A question of good governance

Calls to reform the governance structure of charities have grown louder in the wake of recent sector scandals. Peter Stanford assesses the failings and asks what could and should be done

In 1992, the National Council for Voluntary Organisations produced a report called On Trust, which looked at effective charitable governance. Among its findings was that only one in three of those sitting on boards at the time was either aware of the duties placed on them or "actually knew they were charity trustees".

It is an eye-catching statistic and a useful way of framing the current heated discussion in the charitable sector about what constitutes good governance. Whatever the problems presently being debated, few would surely disagree that substantial progress has been made over the past quarter of a century. And yet, if many more than that miserly one-third of trustees identified in the NCVO report are now aware of their role and its responsibilities, that is not quite the same as being up to the job. And let's be honest, these are not times for faint-hearts round the trustee table.

First of all, there is the unmissable chorus of voices raised at the alleged shortcomings of charity governance arrangements. The noise became deafening in the summer of last year when Kids Company very publicly and chaotically collapsed. It was widely suggested that the trustees, headed by the BBC's Alan Yentob, bore part of the responsibility because they had failed in their duty to oversee the charity's charismatic founder, Camila Batmanghelidjh. From that one case, many speculated that plenty of other trustees weren't doing what they were meant to be doing. Though they provided little evidence to back up such damaging claims, the net result was a dip in public trust in charities, noted by the Charity Commission.

In August, Simon Walker, director-general of the Institute of Directors, was once again highlighting the Kids Company debacle - as well as the backlash Age UK faced as a result of its deal with E.on over energy tariffs for older people - to argue that charities urgently needed to start taking a few pages out of big business's corporate governance bibles. "Third sector organisations can learn from the governance improvements, and failures, of business in order to improve the relationship with donors and beneficiaries," he said in an article for thirdsector.co.uk. To that end, the Institute of Directors has now joined the long list of those organisations that offer training to trustees.

Some experts are pushing the third sector to copy the big-business model, whereby executives and non-executives sit on a single board, rather than the usual two-tier executive/trustees set-up in charities. But others are equally vocal in seeking the same structural outcome via a different route. Bob Humphreys, treasurer for Oxfam International's board of supervisors, told a Charity Finance Group conference last month that the social enterprise model might be a workable alternative to the existing "at-their-sell-by-date" trustee arrangements of some charities.

One-tier governance

With a more commercial culture, social enterprises tend have a one-tier governance structure, like companies rather than charities, plus the freedom to pay those on the governing body. "The increase in regulation, particularly over the last 12 to 24 months, is starting to call into question the traditional two-level governance model," warned Humphreys.

And as if to reinforce that all-pervasive sense that everything surrounding the role of trustees is currently in crisis, next month will see the launch of a consultation on a new version of Good Governance: A Code for the Voluntary and Community Sector. A small working party under the experienced charity consultant Rosie Chapman has been looking at the existing version of the code - which was last revised in 2010 - and is due to put its suggestions out for comment during Trustees' Week (which runs from 7 to 13 November).

"Our starting point is a simple one: that good governance is fundamental to effective charitable activity," explains Chapman. Despite all the headlines, she is determined not to join in any bout of "charity bashing" - or, worse, "trustee bashing". She has seen no evidence whatsoever, she stresses, that the average trustee has become any less conscientious of late, or any less able.

Rather, it is the world around them that is changing: each year the third sector handles £43.8bn in revenue, employs a million people and manages another six million as volunteers. Then there is the new Charities (Protection and Social Investment) Act, passed earlier this year, which gives the Charity Commission greater powers than before to hold trustees to account, up to and including disqualifying them.

"I want the revised code to be a tool for continuous improvement," says Chapman. Although reluctant to give away too much of what the new draft includes, she is happy to confirm that it has taken a neutral stance on the future of the traditional two-tier system of governance, but does include recommended good practice for charity boards.

"Boards do need to evaluate their performance and effectiveness regularly," she argues. "And that should take place, the draft code is saying, every three years. With larger charities, that evaluation should be done by an external body."

Under the microscope

And, in the same good-housekeeping mood, the draft will contain specifics about what should be under the microscope in those evaluations. Chapman mentions references in it, for example, to transparency in the process of appointing to a board, better advertising of vacancies for trustees, recommendations on a decent length of service for trustees (nine years, and to be extended only after "a rigorous review"), optimum size (five to 12 members) and a continuing commitment to diversity.

And what of the thorny question of paying trustees? Those who are urging the charitable sector to imitate the corporate model of having paid non-execs on a unified board, as independent advisers alongside the senior managers, remain as keen as ever on remuneration for trustees.

Chapman admits she is yet to be convinced. "I'm not against," she says. "I am agnostic because I have not seen evidence that convinces me. You have to ask what such payment would buy you. Better skills? More diversity? And if you argue it would bring benefits, where is the evidence?"

Lack of diversity is another complaint repeatedly made against trustee bodies. Most surveys continue to show that they are overwhelmingly white, middle class and in the 55-plus age range. Payment might seem like a simple solution, enabling those on modest incomes to justify the time required in the midst of busy family and work lives to be effective trustees, rather than leaving charities, as now, to rely disproportionately on those with fewer calls on their time and more money in the bank. But Louise Thomson, head of policy (not-for-profit) at the governance institute the ICSA, one of the sponsoring bodies of the governance code, believes that the challenge of achieving more diverse trustee boards requires a broader solution than a financial incentive.

Rosie Chapman

"I think you have to start asking tougher questions about why more people aren't coming forward," she says. "Frankly, with all the responsibilities that are now being put on trustees, the most obvious answer is that they ask themselves 'why would I want to take this on?'"

That would certainly chime with what has been going on in the parallel but remarkably similar universe of school governing bodies. As successive governments of every colour have piled responsibility after responsibility upon school governors, the numbers of those willing to serve on these typically diverse boards have fallen dramatically. In 2014, the charity Governors for Schools reported that 30,000 governor posts were vacant, one in 10 in all schools, and one in four at those in rural and deprived areas.

On charity boards, then, what else could be tried to increase both the number and the quality of trustees? One solution being put forward is honesty about what it entails.

"Too many people are told 'oh, it is only a couple of meetings a year'," says Thomson. "And then they find it isn't. Much better to be honest and explain that being a trustee is a commitment, but it is a commitment you can feel passionate about and somewhere you can make good use of your skills and experience. We have to explain to more people what the benefits are of doing it."

Challenge assumptions

Another way forward might be to look a little bit harder at some of the assumptions in this "crisis in governance" debate. High on this agenda is the unfavourable comparison often made between allegedly failing charities and the smooth operation of corporate governance. But where does that leave BHS and Sports Direct, to name just two that have been in the news?

Alison Hopkinson, finance director of Oxfam UK, comes from a background in the commercial world. She previously held the equivalent post at the computer company Dell, before working for the charity Tearfund and then Oxfam.

Alison Hopkinson

"As someone who has come over from the private sector, I have been so impressed at both charities with the level of interaction between the board - or the council as it is called at Oxfam - and the executive," she says. "In finance terms, that means the finance committee meets four times a year and goes through every aspect in great detail. It is made up of council members (trustees), but also of others who have great expertise. I would say that, if anything, the level of scrutiny is tougher."

And, again drawing on her own corporate background, Hopkinson resists the seductive logic of the claim that, if trustees are paid, effectiveness will inevitably rise. "There is a key difference between non-execs on a company board and trustees. However highly skilled they are, non-execs are paid by the company, and that must leave at least a question mark over their independence.

"But unpaid trustees are the truly independent custodians of other people's money, the money that the public gives to a charity. Theirs is the larger responsibility."

And even if public confidence in charities has dipped of late, it remains ahead of that in commercial companies.

With the consultation on the new governance code going on into the new year, these arguments will all be rehearsed many times over in the months ahead. But it won't, for once, just be hot air. The comments will help to shape the final text, planned to be available by the spring.

But those involved in the process are crystal clear about one thing. Whatever the new document finally recommends, the debate about charity governance is not going to go away any time soon. And quite right too, argues Thomson of the ICSA, for otherwise there is a risk of losing touch with the day-to-day reality of an ever-changing third sector and the issues it throws up. "For me, governance is something that has to be continually reviewed and updated," she says. "Otherwise it becomes like trying to nail jelly to the wall."

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