A new model of public benefit governance for charities

15 Jul 2020 In-depth

The failings of the top-down model of governance employed by most large charities have been exposed by this crisis, says Cliff Mills – but a better option is at hand.

The pandemic has created enormous challenges for many charities. While demand for many services has increased, income has been decimated by the closure of charity shops, the cancellation of fundraising events, and the squeezing of individual donations squeezed as personal incomes have been hit.

On the positive side, the pandemic has provoked a mass outbreak of cooperation at street, neighbourhood and community level. In times of real need, self-help doesn’t wait for permission, or funding, or structures; it just gets on with it. Hierarchy and competition are put on hold as collaboration takes over: survival is the priority. Many have commented how much better this feels and how it would be good to hang on to. We don’t want to go back to the bad old ways; “build back better” has become the slogan.

Putting it differently, problem solving from the bottom up has been running at full speed, while those in charge at the top have had a difficult time, facing the collapse of carefully made plans, meaningless income projections, and employees unable to do their jobs.

A crisis is very revealing; but it also provides an opportunity to speak bluntly and put forward some ideas which normally might not be listened to. I’m going to talk about governance particularly in relation to large charities and whether it is fit for purpose post Covid-19, but in truth I want to question whether it was fit for purpose before Covid-19, and whether what we have learned from the pandemic may provide some crucial insights into improving it.

Cooperative vs PLC view of governance

I should start by being clear where I am coming from. I am a lawyer who specialises in cooperatives and mutuals, which sometimes includes charities, particularly in social housing. My background as a cooperative lawyer affects my view of what we mean by “governance”.

Although people have been running organisations for as long as humans have lived together in society, governance as a subject is comparatively recent. It really started back in 1992 with the Cadbury report. This seminal document came about as a result of a perceived low level of confidence in financial reporting and of the ability of auditors to provide appropriate assurance. This was exacerbated by some high-profile failures (BCCI, Maxwell) and criticism of effective board accountability and directors’ pay.

But the Cadbury report is addressed to investor-owned companies whose shares are traded on the Stock Exchange. The purpose of such corporate entities is to generate a financial return for shareholders, and the reliability and trustworthiness of financial reporting is fundamental to that purpose. The system wasn’t working very well and needed improvement. Cadbury was the response; it contained a lot of wisdom and good advice. However, it did not seek to provide guidance on how all organisations in every walk of life were to be run, and one of the less helpful results of the report has been the subsequent domination of the subject by a PLC view of governance.

Other parts of the institutional landscape, which are less well-resourced because they are not focused on making money, have tended to approach the subject from the PLC precedent, rather than starting with a blank sheet of paper to work out what is good governance and best practice for different organisations in entirely different settings. Equally damaging, it has sometimes resulted in PLC governance being seen inappropriately as a sort of “gold standard”. This is unhelpful in many ways, but I will just refer to one.

In corporations focused on generating shareholder value, subject to maintaining an appropriate reputation the expectation on directors is that they will drive the business hard. Otherwise, it will not prosper against competitors, it will not increase its market share, and its profitability and share price will suffer accordingly. Running a listed company requires command and control: it’s a tough job, and individuals are expected to make tough decisions.

It is not difficult to see why governance in the corporate environment is generally top-down (shareholders don’t want much involvement so long as the business is making money) with an all-powerful board, and generally male-dominated. The character traits needed to deliver what shareholders want are more likely to be assertive, strong-willed and hard-nosed; the competitive environment is well suited to male instincts. That is not to say that it isn’t the right place for both women and men, or that women shouldn’t be better represented in board rooms (I believe they should be); but the operational context in which listed companies trade is one entirely driven and energised by competition.

It is not difficult to see that in such a context, responsibility and accountability can be seen to be about being tough enough to make the big decisions and take the consequences; a tendency to heroic leadership, acknowledging that the buck stops here: “I’m big enough to take the flack. I trust my own judgment to push my ideas even if everyone else disagrees.”

It plays well with the media too. Baying for blood after the small people suffer the consequences of the latest corporate scandal, we hear the constant refrain that somebody “must be held accountable”. This is more about having a scapegoat and it frequently results in “accountability”, especially outside the for-profit world, being reduced to just that – finding somebody to blame when it all goes wrong.

This is not what the governance of organisations should be about. It is wholly inappropriate in a cooperative or a charity – and can be disastrous in a crisis.

Democracy and participation

Outside the for-profit sector, there are additional and fundamental factors which must be addressed: the role of volunteering and donated income in charities, and the role of democracy and equity in mutualism and cooperation. These quintessential features cannot be ignored in designing governance, if it is to be fit for its particular purpose.

If your organisation partly depends on volunteers and donors, its resilience in times of stress will at least in part depend on your relationship with those volunteers and donors. If your organisation requires people (members, usually) to play a part in its democratic arrangements, and proactively to hold those in charge to a set of values and principles, your relationship with those members isn’t a sideshow: it’s the very heart of what your organisation needs to prosper. Governance must be designed for its context.

What is governance?

  • Governance describes how all the elements (or “organs”) of a corporate entity are intended to work, from the bottom up and the top down, in order that it will best and faithfully pursue its stated purpose.
  • The details of governance are set out in the constitution which is the authorised text explaining how a corporation (an artificial legal person) is organised and controlled. It includes setting out how power is distributed and exercised within the organisation.

So governance isn’t just what the board does; it’s how the whole organisation works. This formal governance, or hard-wiring, is in the legal constitution which establishes the structure.

As is widely understood, it is the culture of an organisation rather than its structure which directly impacts how people behave. A good structure helps, but it’s not the solution. People and culture provide the solution. So beyond the formal governance set out in the legal constitution, things like codes of practice, charters, values statements and so on seek to give further guidance about how to do things. They seek to inculcate the right culture.

Getting governance right for charities and mutuals requires both these things: it means establishing the right culture for the organisation, but it also means having a structure which is appropriately designed to deliver the organisation’s purpose.

Here, very briefly, is the coronavirus learning. In a crisis, the key question is how everybody connected with the organisation responds. If culturally and structurally your organisation tends to be a bit top-down, not really engaging the people it depends on (or who depend on it), then a pandemic – or future climate crisis issues – may leave you more exposed than if your culture and structure put those essential human relationships at their heart.

This approach to fitness for purpose doesn’t mean having powerful levers that can be pulled in a crisis with dramatic results; nor having detailed internal procedures in place providing for every eventuality which everyone is expected to follow. It means an organisation being equipped to cope with events that might occur.

A broken model?

So now to the main subject of this article. In a previous article, charity lawyer Philip Kirkpatrick is quoted as saying “the governance model for large complex charities is completely broken”. The results of a recent survey of finance professionals published by Charity Finance showed that a majority of respondents (55%) did not feel that current governance models were fit for purpose. Both articles talk favourably about the idea of a unitary board including executive directors – a model not widely adopted throughout the charitable sector.

The current, “two-tier” approach to governance used by most larger charities is shared in the field I work in – larger coops and member-based organisations – where it has been around for over 150 years and is commonly referred to as the Rochdale model, named after what is regarded as the first cooperative, the Rochdale Society of Equitable Pioneers. In the early days, the members who were the customers of the cooperative elected a small group from amongst themselves to be a committee overseeing the business. They appointed a manager to run the shop, but the manager was not on the committee.

That worked well for smaller businesses, but somewhere along the line of growth, expansion, increased complexity and risk, the role of the manager or chief executive became much bigger, requiring careful selection of the right candidate with specialist skills, and ongoing training. The skills needed to run the day-to-day operation of the coop now resided with professional managers, not elected directors. Housing associations are another example of the two-tier approach. Where there is a large-scale voluntary transfer of housing stock owned by a council into a new housing association, the traditional board structure is one-third tenants, one-third councillors, and one-third independent directors.

As in charities and coops, the people most likely to have the relevant skills to run the housing association don’t sit on the board.

From a practical point of view, this approach has obvious potential weaknesses which can be exposed in particular situations. Essentially, there is a risk that although volunteer trustees or volunteer or elected directors of larger entities bring relevant skills to the table, they do not necessarily have the high levels of skill and training which a board needs to discharge its legal duties.

When serious governance issues arose at the Cooperative Group in 2013, the first finding of the Myners Review in 2014 was that the organisation’s governance “places individuals who do not possess the requisite skills and experience into positions where their lack of understanding prevents them from exercising the necessary oversight of the executive”. This was an extreme case with its own very particular circumstances, but it illustrates the issue I am highlighting.

When reviewing the tragic failure of Kids Company, one of the findings of the Public Administration and Constitutional Affairs Committee was that its board of trustees lacked the experience of youth services or psychotherapy necessary to interrogate the decisions of the founder-chief executive.

So there are practical problems with the two-tier approach when the organisation becomes substantial; but also there are significant legal issues. First, the law treats as directors those carrying out the role of directors, whatever title they hold. Second, the law treats a person in accordance with whose directions or instructions the directors of the company are accustomed to act as a “shadow director”.

In essence, chief executives of larger coops and housing associations are likely to be treated by a court as directors whether or not they are constitutionally members of the board – as is being argued in the application to disqualify Kids Company chief executive Camila Batmanghelidjh from being a director. Third, the law expects a director amongst other things to exercise such “reasonable care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out” that person’s functions. This objective requirement may pose a challenge where the actual general knowledge, skill and experience of individual board members or trustees falls below what “may reasonably be expected”.

So, for larger and relatively complex charities or societies, the two-tier approach poses some significant legal and practical risks. Are there other options?

Public benefit governance

In 2003, the Labour government introduced a new form of legal entity called a “public benefit organisation” which is now set out in the NHS Act 2006. Expressly modelled on traditional cooperative and mutual societies, what are generally referred to as NHS foundation trusts have a membership base drawn from the local community, patients, carers and staff – all of whom can vote in elections – plus a board of executive and non-executive directors.

But the members do not elect the board. They elect a new body called the council of governors, which sits between the members and the board. The board remains responsible for running the business, but:

  • The board comprises both executive and non-executive directors, and one of the latter is the chair.
  • The non-executive directors are appointed and can be removed by the council.
  • The council has a number of other functions including holding the non-executive directors individually and collectively to account for the performance of the board.

There are three interesting things about this approach. First, it creates an entirely new type of corporate structure focused on “public benefit”. Second, to support this purpose it builds into this new approach a form of democracy, as part of the overall governance arrangements, with a new and separate elected body that has the express role of representing members and holding the board to account. Third, by locating the “representativeness” function elsewhere in the governance, it leaves the board to be composed entirely of individuals with the specific qualifications and skills needed to run the organisation.

The statutory form established in 2003 for NHS foundation trusts is highly prescriptive. However, the model has been adapted and used for a new approach to the ownership and governance of a number of services, including: social housing – Rochdale Boroughwide Housing (RBH) and Merthyr Valles Homes; social care – Cartrefi Cymru and Learning Disability England; and leisure services – Salford Community Leisure. These adaptations all use a community benefit society or a company, and in all cases the organisations are also charities.

This approach achieves a number of important objectives:

  1. It establishes a board whose composition is entirely based on competence to do their job. There is no “representativeness” on the board (that is the council’s role).
  2. The council is the place where different voices can be heard. Generally these are the voices of users (tenants, patients etc) and of staff; but they can also include volunteers, local residents etc.
  3. The council has some clear legal powers which (unlike NHS foundation trusts) includes the power to approve forward plans. In other words, it is not for the board alone to determine the future; they are merely agents for the time being. The organisation exists for its members and the wider community, who rightly have a say through the council.

By way of illustration, RBH is the UK’s first tenant and employee-owned mutual social housing provider, owning 13,000 homes. Membership is open to all tenants and employees. Tenants elect 15 representatives onto the representative body (council), and employees elect eight. Rochdale Council appoints four. The board comprises two executive directors, and six non-executive directors, one of whom is chair.

The representative body’s remit includes:

  • Appointing and removing non-executive directors and approving their remuneration.
  • Approving the appointment of the chief executive, approving the corporate strategy and policy framework.
  • Monitoring performance of the business and the board against the corporate strategy.
  • Responsibility for the membership strategy. These functions demonstrate that its role isn’t cosmetic; it has real substance.

A collective enterprise

These organisations have adopted this wholly new governance because they all want the people the organisations depend on for their existence and success – essentially their users and their workforce – to be active participants in the organisation, not just customers or workers. As Adrian Roper, chief executive at Cartrefi Cymru, put it: “Our main aspiration was to demonstrate that we valued our beneficiaries directly, by giving them a democratic voice and access to roles beyond that of “recipient” or “client”. Why, we wondered, should we expect our support workers to listen to what people say, to work co-productively with them, and to support them to acquire valued roles, whilst keeping them away from the discussions about how we run the organisation that supports them? How could we expect our fine, person-centred values to be fully embraced at the frontline if we didn’t really embrace them in our governance?”

They all see their organisation as a collective enterprise, striving to achieve a shared objective for the benefit of their communities, providing services to those who need them, and jobs to their employees.

To be fit for purpose and resilient for the future, governance needs to be designed to suit an organisation’s purpose; and it needs to accommodate the human relationships needed for the organisation to function and prosper.

Cliff Mills is a consultant at Anthony Collins Solicitors and principal associate at Mutuo

 

How have these organisations with representative governance responded to the current crisis?

“Our representative body and our board have moved to virtual meetings, with focused agendas and both committed to joint work. We are looking at how to do this workshop-style using technology later in the summer. We have agreed a huge focus on community support.”

Gareth Swarbrick, chief executive, Rochdale Boroughwide Housing

“Our connection with our customers, members and workforce is very strong, including through emails and social media. We are planning for our AGM to be digital. We even had our community members and families of our employee members asking to volunteer to help support vulnerable people in the city.”

Steve Hassall, chief executive, Salford Community Leisure

“I’m sure that giving a strong voice and real influence to our users, staff and communities through our cooperative membership makes us stronger and better set up to face the future than under our old entirely top-down structure.”

Adrian Roper, chief executive, Cartrefi Cymru 

Governance & Leadership is a bi-monthly publication which helps charity leaders and trustees on their journey from good practice to best practice. Written by leading sector experts each issue is packed with news, in-depth analysis and real-life case studies of best practice in charitable endeavour and charity governance plus advice and guidance straight from the regulator. Find more information here and subscribe today!

 

 

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