Attachment D: ICDC governance standards

Date

The ICDC needs to have high standards of governance, accountability and transparency. Compliance with governance standards should be one of the eligibility requirements for initial and ongoing registration as an ICDC, assessed annually.

As the ICDC can take a variety of legal forms including a trust or company; can receive, control and invest a wide range of assets and revenue streams; operate in widely varying geographic and social circumstances and with a range of capabilities, a principle-based model of governance is likely to achieve the best outcomes for the ICDC, the Indigenous people for whom it invests and controls funds, and other stakeholders.

The principle-based approach to governance of charities to be used by the ACNC is appropriate. The ACNC Governance Standards were settled after widespread public consultation on a Treasury consultation paper. The standards proposed here are based on the ACNC Governance Standards and meet most of the minimum governance standards considered in the Minerals Council of Australia and the National Native Title Council proposal.

A principle-based approach involves setting standards of governance, rather than being highly prescriptive. Principles could be reinforced with published recommendations, applied on an 'if not why not' basis as is done by the Australian Stock Exchange (ASX). Recommendations, which are guidelines not prescriptions, would be set out in guidance material. As the ASX does, the regulator could vary the application of the governance standards across a range of different circumstances and for organisations of different sizes. If an ICDC considers that a recommendation was inappropriate to its particular circumstances, it would have flexibility not to adopt it. The flexibility is tempered by a requirement to explain why if the recommendation is not followed. Culturally appropriate guidance materials, training and resources would need to be developed for ICDCs.

The regulator could develop recommendations underlying the governance standards to be applied differently in different circumstances and for small, medium and large ICDCs. Proposed tiers are:

  1. Small: annual income up to $250,000;
  2. Medium: annual income from $250,001 — $999,999; and
  3. Large: annual income exceeding $1 million.

The regulatory approach to monitoring compliance with the governance standards should be proportionate and risk based. Assessing what or who is at risk; nature and degree of potential harm; likelihood and frequency of occurrence or recurrence; risk profile of the ICDC (such as its size, the existence of accountability mechanisms, its history of compliance and cooperation); behaviour of those responsible.

The five proposed Governance Standards set out below are adapted from the ACNC Standards.

Standard One: Purposes and not-for-profit nature of an ICDC

An ICDC must:

  1. be able to demonstrate, by reference to the governing rules of the ICDC or by other means, its purposes and its character as a not-for-profit entity as defined in the ICDC criteria; and
  2. make information about its purposes available to the public, including members, donors, employees, volunteers and potential beneficiaries; and
  3. comply with its purposes and its character as a not-for-profit ICDC.

Standard Two: Accountability of the ICDC to members and potential beneficiaries

An ICDC must take reasonable steps to ensure that:

  1. the registered entity is accountable to its members and potential beneficiaries; and
  2. the registered entity's members and potential beneficiaries have an adequate opportunity to raise concerns about the governance of the ICDC.

Standard Three: Compliance with Australian laws by the ICDC

An ICDC must not engage in conduct, or omit to engage in conduct, if the conduct or omission may be dealt with:

  1. as an indictable offence under an Australian law (even if it may, in some circumstances, be dealt with as a summary offence); or
  2. by way of a civil penalty of 60 penalty units or more.

Standard Four: Suitability of responsible persons of the ICDC

An ICDC must:

  1. take reasonable steps to ensure that each of its responsible persons meet the conditions mentioned in subsection (3); and
  2. after taking those steps:
    1. be, and remain, satisfied that each responsible person meets the conditions; or
    2. if it is unable to be, or remain, satisfied that a responsible person meets the conditions, take reasonable steps to remove that person.

Standard Five: Duties of responsible persons of an ICDC

An ICDC must take reasonable steps to ensure that its responsible persons are subject to, and comply with, the following duties:

  1. to exercise the ICDC's powers and discharge the responsible person's duties with the degree of care and diligence that a reasonable individual would exercise if they were a responsible person of the ICDC;
  2. to act in good faith in the ICDC's best interests, and to further the purposes of the ICDC;
  3. not to misuse the responsible person's position;
  4. not to misuse information obtained in the performance of the responsible person's duties as a responsible person of the ICDC;
  5. to disclose perceived or actual material conflicts of interest of the responsible person;
  6. to ensure that the ICDC's financial affairs are managed in a responsible manner;
  7. not to allow the ICDC to operate while insolvent.

Note: A perceived or actual material conflict of interest that must be disclosed includes a related party transaction.

Role of Independent Directors

The role of independent Directors or members of the governing body of an ICDC can be very important. It is not advisable to make this mandatory, as there could be instances in which an ICDC could not secure the services of an independent Director. There may also be significant costs associated with properly remunerating independent directors, especially if they are not local. Different requirements may apply for small, medium or large ICDCs. The recommendations underlying this governance standard could make clear an expectation of an independent Director for a large ICDC, on an 'if not why not basis' unless there was good reason this was not possible.

Potential Beneficiaries of an ICDC

An ICDC must work for the benefit of the Aboriginal people or Torres Strait Islanders with rights and interests in the relevant land or waters, whether as a native title claim group, native title holders, Traditional Aboriginal Owners, or as defined under other legislation ('potential beneficiaries'). Not all of the potential beneficiaries will be members of the entity that manages their land on their behalf or of the ICDC. Some will be under age; some will not choose to join; there may be other reasons why they are not members.

It is appropriate that an ICDC has a fiduciary obligation to its members and potential beneficiaries in respect of all assets and funds received. Under Standard 2, ICDCs must take reasonable steps to be accountable and transparent to their members and potential beneficiaries and provide their members and potential beneficiaries adequate opportunity to raise concerns about how the ICDC is governed.

In addition, a mechanism is needed for accountability to the potential beneficiaries. Decision-making mechanisms in the Native Title Act, the relevant regulations and the Aboriginal Land Rights Act (Northern Territory) 1976 provide some guidance in this regard. These include:

  • native title groups authorising native title applications or ILUAs using a traditional or an agreed decision-making process;
  • prescribed bodies corporate consulting and obtaining the consent of the native title holders to decisions affecting their native title; a
    nd
  • Land Councils ensuring that Traditional Aboriginal Owners understand the nature and purpose of a proposal and as a group consent to it before they act on it.

While day to day governance is not as significant as decision-making about land, regular consultation about governance issues with the potential beneficiaries in a manner agreed by them or that takes account of traditional decision-making processes would greatly assist an ICDC's accountability to the group for whom it is working.

One such mechanism would be:

  • Members and potential beneficiaries must be consulted and consent to the purposes and holdings of the ICDC.
  • Members and potential beneficiaries should appoint decision-makers to ensure that the purposes for which the ICDC has been established are adhered to in relation to decisions regarding funds accumulation and distribution plans, investments and acquisitions.
  • Members and potential beneficiaries should be periodically apprised of the performance of the ICDC in terms of funds held and distributed, and the achievement of outcomes in line with the purposes of the ICDC.
  • An agreed dispute resolution process to be used in the event that members of the group consider that decisions that have been made by the responsible persons are contrary to the decisions previously agreed by consent of the members and potential beneficiaries, or where their consent cannot be achieved.

Responsible Management of Financial Affairs of an ICDC

There are some specific aspects of an ICDC that may make financial management more significant. An ICDC has some similarities to a Private Ancillary Fund (PAF) or Public Ancillary Fund (PuAF), which can receive tax-deductible donations and invest funds over time, with minimal distribution obligations, to ensure capital growth and maintenance for the long term. These Funds are subject to specific regulated Guidelines. Some of the financial standards for PAFs and PuAFs could apply to large ICDCs.

Some ICDCs will receive large amounts of annual income or receive income over a long period, which is in part to provide compensation inter-generationally for loss of access to and use of land. In these circumstances it would be appropriate for the recommendations in this governance standard to expect more stringent financial management and investment for the long term.

Based on the PAF/PuAF model, specific financial management recommendations for an ICDC with significant funds under management could include:

  • an appropriate Accumulation and Distribution Plan to be monitored by the regulator;
  • an appropriate investment strategy, having regard to the Accumulation and Distribution Plan;
  • the investment strategy must be implemented by the responsible persons and published for the ICDC members and potential beneficiaries;
  • an independent professional Trustee;
  • the preparation of proper accounts, financial statements and audit of those statements each year by a registered auditor;
  • limitations on borrowing or giving security by the ICDC; and
  • possible limitations on particular types of investment.

A large ICDC should be required to prepare and maintain a current investment strategy for all or part of its fund of income and assets. An appropriate investment strategy should set out the investment objectives and explain the investment methods the trustee will adopt to achieve them. The requirements for an ICDC investment strategy could be adapted from the Public Ancillary Fund Guidelines 2011.