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Governor Benefits - A Broader and More Stringently Regulated Issue?

on Wednesday, 20 June 2018.

The voluntary principle that charity trustees - usually the governors in a charitable independent school setting - fulfil their roles without payment, is a deep part of sector culture.

Most governors and their senior team will be confident that their board complies with the rule. Is that confidence misplaced? In this article, Andrew Wherrett looks at some real-life bear traps and the need to reassess risk in the face of changing Charity Commission regulation.

This is not just another article reminding you that governors cannot benefit from the school charity without a proper legal authorisation in the school's constitution. The rule is too well known for that. Yet, even in the scrupulously compliant world of governor boards, unauthorised benefits do happen. Commonly the cause lies either in a lack of clarity in the school's constitutional arrangements or in the difficulty spotting some benefits.  

Unclear Constitutions - The Words Themselves

Many constitutional documents expressly prohibit members and governors from benefitting. The text then "carves-out" exceptions where benefits are permitted. So far so good. But then, older constitutions in particular have a single dense clause making layer upon layer of carve-out of carve-out. Picking through the layers isn't easy and sometimes clauses elsewhere in the constitution may seem contradictory, muddying the water.

Many schools established as companies with articles pre-dating the Companies Act 2006 have constitutions like this. They also face another problem. The 2006 Act introduced rules for managing conflicts of interest which are difficult to square with older articles. The solution here is to review and replace outdated and impenetrable constitutional rules with a modern standard before trying to authorise any benefits.

Unclear Constitutions - Relying on the Statutory Power

The statutory power to remunerate charity trustees for providing services, now contained in section 185 of the Charities Act 2011, needs to be used with caution, if at all. Governors will have to carefully apply the statutory conditions for using the power, the last of which is often problematic. This condition prevents the power being used if the constitution prohibits governor remuneration. As school constitutions often contain some prohibition, the statutory power cannot be used with any confidence.

Unclear Constitutions - Structure

Charitable independent schools are usually part of a community of enterprises, perhaps including trading subsidiaries, fundraising foundations, other associated charities and alumni associations. The rules affect benefits that governors can receive from elsewhere in the structure and this has featured in at least two Charity Commission inquiries recently.

In the first inquiry, the problem was that the wrong charity in a school structure authorised the benefit. In very broad terms, the benefit actually derived from a different charity. This is an example of why it is really important to know, record and identify who in the structure owns and does what, and what the arrangements between them are.

In the second case, fees had been earned by trustees from a trading subsidiary. According to the Charity Commission (and an unreported legal case), fees paid by a trading subsidiary to trustees are a benefit from the charity which must be authorised under the charity's constitution. The fees were repaid.

Governors receiving a benefit from anywhere within the school's wider family of organisations need to trace the origin of the benefit through formal ownership and through flows of money. They need to ensure that the benefit is properly authorised all along the route it takes.

Indirect Benefits

Everyone would recognise that a contract between the school and a governor's service company results in a benefit to the governor. The same is true of a contract with a partnership or small business that a governor part owns. But benefits to businesses of which governors own even the smallest interest may still need to be authorised. Underlining the point, some school constitutions give an automatic authorisation for benefits to governors as a result of holdings not exceeding one or two per-cent of the shares.

Another source of indirect benefit commonly overlooked are the employment benefits of people who are financially interdependent with a governor, outside of any business links. Spouses, civil partners and co-habiting couples may have a level of financial interdependence, meaning if they are to be employed by the school, the indirect benefit to the governor must be authorised.

Education

Strictly speaking, the education of a dependent child could be a benefit and should be authorised in the school's constitution. Arrangements like fee reductions, scholarships and bursaries are a particular risk as they can easily be reduced to cold, hard, repayable money terms and need to be authorised.

Enforcement

There has been a sea-change in charity regulation. The Charity Commission's case reports have explained that it considers the financial claims that a charity might have against its trustees or governors and it decides whether to secure payment of the claim.  Just in the past few months its activities have ranged from probing a connected employee's company car arrangement through to securing the repayment of fees of nearly £650,000 earned from a subsidiary.

In this climate, there is a real risk that, even if the governor or someone connected to them has given value in exchange, the Charity Commission could seek repayment of unauthorised benefits.

Discovery by the Charity Commission

Until now, the Charity Commission found-out about arrangements in a number of haphazard ways. People complain or blow the whistle. One reported case shows that the Charity Commission considers (and secures) the repayment of benefits when Charities write to it, asking for the benefit to be authorised.

In the future, for financial years ending after 1 January 2018, schools will be required to declare whether governors receive benefits in their annual returns. With this sort of information, it will be short work for the Charity Commission to check school constitutions for authority, or to write to governors for an explanation.

Conclusion

Governors cannot receive benefits unless they are properly authorised according to the school's constitution. Because benefits can come in so many shapes and sizes and because they come by so many routes, there is a real risk that some benefits might not be recognised.

The Charity Commission's current interest in repayment by governors and trustees for losses and benefits combined with coming duty to report benefits makes it more important than ever to ensure that any benefits are properly authorised.


If you need reviewing your Constitution or legal advice for your charity, please contact Andrew Wherrett, in our Charity Law team, on 0117 314 5269.

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