Dr Matthew Turnour
Focusing on purpose
The legal space in which nonprofit organisations operate in is increasingly regulated. Nonprofit leaders, particularly leaders of charities, must be cognisant of the fact that their conduct is under increased external scrutiny. Researchers at ACPNS regularly scan Australia and the world for legal cases that involve important issues concerning nonprofit organisations. A very important recent case from the United Kingdom is, Lehtimäki v Children’s Investment Fund Foundation. It shines a light on the importance of nonprofit leaders always acting to pursue the organisations purposes – even when voting as a member. It affirms the freedom of members to decide how to achieve those purposes without judicial interference provided they are acting in good faith and for the purposes of the organisation. It also highlights indirectly the importance of reviewing and fine-tuning the organisation’s constitution so that the purposes are clear.
All registered charities in Australia are now required to have governing documents and the most important of these is usually the trust deed or constitution. According to the ACNC, a charity’s constitution must include its charitable purpose; the fact that it operates on a not-for-profit basis; and the way its governing body makes decisions and consults members (ACNC Constitution, 2020).
There are three important lessons from the Lehtimäki v Children’s Investment Fund Foundation case.
- Charities must exist for charitable purposes only
The first lesson is a reminder. Charities exist only for the pursuit of charitable purposes. The supervision of charities is becoming stricter. It is prudent to review the wording of constitutions to ensure that this limitation is clear. Boards and members may need to redraft the objects to make sure the purpose is clear and that it is only charitable. There must not be a purpose of benefiting members as members.
As the Lehtimäki v Children’s Investment Fund Foundation case states,
A company cannot be charitable without being “established for charitable purposes only”… Its assets will be devoted exclusively to charitable purposes, not the private interest of its members.
- Charity members must vote to carry out purpose, not in their own self-interest
It has been well established that board members must act in the interests of the organisation but what of members? A significant difference between charitable organisations and commercial organisations is that while commercial shareholders can vote according to their own self-interest and how that might be best furthered, this is not the case in charitable organisations. Lehtimäki’s case establishes that in a charity context not just directors but also members of charitable organisations need to be aware that when they vote, that voting must be done to carry forward the organisation’s charitable purpose.
The court held,
Members do not “sit outside the company” but are… “part of the administration of the charity” with “powers that are all directed at aspects of the management and administration of the charity designed to clearly achieve the charity’s exclusively charitable objects.”
- Charities must maintain focus on beneficiaries, not staff
The third lesson is implicit from the last two and is an extrapolation of the principles into a Covid -19 environment. There is a real risk in the present environment of charities acting to look after staff rather than their ultimate beneficiaries. Charitable organisations understandably want to retain their staff, and so may be inclined to make decisions in their staff’s best interest, rather than their beneficiaries’. The law is clear. The charity exists to pursue its charitable purpose not the interests of its staff. Sometimes the purpose of the charity is best achieved over the longer term by maintaining staff instead of applying resources directly to fulfill the purpose by meeting the needs of ultimate beneficiaries. But the critical point is the choice is always about how best to fulfill the charitable purpose – not how to look after the staff. Provide the purpose is kept in mind, how the purpose is achieved is though a matter for the leaders of the charity. The judgment in Lehtimäki’s case affirms the freedom of members to decide how to achieve those purposes without judicial interference provided they are acting in good faith and for the purposes of the organisation.
References
ACNC Constitution. (2020). The Australian Charities and Not-for-profits Commission. Retrieved 9 September 2020 from .
ACPNS Legal Case notes Series: 2018-11 Lehtimäki v Children’s Investment Fun Foundation. (2018). Mcgregor-Lowndes, Myles & Hannah, Frances. Retrieved 9 September 2020 from https://eprints.qut.edu.au/131995/.
The Children’s Investment Fund Foundation (UK) v Attorney General & Ors [2017] EWHC 1379 (Ch).
Did you know?
ACPNS offers courses for staff, board and other volunteer professionals who work, or are entering the philanthropy, nonprofit or social enterprise sector. One of the units deals specifically with legal frameworks.
Legal Issues for Philanthropic and Nonprofit Organisations
Nonprofit organisations are subject to a legal framework that both regulates and facilitates their internal and external conduct. An appreciation of these frameworks is necessary for good governance, the achievement of their mission and promoting trust with both internal and external parties.
Download our 2021 course brochure for more information or visit qut.edu.au/business/acpns
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