What are the key areas of concern being investigated by the Charity Commission at the moment? We have drawn out the top five from the Commission’s statutory inquiry reports for last year and shared some tips for avoiding those issues in your charity.
Dominant trustees and CEOs
There is nothing wrong with a charity having a leader with a dominant character. Indeed, many charities would not exist without them. Dominance only becomes a problem if the board of trustees does not exercise adequate supervision and control over the individual concerned.
In the Charity Commission inquiry into Care4Calais, the Commission concluded that there had not been any robust challenge of one of the trustees who was the charity’s founder and (unpaid) CEO, and that the charity placed an unhealthy reliance on her. A similar criticism was made in the Charity Commission inquiry into Kingdom Church GB in which the Commission found that the trustees relied on one of the trustees to make all the decisions in relation to the operation of the charity.
In order to discharge their trustee duties, trustees must be the ultimate decision makers and carry this responsibility accordingly. In practice, this means that the board should have the skills and experience to know how and what to challenge. The trustees should meet regularly, receive reports from the CEO or any trustees carrying out executive functions (or obtain assurances from other sources, such as an internal audit) and assert their authority through direction and, where appropriate, challenge.
Top tips: Make sure the board understands how the charity works and the environment in which it works. Think about what level of assurance the board needs and ensure that systems are in place to provide that assurance. A scheme of delegation can help to clarify the powers and functions which the board has reserved and those which it has delegated, along with any limits on delegated powers.
Conflicts of interest
The management of conflicts of interest is a knotty issue and so it is not surprising that the failure to manage them is a recurring theme in Charity Commission inquiries.
In the Charity Commission inquiry into Genesis Philanthropy Group, the Charity Commission found that the trustees did not take steps to adequately identify and manage conflicts of interest and/or loyalty arising from their role in the charity. The trustee meeting minutes recorded no declarations of conflicts of interest (despite these arising), there was no evidence of trustees having received training on conflicts (as required by the charity’s conflicts of interest policy) and the trustees did not record their directorships, trusteeships, employment positions or other interests in the register of interests.
As the inquiry noted, conflicts of interest are more likely to arise when trustees are closely related or when the charity has a close connection with an organisation in which trustees have an interest. Constitutional provisions and a conflicts of interest policy can help to support trustees’ compliance with their legal duties in this area, but what really matters is what happens in practice. If the trustees do not understand the scope of their duties, declare interests or recognise conflicts, problems can arise.
Top tip: Arrange a training session for trustees on the management of conflicts of interest and refresh on a regular basis. The session could be as short as 30 minutes.
Financial controls
Not filing a charity’s accounts on time can prompt the Charity Commission to consider whether it is symptomatic of wider administration and governance issues.
This was the case for Birmingham Education Trust and Middlesbrough Central Masjid and Community Centre. In the Birmingham Education Trust inquiry, the Charity Commission found that the trustees had maintained insufficient financial records, there was a lack of formal documentation recording loans made to the charity and, contrary to the charity’s governing document, there was only one trustee with control of the charity’s bank account.
Internal financial controls are essential for helping trustees to protect their charity’s assets, make informed decisions and meet their legal duties.
Top tip: The Charity Commission published new guidance on internal financial controls for charities last year. Use their internal controls checklist to check your charity’s controls against the legal requirements and good practice recommendations in the guidance.
Trustees receiving benefits
There is a general rule that a trustee cannot profit or benefit from their position as a trustee unless specifically authorised.
None of the routes available to authorise a trustee benefit would generally enable a trustee to use charity funds to renovate their property or purchase antique clocks for personal use, as the sole trustee of The Cowesby Trust discovered in the Charity Commission inquiry into the charity. In that case the Charity Commission disqualified the trustee and recovered around £136,000 from him. The Commission also found that unauthorised benefits had been received by one of the trustees in the Birmingham Education Trust inquiry but concluded that it would be disproportionate to recover the funds due to the low sums involved and the benefit the charity had received for the work she had undertaken.
While many trustee boards are aware that there are restrictions around paying trustees, it is easy to overlook the fact that people connected with trustees such as family members or a company controlled by a trustee are also caught by these rules, as are payments from a charity’s trading subsidiary to a trustee or connected person who is on the trading subsidiary board. It is often suggested that a trustee should resign in order to be able to receive a benefit which they would not have been able to receive as a trustee but it is not as simple as that.
Top tips: It is standard practice for a charity’s governing document to contain a range of circumstances in which a trustee is authorised to receive a payment or other benefit from the charity. Check your governing document is up-to-date in case you wish to rely on such provisions now or in the future. Don’t rely on a trustee resigning as a way of overcoming the issue – look at the Commission’s guidance and take advice if that is planned.
Governance
A theme across many of the inquiries published by the Charity Commission last year is the lack of a properly constituted board of trustees.
In the Charity Commission inquiry into the Cowesby Trust, a key concern was that the trustee had been acting as sole trustee in contravention of the charity’s governing document, which enabled him to act unilaterally and without scrutiny. In the Care4Calais inquiry the charity did not have the minimum number of trustees in place, which meant that the trustees were also not taking valid decisions. In two inquiries (Genesis Philanthropy Group and World Holocaust Forum Foundation) the removal or resignation of trustees due to financial sanctions caused quoracy issues and, ultimately, the winding up of those charities. In the inquiry into Ethiopian Orthodox Tewahdo Church St Mary Tsion, a schism between two factions within the charity led to a dispute as to the identity of the charity’s trustees. This resulted in a significant amount of time and resources of the charity being spent on seeking to resolve the dispute, which ended up in litigation.
In March 2024, the Charities Act 2022 introduced a new power for the Charity Commission to fix defective (or potentially defective) trustee appointments. If this power had been in force at the time of the Charity Commission’s engagement with the Ethiopian Church, it is possible that court proceedings could have been avoided.
Top tip: The Charity Governance Code is a helpful guide to the principles of good governance and recommended practice to help your charity achieve them (including on matters such as the size, composition and culture of a charity’s board). Carry out a regular health-check of your charity’s performance against the Code.
If you would like to find out more about the support we provide to charity boards on governance click here or explore our trustee training here. Information about our work on Charity Commission investigations can be found here.
The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further information.