Time’s Up: Let’s Fix EFA

I’ve put up my hand as a prospective candidate for the board of Australia’s Electronic Frontiers Association in the upcoming election at the Annual General Meeting.

My candidate statement is on the AGM website (https://www.efa.org.au/about/2017agm/) but it’s fairly generic and doesn’t go into detail about what I think should be done with EFA. It’s supposed to be a short, pithy statement, and I wanted to explain myself more fully here.

I think EFA has been largely ineffective for years. I think the organisation has major problems that the board has proven it is unable to fix, even though it’s had plenty of time to do so. Recent events have only reinforced my opinion.

A few like-minded souls and I intend to replace a bunch of the ineffective board members at EFA and try to fix it, if it’s possible to do so.

I’m not yet sure if it is, and I’ll explain why.

What’s Going On?

News broke a couple of days ago that a bunch of members are unhappy: EFA Members Revolt As Cash Dries Up

This is based on my, and others, requests for information before potentially joining the board (if elected). Being on a board comes with various legal obligations, such as making sure the organisation can pay its bills as and when they fall due. Not being able to do so is called insolvent trading, which is illegal.

Taking a look at the organisation’s finances (such as its recent financial statements) and seeing how the board operates (by reading recent board minutes) is called due diligence and is common practice when looking to join a board. It’s covered as part of the Australian Institute of Company Directors’ Company Directors Course which I did some time ago, and passed the exam.

EFA publishes its financial statements each year, and normally publishes board minutes as well apparently. But the current year’s financial statements weren’t available publicly yet, and the recent board minutes are missing.

We’ve been trying to get a hold of this information for three weeks now, as the AGM is on 1 October 2017 in a little over one week.

It’s been quite a saga.

Asking For Information

After nominating for the board, I figured it’d be easy enough to get a hold of this information. The end of financial year was 2 months ago, and EFA uses the online accounting service Xero for its books. Xero has canned reports for your annual financial statements, so generating them should be trivial, if they weren’t done already.

I emailed the EFA’s secretary on 2 September 2017 via [email protected] asking after this information. Jon Lawrence, the Executive Officer of EFA, replied, and he pointed me at the previous year’s financials, and said

“I will ensure that recent Board minutes are published on the website within the next week.”

That didn’t happen.

Not only did it not happen, but Jon stopped replying to emails or Twitter DMs. Apart from two canned statements to the nominees generally (about candidate statements being published and how voting would work), I haven’t received any further communication from Jon.

On 6 September 2017, I emailed Jon pointing out that the FY2014-15 financial information here [PDF to the doc] only contained a Cash Summary report, not the Income Statement or Balance Sheet. I figured it was just a typo or a mistake that was easily fixed, but as you can see, it’s still missing as of when I write this on 21 September 2017.

On 12 September, I emailed the [email protected] list to raise the question more generally about the minutes being missing due to the lack of response from EFA, and the timeframe Jon provided being missed. I also mentioned the 2017 financials, since I’d gone through the previous year’s finances (more on that in a moment) and really wanted a look at something more recent, as the latest information was more than 12 months old.

I was also a bit alarmed by part of current Treasurer Shaun Haddrill’s candidate statement:

“As I have been Treasurer for less than two months, much of what I wish to accomplish has not been possible in this short time. As our funds are quite limited at this point in time, the first objective will be to rein in unnecessary spending.

The second step will be to focus in increasing fundraising activities so that we can return our budget to a healthy level.”

[emphasis mine]

Some of the other nominees emailed in support of finding out this information.

The response from EFA was silence for five days, until (then-)current board member Kade Morton emailed on 17 September 2017:

Can we please have this matter sorted out post haste?

I’m now deeply concerned regarding EFA funds as Shaun’s candidate comments are the first I’m hearing of unnecessary spending. This has never been mentioned in any EFA meetings I’ve been a part of nor in any correspondence I’ve received. To the contrary, it’s been stated to me the financial position of the EFA was in good shape.

In light of Shaun’s comments can we please have the finances opened up and send to all nominees.

That was fairly alarming.

Apparently the lack of communication from the EFA board and executive isn’t a new thing. Member Tim Wilson-Brown forwarded on a couple of emails he’d sent to Jon in February and September 2016, so well over a year ago, complaining about a lack of communication and transparency.

Financial State of EFA

I’m an analyst in my day job, so I’m used to looking at financial statements from organisations. I fired up my usual spreadsheets and took a look at EFA’s financial statements to see what they could tell me.

I didn’t like what I saw.

Assets, Liabilities, and Shareholder Equity for EFA for FY2012-13 to FY2015-16

Assets, Liabilities, and Shareholder Equity for EFA for FY2012-13 to FY2015-16

At the end of FY2013, EFA apparently had $41,548 in cash, which was all of its assets. I don’t have information any further back than that, because there don’t appear to be financial reports before then.

In 2013, EFA had revenue of $26,706 but spent $51,880 meaning it spent $25,174 more than it earned. That ate into cash reserves, which were just under $70,000 in September of 2012.

In 2014, EFA had revenue of $43,711, so nearly double, but spent $69,615, meaning it again made a loss, this time of $25,170 (after adding in some interest on bank holdings). Cash was down to $23,728. An accounts liability appeared this year, of $7,400 and it has stayed on the books ever since. I’d like to know what this is about.

In 2015, EFA lost $16,648 on revenue of $40,545. Cash was down to $6,179 which, given the trend of the past few years was alarming, since if something didn’t change, EFA would run out of money.

In 2016, revenue went up again to $55,545, but the organisation still managed to spend $55,830 leaving it with yet another loss, though small at $285. Cash was down to negative (yes negative) -$439, but some accounts receivables appeared—$5,539 worth—meaning total assets ended up at $5,100.

EFA Revenue and Income Growth

EFA Revenue and Income Growth FY2013-13 to FY2015-16

Labour Costs

Where did all this money go? On labour costs, mostly payments to Executive Officer Jon Lawrence. Jon was originally a contractor, but was made a part-time employee sometime in 2012 or 2013.

EFA spent $44,608 on contractors in FY2013. It spent $58,720 on wages and salaries in FY2014. In FY2015 the board finally managed to reduce wages to $39,651, but still managed to spend 97% of revenue. In FY2016 wages was down to $32,975, which was still nearly 60% of revenue.

EFA Costs to Income on a common size basis

EFA Costs to Income on a common size basis for FY2012-13 to FY2015-16

By way of comparison, according to ABS figures, $32,975 is roughly 54% of the full-time adult average total earnings for a year as of May 2017.

In 4 years, 2013-2016, EFA has spent at least $176,000 on wages, not counting superannuation, and about $235,000 in total, and taken total equity of the organisation from about $70,000 to near zero.

I’m not even 100% confident in these figures because the published financial documents aren’t consistent from year to year. As mentioned above, the FY2014-15 balance sheet and income statement are missing. The income statement for 2016 is missing; I only have the cash summary and balance sheet to work with. That’s two years of missing income statements.

As a reminder, the EFA has a legal obligation to produce these reports, and the board is supposed to be receiving them every 60 days, according to the Rules of Incorporation.

The FY2015-16 balance sheet is showing a negative balance in a Paypal account of $10,759 which is why the total bank assets are negative, and it’s more negative than FY2015 when it was -$4,143. Why?

You can see why I was keen to see how things were looking after FY2017 given how precarious things looked at the end of FY2016.

Ongoing Governance Issues

In 2013, the members rejected the financial report and directed the board to conduct an audit. The accounts were then moved into Xero and the books balanced in preparation for the audit, but I have no idea if the audit was actually performed. I haven’t been able to find the audit report on the EFA website.

The link to the board report from 2013 is wrong on the 2013 AGM page, but happily there is an archived copy in the Wayback Machine. It shows that there have been governance issues with EFA from at least 2012-13. It looks like the accounting was a mess at the time.

The Treasurer throughout this period resigned this year, and the current treasurer doesn’t seem to have received much of a handover.

The board is supposed to meet at least every 60 days, and to receive a current financial report (i.e. the Income Statement, Balance Sheet, and Cash Flow Statement) for every board meeting. I don’t have confidence this has been happening, and I haven’t received any evidence to the contrary so far.

Current Status

Apparently the lack of response from Jon has been because he’s been sick.

The board had a meeting on Tuesday night, 19 September 2017. Sometime around then, board member Kade Morton—who had nominated for this year’s election and intended to rejoin the board—resigned from the board. Board member Andrew Pam stated earlier that day that the board was drafting a public statement “to respond to the expressed concerns”.

On the Wednesday 20 September following the meeting, Pam said that the statement would be issued “Today, I believe.”

It wasn’t.

No update was given until today when I followed up, and now the statement will apparently be issued tomorrow. The Secretary has also been sick, so it appears they are the only person who can issue the statement.

The Chair of the board, Andrew Cake, has only responded to email once, on 19 September to say:

I’ve been avoiding commenting on this issue as i’m a candidate in the upcoming election myself. 

But that was obviously an error on my part. 

It has been EFAs regular practice for the last decade or more to present the accounts for the previous financial year to the membership at the AGM, and to send them out to the membership a few days/weeks prior to that date for the membership to review, along with the annual report. We literally have never been asked for them earlier than that date, so this request caught me a bit unawares. We are happy to hurry the schedule along a bit for candidates as requested.

Given the board should have seen a financial report within the last 60 days, it shouldn’t be hard to email one to the nominees. Quarterly Business Activity Statements for April, May, and June were due by 28 July 2017, or 11 August 2017 if lodged online, and doing that would have required bank reconciliation to have been done.

Regarding the accounts, Cake also said:

As Shaun points out, we have most of our accounting fully integrated with Xero now, but there are a few issues that can require a manual bank reconciliation, and that had not been performed for a while due to changing our treasurer, and some issues allowing the new treasurer full access to our bank accounts. Our previous treasurer retired as treasurer due to retirement from his employment, and moving to a remote location – he simply retired.

This demonstrates poor succession planning by the board.

After repeatedly asking when the accounts and minutes would be provided, the Treasurer has committed to making them available on Monday 25 September 2017.

Vice Chair Angus Murray emailed people on Wednesday 20 September suggesting that the minutes would also be supplied on Monday 25 September, but I don’t have confidence that he’s able to make that commitment, given the context:

Good afternoon Justin,

Thank you for your emails.

In response to your comment regard the minutes of the 2016 AGM – they will be made available shortly. Please note that, as the AGM was held via IRC (as it will be this year again), there is a clear record of the meeting.

In addition, I would like to personally express my apologies for the delay in responding to your queries – it is important that they are addressed and I thank you for your careful review of the AGM documents. In this context, please understand that we are all volunteers on the Board and serve as we hold a passion for digital rights advocacy. Personally, it is sometimes difficult to juggle the commitments of paid work with these email chains.

Nonetheless, every endeavor is being taken to ensure that you, and the rest of the candidates, are fully aware of the organisation’s current position – a high level of transparency is important to me, and the entire Board.

In this same context, please understand that there have been recent changes to the Board (Daemon Singer has recently relocated to rural Queensland and Shaun is doing a great job taking over the role of treasurer). Unfortunately, this has recently been compounded by our Executive Officer being sick. I don’t intend to make excuses as to the delay but please bear with us – as Shaun mentioned earlier, it is anticipated that the financials, minutes, etc will be circulated on 25 September 2017.

I understand how the Board nomination comments may have been misconstrued and kindly ask for patience whilst your queries are addressed.

This suggests that the minutes to be provided are the minutes from last year’s AGM, and not the minutes of all the board meetings that are missing from this page, and are what I’ve actually asked for.

New Constitution

The EFA is planning to change from an Incorporated Association under SA law to a Company limited by Guarantee under Australian Federal Law. There is an agenda item to vote on this at the AGM.

While I support this change in principle, I have some major issues with the details.

Board members would become Directors of the new company. There are legal obligations on directors, not least making sure the company is solvent. I would need to satisfy myself with the state of the finances of the organisation before I consented to taking on the legal liabilities involved.

I also have serious misgivings about a few aspects of the proposed constitution [PDF].

EFA To Take On Unknown Liabilities

In clause 14, Indemnity and insurance, the constitution proposes to indemnify Officers (a director, secretary, or executive officer) of all “indemnified losses” which basically means legal fees or awards against them that isn’t covered by insurance. In clause 14.1.3 (c) this

“applies to Loss incurred both before and after the date of the adoption of this Constitution”

Clause 14.1.3 (b) makes this apply to any Officer who has ever been an officer of the company.

This creates a huge potential liability for EFA, and I don’t see how the organisation benefits from it. I see no reason why EFA should cover losses incurred before the adoption of this Constitution, and I’d love to hear the argument for how this benefits members rather than the individual board members and executive officers who have incurred losses already.

At the very least, we should be hearing from the board and executive about what losses they already know about that EFA would now be on the hook to pay for, because insurance won’t cover losses incurred before the insurance is taken out.

A cynical person might wonder if this was a cover-your-arse move from people concerned they might get sued over something they did a year ago.

Proxies Are Rendered Useless

Another concerning change is in the interaction of various clauses and their effect on how voting will work.

Clause 11.4.3 says “A resolution proposed at a general meeting must be decided on a show of hands.” There doesn’t appear to be any mechanism for conducting a poll, or calling for a poll to be held.

Clause 11.6.2 says that if you want to appoint a proxy or attorney “A proxy or attorney must be a Member for the appointment to be effective.” so you can’t appoint a non-member as your proxy or attorney, and membership is subject to board discretion, under clause 7.3. The board can just reject an application for membership, and doesn’t have to give a reason (clause 7.3.3).

Clause 11.6.7 says that if a person holds a proxy for more than one member, they only get one vote on a show of hands which is the only method of voting allowed. This effectively means that if 3 members—say Alice, Bob, and Mary—give their proxy to Jane (who must also be a member, remember) then instead of having 4 votes available at the meeting, there’s only one: Jane.

Proxies are basically useless, and members who can’t attend the meeting for whatever reason effectively cannot vote.

This effectively means you have to have everyone turn up to the meeting to vote, which looks like an attempt to counter block voting by a group of people who get organised to vote together, but can’t all make the meeting for whatever reason.

Clause 11.4.4 also says that if a motion is carried (or lost) on the show of hands (the only method of voting permitted) then no proof is required. The Chairperson at the meeting just declares the result, which is minuted, and there’s no record of how many votes were cast in favour or against.

This “show of hands” language is pretty common, but normally also includes language about calling for a poll. There is nothing in the proposed constitution about calling for a poll, which concerns me. For contentious issues, being able to call for a poll and have the issue decided definitively one way or the other is important.

Payment Of Directors

The reason for moving to a Corporation is apparently part of the move towards EFA getting a part Deductible Gift Recipient (DGR) endorsement, so certain kinds of donations are tax deductible.

But, and this is weird to me, the proposed constitution says EFA will be able to pay directors for being a director. The Australian Charities and Not-For-Profit Commission has a template constitution and a guide to the template constitution that bans paying directors fees in clause 45. As the guide explains

If a company pays its directors fees and wants to fundraise in NSW, it may need consent from the minister (under the Charitable Fundraising Act 1991 (NSW))

EFA is a not-for-profit organisation. Recent research on NFPs published by the AICD indicates that 54% of charities don’t pay directors at all, 26% get expenses covered, and just 16% pay them fees. These charities in the survey are basically all much bigger than EFA as well, 96% with revenues above $100,000 a year.

I don’t think EFA has any business paying its directors, certainly not if the governance has been anything like that of the past five years where they’ve basically driven the organisation into a ditch.

There are a bunch of other details that bother me, like how the nomination of directors for elections works, what happens if a meeting is adjourned or put off, etc.

Conclusion

To say I’m unimpressed with the way EFA has been run is an understatement. I know that I’m not alone, having spoken to many people who have either tried to help fix EFA and left in disgust, who have just given up on the organisation and ignored it completely (which I also did until very recently), or who have become so frustrated with EFA that they set up alternate organisations to attempt to do the things EFA should have been doing, but wasn’t.

I think EFA has one last shot at salvation. If it can’t be fixed, it should be shut down or merged into one of the other organisations doing good work, where the money currently being wasted by EFA might be used more effectively.

If you agree, then vote for me or one of the other people who want to try one last time to fix EFA:

  • Justin Warren
  • Lyndsey Jackson
  • Peter Tonoli
  • Liam Pomfret
  • Lachlan Simpson
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