Non-Profit Organizations And The Need For Governance
21 Aug 2023
Together, they are the scaffolding that supports a nation’s socio-economic infrastructure.
Together, they are the scaffolding that supports a nation’s socio-economic infrastructure. This supportive, developmental ecosystem is built by Non-Profit Organisations (NPOs), (also fondly known in India as NGOs – non-governmental organizations) whose primary purpose is to serve communities by working for a cause, not generate profits.
NPOs are purpose-driven, mission-oriented, and they drive change, uplift communities, empower individuals and groups, influence policy, and enhance the overall quality of life. They are called the ‘third sector’, as they support the policies and initiatives of the other two sectors – the government and the for-profit, private sector.
Today, the NPO sector has assumed enormous importance, channeling billions of dollars every year, employing millions of people, and touching millions of lives. India’s Million Missions: 75 Years of Service Toward Nation Building – India’s Non-Profit Sector Report, released in January 2023, states that NPOs contribute as much as 2% of India’s GDP. The report adds that these “engines of growth contribute to 2.7 million jobs and 3.4 million full-time volunteers, generating employment figures higher than that of the public sector”. Given its tremendous reach and the number of lives it influences, the NPO sector plays a vital role in the social and economic advancement of communities.
From Charity to NPOs
Historically, societies have always exhibited a collective responsibility towards vulnerable members of the community, attempting to correct social imbalances by supporting marginalised individuals and groups in various ways. Earlier, if the village community took on this onus, as societies grew and expanded, charitable trusts and societies, corporate trusts, and voluntary organisations became the facilitators of education, health infrastructure, cultural promotion, and economic empowerment. Wealthy individuals too engaged in philanthropic work, paying forward to society as a gesture of gratitude or with a view to uplifting those who needed the support.
Then, in April 2014, India legally mandated ‘corporate social responsibility’ (CSR). (Interestingly, the term ‘CSR’ was coined by American economist Howard Bowen in 1953, in his book Social Responsibilities of the Businessman). Now, Section 135(5) of the Companies Act, 2013, made it mandatory for companies of a certain turnover and profitability to spend 2% of their average net profits of the immediately preceding 3 years on CSR.
Accountability: Need of the Hour
With so much at stake, accountability and transparency assumed paramount importance for an NPO, bringing into focus the role of a Board of Directors, whose fundamental responsibilities are:
- Governance: Establishing policies & procedures to ensure the NPO is operating according to its mission and strategy.
- Strategic Planning: Providing overall direction and developing a strategic plan to achieve the NPO’s goal.
- Fundraising: Identifying potential donors & soliciting contributions to raise resources for the NPO to carry out its mission.
- Financial Oversight: Ensuring that the NPO’s financial resources are managed effectively and efficiently.
- Legal & Ethical Compliance: Ensuring that the NPO operates within legal & ethical guidelines, and it complies with all applicable laws & regulations.
In time, philanthropy has become further institutionalized as public-private initiatives started making an even greater impact on society. On the one hand, there was the passion of the NPOs and their singular desire to transform lives, while on the other, vast amounts of money began to pour in as funding from corporate entities.
In the last few decades, the NPO sector has become greatly differentiated and NPOs can be classified in many different ways, broadly as a) Charitable Trust b) Society c) Section 8 Company (Existing in Indian Legal System) d) Non-Profit Corporation e) Foundation f) Religious organization.
It was also an excellent way for companies to incorporate environmental, social and human developmental goals into their planning and operations, for the common good, today’s ESG! According to Bain & Company’s India Philanthropy Report 2023, India’s social sector spending as a percentage of GDP grew from 8.6% in FY 2021 to 9.6 % in FY 2022.
In spite of their different avatars, it is important to note that at the heart of their mission is their common goal – to uplift lives, elevate communities, and work for the greater good.