Membership and Governance Design – Director Members

Key take-aways: The director/member model is less costly, enables quick and efficient decision making, contained issue management, ease of reporting and simplicity of meetings and done carefully, classes of membership can be removed, so to put it simply the director/member model does more with less.

Introduction

On 5 December 2017 the government announced reforms to the administration and oversight of deductible gift recipients (DGRs).

Statements regarding the policy rationale said that the changes would:

• strengthen governance arrangements; and
• reduce administrative complexity.

The changes commenced on 1 January 2024.¹ The reform transferred the administration of four unique DGR categories - harm prevention charity, environmental organisations, cultural organisations and overseas aid relief funds - from being portfolios within government departments to the oversight of the ACNC and the ATO.

In terms of a governance design model, for doing more with less, as part of this DGR reform process was the repeal of Section 30-275 of the Income Tax Assessment Act 1997 (Cth).² Section 30-275 of the Tax Act was the section that required an “environmental organisation” to have 50 financial and voting members.

If the 50-person rule no longer applies for an environmental organisation, with the governments new policy rationale, to strengthen governance and reduce administrative complexity, should not all member based organisations consider doing the same?

We’ve seen many of our NFP clients move away from the historical imperative of having a community based, community represented membership, with various classes, all requiring notices of meetings and having different rights and obligations and moving from that to a streamlined director/member model.

Do we need members?

Adele Stowe-Lindner, General Manager, Institute of Community Directors Australia, writes in an article posted 17 July 2024: “Strong communities have the potential to serve as prevention, first aid, and well-being promotion… They are not a magical cure, but they are at least the societal equivalent of…chicken soup and a hug from one you love.”³

She goes on to say: “And yet Australians’ participation in community groups and activities is wavering. Volunteering is down, club memberships are down, people are just not as engaged in civic life as they used to be. What motivated my grandparents – many people’s grandparents – to be involved in their local, cultural, political or faith communities? Have those times passed?”

The 2024 Community Compass research report, commissioned by Our Community and the Community Council for Australia, surveyed 3,071 people 17 years and over in 2024 and found that 25% of Australians are open to volunteering, but only 11% are interested in taking up a paid membership.

Do NFP organisations need to have members, do they even have members in the traditional sense or do they have clients and participants in programs and volunteers?

Legally, to establish an incorporated association in Victoria requires five members, but this requirement doesn’t exist in all States and for a NFP company limited by guarantee, you need three directors but you can have one member.

Advantages and disadvantages

A director-member model provides governance stability and consistency of strategic direction. It allows for flexibility to obtain the skills needed to govern increasingly complex and regulated entities. It has low admin costs and director appointment, meetings, reporting, all can be more easily managed at a governance level.

The flip side is diminished accountability to members for board performance and removing Constitution rights of members to remove directors. Although the directors, acting as members, can now do this. Also NFP entities have external accountability, to regulators, auditors, Government departments and funding bodies all who regulate activities and performance.

A Nominations Committee can be established to ensure directors are selected and appointed on merit in a transparent manner, advertised openly and can include independent, non-directors, stakeholders, even clients on the recruitment panel. So there are other ways to achieve community engagement and participation at a governance level.

Member oppression orders

In NFP companies, member oppression orders arise from the principle that a company’s affairs should be conducted fairly, not oppressively, unfairly, or prejudicially towards members. If a company’s actions are found to be oppressive, a court can make a range of orders, including winding up, modifying the Constitution or managing operations to defeat the unfair conduct.

This is Section 233 of the Corporations Act, with similar provisions in the various State incorporated association legislation.⁴ If you’re the victim of what the legislation calls ‘selective reduction’ you have standing to bring a claim for such a member oppression order.

The leading High Court case on section 233 is Wayde v New South Wales Rugby League Ltd, here the Court considered whether the decision by the League to remove the Western Suburbs District Rugby League Football Club (‘the Wests’) from the NSW competition (to bring the number of clubs down to twelve) was oppressive, unfairly prejudicial to or discriminatory against the Wests.

The Court had to balance two competing interests - the interests of Wests to remain in the competition, and the interests of the League, which would benefit from having a shorter season, facilitated by having 12 rather than 13 clubs. See, it was a question of governance, a decision made by the League to strengthen governance and reduce administrative complexity, to do more with less.

The Court said it was harsh but not unfair nor oppressive. The directors had made the decision in good faith for the benefit of the company as a whole, and so after balancing the interests of both the company and Wests, and the Court determined that the decision wasn’t unfair.⁵

To remove the member was a decision of good governance.⁶

Change management and consultation

So, finally, how do we safely remove a class of members and guard against unfairness and a claim for an oppression order by aggrieved members?

In the article, Two words that make everyone shiver – change management [posted 12 Dec 2024] Adele Stowe-Lindner, writes: “Leaders who assume that the necessity of change is self-evident may find themselves unprepared for the disappointment that follows when others do not share their enthusiasm.”

To avoid the disappointment that may come when others do not share your enthusiasm for this change and so to avoid a claim of oppressive conduct, communication and consultation steps are required:

First Step – Member Consultation - the first step is to issue an Explanatory Memorandum (EM) with an amended Constitution that makes the required changes.

The EM explains the reason for the changes – this can allow for and facilitate further consultation and “Town Hall” style meetings to discuss and consult on the changes and answer questions.

The reasons set out in the EM will revolve around current understanding of good governance principals, separation of powers and duties – especially if employees are members – the need to avoid conflicts of interest, and depending on your organisational history and context, it may be possible to establish Associate Members, without voting rights, so not abolished but moved to different categories of membership.

The new Constitution might include a ‘Community Engagement Committee’ – that can be established – with former members, so members can become stakeholders and aren’t left behind by the governance changes.

Second Step – The second step is to include a motion of the class or classes of members being removed so that those members themselves vote and resolve to agree to abolish their class of membership as a separate resolution, to the resolution adopting the Constitution. Passing this resolution first greatly removes the risk of a member oppression claim.     

Third Step – The third and final step then is to adopt the new Constitution which now includes the new director-member governance and membership framework.

So to put it simply, the director/member model does more with less.

This article was first published in the 2025 Better Boards Conference Magazine.

Disclaimer

The information in this article is of a general nature only and does not constitute legal advice. Readers are encouraged to contact the author or seek their own legal advice for their specific situation.

Further Reading

An NFP Dispute: a Tale of Two Hugs

Purpose-Led Governance for Mission-Driven Organisations

Getting Basic Membership Rights Right

Navigating NFP Mergers: A Transfer of Business or Control

Inviting Stakeholders to Have a Say in Decision-Making

Preventing and De-escalating NFP Dysfunction: The Role of the Chair

Changing Your NFP’s Legal Structure (Panel)