What to watch out for

Case study: Scottish Natural Heritage

Scottish Natural Heritage (SNH) is a Government-funded conservation body set up by an Act of Parliament and under the charitable rules existing at that time was classified as a registered charity. It was entered into the Charity Register by OSCR in 2006, when the 2005 Act commenced. As regulator, OSCR has a duty to review bodies on the Register, from time to time, to ensure they continue to meet the charity test. Bodies set up by government have a potential risk of failing the charity test because they might be subject to ministerial control. SNH was, therefore, one of the charities OSCR selected for early review. The body has charitable purposes, such as promoting care for and improvement of Scotland’s natural heritage, and also appeared to benefit the public through its work.

However, SNH’s constitution (an Act of Parliament), said the Secretary of State was allowed ‘to give SNH directions of a general or specific character with regard to the discharge of its functions; and it shall be the duty of SNH to comply with such directions.’ OSCR decided that this meant that SNH was subject to direction by Ministers. OSCR directed SNH to remove this clause from its constitution if it wished to remain a charity. SNH indicated that the direction could not be complied with and consequently OSCR removed it from the Register in April 2007.

Case study: Lothian Health Board Endowment Fund

In 2010 OSCR examined the charitable status of Lothian Health Board Endowment Fund as part of a review of the charitable status of selected charities on the Register. The governance and administration of the charity was also considered. NHS charities such as Lothian Health Board Endowment Fund are linked closely to regional Health Boards, which have statutory duties.

It was found that:

• The charity’s purposes, though charitable, were identical to those of the relevant NHS Board
• All of the charity trustees also sat on the NHS Board and were appointed ex officio, that is only by virtue of being appointed to the Health Board 
• During the recruitment process for NHS Board members (through the Public Appointments process), the candidates were not made aware that by taking up an NHS Board post they automatically became a charity trustee as well (although there was specific induction training for charity trustees once appointed).

OSCR was concerned that the way the charity was established and governed did not allow its charity trustees to demonstrate their independence from the NHS Board. The charity said that its practice was to use its funds only for goods and services that were not provided for by statutory funds. Given that the charity and the NHS Board had the same purposes, however, it was considered that there might be a conflict of interest if the NHS Board were to wish to use the charity’s resources to cover statutory provision.

In September 2010 we finished our review and confirmed that the charity did meet the charity test. However, our recommendation was that the charity should take steps so that its charity trustees could demonstrate they were able, at all times, to fulfil their duties under the 2005 Act. The charity had to be able to show that, in a situation of conflict where the charity trustees’ duty to the other body might influence how it used its funds, the charity trustees would decide only on the basis of the charity’s interests and not the needs of the other body. The charity’s own strategic review had identified weaknesses in its governance structure and it was already working to address these. 

We asked the charity to: 

• Review its constitutional structure (although changes would require the amendment of legislation)
• Seek to ensure that during the appointment process it is made clear to candidates what a charity trustee’s role and responsibilities are
• Ensure the induction process for charity trustees remains separate from that for the NHS Board and is appropriate for charity issues
• Put in place a conflict of interest policy to ensure the decision-making process is independent, where both the NHS Board and the charity have an interest
• Make practical arrangements to show the public that it is acting autonomously, for example by taking its own independent legal advice and holding meetings separately from those of the NHS Board (some of these measures are in fact already in place).

Case study: Shetland Charitable Trust

In 2008 and 2009 we received two complaints about Shetland Charitable Trust (SCT). These called into question the way in which the charity was making decisions and how it was managing any potential conflict of interest for charity trustees who were mostly also local authority councillors.

Our investigation found that the charity’s structure made it extremely difficult for it to demonstrate its independence from the local authority and for charity trustees to comply with their duties under section 66 of the 2005 Act. 

• The charity had 24 charity trustees, of whom 22 were councillors, one was the Lord Lieutenant, and one was the headteacher of the local high school
• All of the charity trustees had been assumed into that role because of the offices they held, and in 23 out of 24 cases they owed a duty to the local authority as well as to the charity
• In its day-to-day business, the charity was not showing the public that there was a clear separation from the council. For instance, the chief executive of the council was originally also the chief executive of the charity. The council’s website included a page that provided contact details for the charity and references to the charity did not make it clear that it was a separate body
• The charity had a conflict of interest policy but it was not clear it was being invoked in all the circumstances where it was relevant
• Ambiguity around who was in control of the charity had led to problems in preparing the accounts of the local authority involved. Audit Scotland has qualified the accounts of Shetland Islands Council since 2006/7 on the grounds that the council should have consolidated the charitable trust’s accounts with its own accounts.

Accepting the importance of being seen to be independent, SCT addressed some, but not all, of these issues. It appointed a separate chief executive. It developed a website that was hosted by a private company.

We closed the inquiry into the specific complaints we had received but notified the charity we were continuing to focus on its governance. We considered that there was a high inbuilt risk of irreconcilable conflict of interest where (effectively all) councillors were SCT trustees. We also considered, given the risk of public mistrust in the charity’s decisions, the charity must consider how its decision-making process and practice appeared to others outside the trustee body.

In July 2010, we imposed strict monitoring requirements on the charity. This means that the charity must give us notice of how it deals with all conflicts of interest and we will monitor this closely. We reminded the charity trustees that if we were to find inappropriate actions, we may use our powers, which allow us to prevent charity trustees from carrying out certain transactions.

Case study: Fife Sports and Leisure Trust Limited

In late 2007, Fife Council decided to set up a company limited by guarantee to which it planned to transfer the operations of its sports and leisure services. The new company, Fife Sports and Leisure Trust Limited, intended to apply to be a charity that would run the sports and leisure facilities under a contract with the council. As regulator, we had to make sure that the new company would meet the charity test and that, despite its links to the council, it could still operate independently and fulfil the purposes it was set up for. These included advancing public participation in sport, health and education, particularly through sports and active recreation.

In reviewing the application to be a charity, we found the following:

• The constitution of the new company allowed the council
  to be its sole member.

As such, the council would be able to change the governing rules of the company and appoint and dismiss all of its directors. Best practice would have been for a majority of directors to be selected independently of the council, perhaps through an impartial nominations committee appointed to
sift candidates, and for the council not to have such scope to dismiss charity trustees.

However, on balance, OSCR’s view was that the existing arrangements did not necessarily prevent its charity trustees from acting independently, given other factors in its governance:

• A majority of the directors - that is seven out of thirteen - were to be independent of the council and the Chairperson of the Board would be one of these independent directors
• The company had clear conflict of interest provisions that obliged any of the directors, including those who were linked to the council, whether as employees, officers or elected members, to withdraw and refrain from voting in any discussion in which they both had a  interest and the considered that they could not, in this instance, put the interests of the charity first.

We accepted that, as long as the charity trustees fulfilled their individual duties and followed the conflict of interest policy, they could still act in the company’s own interests.

Governance was not our only consideration with this application. The company also answered our questions on how it would provide public benefit and choose beneficiaries, and showed it would establish an independent policy for charging for its services. We were also satisfied that investments in the leased facilities would mostly come from council funds, making it unlikely that charitable assets would be used to add value to non-charitable property. We granted the company charitable status in April 2008.

Case study: Lloyds TSB Foundation for Scotland

Following a complaint, we investigated the decision by Edinburgh-based grant-giving charity, Lloyds TSB Foundation for Scotland, to reject a proposed change to its funding covenant with Lloyds Banking Group, which was the charity’s principal source of income.

Following the economic crisis, and in view of the possibility that the banking group might report losses in the future, the banking group proposed new funding terms. This meant it would share a reduced specified percentage of the group’s pre-tax profits among the four independent Lloyds TSB foundations in the various parts of the UK and Channel Islands, including Lloyds TSB Foundation for Scotland. The other three foundations agreed new terms with the banking group, but, having taken independent financial and legal advice, Lloyds TSB Foundation for Scotland did not.

We looked at whether the charity trustees had failed in their duty to act in the charity’s best interests.

We found that:

• The charity trustees had taken appropriate professional legal and financial advice about the proposed funding agreement and about its governance structure.
• The charity had turned down the changes, saying it did not believe these were in the best interests of the charity. The proposed changes related both to the way the funds for the charity would be calculated and included other provisions that would have aligned some of the charity’s grant-giving with the company’s corporate social responsibility strategy.
• The charity trustees had engaged in negotiations with the banking group, but it was not clear how open the bank was to amending proposals.
• Following our inquiries, we closed the complaint finding that the charity trustees had acted within their powers. We found no evidence to suggest that the charity trustees had not acted in good faith, nor that they had failed to act in their decisions regarding their charity’s affairs with the care and diligence that it is reasonable to expect of a person who is managing the affairs of another.

Charity trustees are best placed to decide what is in the best interests of their charity. It is important that they have the freedom to discharge that responsibility acting within their powers and duties.

Case study: National Trust for Scotland

We received a number of enquiries and complaints about the way that the National Trust for Scotland (NTS) was being governed, and about decisions it had taken.

While examining the complaints against NTS we noted:

• NTS had complex and unusual governance arrangements. This charity apparently had two main groups with a governance role – the Board and the Council – with 87 members between them and more than 100 other advisers working on panels and committees
• The functions normally carried out by charity trustees appeared to be shared between the Council, the Board and the Audit and Risk Management committees. This made it difficult for the charity both to determine policy and to carry it out
• The complex governance arrangement had resulted in uncertainty about the retention and delegation of powers between the two main groups, which had an impact on the speed and clarity of the decision making processes.

We decided that the confusion over lines of accountability and reporting at NTS would be addressed most effectively from within the charity itself, rather than by a formal series of inquiries. We urged NTS to bring forward its plans to hold a formal review of its governance structure. We asked that our letter recommending such a review be circulated to all charity trustees.

NTS subsequently began an independent strategic review. The outcome of the review reflected the concerns we had communicated to the charity.

The key findings and recommendations of the review were that: 

• NTS’s complex governance arrangements had impeded its ability to operate: the array of people and bodies involved in its governance meant there was no great certainty about who its charity trustees were
• Governance arrangements must be changed significantly before other problems could be properly addressed
• The number of charity trustees should be reduced to a maximum of 15, sitting as a single Board of Trustees
• None of these charity trustees should be representatives of other bodies, as had previously been the case
• Taking into consideration the charity’s membership structure, the review proposed that ten trustees should be elected following public advertisement for candidates, and the other four co-opted by the Board to ensure the right mix of skills and experience
• NTS’s management team should be separate from the Board. While the Board would focus on longer-term strategy, the management team would work towards annual business objectives.

Case study: The Sick Kids Friends Foundation

We investigated an Edinburgh charity following press reports suggesting shortcomings in a fundraising campaign. We initially looked at the charity, The Sick Kids Friends Foundation (SKFF), to establish whether the relatively high level of expenditure against return was planned as a long-term strategy or whether this indicated there were governance issues within the charity.

The findings were that:

• There was a considerable overspend on the campaign and actual funds raised were significantly less than planned
• The charity trustees, however, had sought professional advice in developing the campaign strategy, sought to put in place the appropriate skills and experience necessary with a robust recruitment process for a campaign director, and aimed to monitor and control progress diligently
• Perceptions of management arrangements varied between some campaign staff and charity trustees
• Some questions raised by charity trustees about the campaign were not answered fully and a more robust approach to following through these issues may have been appropriate
• There was a lack of clarity in the charity’s governance structure with unclear lines of authority between the charity’s Council and the charity trustees. The constitution stated that the Council had responsibility for strategy and the Management Board had responsibility for governance – it was unclear as to where the responsibility for some decisions actually lay.

After our inquiries, we were satisfied that there was no misconduct in the administration of the charity by the charity trustees. However, the inquiry did highlight areas where charity trustees could strengthen SKFF’s governance.

We made the following recommendations to the charity trustees (some of which the charity was already working to address):

• Review the charity’s constitution to make sure everyone involved understood who was responsible for decisions and who was in charge of making these
• Assess whether the two-tier structure, which included splitting strategy and governance, weakened their charity, given that the determination of strategy is pivotal to the effective governance of a charity. Separating these out can weaken the role of charity trustees and undermine their authority
• Put in place strong and clear lines of authority and reporting responsibilities when running fund-raising initiatives so that everyone involved knows who is in charge from the start