance Bites. My name is Mark Banicevich, and as you just heard, today I have the pleasure of spending time with Stephen Upton. Stephen, thank you very much for your time. My pleasure. Really appreciate it. I'm looking forward to this conversation about not-for-profit constitutions because, as you noted, when you look through my history, I have one video that's focused on not-for-profits and haven't really done anything since. So, there's a lot more that can be delved into. So, on constitutions, I guess an interesting starting point is that any group of 10 or more people in New Zealand can create an incorporated society. It's not hard to do. You have to have a name, you have to have a governing body, a committee of some sort or a board, a constitution, and contact addresses. Before that, though, it's really important that an incorporated society has a purpose. What's the importance of a clear purpose? To be clear about what we're trying to achieve here. I mean, whether it's an incorporated society, whether it's a company, whatever the legal structure is, it's like, why is this group of people coming together, and can they all agree over what we're trying to achieve collectively? And actually, where that gets muddled or is often assumed—or presumed—that's the challenge. So, then you get into constitutional drafting of purposes or objectives or objects, and it just becomes a laundry list. So, then you end up with a lot of unclarity, and that can set up the organisation for, you know, unable to meet its goals, or things don't get achieved. Yeah, we had a chat about this, I think, late last year, where you were talking about the organisation, or an organisation you're involved in, that had this massive list of objects in its constitution, and one of the challenges was trying to narrow that down to a more manageable list for the purpose. So, what are the challenges around defining the purpose clearly and concisely? Yeah, I guess it depends on what perspective you look at it. I mean, first, there's the legal perspective of being ultra vires [beyond one's legal power or authority]. You know, that, especially people from legal backgrounds or lawyers, will say, "Oh, you want to make sure you're never outside the purpose." Because if you're outside the purpose of your activity, then there's personal liability, there's, you know, other problems that might come from doing things that you shouldn't do, you know, sanctions, reputational risk for the organisation. Often, again, from my experience, those are overplayed. That we're not talking about a sporting organisation suddenly getting into political donations. That's clearly ultra vires. Yes. But too often, as a result, people want to put a whole lot of verbs into the objects or the purpose of the organisation. And then it becomes confused as to what's happening. So, I guess that's the first one. The second is that in the drafting of those founding members, or whoever was tasked with the paperwork, that often there's just a lot of compromise and consensus. "Oh, what else should we put in here?" Kind of trying to think about everything possible that the organisation should do. Yes. As if it's, you know, immutable. Like, you know, "Oh, we've got to decide now"because we'll never be able to change it." So, of course you can. It's just, you know, the idea is it's more stable as a document. So, I guess it's that. And then third, that by being clear now, you avoid those confusions and those, you know, those unclarities for the future generations of the board or, you know, whoever is involved within the organisation. The risk, as you say, when you get lawyers involved, it becomes very much like, you know, if you remember back to the pre-1993 Companies Act [1955], when you used to have Articles of Association, and there'd be exactly that, right. A massive laundry list of all the things that this company might do in the next 100 years, to the extent that they just became useless. And so, they threw them out when they wrote the Companies Act in 1993. So, yeah, you—I guess you want to be broad enough in your wording that you're not constraining yourself to a very narrow set of swimming lanes, but direct enough to say, "Well, you know,"the organisation exists for this reason, and anything that's associated with that reason is okay." Right, so, what advice would you give to an incorporated society that's trying to define its purpose and going through this journey of perhaps a shopping list, or? Yeah, well, it's taking stock. You know, it's really  considering that it's, you know, the sharper it can be, the clearer you make it for yourselves, the clearer you make it to your membership, the clearer you make it to future membership, the clearer you make it to future board members. To people interested in your organisation, this is what you stand for. In terms of future funders or whatever, if it starts to be too vague, too broad, then you can actually lose momentum, and you lose the opportunity there. So, you know, don't be a laundry list of verbs. That's the other one. Just because it's not directly covered, there's an implied, like you said, that,"Well, we're working in this area of sport, or this particular sport, or arts, or the community,"or whatever." If you're setting something up for the communities of Wellington, don't then do activities in the South Island because clearly you're focused on Wellington, - Yes. - and that's who your intended membership are. And if a second organisation, or if you want to change that, do that in the future. Don't be afraid of it. But just, you know, try and be a bit more precise if you can because it, overall, helps. Otherwise, the main thing doesn't become the main thing. Yes, and I guess, as you imply there, if you ever get to the stage where the purpose of the organisation fundamentally is changing, you change the constitution. And you should. That's the idea. And generally, you know, if you're in a sports organisation, as a subgroup of not-for-profits, your purpose to some extent becomes quite clear, right? You exist for the purpose of promoting and developing that sport. A little bit. Yeah. Yeah. How does it expand from that? How does it go beyond, you know, "We exist," for example,"to play Touch in New Zealand?" Yeah, yeah. So, that's an interesting one because it's where different organisations can overlap at different levels. So, you know, with—you take a standard sports, you know, structure. You've got your clubs, which then feed into a region or a province. Yes. an RSO-type environment [Regional Sports Organisation], which then feeds into the NSO, the National Sports Organisation. And so, you know, the interaction between those entities, that if it's unclear as to who's responsible for what, then you can actually end up with quite some confusion. And, you know, maybe the NSO is responsible for the rules of the game, but the RSO was empowered within their territory to do things to promote the sport. And actually, the NSO is not promoting the sport other than making sure the sport is known or the media. And actually, the NSO's primary purpose often becomes high performance. So, facilitating those teams, facilitating representation, facilitating the events for the provinces to be able to come together, and less about people necessarily, you know, going to their local club or going to their local module. Because then you get into the value exchange. So, it actually can be quite confused. And then you've got the big difference between, you know, corporate and not-for-profit governance, which is that you're not just dealing with, at least in a Western sense, a very Anglo-Saxon sense, the shareholder, and the shareholder is the only thing that matters. You actually have a wider range of stakeholders. Absolutely. You end up with the funders, you end up with your members, you end up with maybe your intended constituency, your intended beneficiaries. Yes. And, you know, you end up with employees being actually often quite involved. Volunteer base is another major one. Volunteer base, you know. So, you actually end up with a much wider range of stakeholders - Yes. - that can make it - Yes. - much more difficult, especially if, back to - the purpose, is unclear. And some people say, "Why aren't you focused on A?" And you say, "We're focused on, you know, clause E." You know, well, you create a tension. It's interesting as well when you're talking about that hierarchy of organisations, with the National Sports Organisation, the Regional Sports Organisations, and then the local club-level incorporated societies, and having those three levels, and often the people that are involved in governance at those three levels are very much the same people. Ha, absolutely. And when you're in a National Sports Organisation meeting, you are there to further the purpose of the National Sports Organisation, where quite often you have people from Regional Sports Organisations represented that will be there to represent their Regional Sports Organisations as a regional voice in the National Organisation, which is not the role. Not the role. Not the job description of the director, board member, whatever you want to call them. And it's that recognition of those conflicts, that recognition of, you know, where you are wearing multiple hats, which happens far too often, - Yes. - in sport. The same people end up doing, "Oh, you're good at administration. Oh, you like doing this."You know, you should do it at multiple levels." And that actually causes a big problem. Is to, you know, conflicts. Yes. And also energy, - Yes. - actually, is the challenge. And also, the operations versus governance distinction, because. There's a whole thing on that. Yeah, very much. Are you a committee, or are you a board? Yes. There's a big sort of discussion there, and a big confusion there often. It doesn't mean that a board can't also be on a subcommittee or also have committee activities, but you really want to separate out when it's the board, and you know, what we might get into later about what are the roles and the activities of the board - Yes. - as against what is the doing, the actual committee activities overall. Yes. Yeah. Well, let's move into then the constitution, the topic of the day. What are the main components of a constitution, and what are the key, perhaps, clauses of a constitution? Yeah, so I always think of the constitution as the big brush. You know, it really does, you know, the name, what are we calling ourselves? Yes. What's our geographic area? You know, obvious things like that. Who are members? How does somebody become a member? You know, what are the members' rights? Who votes? How's, is everybody one vote each? You know, like this is, you know, democratic, you know, electoral voting, or is there actually some proportionality to recognise, you know, the disproportionate nature of some representation? You know, kind of what, how many board members, the minimums, you know, - Yes. - how many maximum, minimum. How they're appointed or elected. How they're appointed, elected. You know, how often they must meet. How an AGM [Annual General Meeting] works. I mean, a lot of this is in the Incorporated Societies Act [2022], or whatever, and also constitutional templates that are available, you know, freely online. But it's that, you know, what must be put in front of the members every year? Yes. And then actually, the most important thing, you know, kind of that premortem concept, is how do we exit this? You know, while we're all friends, what if we fall out? Yeah, right. You know, how do we get rid of a board member? How do we get rid of a member? You know, is there any way that you can kick a member out? Your disciplinary-type things. You can, you know, have that sort of thing. And then, how do we wind this all up? What would happen, you know, if we just decide this is no longer exists? What happens to the assets? What happens to the assets? You know, all that, it's that big brush stuff. You know, what's an SGM [Special General Meeting] required for? You know, super majority votes for certain things. How do we amend the constitution? That's often a super majority thing. Yes. So, yeah, it's those big brush things that are important to have in the constitution, and to not go further than that. That's where the problems occur. Yes. When you put too much detail in the constitution. And as you just suggested, because you require a larger majority quite often in the constitution to change the constitution, you don't want to be going for such large majorities when you're trying to tweak small rules that should be done a lot more easily. Yeah, I mean, there's things that are be dealt with by regulation, policies, you know, another level. Yes. They don't need to be baked, you know, hardcoded into a constitution. No. It's often then deterring or kind of getting away from good governance principles. It becomes knee-jerks. It becomes personal, sometimes, about, "We're doing this because,"you know, that person did something that we all agree is bad." "So, it's never going to happen again."We'll put a rule in the constitution." "We'll make sure it could never, ever, happen again." And just, it just actually becomes unworkable. Yes. You know, so yeah. There's plenty of examples of those, but people have it in mind. The idea is, deal with them in other ways rather than try and bait them in, in almost an exclusionary, discriminatory way. Yes. Yeah. Now in New Zealand, we've recently had a change to the Incorporated Societies Act [1908]. We've got the Incorporated Societies Act 2022. And by the 5th of April 2026, all of our 24,000 incorporated societies have to make sure that their constitution meets the new requirements. You know, this is a change from 1908, so it's been a very long time coming, over 100 years to change this Act. So, I expect there are a lot of organisations with constitutions that are woefully out of date. What are some of the significant changes in the 2022 Act that organisations will have to accommodate in their updated constitutions? Yeah, so I guess the most important point is the one you just mentioned, is every single one needs to re-register. And that's often the biggest hurdle. You know, because we're not—it's easier for the larger, you know, the national organisations, those that are well funded. But for a lot of the smaller, you know, it was just 15 people who set up in a small town, something for a sport or an art or a community, that they need to go through this process. Right. So, the process itself isn't particularly onerous, and there are lots of templates that meet the 2022, you know, Act out there. I see the Companies Office, just on the Incorporated Societies Register, has got its own Constitution Builder. [Link in description.] It's got its own Constitution Builder. Sport New Zealand spent a lot of time and energy building out for, you know, the NSO, the RSO, and the club level, you know, the right level of constitutions. Right. So, there is just a— you can take a new one off the shelf, and not one that, you know, might be 30, 40, 50-plus years old. That's the thing. I mean, look, the key things, people should check this, of course, with their legal expert - Absolutely. - or use one of those templates. But the key changes is the minimum number is reduced from 15 to 10. Right. In terms of members. That the consent of each member needs to be collected. So, you need to show that somebody is a member, and that's also annually. They've got to annually confirm that they're still a member. A form of re-registration to the organisation each year. Yeah, yeah. And that's a tricky one. Contact person, as you mentioned in the intro, like that actually wasn't in there, and you had a lot of, you know, uncontactable by the Registrar. Officers have new duties, and they're sort of more aligned to companies officer duties. You know, the good faith duties, the best interests of the society. Organisation. Yeah. You know, managing conflicts well, exercising care and diligence of a reasonable person. You know, those types of things come in. And then one that's kind of been debated a little bit because of independent directors, is that the majority of officers on the board must be members of the society. Right. That's right. It's like, "Well, I know if I'm a member of the society because I'm playing"X sport, why do I need to be in the majority if actually overall independently"I'm being providing governance services?" So, this is more for some of the bigger codes. I've pushed back a little bit on this of,"We don't want people to be in—" It's like, "Well, just sign up as a member. Doesn't mean you have to play." Yes. "It doesn't mean you have to be"out there on the field to be a member. That doesn't commit you to participation." Can those members of the board be appointed or elected? Yeah, both are possible. It doesn't matter how they make it to the board, but they must be half of them must be members. Yes. Yeah, I was involved in an organisation where the constitution was three elected and three appointed, and they're changing the constitution so that it's four elected and three appointed, so that the majority is always going to be members. But it could simply be a matter of appointing a member to make up that majority. Well, that's more about that the membership has chosen the directors rather than this, you know, - Yes. - presumed to be less democratic route of having, you know, other methods, whether"that's the board co-ops, or whether that's you have an Appointments Committee made up of, you know, a group of people from both inside and outside the organisation. Often, again, you make up these committee regulations as you like, but it's the membership must believe that they are representative, - Representative. - and that's a big part of making sure that, you know, you've got the right people around the board table. It's not just saying, "Ah, well, we've been elected, the whole lot of, you know, homogeneous people,"you know, same profession, same demographics, you know, same skill sets. We need ways to broaden this." Yes. So, that's where actually that this elected, it sounds good at first glance, but it's actually can lead to actually a whole lot of problems within. And then how people get on boards anyway. Yes. Like, how their people really want to be elected on boards, I think is over-presumed. In minority sports and smaller organisations, it's often quite hard, as you suggest, to get the right skills onto a board. At the majority, you know, the largest sport level, you got the clout really to go out there and get the right people. It's prestige. Yeah, absolutely. It's just prestige. You know, either it's free tickets to whatever major sporting event, or it's, there is a reasonable, you know, board members' fee associated, or, you know, yeah, there's just other side benefits maybe to being in. Yeah. Getting the right balance of skills for smaller organisations can be very hard. It can be very hard. Yeah. In your experience then, and I guess I may answer this when I ask the question, in terms of the change for these constitutions, does it tend to be a major rewrite of an existing constitution, or tweaks around the edges? You know, if you're moving from what you've got now to one of these templates, for example, my suggesting an answer would probably suggest that much older organisations with very old constitutions probably need an overhaul, but it would be fair that some of the newer entities, it's really just got small tweaks. Yeah, I guess for anybody that's been involved with legal documents, is it at what point do you restate? You know, at what point is just an amendment enough, and at what point is actually a restatement easier, better, cleaner overall? So, I think that there are definitely some more modern constitutions out there that are already compliant because they've brought in more, you know, modern governance, modern, you know, last sort of 15, 20 years. Yes. And there are some that are, you know, 30, 40, 50, 100 years old, and this might be the first time that the, you know, they've been dusted off and actually looked at. Yes. So, he goes, "Oh, where is that thing, that someone"calls the constitution?" And that's probably a good sign to say, "Look, just take a template off the shelf,"and put that one back for dusting." But, you know. Probably, as you said before, you know, get some legal advice, but as a starting point for any organisation, you'd probably want to look at some of those templates, whether it's the Constitution Builder on the Companies Office website, or Sport New Zealand, and just look at those relative to what you've got now and see whether it's better just to modify the template or tweak what you've already got, where it's necessary. Yeah. And seeing as you're having to go through this process, it's a good opportunity to dust it off, to digitise, to modernise, you know, to make sure that it is fit for purpose, and in that also fit for the purpose, like, you know, that the purpose is what you intend the organisation to be. And you're going to have to get the members to agree to this constitutional change anyway. Yes. So, you might at least to start with, you know, want to propose. Do it once, and do it right. Do it once, do it right, or at least, you know, put forward, "Where we're having to spend time and energy on this," which most people don't want to spend time and energy on, "so we may as well look to, you know, include things"that have always been, you know, inconsistent or have caused challenges in the past." And then if you end up having to wind them back to the status quo, so be it, but at least it's an opportunity, would be the way to look at it. How are you going about it with Touch New Zealand? So, look, our constitution is relatively aligned already. There is just a few, you know, tweaks that it will be required to that one. But it's more with the provinces and the clubs, just getting the message out. That's a big part. That, you know, some of the constitutions I've looked at are from the 70s and 80s. They are in need of a complete rewrite, and this is a good chance for those organisations to really come into a sort of modern governance environment. Start to separate out governance and operations. Start to be clearer. You know, prescribed officers, you know, that the President, the Secretary, the Treasurer. Those are really kind of archaic ways of looking at something. Very much. It's more,"These are the people, and if we don't get the skill sets we need, then we will go and get those skill sets," rather than, you know,"Oh, the Treasurer's resigned, now we need to go get another Treasurer." It's like well. Yeah. They're really, the Treasurer role, the Secretary role, are really management positions, not governance positions. Correct, correct. They're committee thinking. Yes. Yeah. Yeah. Very much. And I think you suggested this before, the biggest challenge quite often in this change is communication with the organisations and making sure that they're aware that they have to change and getting them motivated to do so, because often, as we talked about before, in a sports organisation, your members can be quite apathetic, right? They're there to play sport. They're not there to make sure that all the documentation and stuff is in order. Yeah, and again, it depends on the level of revenue through that organisation. It depends on the various stakeholders of that organisation. You know, whether there are funders involved, whether, you know, how big the organisation is. You know, if it truly is 10 people who have incorporated, and there's a incorporated versus unincorporated discussion here as well, - Yes. - about,"Well, there are some benefits of incorporation, but those benefits of incorporation"may not outweigh the costs of incorporation." You know, like it—yes, it removes the personal liability, the direct responsibility for debts, but do you really need that? Are you taking on material debts? So, there's a little bit of some of these smaller clubs may just choose to be unincorporated, because what's the point? There's actually a very good kind of one-page memo or cheat sheet on this on the Sport New Zealand website[Link in description.] as well about, you know, incorporated versus unincorporated. Ah, interesting. So people can go through the comparison. Because it's not required. You know, you don't have to be incorporated. Yeah. It's just at a certain size or scale, it makes sense to be. Yes. And as you say, if you want the separation of assets, of personal assets, that's. That's the biggest one. That's the one that people worry about. You know, are the cost's really that high? Are they, you know, you've got your annual return that you have to do, you've got to keep your constitution in order, have an AGM. You know, are the costs over? I don't think it's about cost. I think it's about burden. Yeah. I think it's that, you know, someone has to do this or else you'd be deregistered. Yeah. You know, someone has to prepare the annual financial statements, although there is, you know, back of a napkin, you know, really is good enough for a lot of organisations. Yes. They don't— they have tier four reporting standards, which is very much cash-based, very, very simple, doesn't need an accountant involved, - No. - doesn't, you know, is just a literally the bank account. Which you really should be doing anyway. Well, you'd think so. Again, if it's multiple people involved, maybe multiple people want to know where the money went, where the money came from. Yeah. But, you know, again, it's horses for courses. It's the right size of governance, the right size of organisation, the right size of, you know, of transferring of risk for how many people and how much money is going through it. Right. Yeah. Well, one final question for you then on this one. What advice would you give to somebody who is joining an incorporated society as a director? Yeah, I think it's know the purpose, align to the purpose, because that's what you're there for. You know, check the purpose. I mean, there are hygiene factors that I'd be looking for. You know, do they have filings on the register? You know, are there AGMs and, you know, annual reports available? What the financial statements? You know, what are you getting yourself into? There's quite a few people who'll say, "Oh, I'll help you out," and then they're like,"Oh, what is this?" You know, previous board minutes maybe, you know, if those are able to be, you know, there are board minutes in some way. And I'm not talking the verbatim, you know, transcripts. I'm talking, there was a meeting and this was who was there and, you know, a couple of key actions. Know your fellow board members because often when you join these types of things, it is about that new network that you're creating or the extension of an existing network. That would be something that I'd kind of want to know. And how you would compliment, and how you'd contribute. Overall, that's kind of what I'd be looking at. It kind of comes back to that, you know, diversity of thought is more important than demographic diversity. So, you know,"What will you bring to the table?" is what they should be asking of you, as much as what you should be asking. So, I think it's that, you know, get a handle on what's required. Know how much of this is board and how much of this is committee. That's where people have often been tripped up. Yes. And they call it politics, but it's actually no, this is just we're a committee of or a working group. We're not actually a board. And if you come in thinking it's a board and you're going to be doing, you know, governance-type activities, and you suddenly find out that you're in charge of, you know, the kitchen next week, that's can be. Yeah. Understanding the level of maturity of the organisation when it comes to its governance journey. There you go. Yeah. Yeah. Stephen, that's been really cool. Thank you very much for your time. I appreciate it. And I look forward to our next conversation. And I'll see you next episode. Thanks. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel, where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe, and share the videos and podcasts.