This question was central to our deliberations as we worked through last year’s review of New Zealand Rugby governance. NZR is probably New Zealand’s largest incorporated society and certainly one that most people have a view about. Most societies are rather simpler—one layer, some members and a single committee. This article considers the societies that evolve layers of governance into what are known as federal models.
Each layer within these models is made up not of individuals but of separately incorporated entities: clubs, districts, regions, even national and often international bodies. Each has a separate governing board or committee. Each layer has a degree of control over the entity above it. This is exercised through the process of an annual or special general meeting.
The scope of that control usually includes appointing—and often removing—officers (including the board or committee); life membership; the ability to alter the constitution, wind up the entity; and the annual duties of receiving annual report and accounts, appointing the auditor etc. This control should not stray into governance matters, such as approving the strategic plan or business plan or approving the budget. These are matters for the committee or board.
To think of these as all-conquering legal and ‘ownership’ rights, however, is a very narrow perspective. The constitution of the ‘layer up’ entity allocates these rights but, as with any authority or privilege, this does not exist in a moral vacuum. At a minimum, attention must be given to the relevant sections of the Incorporated Societies Act 2022. Sections 54-59 outline duties of officers, with Section 61 noting that these duties are owed to the society as a whole rather than to members, whether they are individuals or other organisations. Basically, you can’t sit around the table with a limited ‘representative perspective’. This requirement is consistent with the imperatives placed on directors under the Companies Act 1993, which notes the health of the company as the primary consideration.
As was argued in the review of rugby governance, however, when members of an incorporated society overreach into the entity’s mandated decision making, trumpeting the justification that they are the ‘owners’, they are not being responsible holders of their relatively narrowly defined constitutional rights. Those rights are better defined as periodic opportunities to influence the direction and control of the entity.
The activities of most federated societies have an impact beyond the formal membership. So, more usefully, attention and energy should be applied to the concepts of moral ownership and social licence.
Participants, often children, frequently lie outside the formal membership, as do parents of those children. If the society is charitable in nature, then, as with charitable trusts, the beneficiaries of the entity can most definitely be viewed as among a moral ownership or those affected by the activities of the organisation
The moral ownership of a large entity such as NZ Rugby stretches far, including fans and the many moving parts of the sport outside the society structure (super clubs, schools, fans, volunteer referees and officials—it’s long list).
The idea of a broad moral ownership is usefully paired with the concept of social licence.
The community within which any entity exists gives it permission to operate. A social licence cannot be purchased, it can only be granted. Poor behaviour or insensitivity to the needs of the wider stakeholder community can lead to a withdrawal of that licence and can be highly damaging to the organisation.
In relation to rugby, the review concluded that the voting members of NZR:
…should not claim for themselves a preferential and deterministic class of ownership based on misapplying the notion of ownership. Rather they should view themselves as a significant but not pre-eminent group among a very broad range of connected and mutually dependent parties which, collectively, constitute the moral ownership of New Zealand Rugby.
Hence the governance of the entity needs to focus on what is best for the entire game, not just one group of stakeholders.
As noted, the Incorporated Societies Act 2022 requires directors to focus on the whole organisation. In most cases, the organisation will not be strong and healthy unless the wider ecosystem it connects with and operates within is also strong and healthy. That would seem obvious but, surprisingly, many struggle with this notion.
Even when a society has a considerable asset base, and many do, members have no ownership rights over those assets. If the society winds up, then surplus assets must be distributed to a suitable not-for-profit entity, sometimes but not always specified in the constitution. Section 22 of the Act makes clear that the society cannot be run for the financial benefit of its members. The question then is what do the members ‘own’? The answer is simply a transitory right to certain membership benefits, such as participation in the activities provided for members (golf club, bridge club etc), including the right to influence as described above. It is certainly not some pre-eminent class of decision-making right.
The paradox of federal structures is that they are led from the centre but owned by the component entities all the way down to the smallest ones. The largest entity will often have some functions of scale that appropriately exist at this level. But much of the activity, especially in community-based entities, exists at the lowest level. While a central agency may attempt cross-entity planning, the desired outcomes can only be achieved with the permission of those it is expecting to undertake the intended actions. Trouble occurs when the centre takes to itself responsibility for things that members at lower levels correctly believe belong to them and which are more appropriately dealt with at that level.
When you get very different thinkers agreeing on this you know there is likely some logic to the view.
For example, American economist and management academic Rosabeth Moss Kanter notes the benefits of discretion sitting within smaller units as faster, focused, flexible, friendly and more fun. [1]
And it is not often we get to cite papal wisdom. The papal encyclical, Quadragesimo Anno of 1931, was a response to industrialism and the Great Depression but relevant in this context. It stated:
It is an injustice, a grave evil and a disturbance of right order for a larger and higher organisation to arrogate to itself functions which can be performed efficiently by smaller and lower bodies.
The point is that for an entity to be effective, it needs the permission and cooperation of the those at the next layer down. In some cases, such as rugby in New Zealand, this is oiled by the distribution of considerable cash down through the system. For the whole federal system to work, it needs clearly allocated decision-making rights, along with well-defined and actively developed linkages, together with cooperation up and down the structure. The assertion of a narrow and self-justifying ownership perspective at any level is misplaced and unhelpful.
We have federal structures all around us. Some work better than others. But as organisational theorist Charles Handy notes they require effort to be successful:
[Federalism] is never easy, because it means allowing the small to be independent while still being part of the larger whole, to be different but part of the same. Federalism is therefore fraught with difficulty because it is trying to combine those two opposites, to manage the paradox.[2]
Notes
- 5 Fs for Success. The Independent July 1993.
- Handy, C. The Empty Raincoat. Arrow Books 2002 edition.
