Donald McPherson, Chair of the ACK Board, has written a guest blog on the recently published Charity Governance Code and it’s relevance to Scottish charities.
Corporate governance is now a familiar discipline for companies whose shares are traded on the Stock Exchange. It regulates the relationships between the board, management, shareholders and other stakeholders, and covers topics such as the role of directors and how they are appointed, remuneration, audit and risk management. Companies report annually to their shareholders, setting out how they comply, or explaining their reasons where they choose not to comply, with the provisions of the UK Corporate Governance Code. Weak governance was a key contributor to the financial crisis of 2008 and other corporate failures.
Good governance is not just an issue for large commercial companies, however. Recent events in the charity world, including the Kids Company collapse in 2015, show how a charity with poor corporate governance can fail, with serious and far-reaching consequences for the people it was set up to help and also for the reputation of the voluntary sector as a whole.
The increased focus on charity governance has led to the publication of the Charity Governance Code, produced by a steering group including the National Council for Voluntary Organisations, ACEVO the Charities Leaders Network, the Small Charities Coalition and the Charity Commission for England & Wales. The new Code replaces “Good Governance: A Code for the Voluntary and Community Sector” which was first published in 2005 and brings governance standards for charities much closer to commercial companies.
While the new Code only applies to charities in England & Wales, Scottish-registered charities would be wise to consider how much of the new Code they can adopt, for two reasons. Firstly because stakeholders, including potential funders, are likely to use the Code when they benchmark charities across the UK, but secondly because strong governance will make an organisation better able to manage change and withstand setbacks in an uncertain world.
Structure of the Charity Governance Code
There are two versions of the Code – one is intended for smaller charities (those with annual income of £1m or less) and another for larger charities. In each case the Code consists of a series of principles, supported by more detailed recommendations on good practice. Charities in England & Wales will be expected to include a statement on compliance with the Code in their annual report.
The version for larger charities adds additional requirements in areas such as regular formal reviews of policies and procedures, delegation of responsibility to management and their remuneration, the role of the audit committee, appointment of a vice-chair and, importantly, a requirement for external evaluation of the board’s effectiveness every third year. All of these reflect the greater scale and complexity of large charities.
Trustees should be clear that the guidance contained in the Code is in addition to their duties under charity and general law. Unlike the law however, trustees have a choice whether to “apply or explain” in relation to the Code. This is an important distinction and allows trustees to tailor the recommendations in the Code to the circumstances of their own charity; however stakeholders will look critically at the explanations given by charities which choose not to apply.
Where a charity operating in a particular field has a more specific governance code – for example housing and sport – it may choose to follow that code instead, but in any case should make clear which code it is following.
Each principle focuses on one aspect of governance for the Board to consider, as follows:
Organisational purpose – being clear on the aims of the charity and how they are delivered
Leadership –providing strategic leadership in line with the charity’s aims and values
Integrity – demonstrating values and a culture in line with the charity’s objectives and maintaining public confidence
Decision-making, risk and control – ensuring that the Board’s decisions are reached after careful consideration, including possible risks and that management operate within agreed parameters
Board effectiveness – that, taken together, the Board has all the skills needed to manage the charity, and works as an effective team
Diversity – bringing together a group of individuals as trustees who have different perspectives and therefore avoid “groupthink”
Openness and accountability – maintaining a transparent relationship with the charity’s stakeholders
Detailed Code provisions
For each of the principles, the Code explains the reason why the principle is important for good governance, what are the expected outcomes and lists recommended practice which the boards of charities can adopt to show that they are applying the principle – over 80 recommendations in all. These cover a wide range of topics, some examples of which are:
- Regular review of a charity’s charitable purposes to ensure they are still valid
- Maintaining proper arrangements for appointment, oversight, appraisal, remuneration and dismissal of staff
- The relationship with any commercial subsidiary
- Maintaining and enforcing a code of conduct and managing conflicts of interests
- Regular review of significant risks and how they are managed
- The process for selection, appointment and induction of new trustees
- Performance reviews of the Board
- Arrangements for engagement with members and other stakeholders
What charities should do next
Boards of charities should consider the principles and detailed provisions in the new Code and assess their own performance against each of them, addressing any gaps they find. However there is no “one size fits all” solution: each board should decide which of the provisions it wishes to apply, and those which aren’t relevant, bearing in mind that trustees will need to be able to justify a decision not to apply a particular provision to their stakeholders.
A clear explanation of a charity’s governance arrangements in its annual report should give reassurance to stakeholders that it has a clear view of the contribution it can make to the community and that is properly organised to do so. At a time when there is greater competition than ever for funding, charities need to see this as an opportunity, not a challenge.
If you would like to learn more about charity governance, Donald will be delivering a TrACK Masterclass on the subject on Thursday 22nd February 2018 from 9.30am – 12.30pm. You can book your place at the session for just £50 per person below.