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Opportunities and responsibilities

Gareth Morgan recommends some practical adjustments in the light of the Charities Act 2006...

Charity governance is hardly a new topic – the last fifteen years have seen a plethora of guidance on trustee responsibilities along with plenty of material to help charity boards operate effectively.

More recently, a wide range of guidance has also started to appear on the impact of the Charities Act 2006 – but most of this is dealing with quite specific issues of charity law.   Yet in reality a great deal of the 2006 Act is concerned with fundamental issues which – if understood properly – will impact significantly on how charity boards of trustees need to operate. This article looks at three such issues. 

The new definition of ‘charity’

The new test of charitable status under the Charities Act 2006 has received much public discussion. The existing four heads under which all charities had to express their objects are being widened to thirteen heads (many with sub-headings, so something approaching 30 purposes will be allowed in total). At the same time, the presumption of public benefit is removed, and all charities will need to show explicitly how their work benefits the public. These changes are due to come into effect from around February 2008.

But the average trustee is inclined – with some justification – to say ‘so what?’ After all, the Act specifically states that existing charitable purposes will continue to be charitable, and despite all the rhetoric around public benefit there are only a small number of charities where this will present any problem: in the vast majority of cases it is very obvious that the charity’s work benefits a wide range of people.But I believe trustees who dismiss these changes are missing some key opportunities. I know of many charities where the governing document expresses the objects of the charity in very convoluted terms in order to fit in with the existing heads of charity. In future, the opportunity will be there for many charities to re-word their objects in a way which relates directly to what they do (see figure 1 for examples).

Of course some would argue that rewording the objects is no more than a technical issue, but I believe it is much more than that. It is well known that the central duty of trustees is to advance the objects of the charity – but if the objects are worded in complex terms, it is very hard for trustees making day to day decisions to think in those terms, and discussions can get sidelined by trustees’ personal aspirations.   It is also a huge barrier in fundraising if funding applications have to say ‘Our objects are xxxx but our aim in practice is yyyy’.

So, although the Charities Act 2006 only sought to legislate for charitable purposes which the Charity Commission has already recognised under its existing powers, many charities will want to update their objects, and in doing so will be able to inject new energy into their approach to governance. In fact, clear modern objects may also make the role of trustees easier to understand, thus encouraging recruitment of new trustees from less traditional backgrounds. The new legal structure of the Charitable Incorporated Organisation should also be very helpful in this respect as, if the charity adopts the CIO structure, trustees will no longer have to take on the responsibilities of company directors to obtain a limited liability structure.

Although most people welcome the widening of charitable purposes, some charities see the public benefit test more as a threat. But I believe the public benefit test actually offers a further opportunity to inject new energy into governance.

In future, the Trustees Annual Report will require charities to explain how the work of the charity during the year has benefited the public. I hope this will lead to new emphasis on the charity’s beneficiaries in all trustee discussions. Some charities with a very clearly identified group of beneficiaries do this regularly (for example, a charity providing services to people with a specific disability) – but for many charities where the beneficiaries are far and wide (sometimes extending to the whole of humanity) discussion about beneficiaries are rare.

For example, many religious charities have objects such as ‘the advancement of the Christian faith’ but spend most of their time discussing the upkeep of church buildings. I hope the public benefit test will encourage their trustees to reflect more widely on how they can share their experience of faith sensitively with a wide section of the public (with the building seen purely as a resource in that process). I have known heritage charities where all the trustees’ focus is on conserving specific artefacts: perhaps the public benefit test will encourage them to see the first priority as enabling a wide section of the public to benefit from the heritage they are conserving. 

The new rules on trustee remuneration

Also likely to take effect in 2008 are the new rules which will, in carefully defined circumstances, will allow trustees to be paid for providing specific services to a charity.

This presents a possible danger if trustees get to hear of such provisions without understanding the full details. It does not allow any general payment to trustees for their time spent as trustees – voluntary trusteeship remains the principle. Also, it will not allow trustees to become employees of a charity or employees to become trustees (except, as at present, where specifically allowed by the governing document or by a Charity Commission Order).

But the Charities Act 2006 will make it possible – provided all the conditions are met – to pay a trustee for a specific piece of freelance work which falls outside his/her normal duties as a trustee. This new flexibility will be particularly useful to smaller charities that do not have a readily available pool of external contractors with the relevant skills. So, for example, a local arts charity would be able to pay a fee to a trustee to direct a production. A village hall where a local builder was a trustee would be able to use that builder to do some repair work. A grant-making charity could pay a trustee to do an in depth evaluation of a particular grant.

The new rules also extend to connected parties; for example where a charity wishes to pay a partner or close relative of a trustee.

Making use of these rules will involve care – there are four tests which have to be satisfied in all cases. In particular, the maximum amount to be paid must be agreed in advance (the charity can’t just say ‘bill us at your normal rate’) and the trustee concerned must take no part in the decision and does not count towards the quorum for decisions. So this places greater responsibility on the other trustees not to agree such payments unless they are convinced it is in the charity’s interests.

But used with care, I believe, this change will help to improve the governance in some charities. For example, people who have relevant expertise have often been excluded from being trustees because of doing occasional paid work for the charity. They might now be invited to join the trustee board (they would just be excluded from discussions affecting their own work). I also know of trustees in small charities with few or no staff who have taken on vast amounts of operational work for the charity on a voluntary basis, but then find that their paid work is suffering and are forced to resign. In future, the other trustees would be able to agree specific freelance payments to such a trustee for the operational work, and as a result the person concerned might be able to continue as a trustee.

Fundraising

Although the fundraising provisions of the Charities Act 2006 are not expected to take effect until 2009-10, there is a widespread misbelief that only public collections are affected.

In fact, the Act goes much further, and gives power to the Government to make regulation on ‘good practice requirements’ which would affect fundraising of all kinds (and not just from the public). Whilst fundraising has always been an issue for trustees, in many charities it is delegated to staff and rarely discussed in detail. But under the Act, trustees of every charity (whatever the size) will need to ensure that everything the charity does to generate income complies with these requirements. This will mean much more discussion of actual fundraising messages.

The hope is that that these provisions will not in fact be implemented if the self-regulatory scheme being introduced by the Fundraising Standards Board (FRSB) is seen to work – but this means that the trustees of nearly all charities will need to consider joining the FRSB scheme[i]. The only charities unaffected are where the income is solely from investments or from primary purpose trading.

Governance action

It is clear that the Charities Act 2006 contains much that will have a practical impact on charity governance. I am convinced that most of the changes are beneficial: but where trustees see the changes as purely technical issues with no action required they may well lose out and may even find themselves in breach of the law. 

Gareth Morgan is Professor of Charity Studies at Sheffield Hallam University where he leads the University’s Centre for Voluntary Sector Research and he is course leader of the MSc in Charity Resource Management.

[i] Details available from www.frsb.org.uk.

Gareth Morgan

Gareth Morgan is Professor of Charity Studies at Sheffield University where he leads the university's Centre for Voluntary Sector Research.

In addition he is course leader of the MSc in Charity Resource Management.

www.shu.ac.uk/cvsr 

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