The consultation on the new Charity Governance Code presents the opportunity to address weaknesses in charity governance
Trustees' Week 2016 (7−11 November) saw the launch of the public consultation into the revised code of governance for charities – the newly named Charity Governance Code. The draft Code has been developed by a steering group of umbrella bodies, including ICSA: The Governance Institute, ACEVO, Association of Chairs, NCVO, Small Charities Coalition and WCVA, with the Charity Commission as an observer.
This will be the third version of the Code. It marks a notable move toward strengthening governance in the sector and increasing expectations to meet the challenges charities now face. Our aim is for the Code to be stretching and more aspirational.
Recent years have not been kind to the charity brand, with media stories highlighting organisational failure, fundraising practices, executive pay and the role of trustees in relation to leading and governing charities. It is fair to say that the sector does not command the high regard it once had – but we have been here before. For a sector that has been around since the 6th century, it would be unusual if it had not experienced a few failures and knock-backs.
As before, the adverse coverage has resulted in the usual voices being emboldened to posit that the overarching charity governance model – voluntary trustees and the absence of executives on the board – is no longer fit for purpose and needs a serious overhaul. The usual solutions of introducing paid trusteeship and the unitary board have been offered up as the panacea to solve all the woes of the sector.
Given that other sectors in the UK and beyond have also been subject to media criticism – and are continually re-evaluating the effectiveness of their governance arrangements and suggesting new ways to resolve perennial problems – perhaps we should not judge charities' arrangements quite so harshly.
Drafting the code
Good governance involves a mix of clear purpose, proportionate processes and the right people in the right place. It is 25 years since the godfather of governance (Sir Adrian Cadbury) released his seminal report on corporate governance and this has been followed by a myriad of reports and revisions to the UK Corporate Governance Code.
As modern business evolves, so must the governance frameworks supporting them. Good governance is not static and it does not operate in a vacuum.
In the draft revised Charity Governance Code, we are neutral on whether the traditional charity governance arrangements remain the best for the sector. There is some flexibility within the legal and regulatory framework for individual charities to make the business case to adopt a more corporate approach.
However, solely focusing on the thorny question of trustee remuneration and unitary boards underplays the importance of a bigger issue: how to encourage boards to commit to continual improvement and the behavioural aspects of good governance.
When drafting the new Code, our steering group reviewed governance developments across the UK economy and beyond, as we were determined to learn from all governance successes and failures. Consequently, the consultation draft draws on learning from the banking sector, NHS, social housing, mutuals, sports bodies and education.
Taking the principles approach to governance, which is so familiar in other sectors, the draft Code identifies seven principles that should engender good governance and help deliver the purposes of the charity in question.
Unlike other codes, there is no regulatory requirement to abide by the Charity Governance Code and report against it. The voluntary nature of the Code and composition of the steering group make it a resource created for the sector, by the sector. But that does not mean that the principles and provisions are soft or easy.
The foundation principle
The starting point for the revised Code is that good governance needs to be built on strong foundations of compliance – see diagram below.
The foundation principle therefore repeats the importance of trustees being empathetic with the charity's cause, understanding the legal and regulatory duties and being willing to fulfil them, an ongoing commitment to good governance and a willingness to challenge and be challenged. Once the basics are in place, trustees can work on the other principles, which include:
Principle 1 − Organisational purpose and direction
In this draft Code, we place more emphasis on the board's focus on strategy and assurance, and its role in determining and achieving the charity's stated purposes. The Code also recommends that the board regularly reviews the external environment in which the charity works and assesses whether the charity is still relevant.
It explicitly recommends that trustees consider partnership working, merger or dissolution if others are seen to be fulfilling similar charitable purposes more effectively. Trusteeship should not be seen as a job for life and charities do not have a right to exist in perpetuity, but a board level discussion on these matters does not always happen as frequently as perhaps they ought to.
Principle 2 − Leadership
In common with other codes, this principle expects that every charity should have an effective board that provides strategic leadership in line with the charity's purposes and values. Culture and behaviours are an important aspect of leadership and the draft Code now says that boards, as recommended practice, recognise, respect and welcome diverse, different and, at times, challenging views. It also asserts that the board sets the tone and should embody the charity's values in its actions and behaviours.
For the first time, the Code talks about the specific role of the chair in promoting good governance. We are particularly interested to hear how much detail should be included about the relationship between the chair/board/chief executive in the final version of the Code.
Principle 3 − Integrity
The board being aware of the public's confidence and trust in charities is a fundamental aspect of this principle. In particular, the Code proposes as recommended practice that the board makes sure the charity operates responsibly and ethically, in line with its own values and ethics and those of the wider voluntary sector. This is something that may challenge or cause discomfort to some charities and we are particularly interested in feedback.
Principle 4 − Decision making, risk and control
This principle includes actively managing risks. As recommended practice, the draft Code says that boards retain overall responsibility for risk appetite and management. It also says that boards promote a culture of prudence with resources but also understand that being overcautious and risk averse is, in itself, a risk. Finally, the cumulative effective of individual risks is included as an area for boards to regularly review.
Principle 5 − Diversity
A board's diversity, in the widest sense, supports its leadership and decision making. Diversity as a separate principle has been introduced because we believe that it is important in its own right. We wanted to emphasise the importance of an environment in which the board welcomes people with different backgrounds and experience, and encourages constructive challenge. Boards should not be cosy places; creative tension arising from a multiplicity of skills, experiences and personalities should lead to better decision making.
Principle 6 − Board effectiveness
Our starting point was that many charities – although by no means all – are on top of basic governance policies and procedures. But if charities are aspiring to more, then board dynamics and behaviours is an obvious area of focus. The Code therefore expects more of boards than previous versions and it is more explicit about some aspects of recommended practice. In particular, it proposes that:
- Boards follow the generally regarded optimum size of between five and 12.
- A board committed to continual improvement will embrace regular performance reviews. In line with other codes, we recommend that for larger and more complex charities this will be every year, with an external evaluation every third year.
- There are fixed tenures of a maximum of nine years, subject to any applicable re-election and statutory provision, to ensure creative churn but with an organised approach to retain organisational memory at board level.
Principle 7 − Open and accountable
The draft Code expands on the relationship between good governance and the shifting expectations on transparency and accountability, and says that charities should be open in their work unless there is good reason not to be.
The consultation provides an opportunity for all interested in charity governance to shape a code that addresses some of the perceived weaknesses inherent in charity governance, while building upon charities' strengths. Good governance is not static and we hope this Code provides inspiration as to how individual charities can lead the way and enhance governance for the whole sector.
The closing date for comments is 3 February 2017. You can download the proposed code at www.governancecode.org and fill in the survey on the website. Alternatively, please email your comments to email@example.com. We want a code that meets the challenges of the next decade, so do let us know what works and what needs changing. We look forward to hearing from you.
Louise Thomson FCIS is Head of Policy (NFP) at ICSA: The Governance Institute and Rosie Chapman FCIS is Chair of the Charity Governance Code Steering Group
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