OSCR, from time-to-time, issue Inquiry Reports. These reports follow some form of investigation into the administration of a charity and the conduct of a trustee, or trustees as a collective group. Often they do not conclude that there has been trustee misconduct but in all cases, they offer some form of recommendation on governance. The reports are a very worthwhile read for charity trustees, senior managers, funders, stakeholders and others. It also evident that while a report discusses a charity working in a particular segment of the sector, the recommendations invariably have application to a much wider group of charities.
In December 2015, OSCR issued an Inquiry Report on Voluntary Sector Gateway West Lothian (the VSGWL Report). With that as a backdrop, we look at some key charity constitutional matters that charity trustees should bear in mind.
Get in good health with a constitutional
We have blogged previously on choice of legal form and trends in the wider third sector about legal vehicle selection. Importantly, the charity trustees, at the point of setting up the charity and on a continuing basis, must have an appreciation of why they have chosen a particular legal form and the key terms of their governing document (e.g. Articles of Association, SCIO constitution, trust deed etc.). If a trustee's response is that the legal form and terms of the constitution are on the basis of a 'model', then that is itself a possible sign of weak governance. Trustees should have an informed reason for their charity's legal form and should understand the terms of the governing document and importantly, why the terms are relevant to that particular charity.
Charity trustees also need to be comfortable with, and have knowledge of, the key decision-making processes within the constitutional governing document (including an appreciation of any default rules). OSCR noted in the VSGWL Report that the level of a quorum for trustee meetings was set at a low level, creating the real possibility and opportunity for an important and binding decision to be taken by a very small (and certainly far less than majority) number of trustees.
Who are you?
Not a football chant nor grand existentialism, but a real issue for charities to keep on top of and one which is highlighted in the VSGWL Report. At VSGWL there were four directors formally and validly appointed (properly filed with Companies House etc.). However, they had a further four 'Directors in waiting' when there is officially no such legal position. These 'directors in waiting' existed in an uncomfortable limbo; no powers to act as a director, but probably regarded for regulatory purposes as shadow directors and trustees, along with the associated liabilities and risks.
In the VSGWL Report, OSCR stated that, "It should be noted that we consider all those persons attending board meetings as Directors to be trustees for the purposes of the Charities and Trustees Investment (Scotland) Act 2005 and therefore collectively responsible for the day to day management and control of the charity." Accordingly, if an individual is titled or holding themselves out to be a director of the charity (and we would suggest where OSCR mentions "as Directors" that is in the sense of "as charity trustees"), they will require to adhere to the duties expected of a charity trustee on the basis of their 'shadow' nature and the rules on such a position.
OSCR quite rightly made two observations on the VSGWL charity trustee appointment process. Firstly, that the Articles of Association were not properly understood, as it was believed (wrongly it would seem) that charity trustees could only be appointed at an Annual General Meeting (this ties in with the points in the preceding section of this update). Secondly, those attending "as Directors" should be formally appointed; it is not just a matter of 'housekeeping', but important questions of the validity of decision-making and liability flow from this. It is no surprise that in OSCR's Targeted Regulation consultation, the draft updated Annual Return included a question about the number of trustees of a charity. It is fundamental that charities formally record the appointment and retirement of charity trustees. It can be very risky if these actions are not documented properly _ particularly in the case of trusts and unincorporated associations _ Individuals who thought they had stepped down may still be the legally appointed trustees (even decades later in our experience).
Ensure policies are up-to-date and followed by trustees and others
In the VSGWL Report, it was noted that a recruitment policy and procedure had not always been followed by a (former) member of staff. OSCR underlined the responsibility that trustees (whoever that may be in light of the proceeding section) must have in respect of policy formulation and compliance.
At this juncture it is perhaps worth covering one aspect of recruitment that ties in with the constitution and appointment of charity trustees. The legal rules and definitions applying to what is 'charitable' under Scots law (i.e. for OSCR purposes) and tax law (i.e. for HMRC tax reliefs and recognition) are different. The former is perhaps better known and understood than the latter. The latter requires a charity to:
- have charitable purposes as understood by English law;
- seek registration with a home charity regulator (e.g. OSCR) (one for another day, but this does not necessarily mean registration with a home regulator);
- be subject to the jurisdiction of the courts; and
- have managers of the charity who are 'fit and proper' persons.
This test requires to be met by a Scottish, OSCR registered charity that wishes to be recognised for UK tax purposes by HMRC as a charity. Two limbs of the test are worth particular mention:
- Limb 1: In terms of the constitution of a charity, it must ensure that the purposes are drafted in a manner that is consistent with English charity law (we have seen, as is common in many 'model' constitutions, that HMRC may not accept an oblique general reference to the charity being 'charitable for the purposes of the 2005 Act and the Taxes Act' as sufficient when the drafting of the purposes clause in fact works in conflict to English law).
- Limb 4: all managers must be 'fit and proper'. 'Managers' is widely defined by the legislation and understood by HMRC. It means that at least all trustees and senior managers must be recruited and appraised etc. in a manner which demonstrates that they are, and continue to be, 'fit and proper'. Training to raise awareness of the 'fit and proper' test is often at the heart of processes for ensuring continued compliance. A breach by a single manager can have a (financial, reputational and regulatory) impact on the whole charity.
HR and disciplinary processes
Good HR and people management is important to the success of any organisation. Again, in their report on VSGWL, OSCR highlighted failures to adhere to VSGWL's own policies and procedures. Policy and procedure review and compliance is, as OSCR reminds us, ultimately a trustee responsibility and policies should be reviewed from time to time. OSCR also referred to the importance of taking professional advice on employment matters before making decisions and using charitable funds, for example for comprise agreement payments or similar. Indeed, in respect of professional advice, generally OSCR said that when taken it is an aspect of trustees acting with care and diligence (key elements of a trustee's 2005 Act general duties).
More generally on employment law matters, click here for a handy reference point for forthcoming significant changes in employment law.
Conflict rules... but not as we might know (or believe) them
In the VSGWL Report, OSCR recommends that trustees should declare conflicts and refrain from participating in decision-making where there is a conflict. We suggest an additional step or two.
One takes us back to the first section of this briefing: trustees must read and understand their constitution. What does the constitution say on conflicts and what action trustees should take? There can be situations where trustees may have a potential (or it may even be a real live) conflict, but they should continue to participate in decision making while ensuring they put the interests of the charity first (case law, particularly in trust law, is unkind, or perhaps very fair, to trustees who step back from decision-making or resign rather than maintain a position in the best interests of the charity).
The second step is to understand the conflict rules in the 2005 Act. They are perhaps not quite what they seem or are widely believed to be. They state that (our emphasis):
"in circumstances capable of giving rise to a conflict of interest between the charity and any person responsible for the appointment of the charity trustee ‰„
- put the interests of the charity before those of the other person, or
- where any other duty prevents the charity trustee from doing so, disclose the conflicting interest to the charity and refrain from participating in any deliberation or decision of the other charity trustees with respect to the matter in question."
The rules are not in fact of general application. They relate to the situation of conflicts arising out of a method of appointment. Otherwise, the general duty to act in the best interests of the charity applies as well as ensuring proper adherence to the governing document of the charity.
If the conflict rule in the 2005 Act is indeed triggered, it then requires a charity trustee to make an evaluation (hence the "or" in the rule): put the interests of the charity first or, where another duty prevents that (i.e. makes it impossible) at that point to refrain from acting in the particular decision-making process. These rules should be carefully considered and the outcome of any potential or actual conflict documented to record why a trustee decided to remain or not in the decision-making process. Of course, it may be for reputational reasons that it is considered best for the charity that a trustee 'sits out' of discussions and voting to avoid a decision suffering any form of taint (justified or otherwise).
Not a legal point as such, but one which OSCR discussed in the VSGWL Report and in at least one other Inquiry Report previously. The board, as part of their wider duties, have a responsibility to properly manage the communication of the work of the charity and its reputation. Often this will be positive communication of the success and impact of the charity. In other cases it may be managing communication in respect of less favourable issues. In these situations the trustees must do their best to further the purposes of the charity and appropriately manage its reputation and avoid reputational damage and taint.