Introduction
Part two in our series on key considerations for Scottish charities following the Charities (Regulation and Administration) (Scotland) Act 2023 ("2023 Act") covers an overview of charity governance and management by charity trustees.
The law imposes many legal duties on trustees to ensure responsible management of the charity. This article outlines the best practices for good charity governance particularly in light of new and upcoming reforms.
Responsibilities of a Trustee - Duties, Governance and Control
As organisations which exist to provide public benefit, maintaining public trust in charities is a fundamental objective in the sector. This underpins the reason why the role of charity trustee contains various legal duties which act to promote good governance and ensure that the charity is led by those who are acting in its best interests, including:
- Operate in a Manner Consistent with Charity Purposes: Trustees must ensure that all activities and decisions align with the charity's objectives and mission. This means prioritising the charity's goals in every action taken.
- Act with Care and Diligence: Trustees are expected to perform their duties with the same level of care and diligence that a prudent person would exercise in managing their own affairs. This includes making informed decisions, seeking professional advice when necessary, and being proactive in addressing issues.
- Manage Conflicts of Interest: Trustees must identify and manage any conflicts of interest to ensure that decisions are made impartially and in the best interest of the charity. This involves declaring any personal interests that could influence their judgment and recusing themselves from related decisions.
These duties are crucial for maintaining trust and integrity within the charity sector.
The 2005 Act also includes specific duties relating to the reporting and provision of information. Taken together, these duties are designed to promote transparency and guard against leaders acting in a manner harmful to the charity's interests and the public.
In order to fulfil their duties, it is imperative that charity trustees know who they are and what the purposes of the charity are. Many types of organisations can register as a charity, for example:
- a company limited by guarantee,
- a Scottish Charitable Incorporated Organisation (SCIO), and
- an unincorporated organisation.
Individuals should check the governing document to find out who exactly must abide by the requirements and legal duties. If you are on a committee of a charity then it is likely that you are subject to the legal duties of a charity trustee.
In order to call itself a charity, the organisation must be registered with OSCR and basic information (including the purposes of the charity) are noted under each entry on OSCR's website. The charitable purposes will be fully set out in the charity's governing document. The purposes form the fundamental basis of decision-making, such as the use of the charity's property and assets. In addition to regulatory duties charity trustees should also understand any internal rules of the charity as set out in the governing document or various policies.
Keeping It Formal - your role as a Trustee
A charity trustee cannot act in the best interests of the charity without having access to the charity's information and being able to attend meetings. With all relevant information at their disposal, charity trustees then have a responsibility to use such materials to responsibly direct the charity towards its purposes.
In particular, all charity trustees should have access to and understand the charity's finances as this will form the basis of decision making. This can be as simple as:
- reporting at each meeting the charity's bank balance
- a note of regular outgoings
- current budgets and
- reserves policy.
In order to ensure funds are used appropriately charity trustees also need to ensure that decisions are within budget, understand what benefits that will arise from a decision and ensure the charity is obtaining value for money.
Evidencing charity decisions and activity is another reason why formal record keeping is critical. Meetings of charity trustees must adhere to any rules set out in charity documents (for example, notice or quorum requirements). To demonstrate the meeting was compliant, the meeting should be recorded in the form of minutes. Minute-taking also provides a record of what was discussed and decided at the meeting.
Failing to formalise records of charity decision making and activity can lead to serious consequences for charity trustees. This is demonstrated in a recent English case (Kristine Lovelady v Charity Commission for England and Wales [2024] UKFTT 282 (GRC)), in which the First-tier tribunal upheld the decision to remove a charity trustee from their post for misconduct and mismanagement. Some of the essential elements for this decision were failure to file accounts on time, failure to comply with the governing documents and failure to document decisions. In particular, no minutes were taken at board meetings to record the authorisation of payments made by the charity to the disqualified charity trustee.
Record-keeping informs charity trustee decision-making and also provides a means of accountability in relation to such decisions. Charity law imposes multiple reporting duties on charities to allow checks to be performed on the charity from the outside in order to enhance public trust.
Transparency Through Reporting - Trustee obligations
Reporting obligations are essential for maintaining transparency and accountability within charities and include:
Compliance Monitoring: Regular reporting allows the Office of the Scottish Charity Regulator (OSCR) to monitor compliance with charity law, ensuring that charities adhere to legal requirements and operate ethically.
Encouraging Proactivity: The need to prepare detailed accounts and reports encourages trustees to be proactive in managing the charity’s activities and finances. This helps in identifying areas for improvement and making informed decisions.
Performance Insight: Reports provide a comprehensive overview of the charity’s performance, including financial health, achievements, and challenges. This transparency helps trustees, donors, and stakeholders understand how the charity is progressing towards its goals.
Building Trust: Transparent reporting fosters trust among donors, beneficiaries, and the public. It demonstrates the charity’s commitment to accountability and ethical practices.
By fulfilling these reporting obligations, trustees not only comply with legal requirements but also enhance the charity’s overall governance and effectiveness.
One of the main requirements is the charity trustee duty to prepare and submit an annual statement of accounts to OSCR within 9 months from the charity's financial year end. This duty compels the charity to maintain accurate records which set out both the finances and activities of the charity to give OSCR the ability to scrutinise its content. An examination and report on the charity's account activity must also be carried out by an independent examiner and submitted to OSCR alongside the statement of accounts.
In an effort to increase public confidence in charities, the public will soon be able to access the unredacted accounts of charities of all sizes online from the Scottish Charity Register following reform included in the 2023 Act (currently only SCIOs and charities with an income of £25,000 are published in redacted form). This change, intended to increase accessibility of charity activity, is yet to be brought into force. Whilst there will be an ability for charities to apply for redactions, this reform signifies a continued shift towards increased transparency which trustees should keep in mind when acting.
Cracking Down: Strengthening OSCR's Hand
To date, OSCR has been unable to apply sanctions in cases where charities failed to comply with reporting obligations. If a charity had failed to submit accounts with the deadline, OSCR merely had the power to appoint a suitably qualified person who would prepare the accounts and ensure the charity complied. However, if OSCR could not contact the charity whatsoever then this proved futile as the person could not access charity records.
As of 1 April 2024, the 2023 Act introduced a further reform by providing OSCR with a new power to deregister charities if they:
- fail to submit accounts on time,
- have failed to communicate with OSCR to rectify the issue; and
- a suitably qualified person cannot be appointed to prepare accounts.
In using its new power OSCR must give notice to the charity that it plans to take such action from which the charity has three months to contact OSCR to update its reporting and maintain its charitable status.
This new risk of losing charitable status will undoubtedly encourage charity trustees to comply with their reporting requirements and boost overall transparency of the control and management of charities in Scotland.
Conclusion
Charity trustees are responsible for managing the charity and its assets. Every decision must align with the charity’s governing documents and, above all, serve its best interests. This requires a clear understanding of the charity’s purposes, finances, decision making process and reporting duties. The 2023 Act strengthens this oversight and compliance through enhanced scrutiny and extended powers of OSCR.
