'Of the sector, by the sector'
Rodney Buse looks at the provenance of governance codes inside and outside the sector and explains the practical application of the latest Code of Good Governance.
I am frequently asked; “we are told good governance is important but why is governance so important and what does good governance look like?”
It is a really good question and a good place to start as for some, good governance is an end in itself, but for many others it is an essential characteristic of an effective organisation. Importantly, we all benefit enormously from the public’s trust of the sector and we damage this at our peril.
Background to governance codes
All sectors have had to face issues arising from poor governance not least the private sector. There are a catalogue of events that have given rise to reports including, The Cadbury Report (financial transparency – 1992), The Nolan Report (standards in public life – 2001) and The Higgs Report (effectiveness of non-executive boards – 2003).1 It is no surprise therefore that the charity sector produced its own version in June 2005 under the title: Good Governance: A code for the voluntary and community Sector.2 It was developed by a founding group consisting of ACEVO, CTN, ICSA and NCVO with strong contributions from the Charity Commission.
It was agreed at the outset that the code should be reviewed after 18 months and after a period of practical application. A review was undertaken in 2008 by nfpSynergy that identified a number of issues to address and posed some important questions.3 The first version had been well received and benefited from strong awareness arising from the efforts and funding provided by the Capacitybuilders-funded Governance Hub. In headlines, the report called for simplified language and clarity on how the code should be used and interpreted. In particular, it recommended separation of the principles that were mandatory from the advice that was intended to show how those principles should be applied in practice.
A steering group was charged with developing a ‘refashioned’ code and to consult widely on its development. Each of the founding members was represented on the steering group along with a representative of the Charity Commission. As a group we have travelled a long way together under the chairmanship of Lindsay Driscoll.4 Although our respective organisations have different stakeholders that we are accountable to, good governance of the sector was a unifying passion. It is notable that international aid organisations that compete for funds and the attention of the public often share resources and cooperate well on the ground. So too, with the steering group charged with a common task, we found our differences becoming less and our strong commitment gave rise to a shared understanding of what was needed.
An important part of the process of producing the second edition of the code was that it remained ‘of the sector, by the sector’ and there were extensive consultation processes including the use of online surveys, working groups, an advisory panel, the governance forum, critical friends and others.
New learning
In the period since the launch of the code there have been lessons to learn from the other sectors and developments in our sector to take into account. In May 2010, the Financial Reporting Council issued a new edition of the UK Corporate Governance Code, (formerly the Combined Code).5 The ‘Higgs Guidance’ is also currently being updated by ICSA and is a document well worth reading for charities that are incorporated as companies.6 An extract from the main principles of the UK Corporate Governance Code is shown in Figure 1.
These external developments to the sector can be added to the implications of the new Charities Act 2006, together with the focus by funders and stakeholders on outcome reporting; something which has gathered pace since the publication of the first version of the code. There have also been advances in the understanding of behavioural governance that recognise that structures and policies alone do not deliver an effective organisation.
A complementary framework
The intent of the second edition of the code is that the principles contained in the document will embrace all organisations in the sector and will be applied in all settings. How these principles are applied will be determined by individual needs, so a framework becomes necessary. The steering group are very clear that the framework should be read as non prescriptive and as an aid to the application of the principles. The new edition may be seen as a response to the new environment, away from regulation and the old ‘tick box’ approach. Law may require some ‘musts’ and where it does, some of the more important legal requirements are set out within the framework.
The code complements Charity Commission advice and does not attempt to replace it. There is the opportunity for charities to adopt the code and it is hoped that many will do so in their annual reports. This will give opportunities for charities then to apply or explain any variations they have made to the framework. The code addresses the question: “why are the principles of good governance so important?” Extracted from the code, the headline principles and the reasons for their inclusion are captured in Figure 2.
The first question any good trustee might ask is why the charity is undertaking a particular task? This also applies to work on governance which can be expensive and time consuming. Anyone wishing to promote good governance should have their answers ready for these questions. Before a board decides what to do on governance it should first do its best to identify what is preventing it from being most effective. Comparing practices with good practice identified in the code is a good way either to start the process or, if the problems are already apparent, to ask how implementing the code might help address these problems. But, encouragingly, there will always be the board that simply wants to satisfy itself that it is doing all it can to operate against a code of good practice.
Availability of the new code
The published code together with a pocket version is now available on the steering group website and also the websites of the four founders and the Charity Commission.7 Limited hard copies are available, primarily for promotional purposes. The version published in September 2010 is principally aimed at sector organisations that employ staff although it may have wider appeal. A version for organisations not employing staff is under development and it is planned to be available in the spring of next year.
This code has a generic application. The steering group welcomes the development of codes meeting the needs of sub-sectors and understands that such developments are underway in the arts and the sports sectors. There is great merit in the overriding principles being universally adopted, arising, as they do, from generic codes for the private and public sectors. The nfpSynergy report identified the value of co-ordinating work across the four nations and this is to be encouraged.
If we were looking for an assessment of success for the code in a number of years time it would be an assessment of charity effectiveness and the respect in which it is held in the eyes of the public, the media, government and the world at large. There are many factors that will contribute to this success but the code has an important part to play. In terms of outcomes, it will be organisations saying they have found it valuable to use the code and can identify the gains they have achieved on its application. Another measure of outcome success will be that the principles and much of the framework are incorporated into subsector codes and there is co-ordination across the four nations. In the short term of the next year or two a measure of the success will be organisations signing up to the code by registering with the founders’ group website and expressing their commitment to its application in their annual report and accounts.
Governance case studies
1. The ‘representative’ trustee
A well-known disability charity appointed its trustees as a result of local elections in the four nations and the regions of England. Trustees were properly advised that on appointment as a trustee they were no longer a ‘representative’ and they had a duty to act in the interests of the charity as a whole. Many found this initially quite challenging.
With the advent of skills audits the charity recognised the need for a smaller board made up of a mixture of appropriate skills. Their rules allowed for the direct recruitment of up to three such appointments that enable identified skills gaps to be filled.
Importantly, the role of country and regional chairs became more important. They performed a key role when the charity consulted with its members and were also a channel of communication between the board of trustees and the charity members. They agreed to meet as a committee to facilitate this role, recognising that they did not have, nor should they have, decision making powers.
This structure has helped trustees to focus on the interests of the charity as a whole and overcome some of the conflicts that they felt as a result of being nominated by their country or regions.
2. Dealing with a conflict of interest
A charity’s premises were badly affected by a flood. One of a charity’s trustees had an IT firm who were capable of providing emergency support, but this created a substantial conflict of interest.
Fortunately, a code of conduct was in place which stated how to deal with conflicts of interest. Also, the trustees had undergone induction and training so were very aware of their role, responsibilities and relevant charity law. As the relevant procedures and policies were already in place and the trustees were clear about what to do, they were able to move very quickly to declare a conflict of interest, manage it and put in place clear steps to bring the trustee’s firm in and set boundaries on what it could do and for how long. As a result, the whole situation was dealt with quickly, carefully and transparently, and the charity was able to resolve the crisis effectively.
3. Recruiting a new chief executive
The director of a charity handed in his notice and so its board set about the task of recruiting a successor. Fortunately, the director’s job description had recently been revised and evaluated as part of his annual appraisal. To initiate the recruitment process, the trustees prepared a person specification, terms and conditions of employment and a candidate assessment process.
At first interview, there was a rigorous process for those who demonstrate sufficient capability including:
- a presentation to public/voluntary sector stakeholders who provided feedback on specific criteria;
- an in-tray exercise of various tasks that might fall to the director; and
- an interview with a panel of trustees and an external stakeholder.
Lessons learnt were:
- the value of having someone with HR expertise for your board to keep the process in-house;
- keeping job descriptions up to date and evaluated;
- setting up a working group to lead the process with a mix of skills and experience, and time; and
- the importance of involving trustees and other stakeholders as much as possible in the process.
4. Board performance
Given a board decision to undertake a board assessment, those invited to participate were delighted that they had been given an opportunity to express their views and, surprisingly, not shy about doing so.
Some issues came up that were anticipated by the board, such as communications outside board meetings, more coherent governance arrangements, more time for discussion of strategic issues at meetings, more formal procedures for follow up of agreed actions, more structured management of and communications with the chief executive, and more strategic and regular performance measurement. It was recognised that the process – as much as the result – was important and it included a commitment to feeding back and following up the results. A useful by-product of this process was the chair’s mandate for improvement and taking forward new ways of doing business. As a result, the charity is more sharply focused on business development strategies and more cost effective ways of working. The chair observed that trustees could not afford to ignore good strategic governance.
5. Resolving a conflict between the board and the CEO
A mid-sized social care charity suffered a breakdown in the relationship between its CEO and board. This resulted from poorly defined role descriptions – which in turn led to overlap and conflict at board meetings. Despite the CEO not being a trustee, they attended board meetings and held an important governance role due to their control of information flows between the board and the staff.
Following objective mediation from a third party, the CEO and chair decided to meet and re-define the board and CEO’s roles and relationship together. They used the Code of Good Governance to identify the issues that should be reserved to the board as well as analyse how they could adopt best practice in how the board related to the chief executive. This included allowing the CEO to input meaningfully into the board’s decision making.
In order to reinforce this, they instituted monthly meetings between the CEO and chair to share information earlier and develop a greater personal understanding. The board also appointed a senior trustee to act as a mediator if the relationship between the chair and the CEO weakened in future and informal attempts at resolution were unsuccessful.
The CEO’s relationship with the board was also defined more clearly. This included ensuring a suitable reporting methodology to the board on both the organisation’s progress and future operational plans, developing policy proposals in conjunction with the chair to present to the board as well as reflecting any staff concerns upwards to the board.
6. Improving accountability with stakeholders
The board of a large, international development charity included trustees from a wide range of backgrounds and two from overseas – West Africa and India. A major challenge for the board was to ensure that members used their time together wisely and found the right balance between focusing on strategy and accountability and fulfilling their other duties such as overseeing the work of the organisation.
The trustees struggled to find sufficient time to fulfil their strategic responsibilities and eventually felt compelled to add a new potential risk to their risk register – the trustees and management not being sufficiently accountable to the outside world.
The company secretary was then tasked with coming up with a plan to mitigate this new risk and he began by looking at what similar organisations do and found three standards for accountability and governance. Ultimately he chose to use Good Governance: a Code for the Voluntary and Community Sector and having reviewed the organisations performance against the relevant principles the board agreed that they would annually publish a full accountability report on the web – taking a ‘warts and all’ approach. The report provides stakeholders with feed back on how the organisation is delivering in a range of areas including fraud, adherence to the code, number of staff by gender, disability and ethnic minority etc. The organisation also made a commitment to report the chief executive’s salary and benefits regularly in the annual report and accounts.
7. Review of risk management strategy
The trustees of a medium-sized charity working in the field of international development identified the need to review their risk management strategy. The first step was to hold a short risk assessment workshop for the whole of the board led by the charity’s accountant. This ensured that all the board members understood how to identify risks, including assessing the likelihood, severity and collective knowledge, how to assess the consequences and decide on the appropriate action to manage the risk.
A risk register was developed by the staff for each of the charity’s departments. This covered the whole range of risks for the organisation from failure of IT systems to the risk of theft and fraud in transferring funds to areas without formal banking systems.8
The risk register and risk action plan were monitored on a regular basis by the board’s finance committee. The full board was responsible for monitoring the top five risks for the charity on an annual basis. In some cases the risk was so high either in terms of financial loss or damage to reputation those decisions were taken at board level. For example a key risk was the safety of staff visiting areas of conflict and a decision whether to permit staff to visit Afghanistan was taken by the board.
In preparing this article my thanks go to my colleagues on the steering group both for their support and the learning they provided but also the commitment and passion for the subject that we have shared together.
1. A very useful summary of the history of all the corporate governance reports with links through to the original reports can be found on the CIPD website: ww.cipd.co.uk/ nedresource/information/history.htm
2. www.ncvo-vol.org.uk/ uploadedFiles/ NCVO/ What_we_do/ Governance_and_ Leadership/Good_Governance_Code %20 _PDF.pdf
3. www.nfpsynergy.net/includes/documents/ cm_docs/2008/c/code_of_good_ governance_final_report.pdf
4. A consultant specialising in charity law at Bates Wells and Braithwaite
5. www.frc.org.uk/ corporate/ukcgcode.cfm
6. Further details on the press release from ICSA dated 29 July 2010 and available from www.icsa.org.uk
7. See www.trusteenet.org.uk/ resources/ good-governance-code-summary
8. For more details on risk governance and risk registers, see the Caritas Guide to Risk Governance published in May 2010.
www.charitiesdirect.com/caritas- magazine/ categories/guide-to-risk- governance-401.html
Author: Rodney Buse
Rodney Buse chairs Charity Trustee Networks and has served as a member of the code steering group throughout the development of the second edition.
He undertakes a limited number of governance assignments with a focus on the structures and behaviours that drive organisational effectiveness.
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