Putting to one side politics, words such as "excess" and debates about value, there do seem to be lessons at the core of this issue that apply to charity governance.
Why do we think that? Well, what seems to be key is the dynamic between director responsibility and decision making as against shareholder (or member) rights, expectations and powers. The same issues arise in charities and if not managed properly will lead to different but similarly rooted problems as those being played out in the media about bonuses at the moment.
Directors and trustees do need clear powers to make decisions that are in the best interests of the organisation. Without clear authority with clear lines of accountability and reporting the ability to make a "legitimate" decision is eroded. Trustees need also to appreciate acutely that there are members, that have certain expectations and have powers - powers to overhaul the constitution and thereby the organisation. Reading and understanding the charity's constitution may seem trite and obvious. However, there may come a point where a radical governance moment happens to the charity. Sometimes this will come as a shock, when perhaps it was an identifiable real and present risk that could have happened at any time.
Members on the other hand should appreciate that they have a role to play. In charities (particularly those set up as companies) it can be easy for members not to realise that they have important powers - powers that can very effectively hold trustees to account in a (potentially) "game-changing" way. Members should use these powers properly and should understand the consequences of using such powers.
There is also the issue for members (as was seen in the press at the weekend regarding the position of large institutional investors using shareholder powers) that they should not seek to micro-manage the organisation. Members powers should be used prudently and at the right time rather than create a switch of day-to-day or short term management from trustees to members.
What do these thoughts mean in practice? We think the following key principles apply:
- When setting up a charity, have those creating the organisation thought about the relationship between trustees and any members as well as the powers and identities of members.
- For existing organisations, do trustees and management understand the relationship between trustees and members that the trustees have stepped in to.
- As OSCR highlighted just under twelve months ago, a big point is to understand who is in control of the charity. The trustee/member relationship can be critical to answer the question of real control.
- These might be nice legal points, but what really matters are the serious financial, operational and reputational issues that can stem from what is discussed in this short piece. A failure to understand and grapple with the issues can lead to very damaging financial, operational and reputational results. Having an eyes open approach to this governance can help avoid one of the key characteristics of contentious charity law matters on which we are asked to advise.
Headlines about bankers' bonuses could not be further from the third sector. However, when we look at a cause of the issue and solutions that are discussed, we do see an underlying issue that also affects charities. The relationship between trustees and members is one that all successful charities will consider.
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.