The Financial Reporting Council’s new UK Corporate Governance Code [PDF] was published earlier this week. Reading it I think there are matters that resonate for charities.
There is obvious common ground between the roles of the board in all sectors, but charity boards are invariably made up entirely of non-executives who are not usually involved with management. There are also different perspectives of ownership, contribution and management. For example, trustees of a charity do not own what they work for; individuals guide, support and influence with the key aim of acting in the best interests of the organisation overall, rather than a constituency or grouping. Importantly, this should not fetter those who work for the organisation or those for whom it is working, nor should it deny the flexibility that is needed if activities and services are to adapt to changing needs.
Section 177 of the Charities Act 2011 defines charity trustees as "the persons having the general control and management of the administration of the charity". This definition sometimes causes confusion because of the concept of it involving management and administration. It is important to recognise that what is intended is that trustees need not actually carry out the management and administration, but be responsible for them. Boards are also required to make the appropriate level of challenge and make decisions on key issues.
With most large non-profits, the board has had the foresight to appoint professional management to manage the organisation. This sometimes causes a dilemma. A charity trustee’s position stands in contrast to that of the non-executive director of a company in the private sector, who shares their legal responsibilities with their executive colleagues on a unitary board. In some ways, the greater the competence and professionalism of management, the greater the challenge in understanding the issues of governance and management. Trustees must properly discharge their duties without being seen to simply rubber stamp, but at the same time they should not become over-involved in operational management to the detriment of their critical perspective.
I have carried out many governance reviews and getting the balance right can be challenging. The correct balance will be achieved only when individuals or teams have a clear understanding of responsibilities, the authority necessary to fulfil these responsibilities and the accountability for the consequences of what they have done or failed to do. This accountability is required not just from management but also from boards. A key question is how the board and management are held to account for ensuring that they foster and indeed enforce the right culture and behaviour.
There is much more to it than ensuring compliance with standard policies and procedures, and the FRC’s updated corporate governance code now places much emphasis on culture and behaviour. It explains that "the board should assess and monitor culture. Where it is not satisfied that policy, practices or behaviour throughout the business are aligned with the company’s purpose, values and strategy, it should seek assurance that management has taken corrective action." The charity governance code espouses similar requirements.
At a Crowe charity breakfast briefing called "Culture and Behaviour Trumps Policies and Procedures" there was widespread agreement that board members often wrongly take for granted that the right culture and behaviour permeate through the organisation. Boards need to take time to ensure that organisational culture or values are discussed as part of the formal board agenda. Ethical dilemmas need to be discussed and the decisions should be carefully reviewed. Sometimes this needs to be a theoretical discussion in anticipation of what might go wrong – for example, the risk that organisational or personal performance indicators can lead to or incentivise inappropriate behaviours. An important question for boards is how incidents of inappropriate behaviours or unwanted culture are recorded, monitored and dealt with. The position in the past was that proper accountability and transparency led to unwanted publicity that should be avoided. This approach is no longer seen as appropriate and can lead to damaging consequences.
This article first appeared in Third Sector.