Expert advice

Chairman's Corner: Regional anarchy

Governance | Jonathan Burchfield | 1 May 2007

Jonathan Burchfield and Mike Hudson respond to a worried chair, who asks: what should trustees do when devolution and democracy lead to unfit governance? 

Dear Chairman,

I am chair of a national charity. I had not realised before I took on this role the extent of the challenges facing the governance of the charity. Today the charity has five English regions. Each region has its own committee, director, staff, headquarters, bank accounts and their own plans for the future.None of the regions are registered separately as charities but come under the charity and company registration of the national body. Their finances are consolidated into the national charity's accounts as are their reserves.

Nevertheless each region refuses to allow its reserves to be used to fund badly needed programmes elsewhere but when a region runs into financial difficulties it expects the national body to pick up the shortfall. Regions sign contracts for service delivery which are not commercially viable and there are no financial limits on the orders that they can place or the property they can purchase or lease.Staff are appointed by the regions without any reference to the national body that legally employs them. There is no uniformity of salaries and every region has its own terms and conditions for staff. The board will not address the issues. Each region elects a representative as a trustee of the national board. These trustees are totally uninterested in the national body and are only on the board to protect their region's interest. There are four co-opted trustees of which I am one. On the surface, the charity appears successful and has somehow managed to avoid a major scandal but I fear time and luck may be running out. Our auditors and lawyers are not charity specialists and both firms were appointed because they knew the founding chair. I have tried to persuade my fellow trustees of the dangers of the current situation but any proposed change is squashed by the elected trustees. What should I do next? 

Yours sincerely, A chair who worries about the negative aspects of democracy. 

Dear Chair,

As you know, the governance of your charity needs urgent attention.

At the heart of the governance system of any charity must be a sound understanding of the legal structure and of the roles and responsibilities of those within that structure. As you clearly imply in your letter, you need to knock heads together in order to help people understand that:

• the charity is one legal entity; 
• its trustees' duties and responsibilities are owed to the objectives of the charity as a whole, not just to the region which appointed them
• in acting as trustees they must put the duties to the charity ahead of their regional loyalties; 
• if there is at any time a continuing and irreconcilable conflict between their loyalty to their region and their duties to the charity, they may need to consider resigning their positions as trustees; 
• the trustees are clearly not in control of the affairs of the charity at present and, as such, are in breach of the fundamental duties which they owe to the charity.

Your auditors and lawyers sound poorly qualified to help you sort out the situation, regrettably so are your fellow trustees.

Because the basic problem is a legal one, your first step should be to ask a specialist charity lawyer to prepare a relatively brief report spelling out the legal position and the real risks, which include personal liability on the part of the trustees in respect of their breaches of trust. You should then call an urgent and confidential meeting of the board to discuss that report. You should make it clear to the board that, if it remains disinclined to address the position, you will need to consider resigning and reporting the position to the Charity Commission.

Yours sincerely,

Jonathan Burchfield

Jonathan Burchfield is chairman of Tubney Charitable Trust and partner of the charity & education team at Stone King LLP

Dear Chair,

The two inter-connected issues here are the risks trustees face and the change management skills that are needed to catalyse action.

Personal risks for trustees are very high, particularly if regions continue to commit themselves to lossmaking contracts. We do not know the size of the charity's financial reserves. Let's assume that they are substantial and that you have a window of opportunity to bring about change.

The challenge is how to alert the trustees to the risks they are taking and then to mastermind modernisation of the charity's governance. I would start by identifying potential allies who would be willing to support a proposal that the national trustees should initiate a review of governance.

The review could begin with meetings in each of the regions to discuss the advantages and disadvantages of the current arrangements. This may sound rather tame in the circumstances, but one of the keys to making things happen (when there is no immediate external threat) is to create and sustain a coalition of people who believe change is required. Once this is secured, then you can start to discuss options. A common error in my experience is to start discussing solutions before people understand the heart of the problem.

If there are few reserves, more drastic actions are required. Trustees need to be shocked into realising the dangers. I suggest two actions. First, I would alert the Charity Commission so you have them as a potential ally. Then I would ask trustees to allow you to commission a brief report from a lawyer, accountant or consultant setting out the personal risks they face and the immediate actions required to stabilise the situation.

Yours sincerely,

Mike Hudson

Mike Hudson is the founder and director of Compass Partnership

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