Surplus Distribution Policy

 

I. DISCUSSION NOTE ON ‘POLICY FOR DISTRIBUTION OF SURPLUS’ OF SOCIAL SYNERGY FOUNDATION

 

Tabled at the 20th (Twentieth) meeting of the Board of Directors of the Company held on 21st January, 2019.

 

 

  1. On 31st March, 2019, SSF will complete five full years of operations. This was a period of testing the proposition of organisational development to small and medium-sized mature not-for-profits; of putting out a name and identity in the market-place, and of building predictability in income streams. At the end of this period, financially, our Company can claim to have a sound balance sheet:

    • As of 31st March, 2018, it had accumulated a surplus of INR 7,73,148 (~ Euro 10,000) and is on track to add another INR 3,00,000 by 31st March, 2019, taking it to a million rupees of reserves at its disposal.

    • All the capital put in by the initial members of the Company has been retired and as of date there are no permanent long-term liabilities.

    • It has, over the five years, duly complied with all statutory taxes, including GST, considering that most of its income is from foreign sources

  2. As  per the MoU of the Company (article VIII), “Every member of the company, other than Government Nominees, undertakes to contribute to the assets of the company, in the event of its being wound up, while he is a Member or within one year afterwards for payment of debts or liabilities of the Company contracted before he ceases to be a Member and of the costs, charges and expenses of winding-up, and for adjustment of the right of the contributories amongst themselves, such amount, as may be required, not less than Rs. 5000/- (Rupees Five Thousand Only).”

  3. The Board and Members must make careful note of the above situation. It means that the Members will have to personally bear the consequences of financial mismanagement or weakness. This point can never be over-emphasised.

  4. This is also the single-most important consideration that drives the conservative financial approach of the Management and will continue to do so. It is further reinforced by the fact that there will always remain four permanent constraints to its financial growth:

    • Organisational development as a value proposition will always face a strong challenge in gaining acceptability amongst a critical mass of development sector organisations and donors, especially as there is no academic precedence or brand to back our efforts to convince them to invest in intangible organisational assets. Business development at the Company will therefore proceed at a slow and organic pace with financial growth being, at times, non-existent.

    • Our fundamental mandate is to earn most of our income from organisational development at a price which fits within the pay-hierarchy of our end clients. Even if we possess a pricing power we restrain ourselves from exercising it fully: our work demands that we are seen as part of the organisational set-up and involved in all key decisions rather than viewed only as external consultants. One way to maintain this relationship is by always remaining within the client pay structure.

    • Our preference to work only with those clients with whom there is strong alignment of values and temperament, like the Company’s pricing policy, temperamental fit is what allows it to be able to influence its clients strongly.

    • Lack of professionals with management consulting background who are experienced in organisational development and willing to work within the Company’s cost structure. This means that even if we have willing clients there will always be a limit to our operating capacity.

  5. Now that the Company has reserves to withstand sudden short-term contraction in business as well as working capital stress, the question arises of what must be done with the surplus which will get generated from FY19-20 (April 2019 onwards)? Part of the surplus every year will certainly go towards strengthening the reserves, but the management estimates that there will be excess available for which some productive use has to be found. 

  6. One suggestion, discussed during the Nineteenth Board meeting, was that one way to channel this surplus is to compensate the core team through a bonus route to bring some parity in their pay in line with the market. There are a few challenges to this position:

    • Many individuals who contribute to the organisation do so as consultants and legally the bonus provision cannot be applied to them. The only way to compensate them is to revise their contracts on an annual basis.

    • Given that the real measure of the Company’s value is to be judged in largely qualitative terms over a long time-frame (especially the aspect of it remaining true to its mission), it is a challenge to identify strict quantitative metrics linked to revenue growths or profits or fund-raising.

    • More fundamentally, however, the idea of bonus itself seems incompatible with the ethos of a non-profit which is what the Company is.

    • It is also incompatible with the approach that the Company advocates to its own clients as far as employee compensation is concerned: to use bonus largely to reward the lesser paid employees lower down the hierarchy. The top-management, it is always assumed, is to be paid a fixed and fair rate and is really committed in the organisation because it offers them other benefits: working for a purpose that resonates with them, having a higher degree of independence and accountability, etc.

  7. For this reason, the Management’s stand is to continue to be compensated through well-defined increments of salary or professional fees and being allowed to charge reasonable and pre-defined out-of-pocket overheads. However, unlike the past where these increments were very conservative, going forward, it is possible to be more realistic and reasonable about them.

  8. The second suggestion was to increase the outlay on the FIG (Fund-for-Inclusive Growth) initiative: in fact, this process has already started and in this year the Company has significantly hiked its investments in FIG, reaching out and experimenting with different modes of communication, etc. However, the Company will continue to exercise restraint in this area: it will only invest provided it sees a strong strategic purpose and immediate value; it will not invest in communication and brand-building simply to compete with other organisations or because it is the industry-norm.

  9. What then are the other avenues left? In a typical Company, the approach after compensating management is to compensate shareholders. In a Section 8, the Members occupy this position but with a caveat : a Section 8 cannot distribute its accumulated profits to its Members, but the profits should be recycled strictly within the Company’s operation to meet its purpose as articulated in its MoA. Our implicit public purpose is to provide a meaningful platform for professionals to engage with the ‘old guard’ of the development sector: to conserve the good work done over the years and intelligently and sensitively add on to it. 

  10. In the context of SSF, what is the most optimal way to accomplish this purpose? To act as a market-maker in two ways:

    • Enable our clients to avail services of professionals who they may not be able to fully afford.

    • Help boot-strap independent consultants/professionals who are starting their own operations by bridging them with other professionals who SSF works with as well as provide financial assistance if necessary.

  11. SSF’s work often demands that it get other professionals on board (those versed in fund-raising, communications, design thinking, research etc.). Often our clients do not have access to them, or if they do, they are not able to retain them for reasonable periods of time because donors typically do not provide for such ‘organisational development’ costs. SSF, to a small extent, can fulfil this. The first way of market-making helps achieve this to the benefit of our clients,  theprofessional involved, and us.

  12. Similarly, there are a lot of right-minded professionals who are eager to work with the sector or were already engaged with the sector as part of a larger set-up but now wish to be independent. However, they face three challenges: they may not be financially secured to be able to work at a significant discount to the market, they are searching for an appropriate institutional vehicle to engage with the sector, and they may not know other professionals whose skills they need. Our Company can serve as a good starting place for such independent professionals by providing them a legal vehicle (contract management, accounting), connect them with other professionals within its network, and provide some financial support. The strategic advantage for the Company is that it gets to know the work of these professionals, expands its own network, and hopefully is able to use work done by them as additional credentials to strengthen its own business development efforts.

  13. In short, given our Company’s operations, this is the most cost-effective and also the most productive way to allocate its surplus capital. It is possible to think of this as a small investment operation which, at a micro-level, also sets the framework for how donors can actually support OD efforts of NGOs in general. Our Company calls this ‘investing at the margin’: the idea that with small amounts of capital it is possible to bring about lasting changes, especially if this capital is invested in people and professionals on a sustained basis.

  14. If the Board approves this idea, then there are two ways of allocating this capital:

    • Directly as a charge against surplus

    • As a charge against income (that is part of the budget)

  15. Our Company’s management has inquired with its auditor and Company Secretary on whether the law formally allows it to charge directly against surplus. The initial feedback we have received is that to do so would require both an 80G and 12A certification from the income tax authorities. Both are processes that can take anywhere from one to three years with an additional caveat: procuring a 12A is a 50:50 probability for the Company. Nonetheless, we will make an effort to exhaust this possibility.

  16. In the meantime, the only available option is to actually set aside an explicit provision in the annual budget to spend on this ‘market-making’/‘investing at the margin’ idea. The Management proposes the following mechanism in this regard:

    • The determination of how much capital to allocate to this initiative will be at the sole and full discretion of the Board: it shall alone decide if and how much to put aside each year. The Management will, of course, make its representation based on the opportunities it sees at hand, but the Board has the full authority to override Management.

    • This decision will typically be made in the month of April when the full year Budget will be presented to the Board.

    • Once the Board has allocated its capital, the Management will have full discretion to deploy this capital. The Management, in its annual report to the Board, shall fully disclose what are the opportunities on which the money was put to use and how it was used by the respective organisations and individuals concerned.

    • However, the Management makes it absolutely clear that it will not be in a position to report on output and outcome resulting from this deployment of capital. The reason is simple: just like many donors find it very difficult to assess the quality and output of our Company’s efforts (because of its highly qualitative nature), likewise it is very difficult to report on tangible outputs from investing in specific professionals or persons.

  17. If the Board and the Management are both agreeable to the above, then it can be resolved to adopt this as a policy and practice going forward.

  18. [Note: On further discussions with the auditor, the Company found that there is an alternative to distribute the surplus in form of grants to non-profits that do have a 12A and 80G. But this operation invites income-tax: the entire amount disbursed as grant is accounted for as income and a small rebate is allowed, computed as per a pre-defined formula. In spite of the income-tax implications, this approach seemed the simplest and most transparent, and the Management has decided to operate through this mechanism, until (and if) it gets suitable tax-exemption from the income-tax authorities.]

 

 

II.

 

The Board had granted its in-principle approval to a surplus distribution policy tabled by the management in the Board meeting held on 21st January, 2019, based on the idea of ‘investing at the margin’. Basis that approval, the Board subsequently, in its Twenty-First (21st) Meeting, held on 22nd April, 2019, approved the budget for the financial year ending 31st March, 2020, in which an explicit provision of  Rs. 200,000 (Two Lakh Only) was made under the head ‘Investments at the Margin’.

 

However, before the management can proceed with deployment of funds sanctioned under this provision, it was necessary that the agreement be concretised as a permanent policy. It is important to note that in choosing to proceed thus in deployment of its own funds, the Company was well within the framework set out in its Memorandum of Understanding. In particular, the following clauses under Section III (B) of the MoU bear notice,

  1. Clause (10) To establish and support professorship, fellowships and lectureships, scholarships, and prizes in institutions dealing with the objectives of the Company.

  2. Clause (11) To organise exchange programmes for representatives, functionaries, staff and people involved in philanthropic or social or corporate social responsibility initiative and to provide training of work in India or abroad.

  3. Clause (15) To make donations, grant endowments and/or otherwise assist in any form whatsoever to any person(s), organisations, public charitable institutions, companies, societies, trusts, foundations, academic and/or cultural institutions who have object(s) similar to any one or more of the objects of the Company for the purpose of promoting, assisting, and/or encouraging the carrying and / or achievement of such objects.

  4. Clause (28) To apply the whole or any part of the income of the Company, or the Company’s fund or accumulations thereto, to any one or more of the objects of the Company, as the Board of Directors may, in their discretion, deem fit from time to time.

 

In order to give permanent and substantive effect to this policy, the following set of resolutions were proposed for deliberation in its Twenty-Second (22nd) Board Meeting, held on 19th July, 2019. All the Directors present unanimously passed the following set of resolutions to give effect to the policy:

 

RESOLVED THAT, pursuant to discussions first held with regard to management compensation by the Board at its meeting on 11th October, 2018, and the subsequent detailed discussions on 21st January, 2019, where, at the behest of the Board, the management tabled the draft surplus distribution policy, it is hereby agreed and decided to direct the past and future profits of the Company to achieve one or more of the following objectives: (a) to continue to strengthen the financial reserves of the Company so as to enable it to maintain its independence at all times; (b) to provide financial assistance, in the form of grant, to established micro and small non-profits to meet their organisational development needs; and (c) to give financial assistance, in the form of fellowships, scholarships, direct grant, internships, residency, and other forms of assistance as may be commonly prevalent, to deserving independent professionals, students and individuals within the social service sector or development sector to build their capacities to contribute better to the sector.”

 

RESOLVED FURTHER THAT any assistance so granted to institutions or individuals be compliant with the objectives of the Company as stated in its Memorandum of Understanding.”

 

RESOLVED FURTHER THAT any future budgeting exercise will fully account for this          policy and show all expenditure incurred towards it clearly and separately.”

 

RESOLVED FURTHER THAT the Board retains the right to determine the amount allocated to activities under this policy but that its application and execution is to be left to the discretion of the Management of the Company. It is incumbent upon the management to keep the Board updated on a regular basis with regard to any expenditure incurred and activities undertaken under this policy framework.”

 

RESOLVED FURTHER THAT as an integral part of this policy, the Company eschews any bonuses to all its employees and will compensate them through a well-defined and reasonable compensation mechanism.”

 

RESOLVED FURTHER THAT the policy in its current form is adopted by the Board for a period starting 01st April, 2019 and ending 31st March, 2021, and shall be reviewed by the Board every two years.”

 

RESOLVED FURTHER THAT the Board directs the Management to put in place any necessary systems, processes and governance mechanisms as may be implied in order to give full and proper effect to this policy.”

 

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