Charity advice: the full picture

The Office of the Scottish Charity Regulator (OSCR) has recently published updated guidance for the 183,000 trustees of charities in Scotland. Given the recent scrutiny of charities and their trustees by media and policy makers, the publication is both timely and welcome.

Much of the attention has focused on charities in England & Wales, but the spotlight on charities will not switch off at the border. Slip-ups by charities are big news, and Scottish charities and trustees have no room for complacency.

If putting charities under the spotlight improves management and transparency, that is clearly a good outcome. But if it deters existing or potential trustees from taking on the role, it will be less positive. If civic society wants people to continue to offer their services to charity boards, we must support trustees to perform their roles well.

Earlier this year, I chaired the WS Society’s Charity Conference 2016, which took as its theme “Governance perspectives” – a sign of how far charity governance has risen up the agenda. At the event, Dorothy Dalton, a leading expert in governance and founding editor of Governance magazine, noted the importance of providing practical support and training to trustee boards to encourage them on their journey towards more effective governance.

The publication of OSCR’s guidance, with its practical and accessible style, is a welcome starting point. But expert advisers still have a major role to play in helping charities follow the guidelines – particularly since OSCR’s CEO, David Robb, marking the organisation’s 10th birthday, has said it is seeking to raise governance standards overall (“Moving to targeted regulation”, Governance, January 2016).

OSCR has also recently published guidance asking charities to report notifiable events (Reporting Notifiable Events to the Scottish Charity Regulator, operational from 1 April 2016). This is where something serious has happened or is happening to the charity that threatens to have a significant impact on the charity or its assets.

Advisers must clarify governance

In our work with charities of all sizes, we find that executives, trustees and even their advisers can be hazy about exactly what good governance entails – or nervous about whether they fully understand it. We are often asked if governance is simply another term for trustees’ and executives’ specific legal obligations. But it goes beyond the legal duties set out in the Charities and Trustee Investment (Scotland) Act 2005 and the Companies Act 2006.

Rather, governance requires charity trustees and their advisers to look at all issues relating to the sustainability and reputation of their charity. This includes relationships with staff and volunteers; board composition; board evaluation and setting KPIs; embedding good collective decision-making processes; and fundraising strategy and practices.

In this respect, OSCR’s updated guidelines are helpful in highlighting that there are general and specific legal duties, which trustees must follow, and good practice, which could help them to perform their duties. Both aspects may require specialist training for trustees, chairs and senior staff. Their own previous experience, however senior, may not be sufficient.

Restructuring as a route to survival

One area increasingly relevant to Scotland’s 24,000 charities is the possible need to consider restructuring, given the current pressures on public finances. With COSLA forecasting that local authorities in Scotland may need to cut as much as £350 million in spending this year, restructuring may be the only way for charities to sustain services. This could involve collaborations, mergers or partnerships.

Moreover, these decisions are best made through strategic discussions about possible synergies and efficiencies, rather than as a firefighting response to financial distress.

We’ve already seen a number of mergers in education in Scotland and in the formation of “Third Sector Interfaces”. We also expect consolidation in areas such as cultural and leisure services, service delivery and care services, much of this resulting from the pressures on local authority finances.

When exploring a possible merger, trustees and their advisers should consider:

• Is a merger in the best interests of the charity and its beneficiaries?
• What is our financial future without a merger?
• Is the proposed partner compatible in terms of objectives, strategy, culture and values, governance arrangements, organisation structure and funding base?
• Have we approached our stakeholders and beneficiaries for their views?
• Are there employment or pension issues to consider?

They must also consider the nature of the deal and the new structure of the organisation. There are many ways to structure a merger, and there are often good legal reasons for a transfer of assets into an existing charity rather than the establishment of a “new” charity as the merger vehicle. But it is important to make charities aware of the different options, and the potential risks and advantages of each one. Early due diligence is also essential.

Governance and dominant individuals

An issue that has come to the fore following the Kids Company saga is that of one person having excessive control or influence over the charity.

The problems that arise from this can vary in severity. In England & Wales, the Charity Commission has warned of other trustees disengaging, failing to contribute or failing to challenge decisions. These in turn can lead to unmanaged conflicts of interest, unauthorised personal benefit, or trustees failing to perform their legal duties.

In Scotland, OSCR cites a cautionary example of a chair acting and making decisions alone, trustees being prevented from seeing the charity’s financial records, and charity funds being diverted. Unlike Kids Company, the charity in question did not fail, but the problem did lead to the resignations of a number of trustees and a lengthy legal battle by the remaining trustees.

Whilst not all dominant individual scenarios will result in breaches of the 2005 Act, they can still greatly reduce the service delivered to users, or cause opportunities to be missed. For example, an individual’s (or the board’s) reluctance to share or cede influence may deter a charity from considering beneficial strategies such as merger or collaboration.

The best remedy for such situations is often training. With a clearer idea of their legal duties and of good practice, trustees are usually better equipped to operate collective responsibility. Other measures may include:

• introducing maximum terms for trustees;
• implementing diversity policies, to reduce the possibility of the board being over-compliant or falling into group-think, as well as ensuring a strong mix of skills and experience;
• monitoring the attendance and contribution of trustees.

As we all know, charities face many challenges these days – from funding squeezes to compliance pressures to media scrutiny. Whether they are well known national charities or small local sports clubs, they all need effective governance strategies in place – strategies that not only cover the Charities and Trustee Investment (Scotland) Act 2005 and the Companies Act 2006, but set out good practice for a charity of their size and type.

Advisers would therefore be well advised to brush up on far more than the relevant law when working with charities and other third sector organisations.

A governance health check

To protect a charity’s reputation and finances, trustees and their advisers should conduct regular health checks. This will enable them to stay on top of the many risks and governance issues that could face them. Key areas to look at include:

• constitutional issues, such as the charity’s governing documents, and whether they reflect how the charity operates in practice;
• board issues, such as the mix of skills;
• board operation, including the contribution and attendance of individuals;
• trustee recruitment;
• finance, including the processes for approving the budget, and the operation of controls to prevent fraud;
• fundraising practices, especially in the light of recent media attention;
• restructuring possibilities;
• property issues;
• employment issues.