Charity Financials Insider

Club rules

23 April 2010

Many charities fail to recognise the role members play in their organisations and the governance of membership organisations can be complicated. Andrew Studd examines the legal models and structures

 Charities vary in many ways but one of the most striking is the vastly different role that the members play. For some organisations members seem irrelevant, while for others, the role of the membership is crucial from raising funds, demonstrating support for a particular cause to enable influence and ‘voice’ or to provide expertise. A common governance issue for charities is failing to recognise the role members’ play and avoiding the prickly question of whether the historic role of membership meets their current needs.

Why have members in the charity?

At the outset it is vital to draw the distinction between charity trustees (also referred to as directors of a company) and members. Legally they have different rights and responsibilities but confusion often arises because the roles are performed by the same or a similar group of people.
 
Charities are established with a number of different legal models and structures. Most commonly adopted legal structures require the existence of at least one member. Companies and similar bodies which have members, also have an executive body, generally called a board of trustees or board of directors.
 
Structures that require members include:
  • the company limited by guarantee which must have at least one member;
  • an industrial and provident society which must have at least three individual members; and
  • unincorporated associations which must have at least two members.

The Charitable Incorporated Organisation (CIO) while not yet available will also have members [1]. By contrast, a charitable trust does not have members, just charity trustees.

Rights of members

It is crucial to remember that members have important legal rights. Typically the powers of members are:
power to select, appoint and remove the board of trustees or parts of it;
  • control of changes in the constitution; and
  • power to direct the board of trustees to do things.

These powers will depend on the legal structure, and the provisions of the constitution, of the organisation.

Models of membership structure

Once an organisation realises that it has (or should have) a membership, it needs to think carefully about what sort of membership is appropriate for it as an organisation. The nature of membership that an organisation has (or should have) shouldn’t be static. At different stages in its development it may need a different membership model to assist it in achieving its objectives. A key question is to identify the purpose of the membership and whether it needs to have a role in the governance of the organisation to ensure it is legitimate. There are often methods of achieving a ‘membership structure’, usually for the purpose of raising funds, by giving supporters a role outside governance. This has the benefit of engaging supporters and keeping them informed of the charity’s work but not giving them any constitutional rights.
 
A campaigning body seeking to gain recognition and influence, for example, for the rights of non-smokers, may have needed until the 1960s, a large membership in order to have credibility in raising smoking as an issue. Given where the smoking debate has reached in 2010, a large, active membership may have few real functions.
 
It is important to have the right membership model because having a membership can be costly in terms of management time and the actual cost of engaging with members such as communications and holding meetings. Our view is that organisations should only be incurring those costs if the members are an important part of its role in achieving its mission.
 
There are four broad types of member-ship structure:
  • Highly restrictive or ‘foundation’ model. Highly restrictive or ‘foundation’ model. Many charities only have members because they legally have to, for example, because they are incorporated as a company limited by guarantee. Where one wants the power of the organisation clearly and unambiguously in the hands of the board of trustees, one can opt for a membership model in which the only members are those who currently sit on the board of trustees. A huge range of organisations use this sort of model from grantmaking trusts to service delivery bodies and it is very effective and efficient. If there is a criticism, it is that if the board ever becomes too small or becomes divided, the organisation may find itself with a deadlocked board unable to govern effectively. In that situation only the board of trustees itself is in a position to select new members to resolve that deadlock. 
  • Restricted membership. To ensure there is a wider group involved in governance, an organisation can choose to have a slightly larger membership than just the trustees from time to time. In this model the membership is often made up of the board itself, who can sometimes constitute the majority of members, and other interested parties, often retired trustees, who remain in the membership. The members often do very little by way of active governance unless there is a crisis within the organisation or a significant change, for example a merger, when the trustees can look to this smaller group of stakeholders for support. 
  • Qualified membership or association model. In this model the membership may be a large group, but it is not a completely open group. The organisation seeks to recruit those who meet its membership qualifications. The qualifications may be participation in some profession, interest in some activity or sport, being affected by a disability or sharing a belief or faith. While having a large membership, the organisation is not seeking an unlimited membership. This sort of model is common in professional bodies, environmental pressure groups and charities focusing on the needs of those with particular diseases or disabilities. Members may be heavily involved in the governance of the organisation taking an active part in selection and appointment of the board or providing board members through a hierarchy of interest groups or regional bodies. Members may also be seen as sources of expertise and knowledge, funds, volunteers and influence.
  • Mass membership organisations. In a mass membership model, the organisation is seeking the largest possible membership. There is little or no attempt to exclude anyone from membership. Members are almost always, in addition to being interested in the work of the organisation, seen as a source of funds. The size of the membership tends to mean that they play only a small part in the selection of the executive body, even if they technically elect them. The large membership costs of such organisations are met typically from significant membership funding streams. It is also possible to replicate the mass membership structure without necessarily giving the ‘members’ voting rights.

Membership policy and criteria

Any organisation with members ought to have a clear membership policy which indicates why the organisation seeks to have the size and type of membership that it has. Many organisations are quite conscious about their membership, who qualifies and who they want but often they have never thought about how they got there, what the members are doing and why. Others fail to ‘manage’ the membership list at all.
 
Other organisations are very clear on their membership for example being a member of a professional body can be essential to earn a livelihood. In those situations managing the membership is much more complex – membership criteria will need to be detailed and robust and any rules and processes governing removal need careful consideration.
 

The main problem areas

Identification of members 

One of the most common mistakes in the charity sector is to equate joining the board of trustees with joining the membership of the organisation. Legally they are quite different and the process for becoming a member is usually quite separate from that of joining the board. Only in rare circumstances will joining the board automatically make you a member of the organisation. This simple misunderstanding often leads to potentially very harmful consequences.
 
Certain critical decisions of a charitable company limited by guarantee for example, the election of the board or a change to the constitution, can only be taken at a members’ meeting. If you don’t know who your members are and invite the wrong people to the meeting, the meeting may not be valid. If people vote on the mistaken assumption that they are members but are not, the elections of board members may become invalid and the decisions taken by that board will then be unlawful. 
 
This sounds simple, but our experience is that many organisations have not grasped and properly recorded who their members are.The situation is exacerbated by the fact that in most cases ending membership requires some positive steps. Many people ending a relationship with a charity, for example, leaving the board, fail to resign from membership of the organisation. In most cases membership will continue until terminated by some positive act. This can leave an organisation believing that former board members are no longer members of the organisation when in fact they legally remain members.
 

Members’ powers:

(a) Appointment. Many charities have constitutions that reflect a federated or regional structure and allow the members to appoint trustees to ‘represent’ regional or sector specific interests. This can cause problems for the board as a whole in trying to achieve a balance of skills and in addressing wider diversity issues. It can also be damaging where the trustees fail to recognise their responsibility to the organisation as a whole rather than their regional or sector group. The Companies Act 2006 put on a statutory footing a director’s obligation to act in the interests of the company rather than any other purpose, but this remains a common issue.
 
(b) Removal of trustees and the power to direct. Trustees have found themselves directed to undertake particular course of action or removed by special interest groups who want to take the organisation off in a new direction. Sometimes there is a risk that people will seek to become members of an organisation solely for the purpose of changing its policy as the National Trust found some years ago in the context of hunting. While this is often legitimate where charities operate in a contentious environment, such as organisations that use animals in medical experiments, caution must be exercised to ensure that the charity’s objects can still be fulfilled.
 
Similarly members of charitable but quasi-professional bodies often believe that the organisation is established to represent their interests and provide benefits to them as a group. Of course charity law requires the charity to work for the benefit of the public or a section of the public, not just a closed membership group. In either case the membership’s residual power can prevent difficult decisions being made.
 

The Companies Act 2006: 

The Companies Act has given members new rights to propose resolutions and in particular to vote by proxy which was often prohibited in many organisations’ constitutions. This right is fundamental in that it applies regardless ofwhat an organisation’s constitution says. This means an active group of members can much more effectively get items put on the agenda for meetings and collect proxies to vote in favour, or against, particular resolutions. Whilst in a truly democratic structure this is to be encouraged, it does make a board of trustees much more cautious in its approach to members and the strategy of the organisation.
 
Where tough decisions are required the membership can restrict a board’s ability to make those decisions or require a much more extensive process of consultation and persuasion.
 

Practicalities

Membership structures should always be carefully considered and taken seriously, not just because of members’ powers, but also because of the opportunities it offers and the costs involved if its role is not understood and appropriately managed. 
 
[1]  See also: www.charitiesdirect.com/caritas- magazine/and-they-all-cios-lived-happily-ever- after-544.html, and the news story, 'Never forever CIOs' in this issue.
 
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Andrew Studd

Andrew Studd is a partner in Russell-Cooke's charity team who specialises in advising charities, social enterprises, trade associations and other membership and not-for-profit organisations on a wide range of charity and company law issues, constitutional and governance matters, commercial contracts, mergers and incorporations, joint ventures and reorganisations.

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