Charity Management

Con Alexander considers whether charity trustees should be rewarded financially

19 October 2012

One of the more contentious recommendations made by Lord Hodgson in his review of the Charities Act 2006 is that the trustees of ‘large’ charities should be capable of being paid for the work that they do as trustees, using a proposed general statutory power.

The Charities Act 2006 saw the introduction of a statutory power for charities to pay their trustees for services provided by them (subject to certain safeguards in respect of the number of trustees capable of being paid etc). But, as Lord Hodgson acknowledges in his review, a proposal to introduce a similar statutory power which could allow trustees to be paid for acting as trustees is “a hugely divisive issue in the charity sector”. 

Sizing up

The charitable sector is, of course, incredibly diverse, in terms of the complexity of many charities’ operations, the sectors in which they operate, and the charitable purposes they exist to advance.
 
Charities in the UK range from small, community associations set up to provide facilities for local people, through to organisations that employ thousands of people, turn over amounts that are on a par with many commercial companies, manage significant portfolios of assets, and operate both within the UK and overseas.
 
What all organisations within the sector have in common is that they are subject to charity law and are, in the main, regulated by the Charity Commission for England and Wales.
 
Lord Hodgson’s recommendation looks to draw a distinction between those charities which are sufficiently ‘large’ to require a statutory power to pay their trustees, which he recommends should be charities which have more than £1m per annum in income, and those ‘smaller’ charities, for whom a power of this kind is much less likely to be relevant.
 
It is, of course, a fundamental principle of trust law that a trustee should not, unless properly authorised to do so, benefit personally from his or her role as a trustee, including being paid for what they do. This ‘voluntary’ principle obviously applies to the trustees of both private and charitable trusts, but has also been extended by the courts to include charities constituted in other ways, including charities established as companies and Royal Charter bodies.
In a charitable context, a trustee will generally only be authorised to be paid with the consent of the Charity Commission (which will usually be given by way of an order made under the charities legislation) or, more rarely, the court. A small number of charities will have a power in their constitution which authorises their trustees to be paid, although, at least in the case of more recently established charities, the inclusion of a power of this kind will need to have been agreed to by the Charity Commission as part of the charity registration process.
 
In either case, the Charity Commission is unlikely to agree to let a charity pay one or more of its trustees for acting as trustees without the charity making a clear and compelling case explaining why the payments will benefit the charity.
 
As the Commission put it in their existing guidance on trustee benefits (CC11): “Unpaid trusteeship has always been a distinctive feature of charitable activity, and greatly enhances public confidence and trust in charities. There is a general expectation that charity assets should be used directly for the purposes of the charity.
“As a consequence, any departure from this position is only likely to occur in exceptional circumstances and needs to be fully justified by trustee boards as being clearly in the interests of their charity.
 
“There are circumstances where payment may be justified, but trustee boards need to be clear they can justify a decision to pay one or more of their trustees, and that they can also manage the risks involved in doing this.”
 

Voluntary principle

Lord Hodgson summarises his understanding of the arguments for and against a general statutory power to pay trustees in his review.
Those who support a general statutory power to pay trustees are concerned primarily with the inability to pay as a barrier to effective trusteeship and therefore to good governance. The contention is that payment is more likely to “reach those who are unable to take the role unpaid (those who need to work full time, say), to improve board diversity, and those with high levels of professional skill”.
 
Supporters also point out that the constitutions of many charities authorise trustees who are ‘professionals’ (lawyers, accountants, surveyors, etc) to be paid for advice they give in their capacity. Why, therefore, should a trustee who is, for example, the CEO of a successful company, not bring his or her managerial skills to the charity without the same ability to be paid for them as a lawyer, accountant or surveyor who sits on the same board?
 
The evidence identified by Lord Hodsgon in his review does not appear to support these arguments conclusively. While lack of time was the most commonly cited barrier to people becoming trustees (39 per cent of people gave this as a reason in the research commissioned as part of the review), the review acknowledges that “charities who advertise more widely and have clear and transparent processes for recruitment seem to recruit more easily” and “there is no real indication from sectors that do have the general power to pay trustees that they have found this helpful in recruiting and retaining quality trustees”.
 
So, while lack of time is clearly a barrier for some people in becoming trustees (particularly those with professional skills whose working lives mean that they are less likely to have time available), there does not appear to be any clear evidence that payment is necessarily the solution to the problem.
 
Those against Lord Hodgson’s recommendation (including the National Council for Voluntary Organisations (NCVO), Volunteering England and a range of other important sector bodies) make the point that the proposal fundamentally undermines the ‘voluntary principle’ that trustees should act unpaid.
 
They point to the research carried out as part of the review which confirms that very few charities mention the inability to pay trustees as a barrier to recruitment.
They put forward their argument that the ability to pay trustees will not necessarily attract people with the skills that charities actually need, and that it may create an unfair distinction between those charities that can and those that cannot afford to pay trustees, which could, in turn, create a ‘market rate’ of remuneration, which could lead to an expectation of payment.
 

Greater scope

Interestingly, Lord Hodgson’s review acknowledges the argument that a general power to pay trustees may attract people to become trustees but “not for the right reasons”. The review says very little else about this point, which is essentially that a general power to pay trustees would give greater scope for people to set up and run charities with the aim of enriching themselves.
 
Charitable status is a ‘brand’ recognised by a large section of the general public. It can give access to significant donations by the public and to funding from the public and private sectors and from other charities. It also gives access to a range of reliefs and exemptions from tax.
 
While charities are subject to regulation by the Charity Commission (and Lord Hodgson’s review recommends that the ability to pay a trustee should depend upon there being a clear disclosure of the amount and terms of any payment in the charity’s annual return to the Charity Commission), it seems unlikely that payments to trustees will be subject to the same degree of scrutiny as will be the case in the context of, for example, a commercial company, where its shareholders will have an active interest in monitoring and, if necessary, challenging the remuneration which is paid to the company’s directors.
 
This issue is probably much less likely to be encountered in the context of the very largest charities, with a professional executive team, good procedures and access to advisers, but there must be scope for it to arise in relation to many charities.
 
Will a disclosure in a charity’s accounts be a sufficient safeguard? Does the suggested test for ‘larger’ charities properly capture the correct approach?
My own view is that the ideal is a system under which, in order to reflect the importance of the voluntary principle, all trustees should act unpaid, unless there are very clear circumstances which are objectively assessed and justified as sufficient to support the case for payment in relation to a particular charity.
The circumstances themselves will be very specific to each charity and should be looked at by an assessor with expertise and experience in relation to the charity sector.
 
This is effectively the position as it stands now and the Charity Commission makes the informed and objective decisions that are required.
Clearly, the issue in practice is whether, given the recent cuts in the Commission’s funding, it will continue to have the resources (in terms of staff) to continue to be able to assess applications of this kind in the detail required.
 
Note: this aricle was first published In Private Client Adviser magazine, October 2012.
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Con Alexander

Con Alexander is a partner in the charities and education team at Veale Wasbrough and co-author of Charity Governance (Jordans 2007) 

 
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