Governance of a School: Misuse, Mismanagement and Funding

11 October 2018

The Victorian Ombudsman (Ombudsman), in a recent review into a public school, has investigated allegations of nepotism, conflicts of interest and financial mismanagement. The Australian Charities and Not-for-Profits Commission (ACNC) has also concluded its review into the effectiveness of the Australian Charities and Not-for-profits Commission Act 2012 (Cth) and the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Act 2012 (Cth) (ACNC Legislation) and found some similar conclusions, namely, that schools as not-for-profit organisations (NFP) and/or charities should reduce conflicts of interest, have a clarity of purpose so funding is put to the correct use, and prioritise good governance in the management of their school.

ACNC Legislation Review

As discussed in our previous article, a review of the ACNC Legislation must be undertaken after the first five years of operation. The first ACNC report after the initial five years of operation (ACNC Report) was tabled with the Federal Government on 22 August 2018. The ACNC Report makes 30 recommendations and has four parts:

  • Objects, Functions and Powers
  • Regulatory Framework
  • Red tape Reduction
  • Additional amendments.

Of most interest for non-government schools are the recommendations in relation to the Regulatory Framework. The ACNC Report suggests the following amendments regarding the regulatory framework surrounding the ACNC Legislation:

  • ACNC Governance Standards. As schools would be aware, governance of a charity or NFP is governed by the ACNC Governance Standards. The ACNC Report suggests that Governance Standards 1, 2 and 4 remain with no changes. However, it recommends that Standard 3: Compliance with Australian Laws be repealed to reduce red tape and that Standard 5: Duties of Responsible Persons be amended in relation to conflicts of interest.
  • Comparable Compliance. The ACNC Report also recommends that a registered entity like a school can be presumed to comply with the ACNC Governance Standards if it already complies with other comparable governance requirements, like those required for school registration nationally.
  • Board Director Duties. The ACNC Report's final recommendation for governance is that directors' duties obligations which have been "turned off" under the Corporations Act 2001(Cth) (Corporations Act) for the purposes of schools and NFP organisations should now be "turned on". This would resolve ambiguity and address concerns raised about director misconduct.

The ACNC Report identifies the need for schools which are NFP to have clear governance structures and meet public expectations of transparency and accountability, especially in relation to directors' duties, identifying conflicts of interest as a key category where the most complaints occur. School boards should focus on developing strong codes of conduct for their board members and ensure conflicts of interests are defined and recorded accurately for the purposes of transparency in school records.

Victorian Ombudsman Review

Similarly, in a recent investigation by the Victorian Ombudsman into allegations of improper conduct by former Principal of Bendigo South East college, Ernest Fleming, there was found to be cases of nepotism, conflicts of interest and financial mismanagement of the college. After three protected disclosure complaints led to the involvement of the Ombudsman, the resulting report stated that it was "a case study in nepotism".

According to the Ombudsman's report, Ernest Fleming employed his wife as "Personal Assistant to the Principal", despite there being no record of her applying for the position, and one of his sons as "Athlete Development Program Manager", even though there was a more qualified candidate for the role. In addition, Ernest Fleming employed Michael Bulmer, who initially worked for Bendigo Coachlines before purchasing the company with another of Ernest Fleming’s sons, as the college’s bus coordinator. Later, Mr Bulmer’s wife took on the college’s bus coordinator role. The bus coordinator role allowed the Bulmers to allocate college business to Bendigo Coachlines, at the expense of other local bus companies. This conduct was authorised and facilitated by Ernest Fleming. The report continued that “the investigation found that for many years, Ernest Fleming ran the college as a personal fiefdom, employing and promoting family members, providing substantial benefits to his son’s business partner and companies owned by his son, and using public funds as he saw fit without consultation or approval from the college council".

Importantly for schools, the Ombudsman also pointed out that “his actions showed little regard for department policy, relevant legislation and regulations or for his obligations under the Code of Conduct to avoid conflicts of interest, use his power for authorised purposes, and uphold standards of integrity and financial probity.”

The Ombudsman also criticised the investigating body at the regional office of the Education Department for failing to properly investigate complaints by other employees about Mr Fleming's behaviour. The report stated that "their inaction contributed to a culture in which Mr Fleming went unchallenged and made staff feel like they had nowhere to go with complaints."

Similar to the conclusions from the ACNC report, the Victorian Ombudsman identified the clear need for schools to have governance structures and codes of conduct which are accessible and transparent to the public, clearly identifying and recording conflicts of interest where they occur.

Good Governance and Conflicts of Interest

Governance requirements for schools across Australia continue to increase year after year, with management of conflicts of interest being a new governance hot spot for school administrators. The requirement for schools to properly handle ‘conflicts of interest’ is a core governance discipline where schools can look to the legal and commercial sector for guidance.

A conflict of interest is a situation in which a person or a corporation, in a position of trust, has competing professional or personal interests. Such competing interests may make it difficult for the individual to fulfil their duties impartially and can create an appearance of impropriety.

The obligation to act in the best interests of the school comes from a variety of sources. Non-government schools usually fall into the categories of being corporations limited by guarantee, which brings them under the governance and other requirements of the Corporations Act, or incorporated associations, which brings them under the relevant state or territory Associations Incorporation Acts. Most non-government schools are also registered as charities, which brings them under the governance requirements of the ACNC Legislation. Furthermore, there are school registration requirements in most states and territories which also mandate the management of conflicts of interest as a condition of registration and renewal of registration. Non-compliance with a source of obligation may lead to de-registration (as a school and/or a charity) or other sanctions.

The consequences of a conflict of interest are varied. Although there are certain legal consequences if a person acts in breach of their obligation to either avoid or properly manage a conflict of interest, the greater damage may be to a school’s reputation (and consequently, to its ability to meet its goals and objectives). This can be the case even if no unethical or improper act results from the conflict.

What Schools Can Do Now

Steps a school can take in managing any conflicts of interests include the development of a robust Conflicts of Interest Policy.

At a board level the steps include to:

  • ensure all board members are trained and properly understand their conflict of interest obligations
  • require board members to disclose any material personal interests that could interfere, or be perceived to interfere, with their independent judgment
  • have any perceived or actual conflicts of interest recorded in a Conflicts Register
  • have properly documented procedures that outline how school board meetings should be conducted if a conflict of interest arises.

At a staff level, schools can take steps to:

  • ensure that all employment contracts make it a requirement for staff to avoid any potential conflicts of interest and to notify the school if any conflicts arise
  • train all staff on how to manage any potential conflicts of interest
  • provide a clear and unambiguous conflicts of interest notification process for staff
  • have a gifts policy that makes it unacceptable for staff to accept a gift from a person who may derive a benefit if the gift is accepted.

From the recent reports by the ACNC and the Victorian Ombudsman, good governance, transparency, accountability and strong management of conflicts of interest continue to remain a key requirement for the governance of non-government schools.

Lauren Osbich

Lauren is a Content Development and Legal Research Consultant at CompliSpace. She has over ten years of experience in legal research and legal publishing, working nationally across Australia. She studied at Macquarie University completing a Bachelor of Laws with an Honours in English, followed by being admitted as a solicitor of the NSW Supreme Court. Lauren is also passionate about giving back to the community through the not for profit sector as well as donating time to mentor and coach young lawyers in their professional development and finding time to also be a member of a not for profit Board.