Corporate Governance Workshops...Good corporate governance therefore is an effectual balance of promoting the long-term success of the company, and providing accountability and control

Corporate Governance Workshops

Speakers

Ms. Nadia Almenoar Partner, Corporate Practice Group Rodyk & Davidson

Mr. S Sivanesan Partner, Corporate Practice Group Rodyk & Davidson

“Governance and Intermediaries - Issues in the non-profit organisation environment”

Corporate Governance Workshop

Contents

Part Title

Part I Introduction to non- profit organisations and governance

Part II Current legal framework

Part III

Intermediaries

Part IV Case Study I: NKF

Part V

Case Study II: Ren Ci

Part VI

Case Study III: City Harvest Church

Part VII Moving forward

INTRODUCTION TO NON-PROFIT

ORGANISATIONS


What are non- profit organisations (NPOs)?

• Organisations that are established not for the

purpose of making profits

• This includes charities and institutions of public

character (IPCs)


What is a charity?

• Any institution which is established for exclusively

charitable purposes

• No exhaustive definition, though the charitable purposes

that are recognised are:

1. Prevention or relief of poverty

2. Advancement of education

3. Advancement of religion

4. Other purposes beneficial to the community


What is a charity? (cont’d)

• Other purposes beneficial to the community have been

recognised to be the advancement of: o Health

o Citizenship or community development

o Arts, heritage or science

o Environmental protection or improvement

o Relief efforts for those in need by reason of youth, age, ill-health, disability,

financial hardship or other disadvantages

o Animal welfare

o Sport, where the sport advances health through physical skill and exertion


What is corporate governance?

• “Corporate governance refers to the system by which companies

are directed and managed. This involves a set of relationships

between the company’s board, management, employees,

shareholders and other stakeholders. This also provides the

structure through which the company achieves its objectives and

provides accountability to stakeholders. Good corporate

governance therefore is an effectual balance of promoting the

long-term success of the company, and providing

accountability and control systems which are symmetric with

the risks involved.”

Risk Governance Guidance for Listed Boards, by the Corporate Governance Council

(10 May 2012)


Corporate governance in the context of companies

• Elements of corporate governance:

o Transparency

o Accountability

o Fairness


Should the concept of “governance” for listed

companies apply to NPOs as well?


Fundamentals

• Why is governance necessary in the context of

NPOs, and especially charities?

o “Governance is important because it affects how a charity is run

and the services that the organisation provides. The Board of a

charity is responsible for putting in place the principles and

practices of good governance in the organisation. The Code

also helps charities to be more effective, transparent and

accountable to their stakeholders.”

Code of Governance for Charities & IPCs (by the Charities Council)


Fundamentals (cont’d)

• How is corporate governance achieved in a charity?

• Is this actually being done?

• Who should be responsible?


Defining governance for charities

• Purpose of the charity

o Charities can only carry out acts within their constitutional

documents (e.g. trust deed, memoranda and articles of

association, society’s constitution)

o Difficulties arise due to subjective or very broad

interpretation

• How to best achieve the purpose of the charity

o E.g.: strategic planning, fundraising practices


Defining governance for charities (cont’d)

• Accountability for the charity’s performance, its use of

the funds that it raises from the public

o Accountability to whom? (i.e. who are the stakeholders?)

Donors

Beneficiaries

Regulatory authorities

Public

• Ensuring that the charity abides by applicable legislation


Who is responsible for good corporate

governance?

• Board?

• Trustees?

• Members?

• Regulatory authorities?

• Intermediaries?


Who is responsible for good corporate

governance? (cont’d)

• Everybody was sure that Somebody would do it.

Somebody thought Anybody could do it, so Nobody

did it. Everybody blamed Somebody when Nobody

did what Anybody could have done.

CURRENT LEGAL FRAMEWORK


Legal framework governing charities

• Most common legal forms for charities are:

o Trusts (Trustees Act Cap. 337)

o Societies (Societies Act Cap. 311)

o Companies limited by guarantee (Companies Act Cap. 50)

• All charities need to be registered under the Charities

Act; failure to do so is an offence


Legal framework governing charities (cont’d)

• Two- fold compliance by charities

o Compliance with legislation governing legal form, e.g.

Companies Act, Societies Act, Trustees Act

o Compliance with charities legislation and its

subsidiary legislation


Legal framework governing charities

• “Hard law”

o Charities Act

o Charities (Institutions of a Public Character) Regulations

o Other subsidiary legislation governing the running of charities

E.g. Charities (Registration of Charities) Regulations

E.g. Charities (Accounts and Annual Report) Regulations

• Enforcement

Powers of the Commissioner of Charities


Legal framework governing charities (cont’d)

• “Soft law”

o Code of Governance for Charities & IPCs

o Not mandatory

o ‘Comply or explain’

o Not applicable to exempt charities and grantmakers that

do not have IPC status

• Enforcement

o Governance Evaluation Checklist


Categories of guidelines under the Code

• Board governance

• Conflict of interest

• Strategic planning

• Programme management

• Human resource management

• Financial management and controls

• Fundraising practices

• Disclosure and transparency

• Public image

INTERMEDIARIES


Who are “intermediaries”?

• Accountants/auditors

• Lawyers

• PR professionals

• Media consultants

• Interior designers/architects

• Consultants/advisers


Intermediaries and their duties

• Should intermediaries dealing with charities be held

to a higher standard than intermediaries dealing with

companies?

• Is there a “moral” obligation for intermediaries to

ensure that charities use their monies in accordance

with their objects/purpose?


Intermediaries and their duties

• How much effort should be made to know whether

the client is operating within the “rules”?

• What about the associated increased costs?

• To what extent should intermediaries be able to rely

on the management’s word?


Reliance on intermediaries

• Directors of companies can rely on professional

advisers when making decisions, to avoid liability

(section 157C of the Companies Act) – should there

be similar ‘safety nets’ for charities that are not

companies?


Some statistics

• In 2010 the charity sector had a total income of

$10.7 billion:

o Of this sum, the ‘religious and others’ sector received $1.6

billion (15%) from donations, government grants and fees

for services

o Religion ranked second behind the education sector

(63.4%)

• Religious charities formed 59.5% of all the charities

registered with the Commissioner of Charities ‘Religion and the rules of charity’- Straits Times, 14 July 2012

CASE STUDY I: NKF


Brief facts

• NKF sued SPH and Susan Long after the publication of the

article “The NKF: Controversially ahead of its time?” in the

Straits Times

• Within a day of trial, NKF through its CEO T T Durai, dropped

the suit against SPH after Durai confessed to several

allegations in the article

• Durai and the entire NKF board resigned, and a new board

took over with Gerard Ee as chairman


Brief facts (cont’d)

• The new NKF board commissioned audit firm KPMG to

scrutinise the way the NKF had been run under Durai so as

to bring in greater transparency and unearth any other

misdeeds


Examples of lapses in governance

Example 1: the Board and its powers

• The KPMG report found that the former NKF Board delegated all

powers to the Executive Committee, which in turn delegated most,

if not all, powers to the former CEO T T Durai

• The report noted that since the incorporation of NKF in 2001, it

only saw two departures and the directors were never replaced

• The report noted that out of 21 members in the former board, only

8 attended the foundation's annual general meetings, and all of

them sat on the Executive Committee

ChannelNewsAsia, 19 Dec 2005


Examples of lapses in governance (cont’d)

Example 2: the Audit Committee

• According to the KPMG report, the Audit Committee was

ineffective because it did not meet regularly

• It found that from June 2002 to January 2005, there was only

one informal meeting in 2004 to discuss the revival of the

Audit Committee ChannelNewsAsia, 19 Dec 2005



Example 3: Inaccurate information in reports

• KPMG also found figures relating to the number of kidney

patients, patient subsidies and treatment costs inflated or

misleading

• NKF's report said that in 2003, 52 cents for every dollar

raised went to beneficiaries and programmes for the year; but

KPMG found that only 10 cents out of every dollar went to

subsidise patients' direct treatment costs




Example 4: Conflicts of interest

• It was found that multi-million dollar software contractors had

not delivered, and the former NKF board and key

management personnel were found to have interests in or

were involved in companies with business relationships with

NKF




• "It is not every regulator (who) had a carte blanche to

deal with all the issues happening at NKF. There were

bits of it in different places; it was not pulled together;

and there was a lot of room for misunderstanding

between the different bodies involved to make sure

the regulation was effective. In theory, it might have

been enough but in practice, there was a lot of room for

misunderstanding as to who did what.“ Tham Sai Choy, auditor at KPMG

ChannelNewsAsia19 Dec 2005


The role of auditors

• “The external auditor’s role is to express an opinion on the financial

statements based on the conclusions drawn from the audit

evidence obtained during the audit. He is required to obtain

sufficient appropriate audit evidence to be able to draw

reasonable conclusions on which to base the audit opinion

and to consider the risk of material misstatement in the

financial statements arising from fraud or error.”

• “However, it should be noted that an audit of the financial

statements is not designed to identify all matters that may be

relevant to those charged with governance.”

Media release by Institute of Certified Public Accountants of Singapore (ICPAS), 23

December 2005


Questions that arise

• To whom do the intermediaries owe duties?

o The public?

o The charities? (duty to client, confidentiality, etc.)

CASE STUDY II: REN CI


Brief facts

• In July 2006, after the NKF episode, the Ministry of Health appointed

accounting firm Ernst & Young to carry out a general review of the

operations at its 12 largest IPCs, including Ren Ci Hospital

• At the end of the review, Ren Ci was asked to split the role of board

chairman and chief executive officer (both held by Venerable Shi Ming Yi)

• The MOH next got Ernst & Young to delve deeper into Ren Ci's

operations, and discovered certain loan discrepancies

• A formal inquiry under section 8 of the Charities Act was initiated by the

MOH to look into Ren Ci’s affairs

Asia One, 8 November 2007


Brief facts: the charges involved

1. Shi Ming Yi charged for engaging in a conspiracy with his

personal executive, Raymond Yeung, to falsify a payment

voucher, punishable under s477A read with s109 of the

Penal Code;

2. Shi Ming Yi charged for criminal breach of trust by

misappropriating $50,000, punishable under s406 of the

Penal Code; Criminal Procedure, Evidence and Sentencing, Annual Review of Singapore Cases

(11, 2010)


Brief facts: the charges involved (cont’d)

3. Shi Ming Yi charged for knowingly providing false information

to the Commissioner of Charities, punishable under s10(3)

of the Charities Act (Cap 37, 2007 Rev Ed); and

4. Shi Ming Yi charged for engaging in a conspiracy with

Raymond Yeung to knowingly provide the Commissioner of

Charities with false information, punishable under s10(3) of

the Charities Act Criminal Procedure, Evidence and Sentencing, Annual Review of Singapore Cases

(11, 2010)

CASE STUDY III: CITY HARVEST CHURCH


Brief facts: the charges (cont’d)

• 1st and 2nd charges:

o Shi Ming Yi had instructed Ren Ci’s finance manager to issue a cash

cheque of $50,000 and a payment voucher reflecting a loan of the

same amount from Ren Ci to Mandala Buddhist & Cultural Centre

(“Mandala”).

o However the cheque was later encashed and the cash was given to

Raymond Yeung. This amount was reflected in Ren Ci’s accounts as a

loan to Mandala but there was no corresponding entry in Mandala’s

accounts showing receipt of the amount nor was the money given to

Mandala.

Criminal Procedure, Evidence and Sentencing, Annual Review of Singapore Cases

(11, 2010)


Brief facts: the charges (cont’d)

3rd charge

• During the inquiry, Shi Ming Yi provided false information that the sum of

$50,000 was a loan given to Mandala to purchase wood.

4th charge

• The head of the inquiry then asked Shi Ming Yi to provide documentary

evidence of the purchase of wood. Pursuant to this, a letter purportedly

from Bei Jing Jing Hai Shan Artifact Co Ltd (China) was given to the

Commissioner of Charities. The letter stated that it had delivered two

statutes worth $16,000 to Mandala. This was not true as the statutes were

in fact purchased and paid for by a different entity.

Criminal Procedure, Evidence and Sentencing, Annual Review of Singapore Cases

(11, 2010)



• It may have been easy for these discrepancies to

never have been discovered, had the inquiry not

been initiated- why is this?

• Who should be checking the books of the

organisation, etc?

• To whom is the organisation accountable? (apart

from the COC under the charities legislation)

• Why were the auditors of Ren Ci not aware of these

discrepancies?


The case so far

• In early 2010, the COC received complaints alleging the misuse of the

charity’s funds

• COC reported the matter to the Commercial Affairs Department (CAD),

when it assessed that some of the charity’s financial transactions needed

to be investigated by the CAD for possible criminal wrongdoings

• COC and CAD commenced inquiry into CHC concurrently in May 2010

• COC’s inquiry was under section 8 of the Charities Act

• COC’s Inquiry revealed misconduct and mismanagement in the

administration of the Charity, particularly in relation to the funds that were

in the Building Fund which had been raised and earmarked for specific

purposes

Inquiry into the City Harvest Church, MCCY


Findings from the COC’s Inquiry

• Despite representations made to public and members, funds were used to

fund the Crossover Project; executive members were not told of the actual

purpose of these funds

• Used to fund the Crossover Project under the guise of donations to its

affiliated church in KL, and these were then transmitted by CHCKL to

support the Crossover Project in the United States

• Donations and tithes to the charity were transferred into a private fund

known as a “Multi Purpose Account” (MPA), and monies in the MPA were

used to fund the Project



Findings from the COC’s Inquiry (cont’d)

• Selected donors were asked to transfer their donations from

the “Arise and Build” campaign, to the MPA

• Apart from a few members the existence of the MPA was not

made known to the charity’s members

• Attempt to conceal the existence of the MPA by closing the

joint bank account and dealing only in cash transactions



Examples of governance issues arising from

findings of the COC’s Inquiry

• Disclosure of related party transactions

o Kong Hee’s company sold over S$3m worth of

merchandise to the charity, and this was not

disclosed

o Eventually Kong Hee ‘re-funded’ royalties to the

charity arising from the sale of his merchandise,

however these were later reimbursed to him from

monies in the MPA and the CHCKL Inquiry into the City Harvest Church, MCCY


Examples of governance issues arising from

findings of the COC’s Inquiry (cont’d)

• Board governance and control issues

o Appointment of Investment Manager was not

properly tabled and discussed by the charity’s

board

oWhen he suffered financial difficulties, donations

were “re-funded” to him in two tranches, Board

approval for one being received 9 months after

the re-funds were made Inquiry into the City Harvest Church, MCCY



• Duties of intermediaries where there are complex

structures to disguise the true substance of the

transactions and monies

• Do intermediaries have adequate facts and

information to give professional advice?


Questions that arise (cont’d)

• Do donors insist that funds be used for specific

purposes?

• Can donors change their minds? How can this be

done?

o Under the Charities (IPC) Regulations, if donors

specify a purpose for their donations, this must be

followed

MOVING FORWARD


• Underlying consideration that has to be borne in

mind:

o Tightening restrictions and making regulation/

enforcement more stringent, vs.

o Stifling the charity sector and driving away strong

management and leadership individuals by making

requirements and restrictions too onerous,

discouraging volunteers who have altruistic intentions


• Who are the stakeholders when it comes to charities?

o Donors

o Beneficiaries

o The public- i.e. the entire community

o Others?

• Do donors expect any kind of “return”? What makes them a

“stakeholder”?

• What are the expectations of beneficiaries?

• How can different stakeholders’ interests be balanced?


• Given the understanding of the three cases so far,

what role do intermediaries play and how can they

be made more effective?

• What happens if there are multiple intermediaries

involved and not all have equal access to the

relevant information?


• Who else can play a part in preventing these

problems?

o Public

o Management

o Regulatory/enforcement bodies

o Members


• Should intermediaries whistle-blow?

• If so, to whom?

Documents

Corporate Governance Workshops...Good corporate governance therefore is an effectual balance of promoting the long-term success of the company, and providing accountability and control