Issue 4
Your Guide to Good Governance
March 2021
A common line of inquiry boards pursue relates to creating additional or alternate income streams. Diversification of income is thought to address risks concerning future government funding stability and fee affordability for families.
The collapse of Mowbray College in 2012 occurred following an attempt to supplement revenue through new income streams – in this case overseas educational ventures. It spectacularly failed according to wide media reporting, not least because the anticipated profits never materialised. The situation resulted in the school’s closure, the subsequent sale of assets and court cases with parents.
Most schools use the school entity to engage in trading activities that are closely connected to their core operations (e.g. uniform shops, canteens etc.). For other commercial ventures, schools often consider establishing separate legal entities.
The regulatory environment in which Queensland’s independent schools operate provides one important lens with which to consider any plans to establish new entities. The Education (Accreditation of Non-State Schools) Act 2017 (Qld Act) and the Australian Education Act 2013 (C’th Act) are most relevant here.
In determining a governing body’s suitability, the Qld Act considers the body’s relationship with other entities and how it manages any conflicts of interest in relation to those entities (s. 26). It is also concerned about ensuring schools that receive government funding are not operating for profit (that is, using profits for any other purpose than advancing the school’s philosophy and aims, s. 7).
Further, it requires that governing bodies’ independence in their financial decision-making is not compromised by another entity (s. 10) and that contracts or arrangements with other entities are entered into at arms’ length and are for the benefit of the school (s. 8). Arrangements are not for the benefit of the school if they are offered at more than reasonable market value or if they are not required to advance the school’s philosophy and aims.
The C’th Act (s. 75) also contains a not-for-profit requirement which is clarified in the Act’s explanatory memorandum as applying school income for the benefit of the school or schools of the approved authority and not for the benefit of the owners or any third party. The associated regulations (s. 26) break down this concept, including that money derived from or relating to a school has to be applied for the school or the functions of the approved authority and cannot be directly or indirectly distributed to other persons.
In dealing with these entities, schools should employ practices that control and mitigate compliance and reputational risks. These include the following:
- Commercial arrangements should be established at arms-length by obtaining and documenting independent market value assessments.
- Boards need to carefully consider the terms under which it may be appropriate to use school funds in the provision of start-up loans for new entities.
- Parent and community expectations should be considered together with such loans or arrangements.
- Importantly, careful thought needs to be given to the question of whether school money is being applied for the purposes of the school (C’th Act) and to advance the school’s philosophy and aims (Qld Act).
An important consideration in establishing separate entities is the extent to which the directors of both entities overlap. Less overlap limits the school’s exposure to conflicts of interest but may not always be practical. When establishing these governance arrangements, boards best fulfil their duties by keeping the school’s aims and best interests at the centre of their decision-making.
With a school’s funding eligibility at risk, boards are reminded that ISQ’s School Services team can provide an industry-specific perspective on any plans for income diversification they may have. In almost all cases, it will also be highly advisable to obtain reputable not-for-profit/charity law advice before embarking on this journey.
Cognitive Conflict and Chair Leadership
A commonly held view in corporate governance is that outside directors improve a board’s effectiveness in monitoring the CEO – a fundamental function of good governance. Outside directors bring to the board external professional expertise and skills combined with an independent mindset and are more likely to question and challenge assumptions and opinions held by the board and the CEO. This increased “cognitive conflict” is generally thought to improve executive oversight.
A recent study titled Too unsafe to monitor? How board-CEO cognitive conflict and chair leadership shape outside director monitoring (Veltrop et al. 2020) posits that negative board culture and chair leadership can defeat the anticipated benefits of independent directors. On these boards, increased cognitive conflict amplifies negative board dynamics and inhibits effective governance.
For the Australian part of the international study, co-author Gavin Nicholson (who is scheduled to speak at the upcoming ISQ Governance Forum later this year) and colleagues studied five large Australian corporations through board observations and director interviews. The authors found that those boards that provided a high degree of psychological safety to their directors could benefit from the cognitive conflict introduced by outside directors. On the other hand, those boards with a negative culture (e.g. where directors could be embarrassed, rejected or punished for speaking up or making errors), the cognitive conflict intensified existing dysfunctions. The contention over divergent ideas distracted their cognitive resources away from productive decision-making and problem-solving.
The study found that board chairs with a “participatory leadership style” contributed to a positive board culture that capitalised on healthy cognitive conflicts. Those chairs:
- openly shared information and knowledge necessary for decision-making
- encouraged all directors to share their ideas and actively participate
- synthesised the available information and solutions suggested by directors
- facilitated discussions about the best possible solution to board issues and communicated this back to the group.
At a time that the wellbeing of students and staff is increasingly making its way onto school board agendas, it may also be time to review the psychological safety of school boards to ensure that the directors’ combined intellectual resources are utilised to their full potential.
Reference:
Veltrop, D. Bezemer, P.J. Nicholson, G. Pugliese, A. (2020) Too unsafe to monitor? How board-CEO cognitive conflict and chair leadership shape outside director monitoring. Retrieved from: https://eprints.qut.edu.au/200987/
Long-Term Impact of COVID-19 on Corporate Governance
The pandemic is likely to have lasting impacts on how schools approach corporate governance. As the expectations of boards and their directors increasingly require them to be responsive and implement appropriate strategies given the new contexts, traditional governance principles and practices are expected to change in key areas.
The Board/Management Dynamic: As lines separating responsibilities tend to blur in times of crisis, boards and management must develop clear lines of authority that assure the sustainability of organisational decisions. COVID-related school closures around the country have provided examples of the shifting lines regarding boards’ involvement in operational matters during a crisis. Reflecting on these situations provides a rich learning opportunity for boards.
Greater Board Engagement: Boards are likely to retain a heightened level of engagement with their governance responsibilities (at least during the pandemic) because the organisational responses to such unique events cannot be delegated to management alone.
Oversight of Business Resiliency: The oversight of resiliency (including business continuity, physical security, cybersecurity, and crisis management), as well as attention to long-term business and cultural ‘bounce-back’, are becoming primary board focuses.
Enterprise Risk Management: One of the most significant governance implications of the pandemic may be the elevation of the role and function of the board’s risk management committee (or similar) and the evaluation of the effectiveness of the current risk management framework. Has your board recently considered a review of this function? ISQ can assist.
Quality Education and Student Safety: A greater level of board involvement with management can be expected regarding the quality of teaching and learning (both on and offsite) as well as student safety concerns. Also, complex issues like the equitable distribution of teaching resources or fee concessions and the potential legal, ethical, and reputational risks remain squarely with the board.
Scenario-based Technology Planning: As education relies even more heavily on the availability and effectiveness of technology, an effective emergency technology plan will require board oversight to help assure school preparedness as evidenced by the recent transition to virtual lessons.
Oversight of Workforce Culture: Employee health and safety has become a more crucial element of the board’s workforce oversight especially when we include virus-related concerns, staff morale, and promotion of inclusion in the workforce. Boards are increasingly recognising their responsibility for this intangible asset.
Oversight of Compliance: Boards are reassessing their compliance function to address new risks in an increasingly complex regulatory environment. For example, accessing pandemic relief funds through JobKeeper created new compliance and reputational risks requiring boards in all industries to decide on accepting, keeping or returning such funding.
In conclusion, as the pandemic takes its course, boards have been called upon to exercise an unprecedented level of engagement in supporting their schools. Naturally, there is an expectation that boards will re-evaluate their governance policies and practices within their specific contexts to ask: “What have we learned?”
Adapted from: a Harvard Law School article by Michael W. Peregrine, Ralph DeJong and Sandy DiVarco, McDermott Will & Emery LLP - July 16, 2020
Board Chair Interview
Sandra McCullagh
Chair, Clayfield College School
Council Member since 2017 | Chair since 2019
What excites you about your school?
I am excited about Clayfield College’s senior leadership team which is led by our new principal, Dr Andrew Cousins, and our new Head of Primary, Audrey Fellowes. This team epitomises the future of education and I look forward to being a part of and seeing how Clayfield College evolves. I am excited about the College’s initiatives such as the bush school for Prep and introducing the International Baccalaureate Primary Years Programme. Importantly, we have all been very encouraged by the innovative online learning approach our teachers took to get us through the COVID lockdown.
What prompted you to become a board member?
When I transitioned from an executive to a non-executive director career three-and-a-half years ago, I wanted to only consider roles that focussed on areas I am passionate about. I went to school at Clayfield College, had been involved in the education of young people through philanthropic and volunteering roles and had spent much time hiring interns and graduates as they entered the workforce. This background made Clayfield an excellent fit for me.
How would you describe an effective board?
The excellent boards I have been fortunate to sit on all foster open discussions where directors are willing to put their views forward while listening to those of others, where disagreement without fear is possible and where we work together to reach beneficial outcomes. Effective directors are skilled and passionate for the organisation, respectful of each other and of management, and have a clear understanding of the boundaries between governance and operational issues.
What is your advice for new school board members?
Learn about your school, listen deeply and attend events to understand the school’s culture. At board meetings, don’t feel like you need to wait a while until you can put your views forward. You are on the board for your expertise and your background and this is valuable from the beginning. Also, familiarise yourself quickly with the boundaries between your governance role and operational matters.
Which topics and issues should be on school board agendas in 2021?
The general work of boards will continue to lie in crafting and updating a strategic plan and in monitoring various risk areas. Fee affordability is an area of risk that should be top of mind and so are decisions on the organisation’s capital structure. This year, we will also be considering directions in terms of educational issues as well as oversee the reaccreditation process.
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