We often help founders set up their charitable trust.  They often have the same questions as the previous person we helped – so we have typed out some responses to typical questions here.  If this helps you then feel free to share it with others as well and if you have a more detailed question not covered here then let us know and we can add the answer in.

Can a Charity Founder and the Board Chair also be the NGO Manager/CEO?

In theory this is possible but it is not best practise.  Management (CEO role) is different to Governance (Chair role) and so there is a danger of blurring of the two roles.  Also, if the founder is the CEO/Manager then they lose out on having a Chair who is able to advocate for them and provide good strategy.  If they are the Chair then they would lose out on having an engaged and activated CEO.  So it is best to split the roles up.  The IOD have produced a lot of good material on topics of governance in Charities here.

If the Founder steps down as Chair but remains Manager, how can they be protected from being made redundant or forced out from the Charity

Often in the Trust Deed the Founder – in that document called the Settlor or Donor – have certain rights which are different to other Trustees.  If they are a Trustee then they can usually not be removed as easily as other Trustees.  However if the Founder is no longer a Trustee and is employed by the Trust then ultimately it is up to the Trustees to decide if they are doing a good job or if a change is needed.  This may be a reason why the Founder would want to stay involved in the governance – but also underlines the importance of making the right choice of Trustees, but ultimately they have a duty to act in a way that helps the success of the Trust.

How can a Founder protect their connection to the Charity – for example does there need to be a clause that without them the Charity doesn’t continue? Or have a founding honorary role?

They could be appointed as Patron or a similar title for ongoing connection.  It seems unlikely that future Trustees would force such a person out but they need to act for the best interests of the Trust not the individual who founded it.  It is possible there could be good reasons for the Charity to move forward without a Founder eg criminal convictions or fraud by them.  Hopefully the Founder will have entrusted the vision and articulated it so well that the Charity is not entirely linked with the Founder so that it can go on beyond the person and last much longer.  Founders who hold on tightly to the entity can often find that this ultimately damages the overall potential – the Charity is more than a person and needs to be given room to grow and adapt in ways that are at present not known.

Would there need to be a process for recruitment for a Manager and the Chair so whoever would be a candidate couldn’t simply automatically become Manager?

This may come back to the distinction between management and governance mentioned earlier – Chair of the Board of Trustees should ideally be separate to the Manager/CEO role.  Each position should be recruited for separately.  In a small charity this may not be possible as the Founder/Chair/Manager can be blurred since someone – usually the one with the original vision – needs to actually drive it along at the start.

How to prevent conflicts of interest arising within the Charity and what are the risks?

Good practice is to have some independent Trustees involved in the Charity who will not be employed by the Trust or involved in other ways that the Founder might be.  Also, a conflict of interest register should be kept where any conflicts are noted.  Each meeting any conflicts should be raised as well.  The risks of not disclosing conflicts is that there could be negative publicity later on if a person acts in a way that benefits them personally but is to the detriment of the Charity.

If there is also a related company to the Charity then should it be owned by the Charity?

It depends.  Mainly the question to answer is about funding sources and use of money that comes in.  If the Company is owned by the charity then there can be no private gain to an individual.  Instead a Company can be owned separate to the Charity and the Charity can use the Company to perform some aspects of fulfilling the purposes.  If this is the case then there needs to be independence on the Charitable Trust so decisions made that benefit the Company are made by people who will not privately benefit as eg Shareholders of the company.  We described the options and considerations in more detail in a short podcast here.

We hope these responses are helpful and provide guidance on the interrelationship between a Founder, a Charity and other stakeholders.  If you have any questions then let us know

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. Please feel free to contact Steven Moestevenmoe@parryfield.com, Aislinn Molloy  – aislinnmolloy@parryfield.com or Michael Belaymichaelbelay@parryfield.com at Parry Field Lawyers.

Charities can be a powerful vehicle for bringing change. We have been fortunate to have helped and worked with many clients in this space and can testify to the positive impact they can produce. Given our experience with charities we have produced a handbook on Charities in New Zealand. You can download it here.

The handbook is intended to serve as a practical guide to help start-ups and existing charities from a legal and practical perspective. It is divided into several key sections and provides information on establishing your charity, operating your charity and much more.

If you have further enquires please contact Steven Moe at stevenmoe@parryfield.com or on 021 761 292 or Kris Morrison at krismorrison@parryfield.com.

Be sure to check out our other free guides too, such as Startups: Legal Toolkit and Social Enterprises in New Zealand: A Legal Handbook. We also provide free templates for resolutions, Non Disclosure Agreements and other resources on our site as well as many articles on key topics you should know about.

A. Introduction

In a gentle way, you can shake the world. Mahatma Ghandi

Governance for faith based organisations is not the same as for other entities. We have dealt with both types of structures for many decades and wanted to set out some key thoughts in this article. This was originally prepared as a paper presented at the Legalwise “Religion and the Law” conference held on 30 October 2021. The paper was written and presented by Steven Moe, a Partner at Parry Field Lawyers.

Faith based organisations have their own unique dynamic that can be distinguished from other Not for Profits. Albeit this being an important issue, there has not been much written about it in Aotearoa New Zealand to support leaders of faith based organisations. This article stipulates the unique nature of faith based organisations and provides practical recommendations for their governance.

This article addresses the following issues faced by faith based organisations:

  • What are the usual legal structures where these boards operate?
  • What are the key functions of boards of faith based non-profits?
  • How does the legal framework affect these boards?
  • What added dimensions shape governance?

Should you have any questions or comments about this article please feel free to reach out.

B. What are faith based organisations?

In New Zealand there are approximately 115,00 Not for Profits, with around 27,500 being registered charities. Of those, 8,000 are listed as advancing religion with Charities Services. Charities Services, as the regulator of charities, provides the following description of organisations which advance religion:

“The term “religion” includes many different faiths and belief systems (for example, Christianity, Judaism, Islam, Hinduism, and Buddhism). Generally, however, to be religious there needs to be a body of doctrines that:

  • concern the place of humankind in the universe and its relationship with the infinite
  • go beyond that which can be perceived by the sense or ascertained through the scientific method
  • contain canons of conduct around which adherents structure their lives.”

They go on to provide that the doctrines involved and the conduct expected must be structured and serious enough to be capable of advancing religion. For example, a Jedi Society was denied charitable status. This promoted the ideology found in the Star Wars films.

C. Common legal structures

There are a range of legal structures that can be adopted by faith based organisations – from Charitable Trusts to Incorporated Societies to Unincorporated Associations. This article focuses on registered Charitable Trusts because in our experience it is the most common entity type for a faith based organisation.

A registered Charitable Trust has a written trust deed and trustees that advances its charitable purpose. Most often the purpose concerns advancing religion, however there may also be purposes concerning relief of poverty, education or purposes beneficial to the community. Moreover, it is understood that faith based organisations perform various functions within the communities that they operate. They may have associated initiatives that come under the umbrella of the main faith organisation or as a separate entity. For example, a faith based group may have itself, or have members that started, initiatives such as a preschool, counselling service, aged care, mental health services, teaching English as a second language, immigrant services, school related work, food banks and the like.

A Charitable Trust Deed is flexible in that there is no industry standard. Nevertheless, the common elements are set out in Annexure 1.

D. The bigger picture

A faith based organisation is founded on a very different paradigm of thinking than other organisations, such as a company. This is a fundamental point accounted for when framing our discussion on governance for faith based organisations. There is something much bigger involved with faith based organisations whereby the way of operating or describing entities in the legal sense does not touch on the “spiritual” side of what faith based organisations really represents.

This may be difficult to grasp so let’s consider this dynamic using a word picture:

Imagine a tree standing in a field. The leaves and branches are moving. We can talk about the tree because we can see it easily. However, that is not all that is at play. We may come to realise that what is being considered is not just the tree itself but also the wind. In other words, we cannot easily see and explain some aspects of the dynamics that are relevant when we turn to look at a faith based organisation. In this picture, the organisation is the tree and the wind represents other aspects such as faith, eternity, God and the spiritual. These are often unseen dimensions of life. A purely objective person might say “you are talking about a tree” whereas in fact we may be “talking about the wind”.

We often use the English word “Church” to describe certain types of organisations. Legally we might consider them to be entities that exist and are registered within our law. However, through the eyes of Christian faith the word “church” is something bigger and more profound than a registration number filed with a Government department. In fact, the term used for Church in the Bible falls on the Greek word used in the New Testament of ekklesia which refers to “a calling together”, that is people gathering to worship and serve God. Other religions have similar deeper conceptions about what is going on in the World than can be explained just with legal entities and formal documents. For example, in Hinduism there are concepts like Atman (eternal self – the self as spitirual rather than a material being).

These examples show that we must delve deeper than what exists at law. This is because for faith based organisations there is a lot more going on at a spiritual level.

E. Unique aspects of governance for faith based organisations

Let’s turn now to some of the aspects which make governance for faith based organisations a bit more unique than other forms of entity.

1. Purpose

The purpose of faith based organisations will likely be evident that they are about advancing religion. However, the issue is that sometimes such organisations get involved with activities that no longer align with their original purposes. As a result, it is often appropriate for those in governance to consider whether they are still within the remit of the original purposes or whether they need to revise those purposes (if possible) or set up another entity to perform the activities that they have since taken up.

2. Unincorporated associations

It is common for faith based organisations to have a long history. Therefore, it is also common that these organisations do not have a trust deed or governance in the same way we would today. Many entities are in fact unincorporated associations without the formality of a constitution or document setting out how they will operate. This can introduce challenges for governors today to govern in an acceptable way, such as appointing and removing people, decision making and liability. Therefore, it may be appropriate to look at the existing structure and determine whether it is the right one or if a new entity should be created or new rules adopted.

3. Statements of belief

It is common for a faith based organisation to have a statement of faith or belief set out in the schedule to the trust deed. This introduces an additional set of criteria which Board members need to be aware of. Anyone that proposes to join the board would usually be required to confirm that they adhere to those beliefs. As such, a statement of faith may add an extra level regarding who can qualify to join the Board. Further, it may be that on a yearly basis, or when requested, a Board member may be asked to reaffirm or sign that they agree to the statement of faith.

4. Conduct of Board members

As well as affirming a statement of faith it is likely that in the rules there may be reference to criteria to remain a trustee. While this is also common in other organisations it may be heightened in a Church organization with the ability to remove a trustee if, in the opinion of more than three quarters of the other trustees, doing so is in the best interest of the Trust. In other words, it is likely that the standard expected of trustees may be different to those in a different context. Therefore, the impact of conduct will be particularly important for those on Boards of faith based organisations.

5. Relationship to the Bigger Group

It is common for churches to be affiliated to a denomination. This can provide real benefits such as in the form of training, conferences, sourcing of content and decision making at a national level. It may also mean that the individual Church and the governing body will relate to the Denomination. This is different to a normal “independent” charity. It introduces interesting dynamics to discussions which will differ depending on the strength of the relationship. For example, some trust deeds will simply refer to assets going to the denomination on wind up. Others will have more direct relationships, particularly if the denomination holds the legal title of the land on behalf of the Church. This can affect ventures that the Church wants to take on, such as developing part of the site for social housing, taking on more debt to fund expansion or even selling the land. Some denominations will be very involved in the decision making process while others are not so involved. The context is critical. As such, it must be understood how the entity relates to the domination and when approvals are needed at that level.

6. Relationship with international bodies

Sometimes a faith based organisation will not have a New Zealand based body which it relates to. This may be because the organisation was set up by an overseas based charity to do work in New Zealand. Consequently, the same considerations in relation to a denomination mentioned above may apply here to the overseas entity, in that it must be fully understood how the board relates to any overseas groups. For example, trustees may need to be approved by the overseas body, big decisions may need to be brought to them for approval and they may continue to have international board members that they appoint. This raises interesting dynamics for the New Zealand entity over time, particularly if those involved locally may want to align more with local culture and trends. For example, this could relate to wanting to partner on Treaty matters or other areas not familiar to the overseas based charity.

7. Interaction with other Trusts

Often a religious group will have members that wish to do good in the local community. It is common for them to approach the Charity and seek to set up a new Charity that has the blessing of the original group. Sometimes the old Charity itself controls these new initiatives. For example, if the trustees of the older Charity itself have the right to appoint and remove the trustees of a community focussed trust then it is likely that this will count as ‘control’ for tax and accounting purposes, and the accounts will need to be consolidated with those of that original Charity. Trustees of a faith based group should consider if this is the right solution because it may be that these new initiatives should be given their own wings to fly independently of the original group. Accordingly, the organisation will have to be aware of accounting implications when they have control over other trusts.

8. Duties of Trustees

The Trusts Act 2019 imposes on trustees mandatory and default duties. It is essential for trustees of a charitable trust to know and understand the terms of the trust deed so that they can be sure of meeting their obligations and duties to the beneficiaries. The various duties of trustees are set out in other articles we have written, such as this.

9. “Special Character” and Governance standards

Sometimes there will be some unique considerations when it comes to this type of organisation. It must be considered whether those “called” by God are employees. Also relevant will be considerations in relation to schools that a Church may be associated with.

With regards to governance standards there are overseas resources that may be of interest. For example, the CMA Standards Council in Australia have produced Principles and Standards. Further, the “Nine Principles of Ministry Accountability” provide a unique framework for thinking about governance for faith based groups. Their focus is on accountability. It is helpful to look for resources that deal with faith based groups and consider what might be suitable for the particular organisation.

10. Back to the bigger picture

As mentioned earlier, for faith based organisations there is another factor at play: A higher power. This means that there will often be extra dimensions to decision making and process. For example, it is common for faith based boards to start meetings with prayer or a devotional reading. In addition, it is likely that all those involved will feel that the Trust and entity is a vehicle to achieving a much higher calling. Therefore it is essential to understand that there is more at play that just the words in a trust deed.

Conclusion

We have a great deal of experience in dealing with faith based organisations and in our experience none of them are the same as the next. If you’d like to talk about your situation then let me know by email to stevenmoe@parryfield.com. To come full circle with how we began this article, it is clear that there will be unique aspects of governance for faith based organisiatons. Being aware of those will help – whether you are in governance or providing advice to such an organisation. Those different drivers and stakeholders will be vital when taking action and ensuring that the organisation is successful.

 

 

 

ANNEXURE 1: USUAL CONTENT OF A CHARITABLE TRUST DEED

There is no industry standard for a charitable trust deed. Also, there is no particular format required in the Charitable Trust Act 1957, but it is normally expected for a charitable trust deed to cover the following key points:

  • That a settlor is setting up the trust by donating to create a fund (often $10)
  • The purpose of the trust
  • The name of the board
  • Who is on the board, such as min and max number of the trustees
  • How trustees are appointed
  • How they can be removed
  • Any process around how long they serve
  • How the property will be controlled by the board
  • Powers of the trustees
  • What funds will be used for
  • Conflicts of interest and how they are dealt with
  • Common seal (it is required)
  • Meetings of the board and quorum and notices
  • Preparation of financial accounts
  • How contracts entered into
  • Variations of the trust deed
  • How to wind up and what happens to assets

In this article I want to tell you some key points that I have learned about setting up an impact driven organisation in Aotearoa New Zealand. This applies whether that ends up with a charitable structure or a for profit structure or some form of hybrid. The reason that I know about this is my job is as a Partner at Parry Field Lawyers where I have a unique practise of law focusing on helping purpose driven people achieve their mission. Also, with more than 200 interviews for seeds (www.theseeds.nz) I have spoken with some of the best entrepreneurs in New Zealand and gained their perspectives.

So to download all this information to you I am going to share here about three things I think are key to know. I would be curious if you agree with me, and it might be that you know others who would appreciate the challenges because I am going to give it to you straight. I commonly go through these points – probably 2 or 3 times a week – with people who are wondering about setting something new up so this is also going to be a lot more efficient as I can get people to listen to it before speaking about the specifics of their situation.

• First, I will discuss the three key questions to ask before considering the detail of what structure is best.
• Second, we will look at three of the most commonly used legal structures for impact driven people.
• Third, some reflections on the way to enshrine impact within those structures and the key things needed.

So let’s turn to the high level questions you need to get right from the beginning. Don’t skip over this part…

Part 1: The Three High Level Questions to ask first

What is your purpose?

The first thing to remember is that the purpose and mission needs to come first. What is it that you really want to do? The detail of what legal vehicle to choose then becomes a secondary consideration that is about how you best fulfil your purpose. I encourage you to clearly articulate your mission and your purpose because that will drive all other decisions. This is the “power of why” and will be what you come back to when things get blurry and you wonder why you started on this journey. Also I want to know what that is in just 30 seconds – not the 5 page version, just the three short bullet point version. If you can reduce it down to that then you will be able to convey it clearly to others as well.

So why is getting the purpose important?

The purpose is the first key consideration. Why? Well I like to think of it like this – if you go buy a car there are many options. You might want to get an off road 4×4, or a convertible, or a 7 seater – there are a range of vehicles that depend on what your purpose is. In the same way when choosing a legal vehicle we need to understand the purpose of what you want to do. Think of a limited liability company as one type of special purpose vehicle, the same with cooperatives, incorporated societies or charitable trusts. So we need to know the direction you want to head in order to decide on the right vehicle.

What fuel is driving the vehicle?

The second key consideration comes from Jerry Maguire and the phrase “Show me the Money!”. Money is like the fuel that is needed for the vehicle to run – whatever type is chosen. There are two parts to this which affect the decision. Where is the money coming from – sales of product or services, private investment by issuing shares, loans, donations or grant funding? And also, where is the money going to – will there be private profits for individuals or will the funds be reinvested back to promote the mission? All of these factors are critical to work out what structure is best.

Replication?

The third question is a bit different. But before we get into the legal structure options I think it is important to ask this: Is there someone out there already doing what you plan to do? We see in New Zealand a lot of replication where people want to do good and assume that to do so a new initiative is needed. I don’t think that is always the case. If the mission and purpose is most important then strip away any ego associated with founding something new and ask the hard question: for the good of the cause am I better to come in as a strong supporter and work with others already doing the mahi? This may sound like a strange thing to be proposing since my job is to act for people setting something up so I am doing myself a disservice by advocating this thinking – instead I could fan the flames of starting something new. But there is a bigger picture here and if I can encourage one person to not start something new and instead come in as a big advocate and supporter of a struggling initiative that just needs some volunteers then that will be better overall. So please do look around and have conversations about collaboration before going off and setting up something new.

Part 2: The three best types of legal structures to consider

There are many possible structures but I am going focus in on the ones I think are the simplest and easiest ones. There are basically three options. They are:

Set up a Company: This is a commonly understood vehicle for running a new initiative. As a positive you can privately benefit through dividend return to shareholders, you can more easily access investors by issuing them shares, people understand the structure over other options. The key ingredients are a director, a name and a shareholder. The downside is that you will be less likely to get grant funding or donations, people make assumptions that what you do is driven by profit rather than purpose, so there can be a lot of explaining needed, and if taken over the company might lose the essence of why it was originally founded. I am setting up many impact driven companies so am happy to discuss all this in more detail if anyone would like to know more.

Set up a Charity: Setting up a charity provides a nice vehicle because you are forced to write down you purposes – I think that is a good thing. You need to fulfil one of four charitable purposes: Advancing education, reducing poverty, advancing religion or purposes beneficial to the community. So just because what you want to do is “good” doesn’t necessarily mean that it will be charitable. Becoming a charity results in significant tax benefits because you are helping society – for example, you can issue tax deductible receipts to donors. However you will not be able to privately benefit (apart from market rate salaries), will not be able to issue shares that return dividends to shareholders (unless to another charity) and will have difficulty raising capital funding. One common misconception is that a charity must be a Trust – in fact, companies can be charitable as well it is just that they must clearly articulate that there is no private benefit and state what the purposes are. I am setting up several charities each month across the full range – recent examples include an ocean focussed charity, one setting up Buddhist temples, one working with children on design thinking – a very large range.

Hybrid option: Remember the “show me the money” point earlier? Well this is where it kicks in – if funding is coming from private investors, this option is preferred over a charity. Whereas if funding is likely from grants or donations, then the charity option may be preferred. There is no one template that will apply for all. While it involves some duplication of having two entities, sometimes what I see people end up considering is a hybrid option. This involves having a company while also setting up a Foundation which is a charity. How closely aligned they are will depend on the circumstances. If setting up a charity then part of the thing to consider is having independence in that charity so there is no chance of a conflict of interest. Ultimately this is all about finding the best way to have maximum impact. Increasingly I am seeing pull from either end – private companies wanting to give back through creating a charity, while charities are looking to commercialise some aspect of what they do in order to generate another income stream. I think the lines will continue to blur as we increasingly move towards discussions of impact being the most important thing. Like I said at the start it then is down to the detail as to the type of legal structure used as the overarching point is that mission and purpose and impact are being implemented.

Part three: Enshrining impact

I want to finish off with a few thoughts about how we started – a focus on impact. Thinking about each of the structures discussed I would just comment that for a charity you are required to set out the purpose you want to achieve, which I think is a really good thing.

For a company, it is not legally required to set out what your mission is – which I think is an oversight that one day will be corrected – but it is possible to enshrine your impact by setting out your mission in a constitution. That is a public facing document and if I get involved I try to have clients articulate their mission and purpose right at the start so that they are open and clear with the world about what they are there for.

I would encourage you that whatever entity type you end up choosing that you really come back to the mission and purpose and clearly set out what it is. I can guarantee that will be the most valuable point to get straight. Once that is done then it will help you to decide on the detail of which type of entity to choose. You may notice that this summary focusses more on the high level questions than the detail – that is on purpose.

My final thought is to consider how you report on impact – wouldn’t it be great if we all started measuring and talking about impact in ways that get beyond financial metrics. It is really hard to do but research it and get amongst it to lead the way in how you measure and talk about the impact you are having. If you can do that then I am confident your venture will be more assured of success.
I’ve enjoyed reflecting on this topic and would be happy to discuss further with you – and if I directed you here to listen before we have a phone call then I look forward to chatting sometime soon.
Until next time.

Note: This is a short overview of issues – inevitably situations will be different for each context and you need to consider a variety of issues such as Financial Markets Authority rules, Tax considerations, employment, shareholder dynamics, among many other things. But the point of this is to provide some high level thoughts to get you started.

Steven Moe is a Partner at Parry Field Lawyers with 20 years experience and a focus on empowering impact

Steven can be contacted on:
E stevenmoe@parryfield.com
T +64 21 761 292

Our Partner Steven Moe has collaborated with Arts and Not for Profit leader Anne Rodda to co-write the White Paper, “Tomorrow’s Board Diversity: The Role of Creatives” which can be

downloaded here.

This is part of our ongoing initiative to support thought leadership regarding Governance and the Arts, NFP and ‘For Purposes’ initiatives in Aotearoa New Zealand. Other examples include the just released “Charting the Future: A Framework for thinking about Change” here. To find out more about us have a browse of this website and the free resources in the tab above. If you have comments on the paper we’d love to hear them, email stevenmoe@parryfield.com.

Advance readers of the White Paper have commented:

“This White Paper brings to light a topic which is often neglected: the role that creatives can play on boards. In our experience, directors who have a range of diverse and creative talent, capabilities and knowledge bring different perspectives to decision-making, planning and board culture – that will likely enhance an organisation’s performance, as well as better represent the stakeholders.”
Kirsten Patterson (KP), Chief Executive, New Zealand Institute of Directors.

“I have been fortunate to always have had a strong musical and artistic background that has become the pillar stone to my creative success in business.” Sir Michael Hill

“Simply by sailing in a new direction, you could enlarge the world…” Allen Curnow

Steven Moe has just collaborated with Craig Fisher to produce this paper, which can be downloaded here. The paper looks at challenges faced by the crisis, poses 7 hard questions we need to be asking and examines where the opportunities are.

From the Introduction: “Covid-19 is forcing us to  ask some hard questions. Our focus in this paper is on charities, NGOs, NFPs and community sector organisations as it has accelerated conversations for them about sustainability. However, many of these concepts will apply to other organisations as well in this unique moment in time.

Early explorers like those described in the quote who sailed to new placed relied on charts, maps, stars. We also are headed towards new locations as a result of the crisis and we need to be asking the right questions to get there. In this paper we want to dive deep into some key issues that we see organisations are facing in order to provide a constructive framework for considering the future.

We don’t have all the answers. But there are lots of fantastic minds, skills and experience within our sector. Hence, we hope that some of the questions and provocations that we pose within this paper will further assist firing up some lively neurons to help organisations change and thrive.” 

About the authors:

Steven Moe is a Partner at Parry Field Lawyers with 20 years experience and a focus on empowering impact.  He has worked as a lawyer in Wellington (3 years), London (3 years), Tokyo (4 years), Sydney (4 years) and since 2016 based in Christchurch.  He hosts the podcast seeds with 180+ interviews and wrote the book “Social Enterprises in NZ: A Legal Handbook.  He is Chair of Community Finance (impact investing with a social housing focus) and shared some of his journey here.  His profile has more: https://www.linkedin.com/in/steven-moe-0b3b008a/

Steven can be contacted on:
stevenmoe@parryfield.com
T  +64 21 761 292

Craig Fisher FCA: Craig is a Consultant with RSM and a professional director with a strong interest in governance, audit and assurance, and sustainability of impactful organisations.  He is a Fellow Chartered Accountant with nearly 30 years of public accountancy experience, a former Audit Partner, and the former Chairman of the RSM New Zealand group.  Passionate about a strong and healthy Aotearoa he holds a range of interesting governance roles.  More details of his experience can be found here: https://www.linkedin.com/in/craigfishernz/   

Craig can be contacted on:
craig.fisher@rsmnz.co.nz
T  +64 21 899 848

We live in a time when paradigms are colliding. Old conceptions from an extractive economy which have been accepted for decades are being challenged by new ideas that are planted in the soil of a regenerative economy. One outworking of this is the growth of “Impact Investing”.

Traditionally, the primary driver when looking at an investment has been monetary returns for the investor. “You can pay a 9% return on investment? Well, that is not as high as the 11% I have on offer here – so you know where I am going.” However, such an outlook is limited and narrow because it is only focussed on financial returns.

Impact investing offers a different approach. The Global Impact Investing Network provides the following definition: “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

So the alternative presented by impact investing is that there are other considerations that need to be thought about, such as:

  • What does the business actually do – is it an extractive business which is contributing to degradation of the planet? Coal fired power station, anyone? Sugary drinks? Tobacco?
  • Who does the business employ – is the business model built on the premise that there is exploitation in how cheaply it can produce whatever it makes, either onshore or offshore?
  • What other outcomes are there – perhaps social, cultural, environmental or other factors will be impacted by the business.

The key is that there will be some positive impact through the investment, while still generating return for the investor. It’s about thinking a bit longer before you decide what to invest in.

All this is increasingly relevant and growing – the Global Impact Investing Network did a survey and reported US $114 billion invested by the 208 respondents (large funds) in impact investments. They state regarding this that, “impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns.”

Locally, in New Zealand an Impact Investing Network was set up last year and they provide resources and information. More than $8 million was raised by one paradigm-shifting New Zealand fund (the Impact Enterprise Fund) which is investing into social enterprises and others pushing boundaries with their companies. Another (Purpose Capital) raised $20 million recently. Impact investing is here to stay and we are confident it will grow as more people step back and think through how they are investing their funds.  What might this mean for you?

 

Please note that this is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact us on 03 348 8480 or by email to Steven Moestevenmoe@parryfield.com or Kris Morrisonkrismorrison@parryfield.com

We live in unprecedented times. In this short guide we have set out key issues which we think Charities in New Zealand should be focussed on.

We will update this article as we have further information and expand it more.

Key Information

We recommend looking at this site for the latest Government announcements on COVID-19. Also, note that there is a specific page for community groups where there is more detail – in particular for eg Churches, regarding gatherings, here.

Government support for Charities

While initially unclear, the government has confirmed that this wage scheme and leave scheme apply to registered charities, non-government organisations, incorporated societies and other entities. These groups can apply if they meet the qualification criteria. We found that this information was the best to refer to but this summary from Deloitte is helpful as well.

Charities Services guidance

Charities Services have published this guide and key points to note are:
• They remain open and will continue to operate to process registrations etc;
• Annual returns can be extended – best email for info is info@charities.govt.nz;
• Charities Services will not be accessing their post during the shutdown so contact by email;
• They suggest formally postponing AGMs if needed.

Governance

We suggest this is a great chance to look back at your purposes and ensure that they are being followed. Why not also check policies and other rules? We also suggest you ask questions as a governing body to ensure that everyone understands the finances and budgets – how will they be affected? Remember, there are obligations as trustees which need to be complied with, for a summary see here. Finally, if you are making important decisions then record them in minutes of meetings. It may be that due to physical distancing you will need to adjust how you have meetings – we use Zoom.

Contracts

Consider seeing what they say about “Force Majeure” events – things outside of your control – there may be provisions which help to delay provision of services or goods at this time. Is some renegotiation needed around the terms? Price? Timing?

Leases

If you have a commercial lease have a look and see if there is an “Emergencies” clause. If you have such a lease it depends what it says – so it is worth checking your agreement with the Landlord. If you have a recent ADLS version Deed of Lease (which is industry standard) then there is a definition of “Emergency” which includes an epidemic. Clause 27.5 then has provision about access to the property in an emergency – see the screen shot – that refers to “a fair proportion of the rent and outgoings shall cease to be payable…” in some circumstances where you are unable to access the premises as a consequence of the emergency. Use that clause as the basis to talk with your Landlord in the coming weeks.
As a side note, if you only ever signed an Agreement to Lease, don’t panic that it doesn’t have that clause, as the Deed of Lease provisions are deemed to be incorporated into the Agreement to Lease as well (if it is an ADLS form) – see clause 4 of the ADLS Agreement to Lease form.

Other guidance

There is a lot out there – but here are some resources:

• For those in Churches, we have created this book – the principles would apply to any charity.
• Philanthropy NZ have issued this helpful summary of things to consider for COVID-19.
• As mentioned above, check out the Charities Services link here and what they refer to.

On March 26 2020, the Government announced more support for community groups. You can find out more here.

Questions?

This article is not a substitute for legal advice and you should consult your lawyer about your particular situation. Feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com  at Parry Field Lawyers.

Are you an entity that carries on business for the benefit of a registered charity? Then it is essential that you are aware of the incoming changes to business income tax exemptions. This article explains what the current law is and how the incoming changes will impact both registered and unregistered entities.

A key benefit of being a registered charity is enjoying the tax exemptions on business and non-business income set out in the Income Tax Act 2007. Under section CW 42, registered charities do not need to pay tax on their business income provided that they carry out their charitable purposes in New Zealand. However, the section goes further and extends the exemption to entities that carry on business for the benefit of a registered charity. This means that businesses can benefit from this exemption without registering with Charities Services. Therefore these businesses are not obliged to comply with the charity reporting requirements.

The Government has been concerned that some businesses may be taking unfair advantage of the provision, undermining the transparency and accountability mechanisms in the Charities Act 2005. As a result, the Taxation (Annual Rates for 2018-2019 Modernising Tax Administration, and Remedial Matters) Act 2019 narrows the eligibility for this exemption. Taking effect from the 2020-2021 income year, an entity must be registered as charitable to be eligible for a business income tax exemption. This means that an unregistered entity carrying on business for the benefit of a registered charity is no longer eligible.

This will have an impact on companies that are owned by a charitable trust. From 2020, the charity’s registration will no longer shield that company from income tax obligations. Entities that are currently relying on another’s registration need to consider whether they are eligible for charitable registration in order to retain this benefit. This could involve revising the constitution of the business and making clear it is sending profits to the charity.

 

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Our team is experienced with charities, social enterprises and trusts that are common in this area of law. We would be happy to assist you in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or 021 761 292 should you require assistance.

We live in a time when paradigms are colliding. Old conceptions from an extractive economy which have been accepted for decades are being challenged by new ideas that are planted in the soil that dreams of a regenerative economy. One outworking of this is the growth of “Impact Investing”. In this paper we outline what that is, why it matters, discuss examples and cover the implications for NFPs interested in this area.

 

What is Impact Investing?

Traditionally, the primary driver when looking at an investment has been monetary returns for the investor. “You can offer a 9% return on investment? Well, I can get the 11% over here…” However, such an outlook is limited and narrow because it is only focussed on financial returns.

 

Impact investing offers a different and more holistic approach. The Global Impact Investing Network provides the following definition: “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

 

So the alternative presented by impact investing is that there are other considerations that need to be thought about beyond financial returns, such as:

  • What does the business actually do – is it an extractive business which is harmful to the planet?
  • Who does the buisiness employ – is the business model built on the premise that there is exploitation in how cheaply it can produce whatever it makes, either onshore or offshore?
  • What other outcomes are there – perhaps social, cultural, environmental or other factors will be mpacted by the business?

 

Key attributes

Some of the key attributes of impact investing include a desire to achieve a positive social/environmental (or other) impact, a plan to measure this impact and an expectation of generating a financial return on the capital invested. So in an NFP context, this is more than just grant making (or receiving) as the funds actually come back to the investor. The key is that there will be some positive impact through the investment, while still generating positive return for the investor. This also means an investor may need to think a bit longer before they decide what to invest in.

 

How does Impact Investing Work?

Impact investing is not a one-size-fits-all model. Different investors may have different impact and financial aims, meaning the form and terms and conditions of investment will be different in each scenario. However, to create a level of consistency, the International Finance Corporation has created a framework for managing impact investing.

 

 

Source: Investing for Impact: operating Principles for Impact Management, IFC, 2019,

https://www.impactprinciples.org/sites/opim/files/2019- 06/Impact%20Investing_Principles_FINAL_4-25-19_footnote%20change_web.pdf

It is worth noting that there are different types of impact investing (e.g. managed funds, CDFIs (Community Development Finance Institutions), SIFIS (Social Investment Finance Intermediaries), social impact bonds, direct investment, investment clubs and catalytic investment).

 

Why is Impact Investing Important?

Increasingly, organisations are being pressured by both shareholders and stakeholders to achieve a social impact alongside financial returns. Larry Fink, CEO of Blackrock (the largest investor in the world at around US$6.8 Trillion) has stated, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” According to the Morgan Stanley Institute for Sustainable Investing, 85% of investors surveyed were interested in engaging with Impact Investing. It is clear that funders are now expecting more from the organisations they choose to invest in.

 

A Broader Shift?

This represents an expanded view of the role companies play and to whom they are accountable. While companies have traditionally focused on achieving the best financial outcome for their shareholders, the interests of stakeholders is becoming increasingly relevant. The Companies Act 2006 of the United Kingdom focuses on promoting a company’s success, “for the benefit of its members as a whole.” Impact investing is only one aspect of a much broader shift in thinking that is challenging (and hopefully transforming) the shareholder capitalist order.

 

Examples of Impact Investing in NZ

It is useful to look at some examples of impact investing to show this is more than just a theoretical discussion.

 

Ākina

The Ākina Foundation is dedicated to transforming the values of the New Zealand economy by supporting enterprises and businesses in creating positive impact for the land and people of Aotearoa. Ākina is leading the way in Impact Investing, co-establishing New Zealand’s first impact investing fund. The Impact Enterprise Fund manages $8.7 million and has supported several projects, including Waikaitu and Melon Health. Ākina also introduced Impact Investment Readiness Grants to provide social enterprise and impact-driven businesses support to become “investment-ready”.

 

Purpose Capital Impact Fund

The Purpose Capital Impact Fund has raised $20 million and is aiming to raise $30 million to, “generate meaningful impact and financial returns in its regions and across New Zealand.” Having already reached its initial target, it is one of New Zealand’s largest impact investing fund. The Fund focuses on tackling big issues such as affordable housing, environmental degradation, climate change and inequality and aims to generate financial returns of 5-6% per annum (net of fees and expenses).

 

Community Finance

Community Finance provides low cost finance to New Zealand’s Community Housing Providers to build new, safe and affordable homes for Kiwis (disclaimer: the author is he chair of this company). Their finance model enables investors, philanthropists and foundations to invest in a meaningful and ethical way to help develop thriving, diverse and inclusive communities. Their lending platform, called the “community-to-community model”, enables investors to ethically invest for the benefit of communities and help make a positive impact. Investors receive regular reports on the direct social impact of their investment as well as a financial return of between 2% pa and 2.50% pa, which is similar to the financial returns on corporate bonds and term deposits. Community Finance has partnered with a range of Community Housing Providers including the Salvation Army, Habitat for Humanity and Community Housing Aotearoa to activate new housing supply where it is most needed. Community Finance also has three pilot projects under way in Auckland, as well as emergency transitional, social and affordable housing projects in Bay of Plenty and Christchurch.

 

What does this mean for New Zealand NFPs?

By just relying on grants, NFPs are reliant on other activities (such as fundraising) to raise funds.Conversely, the tenets of traditional investment may clash with the charitable purposes of aNFP. Impact investing provides NFPs with a unique way to invest funds in accordance with their charitable purposes (or potentially to receive investment themselves). The trustees of a charitable trust may be able to invest the trust’s assets in projects that are making an impact, while receiving a return.

However, impact investing isn’t for everyone and there are many things that a NFP should consider before engaging with this new model of investing.

 

Option B: Those seeking to Invest

What do NFPs need to consider when exploring impact investing within their future investment plans?

It is important for NFPs consider what impact they want to achieve – is the way they have always done things the only way? One option that could be considered is through investing for impact. Critical to this is how to measure impact and set expectations and create accountability. The NFP will also need to address what to do if the impact is not achieved.

As with any form of investing, impact investing carries risks which NFPs should consider. For example, as impact investing is an emerging concept, there is less capital in the market. This means that it may be harder to sell investments if capital is needed. NFPs need to think about whether they will be in a position to wait the full duration of the investment. What are the primary motives – purpose or profit or both?

 

What types of projects suit this model of investment?

There are different types of projects that NFPs may invest in. An organisation may seek seed funding, allowing them to research and develop new ideas. Alternatively, money may be invested to grow an existing project or enable a business to perform a contract (e.g. social bonds). Finally, impact investment can allow an organisation to purchase assets which will provide revenue over time.

 

What legal questions does an organisation need to take into consideration before embarking on this model?

The governing body of a NFP must ensure their investing activity complies with legislation and their governing documents. For example, Sections 13A and 13B of the Trustee Act 1956 enable trustees to invest prudently in any property. This means that trustees must exercise care, diligence and skill when investing trust assets. Section 13E sets out a list of factors that trustees may consider when choosing to invest. It is important that trustees seek professional advice when choosing to invest and take steps to reduce the risk of breaching their duties.

The trustees must also ensure they are complying with the trust deed. The trust deed may direct trustees how to use the trust’s assets and have instructions on investing. The charitable purposes of a registered charitable trust will also guide the trustees as to the type of projects they should invest in. Where possible, it may be beneficial to amend the trust deed to expressly allow the trustees to carry out impact investing. If the trustees are unsure of their obligations, it is recommended that they obtain advice.

 

Positives

There are many positive aspects of impact investing. It represents the future of investing, as traditional views of business and charity are being challenged. Impact investing also diversifies income streams, opening up new opportunities to generate income while making a positive impact. And it empowers others through more than just providing grants. While there may always be a place for grants in the NFP sector, impact investing widens the scope of both fundraising and investing and successfully integrates profit with purpose.

 

Challenges

While impact investing is an exciting and emerging concept, there are several challenges that must be addressed to ensure its growth. Key challenges include:

  • Readiness: while there are many opportunities to create impact in New Zealand, some entities are not yet ready to seek investment. Groups that would traditionally seek grants may lack the training to engage with investors. This means that more resources need to be allocated for preparing these organisations for investment.
  • Greenwashing: as impact can be hard to measure, there is a fear that organisastions may claim their product/service creates a positive impact but, in reality, has very little social/environmental benefit. This means standards to measure impact must continue to be developed and investors need to have clear reporting mechanisms to ensure accountability
  • Inefficiency/difficulty: in a 2016 survey carried out by Ākina, 10% of organisations surveyed had sought impact investment but had found the process difficult and inefficient. They also noted that there was often a disconnect between the objectives of the investor and investee. This means that organisations need to consider how to make impact investing more accessible to organisations and investors need to clearly set out their expectations before investing.

 

Impact investing is here to stay and we are confident it will grow as more people step back and think through how they are investing their funds. It represents one element of a broader shift in thinking, as the traditional values of investing and capitalism are challenged. While not all organisations will be able to engage in impact investing, NFPs should consider how they can best achieve their desired impact and whether impact investment is the way forward. They should think about what impact they want to achieve, how to measure that impact and how to manage the risks of investment. Finally, they should ensure they comply with any legal obligations imposed on them to prevent a breach of duty. We look forward to see how impact investment reconciles profit with purpose, for the benefit of shareholders, stakeholders and the future of Aotearoa.

 

Should you need any assistance with these, or with any other NFP matters, please contact Steven Moe at Parry Field Lawyers stevenmoe@parryfield.com (+64 3 348 8480).