In a move to bring charity governance in-line with the recommendations of the UK Corporate Governance Code, the best practice guide for the UK’s listed companies, the new Charity Governance Code is advocating external reviews for larger charities every three years, more openness and limits on how long trustees may serve.
The new Charity Governance Code, which replaces the previous Code of Good Governance, outlines the high standards of governance that all charities and their trustees in England and Wales should aspire to.
“The code for the first time sets out clear aspirations for a charity board to meet. This code is a great stepping off point to help charities navigate the changes” Rosie Chapman, chair of the Charity Governance Code steering group
The Charity Commission is encouraging registered charities to use the code to tackle the governance challenges that the sector has faced over the last two years, most notably in the case of the failure of Kids Company.
“There is a clear consensus within the sector that we must focus more on governance. With this in mind, I envisage that we will soon see a commitment to following the Charity Governance Code become a requirement from many funders. Taking action now is a way of getting ahead of the game” Sir Stuart Etherington, chief executive of NCVO
The new code comes in two versions which share common principles and outcomes: one set of recommended practice applies to smaller charities and another to larger organisations – there is no single definition of what constitutes a small charity, the Small Charities Coalition defines small charities as those with an income under £1m, NCVO, on the other hand, define small as being income under £100,000, and that represents 80% of all registered charities.
The Charity Commission are keen to emphasise that good governance is not about ticking boxes, it is about attitudes and culture and putting the charity’s values into practice. How trustees make decisions and how well they understand what is going on are key to avoiding the pitfalls that have been highlighted in the negative press the sector has received over the last two years.
“The bottom line is, good governance is no longer an optional extra. It’s essential to charities’ effectiveness and probably their survival too. Charities need to be able to demonstrate that they take it seriously, allowing it to change the way they operate”
Charity trustees need to be less conservative, better informed and more supportive of their executives in order that their charities can realise their potential and maximise the difference they make by using good governance to develop and maintain their vision, mission, values and strategy to deliver their charitable objects.
As with the UK Corporate Governance Code and its principle of ‘comply or explain’, which is ultimately the responsibility of the shareholders, or owners, to enforce, the Charity Governance Code works on the principle of ‘apply or explain’ – the question is who is responsible for its enforcement? In most charities the closest thing to an owner is the member of the charity who is most likely to also be a trustee and therefore not the best people to be holding themselves to account. In practice the expectation is that funders will be expected to ensure that the charities they fund are well governed.
The code is built on the ‘foundation principle’ that all trustees should understand their legal duties, liabilities and responsibilities and should be committed to good governance. In practice it is not always the case that trustees take the time to fully understand their roles – something that the Charity Commission will continue to focus their efforts to try to improve.
The code then develops seven principles:
4. risk and control;
5. board effectiveness;
7. openness and accountability;
The key recommendations of the code include:
- More oversight when dealing with subsidiary companies; registers of interests and third parties such as fundraising agencies or commercial ventures.
- Where a charity uses third party suppliers or services – for example for fundraising, or data management, boards must ensure the work is in the charity’s interests and must regularly review agreements.
- An expectation that the board will review its own performance and that of individual trustees, including the chair, every year, with an external evaluation for larger organisations every three years.
- Boards should regularly review the sustainability of income sources and business models and their impact on achieving charitable purposes
- Boards should regularly check charities’ key policies and procedures to ensure make sure that they still support, and are adequate for, the delivery of their aims, including key areas such as fundraising and data protection
- No trustee should serve more than nine years without good reason.
- Boards thinking carefully about diversity, how they recruit a range of skills and experience, and how they make trusteeship a more attractive proposition.
- Boards should operate with the presumption of openness.
- Stronger emphasis on the role of the chair and vice chair in supporting and achieving good governance.
The publication of the new code comes at a very critical time for the charity sector where high profile catastrophic collapses, data misuse and donor fatigue have all contributed to the need to focus on governance improvement.
Whilst the implementation of the code will undoubtedly lead to better levels of trustee understanding and engagement in the basics of good governance, will it address fundamental issues such as an evaluation of the public benefit achieved by a charity, known as the impact statement?
Charity trustees should also be encouraged to consider the risks involved in being too conservative and not taking strategic opportunities, particularly mergers or acquisitions with charities with similar objects.
The main test of the code will come from the cultural change required to move trustees from being dedicated volunteers but amateur board members to becoming much more professional in discharging their duties.