An Updated Code of Governance for the Sector

The Code is very much designed as a "tool to support continuous improvement, not as a simple tick box exercise".  How can the Code help charities ensure that their governance is as effective as possible?

The Charity Commission welcomed the publication of the Code, commenting that it is "vital that charities get their heads around governance. Following good governance practices, not just paying lip service but really understanding and applying them, could have averted many of the bad headlines of the last two years. It's more than ticking the boxes. It’s about attitudes and culture, whether a charity puts its values into practice. It’s about how trustees make decisions and how well they understand what’s going on. We have seen the consequences of failing to do that."

From the Commission's perspective, therefore, there is a very real value in the Code, which has essentially been endorsed by them as the benchmark for charity sector governance.

The Code's Approach

The Code sets out 7 principles, underpinned by a 'foundation principle' which is, as the Commission put it, that it is a "given that all trustees understand their legal duties and are committed to their cause and good governance" and that "we don’t take trustees’ commitment for granted, but it should be reasonable to expect that commitment to translate into finding out about their responsibilities". 

Having said this, the Code itself makes it clear that it does not attempt to set out all the legal requirements that apply to charities and charity trustees, but it is based on a foundation of trustees’ basic legal and regulatory responsibilities and that the seven Code principles build on the assumption that charities are already meeting this foundation.

The Code develops each of the 7 principles with a 'rationale', a 'key outcome' and then a series of items of 'recommended practice'. It is these aspects of recommended practice that many trustees and senior managers of charities may wish to focus on in more detail, because they represent the practical output of the Code.

Larger and Smaller Charities

The Code’s principles, rationales and key outcomes are intended to be universal and apply equally to all charities, whatever their size or activities.

The recommended practice to meet these principles will obviously vary. The Code states that "although it’s hard to be precise about the distinction between larger or more complex charities, governance practice can look significantly different depending upon a charity’s size, income, activities or complexity".

The Code therefore includes different versions of the recommended practice for 'larger' and 'smaller' charities to reflect and address some of these differences (larger charities are those with typical income of over £1m a year and whose accounts are externally audited).

Self-evaluation

Of course, many charities may already use the Code as the basis of their governance practice but even if not, we recommend that trustees of charities should give serious consideration to using the Code as a method of self-evaluation of their governance effectiveness. In that sense, it is a very useful tool to enable trustees to self-assess how they are doing against the Commission's expectations as regulator.

The Code itself anticipates that how a charity uses it is something which will develop and mature, particularly where a charity is growing and changing. Given this, some of the recommended practice may not be appropriate for a particular charity to follow initially, but may become relevant in the future.

'Apply or Explain'

The Code recommends that a charity should explain the approach it takes to applying the Code, so it is transparent to anyone interested in its work.

The Code calls this approach 'apply or explain' and encourages trustees to meet the principles and outcomes of the Code by either applying the recommended practice or explaining what they have done instead or why they have not applied it. The Code does not use the phrase 'comply or explain' (which is used by some other governance codes), because meeting all the recommended practice in this Code is not a regulatory requirement.

The Seven Principles in the Code are:

• Organisational purpose and direction
• Leadership
• Integrity
• Decision making, risk and control
• Diversity
• Board effectiveness
• Openness and accountability

We look in a little more detail at the some of these principles below:

Organisational Purpose and Direction

In relation to 'organisational purpose and direction', the principle is that the members of a charity's board of trustees are clear about its charitable objects. The rationale for this is that the trustees should have a focus on strategy and assurance (rather than the day to day details of operations), with the key outcome of ensuring that the trustees have a shared understanding of, and commitment to, their charity's objects.

In terms of 'recommended practice', the Code recommends that the trustees ensure: that they set and review the charity's strategy; that they can explain the public benefit requirement and how their charity meets it; that they are focused on the evaluation of both impact and outcomes; that they are committed to benchmarking to support continuous improvement; that they keep the external environment under review at all times and that their strategy for their charity is sustainable.

Leadership

The principle of 'leadership' is that the trustees must provide strategic leadership in line with the charity's objects and its values, the rationale being that it is the responsibility of the trustees to set and safeguard the charity's strategy, vision and values.  The key outcome is that every trustee accepts collective responsibility and ensures that the agreed values underpin all of the charity's activities.

The key aspects of recommended practice are: that the chair of trustees accepts leadership responsibility; that there are proper arrangements for delegation to the senior managers of the charity; that the board recognises and welcomes diverse, different and conflicting views; that all trustees give sufficient time to their role; and that the trustees provide oversight, direction and "constructive challenge" to the charity's senior managers.

Decision-making, Risk and Control

The principle in relation to 'decision making, risk and control' is that the board of trustees uses informed and rigorous decision-making processes and effective delegation and controls, with the rationale being that the trustees are ultimately responsible for what the charity does.  But they cannot do everything and the key outcome is that the trustees are all clear that their role is strategic rather than operational and that they have the degree of assurance they need in relation to the charity's control and risk managements systems.

Again, there is a recommended practice in relation to this principle. Trustees are expected to review the terms of their delegation to senior managers (and committees of the board) to ensure that their operational plans are in line with charity's objects and strategy, to scrutinise delivery against the operational plans and timescales, to ensure that the trustees retain overall responsibility for risk management and that the board promotes a 'culture of prudence', but also understands that 'being risk-averse is itself a risk'.

Board Effectiveness

There is a specific principle in relation to 'board effectiveness'. This is that the trustees work as an effective team to use their skills, experience and knowledge, with the rationale that the overall performance of the trustees is paramount to their charity's success (so good trustee performance and development is essential).

The key outcome is that the trustees function collectively, with an appropriate knowledge and skills base.

In terms of recommended practice, trustees should ensure that they receive all information and come to meetings prepared, that their meetings are well structured and chaired, that the board evaluates its own composition and size to check on effective leadership, that there is a formal, rigorous and transparent trustee recruitment process supported by a skills audit and that trustees receive an appropriately resourced induction. The Code also recommends that the board should evaluate its own performance and that of individual trustees on a regular basis.

Conclusion

The Code also contains more information in relation to the other principles, including integrity, diversity and being open and accountable.

While the Code does contain a great deal of detail, it is in our view a very helpful document, particularly in terms of self-evaluation.

Trustees should bear in mind the Commission's own comments in relation to the Code, including that '… 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'.

 For more information, please contact Con Alexander on 0117 314 5214 in our Charity Law team, or complete the form below.