INTRODUCTION TO CORPORATE GOVERNANCE

 

 

 

Corporate governance is a system comprising a set of rules, practices, and processes used to direct and control an organization.

The Board of Directors are the primary force for determining Corporate Governance. Accounting transparency, fairness and responsibility or the full fundamental principles of corporate governance.

Forbes identifies the five pillars of good corporate governance.

 

1.   Effectiveness of the Board of Directors

2.   Compensation and remuneration

3.   Risk and crisis management

4.   Relationship with stakeholders

5.   Ethics and transparency

 

In businesses seeking investors, there has been pressure for them to develop a framework that help stakeholders understand how an organization is managing risks and opportunities related to the Environmental, Social and Governance criteria, usually called E.S.G. factors.

 

Environmental factors

This includes organizations impact in managing climate change, greenhouse emissions and natural resources. Most of these factors do not apply to a church but we suggest that the. Church Board of Management should make an annual review that there are not matters which need their attention.

It may be important for the Board to respond to a question that the exposure is examined annual by the Board at a meeting of the directors.

 

Social factors

 

This pillar refers to an organization with stakeholders and will include human capital management covering fair wages, non-discrimination in employment engagement and also the impact on the communities in which it operates.

A church should have procedures to provide adequate controls and examples are discussed in Chapter 9.

 

Governance

 

Corporate Governance refers to the way an organization is led and managed and leadership how incentives are aligned and what types of internal controls exist to promote transparency and accountability on the behalf on the part of leadership.

Chapter 9 contains proposals for an organization to meet the highest standards of Corporate Governance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHAPTER 8 Internal accounting controls

 

It is of major importance to a church is to have a proper system of internal accounting control. A cursory search of the Internet will shock you to see the number of frauds that are found in churches and, no doubt, there are many unidentified losses as well.  So as to minimize the exposure to fraud, we set out below some of the characteristics of internal control for your consideration. These guides will not be comprehensive as a specific analysis of the circumstances in your church is necessary to have a reliable evaluation of the needs of your church.

 

The purposes of these comments are  to provide the  management  a rough guide in evaluating the existing level of Internal Control over receipts and payments at the church. We have made some suggestions which are designed to reduce the risk of fraud and to give reasonable assurance of the accuracy of reported results of operations.

 

8. 1  Income:

The income for the church should be budgeted by the management and is generally sourced as follows:

 

                             Pledges                                                                         

                             Plate and other donations.                                     

                             Special fund raising activities

                             Christian education                                                                                                                                                                                                               

        

 

8.1.1 Procedure for controlling pledge income:

 

8.1.1.1 Pledges are, generally,  requested  once a year for the following year by  a group called, say, the Stewardship Committee . This group sends a written letter, with a  brochure to all members of the church. Members are requested to make  a commitment included in a pre-printed card included in the aforementioned package. The Card is returned to the church in an envelope addressed to the  nominee of the Stewardship Committee  at a specifically identified address. These pledges help the Board of the church budget revenue and in some cases, help members of the Stewardship Committee to work with members in obtaining donations to fund projects or to increase revenue of the church. These are not commitments which would be legally pursued if not honoured.   

 

8.1.1.2  The  other church mail is generally opened by two persons, one of which would be ,say, the Administrative Secretary but the pledge envelopes sent to the specified address  are identifiable and are given unopened to a designated official ,say, the Treasurer. The procedure for controlling other income in the mail is discussed below.   The  Treasurer acknowledges each pledge and advises the Stewardship Committee chairman the names amounts of the responders.

In some churches, the pastors are not advised of the names of donors or amounts received.

During the months following the receipt of pledges, primarily in the new calendar year, checks are received through the mail in respect of these pledges. And the treasurer receives all pledge envelopes and  as a control feature, he arranges with his assistant to acknowledge receipt of the check and to bank the received amounts. Tax receipts are also issued to the donors and a record is kept by the treasurer of the tax receipts so that a reconciliation can be done by the treasurer of the tax receipts issued and the amount deposited. The Chairman reports these results to the Finance Committee.

Any pledges not honoured should be followed up by the Stewardship Committee  which has the benefit of possibly increasing revenue but also serves  as an internal control check that any unaccounted receipts would be identified and could be investigated.

 

8.2 Other income received by mail

 

All mail should be opened by two persons and any checks received should be listed in a diary on the date that the mail was opened. Usually, one  of the mail openers should be the Assistant Treasurer . When all mail is opened, the list of checks should be  agreed by the two openers of the mail  and recorded in a diary signed by the mail openers. The checks should be restrictively endorsed for the credit of the church bank account and handed to the Assistant Treasurer for banking. When the checks have been banked, the bank deposit book and the list of checks in the diary should be agreed by an independent person  and the diary signed to record that the two were agreed.

It is unlikely that cash would be received in the mail but should it be received, it should be listed in the same as the checks are listed and the same procedure should be followed to check that the full amount was timeously deposited

 

8.3 Procedure for controlling plate and other income:

 

 It is important that the plate income is never left with one person as that is an unfair responsibility for that person and there could be a temptation to take from the cash.  At each service, two persons who are independent and are not related family members should count the cash at all services. It is important to count the amount received and record the agreed amount passed to the Assistant Treasurer for banking. Checks received should be restrictively endorsed for the credit of the designated account of the church, The counters should verify that the amount on the envelope matches with the checks listed.  The record of the count should be recorded on triplicate bank deposit slips. Two copies deposit slip are placed with the cash and checks in the lock box. The third copy of the deposit slip should be given to the Church Administrator who should check these against the stamped deposit book kept by the assistant treasurer. The requirement here is that the deposit slip must be independently agreed with the diary to ensure that all receipts  are promptly banked in full.

 

 

 

 

 

8.4   Procedure for controlling income delivered to the church office:

 

When other checks are mailed to the church, they are controlled in terms of the procedure set out in paragraph 8.2  above. Checks that are delivered to the church or are handed to pastors or employees should be acknowledged by issuing a receipt and the checks should be restrictively endorsed and handed to the Assistant Treasurer for her attention. An independent check should be made to check  that all received amounts for which receipts have been issued has been banked.

Contributions received for special services such as weddings should be restrictively crossed and inserted in the lock box in the Assistant Treasurers office. A copy of the receipt should be sent to the payer and a copy of the bank deposit slip for this income should be sent to the person who received it on behalf of the church.

 

8.5 Sundry  Income

This sundry income includes income  from all congregation members and fund raising activities. Checks or cash delivered to the church should be acknowledged by issuing a receipt and the checks should be restrictively endorsed and the cash and check handed to the Assistant Treasurer for attention. The assistant treasurer will be responsible to ensure that the church receives all receipted income.

 

 

 

 

8.6  Expenditure

 

8.6.1 Salaries and benefits

 

Payroll and ancillary costs represent the major cost of any church. Desirably, there would be a functional Remuneration Committee which would include the establishment and monitoring of personnel and employment policies.  This committee should prepare a Policies and Procedures Manual  recording  a summary of the personnel policies which were approved by the Board.  These procedures would require Personnel files  to be maintained for each employee to ensure that they have a complete record of employment as well as a record of prior employment, reference checks at time of hiring etc.

 

Major areas of exposure which will be the responsibility of the Remuneration Committee include the following:

 

·      That there is a reliable procedure for checking prior employment references before hiring new employees. This is one of the most important functions at the church as many employees are exposed to members with special needs and could be exploited.

·      A possible need to ensure that staff are not paid excessively and are paid market competitive salaries  so that they are not lost to the church for a more profitable employment elsewhere

·      A need to ensure that all fringe benefits are comparable with the current market and are legally permitted, particularly by the tax authorities

·      That payroll deductions are properly computed and that there is proper control to ensure that the IRS  and others reporting are correct.

It is beyond the scope of this booklet to expand further on the function. It is ,however, imperative that a personnel function should be in place and that a proper approval procedure is implemented for staff salaries.

 

 

Another control which should be carried out by the check signer is as follows

·      Once the first periods salaries are agreed, each time salary checks are signed, a list should be prepared and a summary presented to the signer showing the total salaries paid

·      In the following months, the signer will use the prior month total and make adjustments for new employees added  at the salary stated in the attached letter of appointment and any other variations caused by losses of staff, absence, part time employees, overtime etc.

·      The signatory should have a clear understanding of the total payroll expense that he is signing and clear approval from the appropriate source for any additional expenses.

This type of reconciliation would be as follows:

 

       Total salary in opening month as per signed approved salary role.        $ 12,000

 

        Add new employee  - A N Other per letter dated xxxxx                                   1.200

      

         Add Overtime paid to XYZ per letter from ABC dated                                        300

 

 

        Total salaries per  agreed list of staff                                                                $13,500

 

8.6.2 Other Disbursements

 

The usual procedures to control other expenditure are as follows:

1.     In most churches, Chairman are appointed covering Music programs, Family Service, Music, Missions, Christian Education, Multimedia,  Health ministry and Property Management. The Board of Management will give the chairman strategic direction in his budget presentation so that each ministry develops budgets in line with the strategic direction and expected funding available.

2.     Each Chairman should present  a budget to the Board of Management. After discussion and agreeing priorities for the church as a whole, the  budget must be approved , with or without change, and included in the budget for the church for the year. It is difficult for accounting to control the timing of expenses and therefore,  each Chairmen should establish approval procedures for all expenditure in respect of their area of responsibility on the basis that this expenditure will be in accordance with the approved budget for the year. The Ministry results will be reported, say, quarterly to management who will at that time satisfy themselves that each ministry is operating within budget.

3.     Other expenditure which includes Office expenses, Housekeeping, Kitchen and General expenses incurred on a needs basis are controlled by the designated members of the   office staff but check signatories should carry out superficial supervision by satisfying themselves that the expenditure is within  the approved budget .

4.     There should be a list of approved suppliers who have been so designated by management.  Staff who make purchases should negotiate lowest possible prices from suppliers. The church should receive best possible prices but preference should be given to supporting members of the church and  the church could beneficially  publish a directory of members who are involved in business so that the church and other church members can support these companies. This listing could be in the form of  “mini yellow pages” or could be on a desk top one page diary with each church member having the opportunity of advertising. This project could raise funds for the church and also, keep as much expenditure in the family as possible.  Any purchase over a Board of Management designated amount from another source  other than an approved supplier, should be subject to approval as designated by management.

5.     All payments  made are  to be supported by an invoice which has been approved by the purchaser and is presented to the check signer with the documentation below:

The documentation supporting payments must show evidence of the following checks and approvals:

·      Account allocation

·      Basis of selection of supplier. Options being price, church member, contract etc.

·      Agreement of price charged

·      Clerical accuracy of invoice

·      Approval of receipt of goods or service

·      Approval of Department head authorising disbursement

 

 6     Check signing authorities are to be defined and a guide is as follows:

·      For payments of up to, say,  $1 000.00 require to be signed by either The Church Administrator as well as one designated Board of Management member

·      For payments in excess of $5000.00 require the signature of two of the designated Board of Trustee members.

Approved trustees are the Chairman, Vice Chairman, Corporate Secretary and Treasurer.

 

8.7  Capital Expenditure

 

Each church must have  a  formalised approved policy of capitalising all capital expenditure, a guide may be all expenditure  of more than $500. At the time of preparing to budget, the Board of Management should give guidance on the churches appetite for capital expenditure based upon anticipated financing available.

This policy would require a request for capital expenditure to be presented to the appropriate level of church administration. A special approval form is required showing the reason for incurring the expenditure and a clear indication of the benefit to be obtained. This is an important function and chairman must realize that once capital expenditure is approved, all additional changes within the budgeted period should be within the agreed parameters.

 

 Each proposal must be supported by at least two alternate price proposals.         Possible levels of approval are the following

·      All capital expenditure in excess of $500 but up to $2 000 can be approved by the Chairman of the Ministry requesting the expenditure provided that the expenditure was included in the previously approved budget.

·      Expenditure in excess of $2000 and up to $5 000 should  be part of the approved budget but before payment, also approved by the Finance Committee but in the case of urgent approval, by the chairman and one other Finance Committee member.

·      Expenditure of more than $5 000 as part of the approved budget must be approved by the Management Board before payment is made.

 

 

 

 

 

 

 

 

 

CHAPTER 9 Organization structure

 

As one reads the proposals for good internal control for a church, one realizes the importance of Governance in our modern society and the need for identified levels of responsibility. In the current environment of the world, we know that Christians are being challenged on a daily basis and there is a need for more emphasis to be given to the sustainability of the church as we know it. There is a need for independent assurance and definition of the role of the Management as well as the role of the Pastoral team.

 

 

THE BOARD OF MANAGEMENT

 

The name and authority of this body may differ in churches but, other than religious responsibilities, it is the highest level of authority. The Board will be appointed in terms the by-laws of each and every church.

Each Board should have a clear governance document define their role as being  responsible for the vision and planning of the strategic direction of the church. The day-to-day business and financial affairs of the church should be formally delegated to other persons in terms of a written document. Religious services and activities are separate and are defined separately below.  Some considerations in this regard are as follows:

 

Composition of the Board of Management

 

• The number of members will be defined by the by-laws and would generally include: an elected Chairman who should not be a pastor or an employee, the Senior Pastor and the prescribed number of church members elected by church members as prescribed in the by-laws, usually between three and six additional members. The Chief Financial Officer “CFO”, in this presentation, often referred to as the Treasurer attends these meetings but, generally, is not a Board member.
•  The Chairman is the chief executive officer of the church and is responsible for the organisation to control the business, operations and financial affairs. The Chairman will preside over meetings, and it is suggested with the Treasurer presiding in his absence.
• The CFO, Treasurer shall have care and custody of all funds and securities of the church.
• One of the Board members will be appointed Corporate Secretary and he shall co-sign contracts, conveyances and other instruments as approved by the Board. He will also approve Minutes of Meetings which are approved at the following meeting of the Board.
• The Board will include an appropriate balance of skills to ensure that the Board is able to carry out its duties.
•  No single director will be allowed to dominate the Board and all trustees will be members of the church who are not employees, other than the Senior Pastor.
• There will be no conflict of interest between Board members or between Board members and the church.
•  Board members will be formally appointed for a defined period, usually three years and will be available for re-election.

 

 

 

 

 

 

Board meetings

 

·      The Board will meet at least four times per year. Additional meetings may be called by the Chairman or in his absence the Treasurer or the Corporate Secretary on the written request of 4 trustees.

·      The Quorum for the meeting will be a majority of the members at the time of the meeting.

·      Board papers will be timeously delivered to members so as to ensure that they are properly briefed prior to the meeting.

·      The Corporate Secretary will assist the trustees in ensuring that they always comply with the law and good corporate governance.

·      Comprehensive minutes of the meetings will be kept.

 

 

The responsibility of the Board is defined in a charter showing that they are responsible to the members of the church for meeting the legitimate expectations of the members and the continued growth and prosperity of the Church. The Board is responsible for the following:

·      Approve the strategic direction of the church and the budgets necessary for the implementation thereof

·      Appoint the Senior and Associate Pastor while other non-administrative  appointments could be delegated to the pastors subject to the approval of the Chairman.

·      Administrative staff are appointed by the Chairman or Treasurer and approved by the senior pastor..

·      Ensure that the church is a responsible contributor to our society ; ethically, socially and environmentally

·      Guardian of the values and ethics of the church and to promote ethical culture among its members

·      Appreciate that sustainability and growth of the church is the essence of our survival.

·      Appreciate that strategy, risk and sustainability are inseparable

·      Monitor the management and their implementation of the agreed vision and develop an authority framework within the letter and spirit of the law.

·      Ensure that risks are identified and managed

·      Establish internal controls to cover financial, operational, compliance and sustainability.

·      Ensure integrity of financial reporting

·      Ensure that the Church makes full disclosure of material matters to the Members

·      Ensure that internal and external disputes are resolved without any reputational risk to the Church

·      Manage conflict of interests ( real or perceived) and disclose such to the Board members

·      To act in the best interests of the Church

·      To delegate certain responsibilities to committees

 

 

COMMITTEES

 

The following committees should be considered and Board members have a right to be present by invitation, as agreed by the Committee chairman, to any committee meeting.

 

Religious Responsibility

 

The Ordained Ministers are the spiritual leaders of the church and are responsible for the planning and execution of the religious services and religious activities. Provided that there is no significant change in religious approach , they have no obligation to  consult with the Board regarding details of religious activities, enlargement of current activities and consideration of new projects. If they wish to make changes in the religious approach they should keep the Board involved.

 

·      Each denomination is different but, but in the absence of specific directions, the Minister candidates  shall be identified by a Search Committee,   approved by the Board of members and once selected,  called to serve by two-thirds vote of the members.

·      The cancellation of any employment contract requires a two-thirds majority vote of the members at a congregational meeting.

·      Religious services shall be the responsibility of the Senior Pastor.

·      The Senior Pastor will have sole responsibility for inviting visiting preachers to officiate at any form of service in the church but the Chairman must approve any costs involved.

·      Where possible, the Senior Pastor and his Associate shall always participate in any service held at the church

·      Where the Pastor and the Board  do not agree on either the content of religious activities, the enlargement of current activities or new projects, every effort will be made to reach agreement but failure to do so will necessitate a General Meeting of members for the members to agree on the future activities. A two-thirds majority vote is required to adopt any change in activity, enlargement or new project.

·      The religious committees will report to the Senior Pastor or the Associate Minister as delegated by the Senior Pastor. Examples of these committees are as follows:-

          Christian education

          Congregational care

          Membership/evangelism

          Missions /outreach

 

·      The office staff will report directly to the person shown on the organisation chart but all employees have the right to discuss terms of employment with the Senior Pastor who will resolve any disagreements.

 

The Finance Committee

 

The Finance Committee is critical to ensure the integrity of integrated reporting as well as financial risk management and internal control. The Chairman of the Finance Committee will be a Board member, who is not the pastor, a is suitably qualified to understand and evaluate the responsibilities.

The committee should consist of at least three members of the church , not necessarily Board members who have the required skills. 

The role of this committee is as follows:

·      To meet at least eight times each year

·      To agree the accounting policies and practices to be followed

·      Be responsible for all reporting to members of all financial reports, annual financial statements, forward looking information and forecasts as well as control over all capital expenditure. It is suggested that the monthly reporting of total income and expenses be made to the congregation at large.

·      Assist the Board in providing comfort for financial projections and sustainability and to agree the strategy and business plans and annual budgets for approval by the Board.  Any subsequent changes in strategy or material deviations in the business plan must be approved by this committee and possibly the Board. .

·      Ensure that a proper evaluation of risks is made in evaluating the level of insurance cover required for asset protection as well as risks such as liability for injuries on church premises.

·      Review internal financial controls and report back to the Board who must approve the control environment

·      Oversee the internal control environment

·      Consider I T risks and controls as well as church continuality and information on security

·      Oversee the financial risk management

·      Agree the financial statements and report on its activities in an annual written report to the Board

 

Stewardship or Fund raising committee

 

Each church will  need to define the composition of the committee and the role that they play. We further suggest that the “pledge committee” should be the lead part of this committee. And that sub-committee could be established to carry out each function such as an annual cake sale etc. etc.

 

 

Risk Management Committee

 

The Risk Management is inseparable from the business of the Church. The Board of Trustees is responsible for the risk management process and they may delegate this responsibility but this delegation must be clearly agreed in writing.

The committee should have a charter defining its responsibility and must  be chaired by a Board member who is not part of the Pastoral team.

They must  work with leaders in the church to identify the major risks facing  each facet of the churches operations. This is a “risk up” approach whereby each individual ministry must identify its risks and its proposal for handling these risks. The Risk Committee must evaluate these proposed risk management actions and assist the ministries in improving the mitigation and control  of the risks.

The Board cannot be involved in the management of all areas of risk but the Risk Committee must report the top ten or more risks to the Board  for them to approve the action taken and the acceptance of the level of identified risk. The level of accepted risk must always be measured against the  churches ability to deal with that level of exposure.

 

 

Remuneration Committee

 

This committee must be chaired by a Board member who is not part of the Pastoral team.

The church must remunerate its staff fairly and responsibly with the view to both the current position as well as the long term interest of the Church.

The Remuneration Committee should have a Charter defining its role as well as arrangements for approving staff remuneration and staff policies and benefits. Other responsibilities of this committee include:

·      To ensure that appropriate reference checks and background references are obtained for all new employees before employment. THIS IS A PRIORITY AND MUST ALWAYS BE THOROUGHLY CARRIED OUT.

·      Ensure that payroll levels and related benefits are competitive.

·      Ensure that proper record of service and remuneration are maintained for each employee.

·      Approve the terms and conditions of  all staff including the Senior Pastor and the Pastoral team and provide guidelines for the level of remuneration to all employees as well as the composition of fringe benefits and employment benefits.

·      Design a basis of evaluating staff and recording these evaluations in the employees personnel file.

·      To approve the remuneration proposals before these are communicated to the staff.

·      Satisfy itself on the accuracy of performance recordings

 

 

The annual report to the Board must explain policies, strategic objectives and the basis for determining base rates of pay. Ex gratia payments and bonuses , if any, must be approved by the Remuneration Committee and reported to the Board.

 

 

 

Capital Expenditure Committee

The committee should be chaired by a Board member who is not part of the Pastoral team.

They must evaluate and approve proposals made by Committee Chairman and identify the major expenditures required by the Church. They must make proposal to the Board for ensuring that the church is not neglecting the need to incur capital expenditure.

 

 

The annual capital expenditure budget must be approved by the Board and expenditure in terms of the budget  must  be  approved in terms of defined levels of approval.

 

DISPUTE RESOLUTION

 

The Board should establish a formal process to resolve internal and external disputes and disagreements and the Board must ensure that disputes are resolved efficaciously. The Board must agree between mediation, conciliation and adjudication methods.

 

 

Other committees will be established as determined by the Board.