Ensuring independent decision-making

Our experience, and good practice, suggest that to enable good governance a charity’s governing body or Board should have a certain mix of skills and experience to manage a charity’s affairs. It is essential that charities identify the necessary skills and seek to make sure that the governing body of the charity includes people with these.

Each charity should decide how it selects charity trustees to achieve the right mix of skills and experience for the particular type and size of charity. This may be by combining charity trustees chosen either by members or stakeholders with others who are co-opted for their expertise, or by giving its charity trustees the appropriate training to strengthen their governance skills.

The appointments process for charity trustees should be designed to identify the best people for the needs of the charity. What the needs of the charity are will depend on its context and activities, and these may make it appropriate to bring in charity trustees who can provide links to stakeholders, whether beneficiaries or other bodies with whom the charity is involved. Such charity trustees must act in the interests of the charity, as must all charity trustees. Where there are links to another body, a transparent arm’s length selection process for independent charity trustees, such as an independent nominations committee may be appropriate and help to ensure real and perceived independence. In a branch structure with a geographical basis, representatives may be elected onto the national or parent body.

Sometimes a third party involved in setting up a charity does not appoint a governing body or Board until after it has established the charity’s purposes, written a business plan and drawn up funding arrangements for the proposed body. Since the Board should be responsible for the charity’s strategy and activities, this process may prevent the charity trustees, once appointed, from acting in the best interests of the charity. For example, a local authority may build in an obligation for the charity to contract with it for a particular service, such as providing sports facilities, rather than with other suppliers. It would be good practice to adopt some arrangement, such as a steering group, perhaps composed of people who will eventually serve as charity trustees, which will allow broad policies to be addressed appropriately before the formal establishment of the charity.

The law does not prevent a linked body from appointing some or all of a charity’s trustees, nor prevent the appointment of charity trustees ex-officio (that is, because of another post or role they have). However, a charity trustee, once appointed, must act only in the charity’s best interests and cannot act merely as a delegate for another body or group of stakeholders.

Good governance means these should be people able to take decisions independently, based on their own judgement. We recommend that a charity’s Board should have a majority of independent trustees and that the chair of a charity should be independent of any linked body.

Charity trustees need to remember that they are collectively responsible for decisions made and for ensuring compliance with the provisions of the 2005 Act. To fulfil this duty, they should therefore ensure that the charity’s constitution sets out the procedure for dealing with a charity trustee who has consistently failed to act appropriately in the interests of the charity and, if appropriate, removing them. Good practice would be that a majority of charity trustees (sometimes this is set as a two-thirds majority, to protect against arbitrary action) would have the power to remove a charity trustee if they were satisfied that a charity trustee had failed in his or her duties. 

A charity’s constitution will set out the conditions under which a charity trustee can be removed. Charity law does not prevent a charity’s constitution from allowing an external body to remove a charity trustee. Where a constitution gives an external body power to appoint a charity trustee, it would be usual for that body to have similar power to remove the charity trustee. However where the extent of such power of appointment and removal jeopardises the benefit being provided by the charity, charity trustees should seek to review the charity’s relationship with the external body and if necessary introduce changes. There are specific circumstances where the external body is a Scottish Minister.

A constitution should set out clearly who is in charge of a charity to avoid any doubt or dispute within the charity or with any other body. The charity trustees must be in management and control and should have all the powers they need over strategy and management to ensure they can carry out their duties.

Where the charity trustees have the power to delegate their authority, the terms under which this can happen should be set out in the constitution.

The constitution should contain a conflict of interest code, or impose an obligation on the charity trustees to comply with a code of conduct which they will adopt. (The latter would give greater flexibility and would be easier to update.) This should, among other things, define what conflicts of interest are and set out the measures charity trustees should take to deal appropriately with them, such as withdrawing from discussions in which they have a personal interest and where they consider they cannot give priority to the interests of the charity.

Charity trustees should review the charity’s constitution regularly to ensure that the charitable purposes are those the charity wants to pursue and that they are current. They should also review and update any part of the constitution that does not reflect the lines of responsibility and accountability at the charity.

There should be clear communication of the terms of the constitution and the charity’s purposes to all charity trustees, employees, volunteers and donors. 

The legal structure of a charity will have practical effects in determining which regulatory bodies the charity will have to report to, in addition to OSCR, and the manner in which it must report. For instance, if a charity chooses to be a company it will have to adhere to the Companies Act 2006 and the reporting requirements of Companies House, as well as those of the charity regulator.

A charity’s structure and the nature of its links to other bodies are also important in determining how accounts should be presented. Any ambiguity about control being exercised over a charitable body that has links to another body may lead to confusion as to what type of accounts should be prepared. The person who is preparing or auditing accounts for a body with a controlling or influencing relationship with a charity may take the view that these accounts should be consolidated with the accounts of the charity. This will depend on how they interpret the regulations in the current accounting framework in the UK which specifies when this must happen. (You can read more about this in the Charities Statement of Recommended Practice 2005.)

When consolidated accounts like these are prepared, the charity is treated as a subsidiary of the other body. The charity trustees may consider that this is an undesirable consequence of how the charity is structured and its relationship(s) with other bodies. For example, in the charity sector, there may be concern about the public perception if a charity is treated as a subsidiary of a public body, and the charity trustees may fear a decrease in public donations. This may lead the charity to consider whether it needs to review its constitution.

A charity’s constitution should clearly define the rights of its members or affiliated bodies regarding the appointment and removal of charity trustees and of giving directions to the charity trustees. In many charities, charity trustees are accountable to the membership or other stakeholders in varying degrees. Some constitutions allow members’ involvement in making key decisions that its charity trustee board must carry out. When members exercise such a power to direct the management and control of the charity, however, OSCR may consider that they are acting as the charity trustees. A charity should look at the implications of this when writing a governing document since the duties and responsibilities of charity trustees under the 2005 Act may in such situations rest with its membership. A constitution should allow charity trustees (whoever they are deemed to be in a particular case) to be free to take those decisions required to administer the charity in its best interests

Since charities may benefit from public donations and work for the public benefit, the public’s perception of their operations is extremely important. Charity trustees should ensure that they run the charity as a separate body and show this in practice. As a separate body the charity must ensure it has its own accounts, including the trustees’ annual report. It should also make sure it has its own business plan, minutes, meeting papers and a register of charity trustees’ interests (in line with its conflict of interest policy). Some of the ways the charity can demonstrate publicly the independence of its operations are to:

• Provide a separate induction process for charity trustees
• Ensure the charity’s business is conducted separately. The only matters discussed at the charity trustee meetings should relate to the charity. If the charity is linked to another body, the charity should not hold its meetings as part of those of the other body, but have its meetings at a different time
• Consider how Board papers are made available to Board members. If charity trustees are linked to another body, should Board papers go to that business address or to a different address?
• Establish and observe a conflict of interest policy and keep records to show how it is being implemented
• Keep independent financial records. Even if charity trustees wish to, or are required by other authorities to include its charity accounts with those of another body, the charity must also keep separate financial records and comply with the statutory requirements to file accounts with OSCR
• Ensure its funds are administered properly. When charity trustees manage charitable funds and also other funds as members of another body, they should be clear about the different rules that apply to charitable funds. Charitable assets must only be used for charitable purposes, even if a charity winds up. As regulator, we must monitor charitable assets and how they are being spent or used
• Make sure that the ways in which the charity’s public face is presented, such as a website, do not allow it to be seen inappropriately as part of another body. There may be financial benefits from having a charity’s web pages hosted within the website of a linked body or a funder. However, charity trustees should balance these benefits against any impact on its image or reputation if, by doing so, this would affect the public’s perception of the charity
• Use only the charity’s own headed notepaper. Scottish charities must comply with legislations regarding how they show their charitable status on their literature and other documents. A charity must not use another body’s stationery for its correspondence.

A charity trustee must act in accordance with a charity’s constitution and always make decisions based only on the charity’s interests and not his or her own, or those of any body to which he or she might also have a duty.

A charity trustee’s main duty is to make every decision in the interests of the charity. To do so, charity trustees should be aware of personal interests in any decision the charity makes and ensure that they declare in advance any conflict of interest and, when they consider they cannot give priority to the charity’s interests, withdraw from a discussion and from voting.

In order to make the best decision on a significant matter involving a linked body, the charity trustees should consider engaging independent professional advice, if the scale of the decision and risk associated with it merits this. When taking advice, the charity trustees should make it clear it is intended only for the charity. Nevertheless, the final decision should always rest with the charity trustees and be based on their judgement of what course is in the best interests of the charity.

Significant negotiations with a linked body should be carried out at arm’s length: one way of demonstrating this is if an independent third party, such as a legal professional, confirms that terms are reasonable and at market value. 

Charity trustees should be seen to be acting clearly in their charity’s best interests. To demonstrate transparency, charity trustees should declare in advance any potential conflict of interest. The term interest goes far beyond direct financial benefit to a charity trustee personally. A charity trustee would potentially have an interest if his or her charity were discussing a contract or any business arrangement with a body to which they owe a duty because they are either an officer or an employee, or to which they have family links. The kinds of issues where the two bodies’ interests are potentially different are:

• When negotiating, or renegotiating, the terms and conditions of any contract
• During discussions relating to any contractual disputes.

A conflict of interest policy should set out:

• What a conflict of interest is, detailing any particular conflicts likely to be relevant to the charity
• Duties and mechanisms for declaring interests
• Procedures for dealing with conflict of interest, such as the circumstances where a conflicted charity trustee should withdraw from decision making and the procedures for decision making in such a case.

The charity’s constitution or other governing documents should set out the procedure when there is a conflict of interest such as those detailed above, or state that the procedure will be regulated by a code of conduct or standing orders.

Where a charity trustee is aware that he or she is subject to a conflict of interest between the interests of the charity and those of another person or body who appointed them, and where they are unable, because of their duty to that other person or body to put the interests of the charity first, then they must withdraw from the discussion or decision concerned. It may also be appropriate for charity trustees to withdraw from discussions in other circumstances of conflict of interest. Where they do not do so, they should be able to demonstrate that they have acted in the interests of the charity. In doing so, procedures such as the recording of discussions and decisions, and the consideration of appropriate professional or other advice will be relevant. Considerations of confidentiality may also be relevant. It is in the charity’s interests that any discussion about any contract to which it is party should be confidential. Charity trustees with an interest in the other party to a contract should be able to show they have acted appropriately to protect the charity’s interests

A charity trustee will have to consider whether their interests mean that conflicts will be regular and recurring, and, particularly if, in terms of the charity’s constitution or code of conduct or of good practice they find themselves frequently having to withdraw from significant charity decisions. Is this preventing them from usefully carrying out their charity trustee duties? In such a situation, it may be appropriate for them to stand down and be replaced by a charity trustee who does not have the same conflicts.

There is no legal reason why charity trustees may not have an interest in another connected body as long as they are able to give priority to the interests of the charity. It is up to the individual charity trustee then to decide in the light of the circumstances whether the scale of the conflict means they should not join, or remain, on a charity Board. 

They must act in accordance with their duties under section 66(5) to protect the interests of the charity. This provides that the other charity trustees must take practical steps to ensure that a specific breach of duty is corrected by the charity trustee and not repeated. If there is serious or persistent breach of the duty between the charity trustee and the person who appointed them, then the charity trustee concerned should be removed.