China Charity Law Guidebook – Chapter 4: Internal Governance (Pt. 5)

We continue with Part 5 of our series on the China Charity Law and other regulations in  China in partnership with Shanghai Legal Center for NGO (ForNGO) with Chapter 4 of the China Charity Guidebook with an overview on internal governance of charitable organizations. For a full list of articles part of this series, please visit our intro article or sector news page

1. Internal Governance of Charitable Organizations ABC

1.1 Articles of Association for Charitable Organizations

Articles of Association are to charitable organizations what constitutions are to countries. Together, they comprise the most important document for a charitable organization and form the basis for its internal governance. Moreover, such Articles provide essential content for operational decision-making.

The Charity Law has two requirements regarding Articles of Association[1]: First, no Article should violate relevant laws or regulations; otherwise, it is invalid. Second, they must contain important items, such as the charity’s organizational type, purpose, and scope of activities, along with its structure, duties, and internal mechanisms for the supervision of its bodies in charge of decision-making and execution.

The range of organizational types include foundations, social service organizations, and social organizations. Given this, charitable organizations of different organizational types have distinct name registration rules, property sources and requirements, internal governance structures, and business scopes. The table below presents the differences in the specific requirements for three separate organizational types.

Organizational Type

Articles of Association

Legal Basis

Social Organizations

(1) Name and domicile;

(2) Purpose, scope of business and location of activity;

(3) Membership and members’ rights and obligations;

(4) Democratic organizational and management systems and procedures for forming the executing agency;

(5) The qualifications for the person in charge and the procedures for selection and removal;

(6) Principles of asset management and use;

(7) Procedures for modifying the Articles of Association;

(8) Termination procedures and disposal of assets after termination;

(9) Other matters that should be prescribed by the Articles of Association.

Article 14 of the Regulation on Registration and Administration of Social Organizations

Foundations

(1) Name and domicile;

(2) Purpose and scope of public welfare activities;

(3) The amount of the original fund;

(4) The composition, mandates and rules of procedure of the board of directors, and the qualifications, selection, and term of office of the directors;

(5) Duties of the legal representative;

(6) Duties, qualifications, selection, and term of office of the supervisors;

(7) The preparation and review of financial accounting reports;

(8) Rules on assets management and use;

(9) Conditions and procedures for termination and post-termination asset disposal.

Article 10 of the Regulation on Foundation Administration

Private Non-enterprise Units

(1) Name and domicile;

(2) Purpose and scope of business;

(3) Organizational and management system;

(4) Procedures for the selection or removal of legal representatives or persons in charge;

(5) Principles of asset management and use;

(6) Procedures for modifying the Articles of Association;

(7) Termination procedures and post-termination asset disposal;

(8) Other matters that should be prescribed by the Articles of Association.

Article 10 of the Interim Regulations on Registration Administration of Private Non-enterprise Units

 

1.2 Internal Governance Structure of Charitable Organizations

Charitable organizations shall establish an institutional governance structure characterized by independence, a clear division of powers and responsibilities, coordinated operation, and effective checks and balances based on their Articles of Association. Article 12 of the Charity Law states: “Charitable organizations shall establish sound internal governance structures and clarify the delineation of authority and responsibility for decision-making, implementation and supervision, and carry out charitable activities on the basis of relevant laws, regulations and its Articles of Association.”

Under the current legal framework, charitable organizations of different types have unique internal governance structures.

Organizational Type

Governance Structure

Legal Basis

Social Organizations

Decision-making body: members’ meetingxi /member representatives’ meeting

Executive body: board of directors

Article 14 of the Regulation on Registration and Administration of Social Organizations

Foundations

Decision-making body: board of directors

Supervising body: Supervisors/Board of Supervisors

Chapter 3 Organizational Structure of the Regulation on Foundation Administration

 

Social Service Organizations[2]

Decision-making body: board of directors

Supervising body: supervisors/board of supervisors

Chapter 4 Organizational Structure, the Regulation on Registration and Administration of Social Service Organizations (Amendment Draft of the Interim Regulations on Registration Administration of Private Non-enterprise Organizations for Soliciting Opinions)

 

1.3 The Accounting System of Charitable Organizations

Article 12 (2) of the Charity Law states: “Charitable organizations shall implement the unified national accounting system, conduct accounting in accordance with the law, establish a sound accounting supervision system, and accept the supervision and management of relevant government authorities.”

In August 2004, the Ministry of Finance issued its Accounting Regulation for Non-governmental Non-profit Organizations, effective January 1, 2005. This promulgation differs from the accounting regulation for ordinary enterprises, administrative bodies, and government-sponsored institutions.

It applies to compliant non-governmental non-profit organizations established lawfully within the boundary of the People’s Republic of China. Such organizations include social organizations, foundations, private non-enterprise organizations, Buddhist temples, Taoist temples, mosques, and churches. Private non-profit organizations should have the following three features:

1) Its mission and purpose are not for profit;

2) Its resource providers do not seek economic returns from the resources invested;

3) Its resource providers do not enjoy ownership of the organizations they provide resources to.

According to these provisions, charitable organizations under the Charity Law must also comply with the Accounting Regulation for Non-governmental Non-profit Organizations.

1.4 Charitable Organizations Are Barred from Using Their Affiliations to Impair the Interests of the Organization Itself, its Beneficiaries, or the General Public

Article 14 (1) of the Charity Law states: “Founders, major donors and management staff of a charitable organization shall not abuse their association to harm the interests of the organization or any donor or social public interests.”

Affiliated transactions can improve transactional efficiency and reduce communication costs. But they can also be used subversively to transmit interests. Charitable organizations’ properties have public property features. Hence, it is necessary to limit their capacity for affiliated transactions. Important to note is that the Charity Law does not itself limit affiliated transactions, but only hedges against them being used in such a way that the interests of the organization, its beneficiaries, and the public are harmed.

The Charity Law does not explicitly provide a definition of affiliated parties. The Regulation on Registration and Administration of Social Service Organizations (The Amendment Draft Soliciting Opinions) and the Regulation on Foundation Administration (The Amendment Draft Soliciting Opinions) define “affiliated parties” as follows:

Article 61 of the Regulation on Registration and Administration of Social Service Organizations (The Amendment Draft Soliciting Opinions)

The affiliated parties designated in this Regulation refer to organizations or individuals who control (or are controlled by) and influence (or are influenced by) directors, supervisors, and heads of organizations, which may result in the transfer of the interests of social service organizations.

Article 79 of the Regulation on Foundation Administration (The Amendment Draft Soliciting Opinions)

The affiliation designated in this Regulation refers to relations between the foundation and its founder, the companies or organizations the directors work for and the foundation, invested parties, and other individuals or organizations who may jointly control (or be jointly controlled by) or materially influence (or be influenced by) the foundation.

 

The Charity Law has specified the decision avoidance and information disclosure system for affiliated transactions: “Where the founders, major donors, and management staff of a charitable organization are involved in a business transaction with the organization, they shall not participate in the decision-making of the organization.”[3] When the founders, major donors and management staff of a charitable organization plan to trade under the mantle of the organization, they must not participate directly in the decision-making related to the trade itself, so as to avoid damaging the interests of other decision-makers. Moreover, the Charity Law requires that affiliated transactions must be made public. This also shows how high the requirement of the law is concerning affiliated transactions, in the name of protecting public property and interests.

1.5 Who Must Not Act as the Head of a Charitable Organization

The head of a charitable organization should be determined through normative procedures by its decision-making bodies according to its Articles of Association. The head of a charitable organization can include the following positions: director, deputy director, and the secretary-general for foundations; president (director), vice president (deputy director), and secretary-general for social organizations; directors, deputy directors, and administrative heads (director-in-charge, chairman, president, etc.) for social service organizations.

The Charity Law has exclusive provisions concerning the qualifications of such a head. A person in any of the following circumstances shall not serve as the head of a charitable organization:[4]

1) Having little to no capacity for civil conduct;

2) Having been charged with a criminal offense less than five years before the appointment as head;

3) Having served as the head of an organization which had its registration license revoked or was banned from operation less than five years before the new appointment as head;

4) Other circumstances provided by relevant laws and administrative regulations.

The first three points are easy to understand. For the fourth point, however, we have identified the following circumstances in which a person is ineligible to be the head of a charitable organization:

  • According to Article 23 (1) of the Regulation on Foundation Management, “The position of Chairman, Vice-Chairman, and Secretary-General of the Foundation shall not be held by current state functionary. The legal representative of the Foundation shall not serve as a legal representative of other organizations."
  • According to Article 14 (2) of Regulation on Registration of Social Organizations, “A legal representative of a social organization shall not serve as the legal representative of other social organizations.”
  • According to the Opinions on Reforming Social Organization Management Systems and Promoting Healthy and Orderly Development of Social Organizations, issued by the General Office of the CPC Central Committee and the General Office of the State Council, strict implementation of the Notice on Government Bodies Not Assuming Leading Positions in Social Organizations and Notice on Regulating (Partially) Retired Officials Assuming Leading Positions in Social Organizations is required. Civil servants shall be strictly regulated in their serving as the head of social organizations. A review of the process used in their selection is to be held periodically to ensure civil servants are elected to such posts responsibly; though they are not to serve in more than one social organization at a time. A civil servant serving in a social organization shall not concurrently serve as the head of a foundation or social service organizations. Any civil servant who violates such restrictions shall resign from his or her post or resign from the social organization altogether within six months after the violation.

2. Practical Guide

2.1 Use of Model Articles of Association

In practice, and in line with the Charity Law and the three major regulations affecting it, civil affairs authorities have developed model Articles of Association for foundations, social organizations, social service organizations, and charitable organizations. For purposes of developing or revising such Articles, an organization can inquire on the official website of the local Administration Bureau of NGOs (in Beijing, Shanghai, Shenzhen, etc.) or at any local social organization authority for relevant information[5].

For reference, please refer to Appendix 1 - TK1-7 - for model Articles of Association and its interpretation of various social organizations under the Ministry of Civil Affairs and Shanghai Municipality.

It should be noted that there are major event reporting clauses in the model Articles provided by the Shanghai Community Administration, whereby organizations are required to file and report their compliance with the Charity Law and the requirements of registration authorities. These reporting requirements are made according to the Guidelines for Shanghai Social Organizations to Report Major Events, issued in April 2014 by the Shanghai Municipal Civil Affairs Bureau and the Shanghai Community Administration. Major events include conferences, changes in key responsible persons, international activities, and major public incidents or emergencies. As required by the Guidelines, major conferences or international activities shall be reported to the relevant registration or industry authorities (competent business authorities) 20 working days in advance; other activities shall be promptly reported afterwards.

2.2 Approval of Articles of Association

During the period in which regulations were being revised, some social organizations were found incompliant, having failed to go through the necessary legal procedures or file for official record. According to the three major regulations, to revise their regulations sufficiently, foundations, social service organizations, and social organizations must file with the relevant registration authorities or competent professional supervisory units for approval and official record. Failure to comply with such legal procedures will result in rejection of the revised regulations, which will subsequently invalidate the carrying out of subsequent activities.[6]

  1. Materials List (for private, non-enterprise organizations in Shanghai, as an example):

NO.

Application Materials

Requirements

1

Revision Description for revising Articles of Association

The Revision Description shall include content and reasons for the revision, signed by the relevant legal representative and stamped with an official seal.

2

Resolution to revise Articles of Association of the decision-making body

The decision shall be made in compliance with the rules of procedure provided in the Articles of Association. It shall be officially made after discussion by the board of directors, signed by the directors thereafter, and stamped with an official seal.

3

Revised Articles of Association

It shall include the names and locations, purpose and scope of the business, organizational and administrative rules, procedures for the appointment or removal of legal representatives or responsible persons, principles for management and the use of assets, procedures for revising the Articles of Association, termination procedures, the disposal of assets after termination, and other matters required by the Articles. One format is the Model Articles of Association for Private Non-enterprise Organizations in Shanghai.

4

Reviewing form for Articles of Association

It shall comply with all procedural rules and legal requirements and shall not violate national laws or regulations. Approval by way of an official stamp by competent business authorities is needed for Private Non-enterprise Organizations under a dual administration model.

 

      2. Procedure for Filing Articles of Association for Official Record (for private non-enterprise organizations in Shanghai, as an example):

2.3 Governance Suggestions for Decision-Making Bodies

Many small to medium-sized charitable organizations lack governance experience in their decision-making body. In this regard, the following suggestions are offered for consideration:

  1. Decision-maker selection. In line with the different development stages of charitable organizations, decision-makers should be properly selected to ensure the effectiveness of the decision-making body.
  2. Proper training. The “professional training" of decision-makers is highly recommended, including clarification of relevant laws and Articles of Association, and a clear description of each organization’s duties, rights, and obligations.
  3. Meetings. The meetings of a decision-making body must be held in compliance with relevant laws, regulations, and organizational rules (no less than twice a year) to reinforce the body’s role in internal governance.
  4. Rule by rules. Charitable organizations that have passed the start-up period and transitioned into the growth period must strengthen their rules and regulations for internal governance (in addition to the Articles of Association, there must be rules for the board of directors, supervisors [supervisory board], financial management, affiliated transaction, information disclosure, archiving, etc.) and control, and standardize relevant processes to ensure effective implementation.
  5. Supervision. Decision-making bodies and supervisors should have full oversight over the operation of their organizations and staff, including assessing the performance of the executive head (secretary general or director) and regularly analyzing the budget.

Here are a number of areas that require internal rules and regulations:

1) Board of Directors

2) Supervisory Board (Supervisors)

3) Personnel Management

4) Asset Management

5) Financial Management

6) Donation Invoice Management

7) Special Fund

8) Project Management

9) Major Event Reporting

10) Information Disclosure

11) Archive

12) Seal and Certificate Management

13) CPC Party Building

14) Integrity and Self-discipline

15) Staff Manual

16) Volunteers Management

18) Affiliate Transactions

19) Asset Preservation and Appreciation

20) Trade Secret Management

21) Copyright Management

22) Trademark Management

 

2.4 Distinguishing Key Concepts in Accounting Regulation for Non-Governmental Non-profit Organizations

a) Income Accounting

Income refers to the inflow of economic benefits or service potential derived from the business activities of non-governmental non-profit organizations. It results in an increase in net assets. According to different sources, income is divided into donations, membership fees, service revenue, government subsidies, investment earnings, commodity sales, and others.

  1. Donations refer to income earned by accepting donations from other entities or individuals.
  2. Membership fees refer to fees collected by members of a non-governmental non-profit organization according to its Articles of Association.
  3. Service revenue refers to income obtained by providing services to clients in accordance with the Articles of Association, including tuition fees, medical fees, and training charges.
  4. Government subsidies refer to income derived from receiving government grants or subsidies from government agencies.
  5. Commodity sales refer to revenue generated from the sale of goods (such as publications, medicine, etc.).
  6. Investment earnings refer to net gains and losses from outward investments.

If non-governmental non-profit organizations have income from major business activities other than the above-mentioned sources, these should also be accounted for.

  1. Examples of such income sources include the disposal of fixed assets and intangible assets.

Labor donations shall not be counted as accounting items proper, but should be disclosed in the notes of accounting statements.

According to the regulations above, the following classifications can be made:[7]

By Source
By Restrictions in Use By Type
Restricted Income Non-Restricted Income Trade Income Non-trade Income
Donation Income  
Membership Fees Income  
Service Income    
Product Sales Income    
Government Subsidy Income
Investment Income    
Other Income    

 

b). How Should Non-Monetary Income Be Accounted For?

  1. According to Article 18 of the Law on Donations for Public Welfare, if a non-monetary donation is accepted by a public interest organization, an invoice shall be issued commensurate with the fair value of the donation
  2. Where a donor provides invoices, declaration forms or other credentials, they shall be used as the basis for confirming the book value of the donation; if the donor fails to provide credentials, other means of confirmation shall be used.
  3. Where the credentials of the donation provided by the donor significantly differs from its fair value, the fair value shall be used.
  4. Where a donor donates fixed assets, equities, intangible assets, relics, or cultural assets, an assessment of these assets by a qualified third-party shall be used in determining the book value. If it is impossible to assess or confirm a value, the donation shall not be accounted as donation income, but registered separately.
  5. Where a donor donates equities of a non-public company, the book value shall be used; where a donor donates equities of a listed company, the fair value of the stock on the day of donation shall be used.

xi Member and Member Assembly of Social Organizations - Social organizations are non-profit social organizations that are voluntarily formed by members to carry out activities in accordance with their articles of incorporation in order to realize their common wishes. Members of Chinese social organizations include individual members or unit members. Individual members must be Chinese citizens. Organizations other than state organs can join social organizations as unit members. The highest authority of a social organization is the member (or member representative) assembly, which shall exercise the following powers:

(1) To formulate and amend the articles of incorporation;

(2) To elect and remove directors;

(3) To deliberate the work reports and financial reports of the board of directors;

(4) To decide on termination;

(5) To decide on other major issues.


[1]Article 11 of the Charity Law

[2]The Interim Regulations on Registration Administration of Private Non-enterprise Organizations issued in 1998 does not specifically provide the internal governance structure of private non-enterprise organizations. It only outlines that “…should establish organizational management system; selection and removal procedures of the legal representative or head of the organization”. This part is supplemented by the provisions in the Regulation on Registration and Administration of Social Service Organizations (Amendment Draft of the Interim Regulations on Registration Administration of Private Non-enterprise Organizations for Soliciting Opinions).

[3]Article 14 of the Charity Law

[4]Article 16 of the Charity Law

[5]Official Website of Shanghai Administration Bureau of NGOs http://stj.sh.gov.cn/node2/node3/n4/n81/n86/index.html  Accessed on May 5, 2018

[6]Official Website of Beijing Administration Bureau of NGOs http://www.bjmzj.gov.cn/news/root/cjwtjd/2011-10/101239.shtml Accessed on Feb. 13 2018

[7]Excerpt from Enyou Detailan. Introduction to Accounting for Non-governmental Non-profit Organizations, Page 45