The charity governance code comprises a set of principles and best practice standards to help charities and their trustees develop high standards of governance. The Charity Commission supports the code and has withdrawn its ‘hallmarks of an effective charity’ guidance in response to it.
The new charity governance code
Changes to the previous version of the charity governance code include:
- a recommendation that no trustee should serve more than nine years without good reason
- greater emphasis on the role of the chair in achieving good governance
- suggesting a new role for the vice chair as a conduit of information/views between the other trustees and the chair
- a recommendation that charities with income over £1 million should have an external evaluation of the charity’s governance every three years
Trustees are encouraged to meet the principles and outcomes of the code, by either applying the recommended practice, or explaining what they have done instead or why they have not applied it. However, compliance with the code is not a requirement, and as is the way with sector-wide guides, there will be good reasons why some charities choose not to follow some parts of the guidance.
Principles of good governance
The code assumes trustees are committed to the good governance of their charity and understand their role and legal responsibilities. It is not a comprehensive guide to charity law and trustee obligations; rather, it provides a set of governance principles and practices to adopt in ensuring a charity is well managed.
The code contains seven key principles:
- organisational purpose
- decision-making, risk and control
- board effectiveness
- openness and accountability.
Key outcomes and recommended practice are identified for each principle.
The code is designed to be used by all charities, but recognises the difficulties in applying governance standards uniformly across the sector. The recommended practices for each principle are varied for larger and smaller charities; larger charities being those with income of over £1 million a year whose accounts are externally audited, and smaller charities being below this threshold.
Whilst the code is intended to be a guide only, some commentators have suggested that it may become increasingly relevant to demonstrate compliance with the code when dealing with the Charity Commission and funders. Charities are encouraged to include a statement in their annual report detailing their use of the code.
Key points to note
- Trustees - the code recommends a board of at least five but no more than twelve trustees as good practice but many charities fall outside the recommended range for good reasons. The trustee appointment process must be formal, rigorous and transparent, and trustee terms of over nine years are discouraged.
- Performance review - the board must review its own performance, with larger charities expected to self-review annually. Charities with a turnover in excess of £1 million are expected to have an external evaluation every three years. The code strongly encourages board diversity, both in terms of the protected characteristics under equality legislation and, more broadly, skills and experience. Delegates at our seminar on the charity governance code suggested that the concept of diversity also applies to the question of who charities choose to engage with as individual beneficiaries or (in the case of grant-making charities) recipients of funds.
- Chair - the code emphasises the importance of the chair and recommends that the board has a vice-chair who provides a sounding board for the chair and serves as an intermediary for the other trustees if needed, a suggestion which may be helpful in some scenarios but which some charities may hope would not be necessary on the basis that sound communication between board members already exists.
- Independent advice - boards are expected to obtain independent professional advice, including legal and financial, where required to discharge their duties effectively.
- Subsidiaries, suppliers and stakeholders - the code highlights the importance of adequate oversight over relationships with subsidiaries, suppliers and stakeholders. There must be clarity surrounding subsidiaries, including regarding the benefits and risks involved in such arrangements, and the relationship should be clearly recorded and reviewed at appropriate intervals. There should be regular and effective communication with stakeholders, who should also have the opportunity to hold the board to account.
- Policies and procedures - the board is further expected to have in place effective and robust policies and procedures dealing with conflicts of interest, board strategies, functions and responsibilities, finances (including reserves), service or quality standards, good employment practices and encouraging and using volunteers (where needed), and key areas of activity such as fundraising and data protection, as well as terms of reference for committees and a framework for monitoring organisational performance. Our experience is that duties and processes around management of conflicts, particularly conflicts of duty, is widely misunderstood.
All charities should consider the new charity governance code to develop and improve their governance. However, as the sector is not uniform, charities should consider carefully which aspects of the code are most relevant and useful for them and take a proportionate approach.