CHARITY GOVERNANCE REVIEW 2015 Navigating a changing world · Contribution of the top 100 charities...

C H A R I T Y G O V E R N A N C E R E V I E W 2 0 1 5

Navigating a changing world

14%

34%

Key highlights

Contribution of the top 100 charities to the UK economy:

have a female chair, 8% less than 2014

(FTSE 250, 3.6%)

of the top 100 charities cite the economic environment as their key risk

(43% in 2014, 58% in 2013)

of the top 100 charities set out values within their

annual report

of the top 100 charities identify availability of future funding as the most commonly identified risk

(41% 2014, 9% 2013)

full-time employees (0.7% of UK workforce)

provide good or excellent disclosure on their environmental policies

(23% 2014)

contributed to UK economy (around 1.1% of UK GDP)

approximate investments

64%

30%

47%

215,000£17 billion

£36 billion

CHARITY GOVERNANCE REVIEW 2015 1

Contents

Foreword 2

The regulator’s perspective 4

Navigating a changing world 5

Diversity 5

Board skills and experience 8

The value of values 9

Social investment 10

Environmental sustainability 10

Volunteers 12

Social media 14

Understanding risk 16

Disclosure of main risks 18

The strategic report 22

Key performance indicators 23

Reporting performance 24

Reporting financial performance 25

Reserves 26

Going concern 26

Size of the board 27

Board evaluation 29

Induction and training 31

Attendance at meetings 32

Remuneration 33

Board committees 34

Senior management remuneration 35

Towards a new code of corporate governance 36 for the voluntary sector?

About us 37

Contact us 38

The Grant Thornton Governance Institute 39

Methodology

This report is based on a desktop review of the latest financial statements filed with the Charity Commission or Office of the Scottish Charity Regulator (OSCR) in summer 2014 by the top 100 charities, by income, in England, Scotland and Wales. The range of financial year-ends means the financial statements reviewed cover the period from 31 January 2012 to 31 March 2014. Our sample excludes universities, but includes a number of charitable registered providers reporting under the Housing Statement of Recommended Practice.

Within this report we refer to our report ‘Charity Governance Review 2014: Good Governance Gathers Pace’ as the 2014 report and this year’s publication as 2015. Last year’s report is available to download from our website: www.grant-thornton.co.uk/en/Services/Business-Risk-Services1/Governance-matters/Charity

We have based our review on the Charity SORP (‘Accounting and Reporting by Charities: Statement of Recommended Practice 2005’), the Charities Act 2011, the Companies Act 2006 and best practice guidance from other sectors, such as the UK Corporate Governance Code. Where appropriate, we have also considered the requirements of the new Charity SORP, which applies to accounting periods beginning on or after 1 January 2015.

As in previous years, we draw on the guidance in the UK Corporate Governance Code, designed for listed companies but relevant to large charities operating at a similar level of complexity. We also refer to our companion reviews of corporate governance in the FTSE 350 and the top 60 housing associations.

Carol Rudge would like to thank Steve Harper, Louise Hughes, Phil Keown, Camilla Williams, Alice Watson-Thorne, Gabriella Bullock, Nicoline Oerting and Saskia Harrison for their help in preparing this report, and our contributors for their valuable insights: Lynne Berry, Andrew Cheesbrough, Alice Maynard, Philip Nelson and Ann Phillips.

2 CHARITY GOVERNANCE REVIEW 2015

Welcome to Grant Thornton’s third annual review of governance in the charitable sector, covering the disclosures made in the trustees’ reports of the top 100 charities in England, Wales and Scotland.

This report is part of a broader review of UK governance practice and complements our other similar publications on the FTSE 350, the NHS and the social housing and local government sectors. With this comprehensive programme, we aim to help organisations to improve their performance by learning from their peers, both within their sector and beyond.

Future funding fears2014 was another challenging year for UK charities, with many facing the twin pressures of uncertainty over funding combined with increasing public demand. Such financial concerns are captured in our research where, for the first time, the availability of future funding is the most common risk cited in trustees’ reports, overtaking recession-related risks.

Allied to future funding worries, the sector is also negotiating a more complex operating environment. Charities that formerly relied on government contracts are having to adapt to the growing use of ‘payment by results’ and to other changes in the way public sector contracts are awarded.

A breakdown of trustThe public, that other vital conduit of funding, is also looking less reliable. The ‘2015 Edelman Trust Barometer’ found that trust in charities and NGOs in the UK reduced from 67% in 2014 to 51% this year.1 Such disaffection may be linked to the thorny issue of ‘overheads’, not least that of executive pay. In common with the commercial sector, the focus on remuneration within the charity arena has remained high. In 2014, a National Council for Voluntary Organisations (NCVO) report set out wide-ranging recommendations on disclosure of executive pay, while certain charities’ remuneration arrangements were subject to press scrutiny.2 We found that within the top 100 charities executive pay varies significantly. The average highest paid employee, usually the chief executive, receives £196,000 (with a range from around £60,000 to almost £800,000). This wide span reflects the significant variance in size and complexity of activities even within the top 100 charities.

Faced with such challenges, there has never been a more important time for charities to set out their stall to the government and the public, outlining their value – and values – as a means of securing support.

Foreword

Carol Rudge Head of Not for Profit UK and Global

1www.edelman.com/insights/intellectual-property/2015-edelman-trust-barometer2www.ncvo.org.uk/images/documents/about_us/our-finances-and-pay/Executive_Pay_Report.pdf


Foreword

However, our research suggests that many organisations could improve the way they engage with stakeholders, particularly in the style and content of their annual report.

Engaging with stakeholdersAt its best, an annual report can be an innovative and vital method of communicating with stakeholders. Some charities, for example, publish ‘interactive’ accounts on their website. However, many organisations are failing to realise this opportunity. Integrity, including ethical business practice, is the main thing that builds trust, according to Edelman.3 Setting out transparent and open governance arrangements in the annual report is an important part of demonstrating integrity and reinforcing trust in the sector.

However, in some areas, we found much greater transparency within the annual reports published by large corporates than by charities. For example, the majority of the FTSE 350 disclose key performance indicators (KPIs) within their annual reports, compared with only 23% of charities. All large companies are required to include KPIs within their annual reports. There is no such requirement for unincorporated charities, which partially explains the greater use of KPIs within the corporate sector. Disclosing KPIs can also help show what drives a charity and how it assesses its performance.

The annual report is, of course, only one way that charities connect with stakeholders. Increasingly, social media is becoming a major component of the communication armoury. Other recent Grant Thornton research found that charities are using social media to open up new funding sources, deliver innovative services and create transparency.4 However, in our research for this governance report, we found a surprisingly small increase, from 74% to 76%, in the number of top 100 charities using all three of the main social media platforms (Twitter, LinkedIn and Facebook). This is despite increasing social media interest in the sector, with the average number of Twitter followers of the top 100 rising from 78,000 to 94,000.

Differentiating the sectorTrust may be falling in charities and NGOs but it is still higher than in the other main types of institutions – business, media and government.5 One of the main differentiators for charities, and one which they can celebrate, is their bedrock of volunteers. According to the NCVO, 22.7 million adults formally volunteer at least once a year, with 15.1 million doing so monthly.6

However, while 59 of the top 100 mention volunteers within their annual reports, relatively few attempt to measure their contribution in financial terms. This is unfortunate because, as well as helping to acknowledge the contribution of volunteers, it is important to make stakeholders aware of the non-financial factors that assist a charity to meet its objectives.

In what it says about itself in its annual reports, therefore, the charity sector could learn some things from business. To do so, it may benefit from clearer guidance. Our review is based around the details that the top 100 charities choose to publish in relation to governance; inevitably, this will not reflect everything that they actually do. Transparent disclosure needs to be underpinned by good practice. ‘Good Governance – A Code for the Voluntary and Community Sector’ is guidance fully endorsed by the Charity Commission. Despite having two formats, this code essentially provides ‘one version of events’ for all charities, whatever their size. Given their scale, public profile and complexity, it could now be time to develop a bespoke code of corporate governance that reflects the particular challenges faced by our larger charities.

3www.edelman.com/insights/intellectual-property/2015-edelman-trust-barometer4Growing Communities – How Charities Govern Social Media – available at: http://www.grant-thornton.co.uk/Documents/Growing_Communities_Charity_Social_Media_Report.pdf5www.edelman.com/insights/intellectual-property/2015-edelman-trust-barometer/trust-and-innovation-edelman-trust-barometer/executive-summary/6UK Civil Society Almanac 2013, NCVO


Paula Sussex Chief Executive Officer, Charity Commission

I welcome this review, which provides useful insight into the reporting and governance practices of some of our largest charities.

The organisations whose reports were reviewed for this analysis make up only a very small proportion of registered charities. But, by virtue of their size and reach, they are among the most visible and most closely scrutinised.

We know reporting matters to the public. Our independent research into the drivers of public trust and confidence tells us the overwhelming majority (90%) feel that “it is important to me that charities explain in a published annual report what they have actually achieved”. And each year, charities’ details are viewed on the public register over six million times.

So it is vital that larger charities go beyond complying with the letter of the SORP and take the opportunity of annual reporting to tell a compelling story about how they are run and what they have achieved.

This report highlights some encouraging examples of imaginative reporting – for example on charities’ mission and values – and reveals positive trends in charities’ governance practices, such as slow but steady increases in transparency around the risks charities face and in the use of social media to engage with supporters and other stakeholders.

But some of the findings give pause for thought. Less than a quarter of the largest charities include information about board evaluation in their Trustees’ Annual Reports – and half of those that do include minimal information. There is clearly room for improvement here. Trustees are ultimately responsible for their charity and the guardians of their charity’s mission. Performing regular reviews of board performance is therefore hugely valuable, especially for the largest charities.

I encourage boards to consider the report and take inspiration from its findings. Reporting is not optional, but it is an opportunity that charities should use to their best advantage.

The regulator’s perspective

It is vital that larger charities go beyond complying with the letter of the SORP and take the opportunity of annual reporting to tell a compelling story about how they are run and what they have achieved.

28 2816 21


DiversityGender diversity on boards continues to be a high profile issue across all sectors. However, while important, gender diversity is just one element of a much wider debate. Research by the Association of Chief Executives of Voluntary Organisations (ACEVO) found that over 97% of charity chairs are white and 76% are aged between 55 and 74.7 They also found that an overwhelming majority of board members (94%) are white.

Within the top 100 charities, where it is possible to determine from the disclosure of names, 28% of trustees are women. Only two boards have no female members, and women outnumber men on nine boards (an increase from seven in 2014). This compares favourably with the commercial sector, where no FTSE 100 company has a majority of female directors.

The female representation on charity boards is similar to that of the top 60 registered housing providers, where 28% of board members are women. This continues to be far stronger than in the corporate sector where Cranfield University’s ‘Female FTSE Board Report 2014’ found that just 21% of FTSE 100 board members and 16% of FTSE 250 board members are female.8 However, the Cranfield report revealed that more than one third of recent board appointments were female and predicts that women will account for over 26% of FTSE board members by the end of 2015. This suggests that the commercial world may be gaining ground on charities.

Charities continue to lead the corporate sector in the gender diversity of the chair, although the gap is closing. Fourteen per cent of the top 100 –

down from 22% in 2014 – have a female chair, compared with 3.6% of the FTSE 250. The housing sector is even further ahead with 22% of the top 60 registered providers having a female chair.

More than half of charities (58) disclose the existence of a diversity policy within their annual report. However, the disclosures are of varying quality and only 19 charities include a good or detailed diversity policy.

“The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.”(UK Corporate Governance Code, main principle B.1)


Male Female

WHAT PERCENTAGE OF FEMALES ARE ON THE BOARD? (%)

7ACEVO Pay Survey 2013/148http://www.som.cranfield.ac.uk/som/ftse

Charity sector Housing sector FTSE 250 FTSE 100



The diversity advantage

Welcoming challenge and encouraging what the UK Corporate Governance Code calls constructive debate and effective scrutiny is at the heart of good governance.

Performing betterThe 2014 code puts a strong emphasis on diversity; of having more individuals from different backgrounds on boards and, in particular, increasing the number of women and people from minority ethnic groups, to help avoid ‘group think’. This reflects the growing feeling that diversity delivers both greater scrutiny and better performance. McKinsey’s annual ‘Women Matter’ report tracks such themes, in relation to gender, and the results are compelling. Companies with diverse boards do perform better.

Diversity also plays a part in creating, or restoring, public confidence. After all, the loss of trust and market failures of 2008/2009 hastened the review of the code and led to warnings about complacency. Reporting on diversity, through the ‘comply or explain’ regime, has since become something that shareholders expect in the annual report, because it encourages good governance, creates better returns and builds trust.

Neglecting a good sector storyThis is not the case in the charitable sector. There are no reporting requirements that ask for results against diversity targets, and indicators are not used to measure gender or race. Many charities do, of course, report their ambitions to reflect greater gender and race diversity among their boards, staff and volunteers. But charities do not do it routinely, despite having quite a good story to tell.

Charities are better at promoting women to top positions, with many women chairing boards. However, as Norma Jarboe, founder of WomenCount, which benchmarks female leadership across charitable, academic and public sector bodies, has pointed out, the larger the charity, and the more its income is derived from investments or property, the less likely it is to have female leadership – either executive or non-executive. Nonetheless, most charities can celebrate having attained a 30% ratio of female board members, arguably the tipping point for good governance in gender.

Stifling diversityReporting against diversity in race, disability or age is even less advanced. Indeed, Tesse Akpeki, from governance development consultancy On Board, has found that charities can stifle diversity. She cites an example where: “The chief executive wanted to encourage people… from different backgrounds for board membership. But the board… kept on selecting people they knew and were comfortable with.”

However, charities are ahead in one area: in the variety of sectors that boards, and even CEOs, represent. People come from the corporate sector, small business and public service; many have been carers, service users and volunteers. This is a form of diversity that other sectors, particularly the corporate world, would do well to emulate, and which might well encourage constructive debate, challenge group think and promote good governance.

Professor Lynne Berry OBE Voluntary Sector Leadership, CASS Business School

14 3.6 22

86 96.4 78



Charity sector FTSE 250 Housing sector

Male Female

GENDER OF THE CHAIR (%)

PERCENTAGE OF FEMALE TRUSTEES (%)

0

40

20

60

80

100

Top 100 charities

Diversity key questions for trustees to consider:

• Is the board’s range of skills and experience sufficient to meet the needs of the charity?

• Is the board sufficiently representative of the charity’s beneficiaries?

• Have any areas been identified where the board would benefit from a greater level of diversity? If so, how can this best be achieved?



9ACEVO Pay Survey 2013/14 10http://www.associationofchairs.org.uk/resources/chairs-compass

Board skills key questions for trustees to consider:

• Does the board assess the skill base of its trustees?

• If so, have any areas of improvement been identified? What plans are in place to address these areas?

• When recruiting new trustees, are the skills the charity needs taken into account?

• Should the skills of the trustees be disclosed in the annual report?

Board skills and experienceTo be effective, a board requires a variety of skills and experience. The optimum mix will depend, however, on the type of organisation and its activities.

We believe that the annual report offers an important medium by which to demonstrate to stakeholders that a charity’s trustees have an appropriate mix of experience and skills. However, our review shows that very few charities (9%) use their annual report to indicate their trustees’ skills. Furthermore, only 15% disclose more than the statutory requirements, the same ratio as in 2014.

The research by ACEVO mentioned above found that a mean of 3.8 trustees on each board come from the private sector.9 This compares with 3.0 from the public sector, 2.9 from the third sector and 3.7 who are retired or not working.

How to be a good charity chair

The chair’s main role is to ensure the board does an excellent job in leading and governing the organisation. This is not an end in itself: well-governed organisations are better able to deliver for their beneficiaries and other stakeholders.

As a chair, you need to do four key things to achieve this:

• Be clear about the organisation’s vision and purpose. You must make this central to all debate and decision-making and firmly embed it in your own thinking

• Ensure you have the right people around the table, and build a team approach. Boards need the right skills, both for the fundamentals of good governance (finance, services, etc) but also to bring an understanding of specific strategic issues on the organisation’s agenda. Consequently, the ‘right’ people for one phase of organisational development may not be right for another. And it’s no good having people with skills and experience if they don’t apply them and recognise the value others bring

• Ensure good relations, particularly with the executive team – without them the organisation cannot thrive – and respect the boundary between governance and operations. The best chairs also enable effective relationships with the board’s constituency, its members, beneficiaries and service users, and contribute to good relations with funders and donors

• Engender thorough, meaningful debate around the board table that can underpin sound decision-making throughout the organisation for its long-term benefit

Developing the board will always be a central part of the role. A good chair will have a plan to improve effectiveness; they will not shy away from creating opportunities for formal and informal feedback and evaluation and will acknowledge where improvement is needed. The Association of Chairs’ 2014 publication: ‘A Chair’s Compass’ is an ideal starting point for chairs that want to establish such a plan.10

Dr Alice Maynard CBE Association of Chairs

37

20

8

24

11



The value of values“An effective charity is clear about its purposes, mission and values and uses them to direct all aspects of its work.”(‘The Hallmarks of an Effective Charity’ (CC10), the Charity Commission)

A charity’s values influence both the way it operates internally and how it engages with beneficiaries and wider stakeholder groups. The majority (63) of charities outline their values within the annual report. Of those that make this disclosure, there is a broadly even split between those who do so within a foreword (31) and those who use the main body of the trustees’ report (32). In a small number of annual reports (19) the information is long enough to take up “a paragraph or more”.

The emphasis on values also affects how charities choose to invest their funds. Given a number of high-profile media stories regarding investments made by charities, there is an increasing focus in this area. Thirty five charities disclose an ethical investment policy (up from 25 in 2014).

Values key questions for trustees to consider:

• When did the charity last reflect on its values?

• Do the charity’s values remain relevant?

• How do the charity’s values influence its work?

• What does the charity report externally about its values?

• How do the charity’s values influence the day to day operations?

DOES THE ANNUAL REPORT DISCUSS THE CHARITY’S VALUES? (%)

No

Yes – this is mentioned within the main body of the Trustees report, but briefly

Yes – this is mentioned in a foreword, Chair or Chief Executives statement, but briefly

Yes – this is mentioned in a foreword, Chair or Chief Executives statement, with a paragraph or more

Yes – this is mentioned within the main body of the Trustees report, with a paragraph or more

Example disclosure:Girls first – Put the girls’ interests, happiness and wellbeing first at all times. Encourage each girl to be the best she can be, to reach her full potential.

Networked – Work together productively within our schools, our communities and the Girls’ Day School Trust (GDST) as a whole. Share inspiration among ourselves and with others.

Bold – Take risks, push hard and overcome setbacks. Do things in a new way. Have a go. Have fun.

Principled – Always do the right thing, by our own high standards and by everyone else’s. Be open, honest and accountable.

(Extract from The Girls’ Day School Trust Trustees’ Report for the year ended 31 August 2014)

“We found the work we did through the organisation on our values really helpful, and now that we have established them – Girls First, Networked, Bold and Principled – we find that they inform our daily interactions. It is really encouraging to see how quickly the values have been adopted and how colleagues regularly use them to challenge and test decisions.”Helen Fraser Chief Executive, The Girls’ Day School Trust



Social investment“Charities are increasingly interested in how they can invest to directly further their aims as well as achieve a financial return.”(‘The Essential Trustee: What you Need to Know’ (CC3), the Charity Commission)

A number of charities disclose that they use investments to further their charitable activities. Almost one quarter (23) of the top 100 disclose the use of social investments, which aim to provide a mix of social impact and financial return. With the concept of mixed-motive investments being introduced in the new SORP, it will be interesting to see if this changes in coming years. The concept of mixed-motive investments reflects the fact that investments may not always have straightforward drivers and that trustees may wish to make an investment that cannot be entirely justified on charitable grounds or on its return.

Environmental sustainabilityThere is no requirement under the 2005 SORP to discuss environmental sustainability. Nonetheless, some charities choose to include details of environmental matters within their accounts, either in relation to their charitable objectives or as part of their wider social responsibility. We found that 30% of the top 100 provide good or excellent disclosures about their environmental policies. This compares with the FTSE 350 where 66% provide helpful information. Quoted companies are required to report on environmental matters within their annual report to the extent it is necessary for an understanding of the company’s business. Most (55%) charities do not make disclosures on environmental matters.

“Trustees should have regard to the impact of their charity’s activities on the environment. They should consider ways in which their charity can take an environmentally responsible and sustainable approach to its work, which is consistent with its purposes even when its purposes are not specifically related to the environment.”(‘The Essential Trustee: What you Need to Know’ (CC3), the Charity Commission)



Example disclosure:Conservation is at the heart of Historic Royal Palaces’ mission, so managing the estate with as little environmental impact as possible is important to us.

Energy reduction in historic buildings is challenging. Our organisation’s ambition translates into increasing activities for visitors and expanding spaces available to the public and staff, which in turn make energy reduction more difficult. Nevertheless we continue to implement and explore a number of initiatives to manage our consumption of electricity, gas and water more efficiently. This includes:

• continual improvements in electricity shut down procedures at nights and weekends

• increased use of low energy lighting and conversion to LED lighting

• draught proofing historic windows at Hampton Court

• roof space insulation installed at the three largest palaces and lagging on pipes

• grey water is used to irrigate the lawns in the moat at the Tower of London and flush some of the public toilets. At Hampton Court rain and river water is used for the majority of irrigation.

We continue to focus on waste management and increased re-use and recycling. This has resulted in most palaces reaching greater than 80% waste recycling for the last four years (85% at Hampton Court, 84% at Banqueting House, 82% at the Tower of London and 66% at Kensington Palace in 2013/14), and no waste sent to landfill in 2013/14.

The following initiatives have contributed to this achievement:

• a trial at the Tower of London, in cooperation with our catering concession, successfully demonstrated composting as a means of removing food waste from our waste streams. More work will be undertaken in 2014/15 to roll out the programme across our palaces

• installation of well signposted recycling points in staff and public areas, including at large-scale events

• specific cardboard collection from the retail shops and compacting at the retail warehouse for recycling

• the Gardens and Estates department recycle 95% of their green waste, which is shredded and never taken off site.

We are committed to the sustainable management of habitats of wildlife conservation importance and are being considered by Natural England for designation as a Site of Special Scientific Interest.

(Extract from the Historic Royal Palaces Trustees’ Report for the year ended 31 March 2014)

Environmental sustainability key questions for trustees to consider:

• Does the charity have a policy on environmental sustainability?

• Does it measure its impact on the environment?

• How can the charity reduce its environmental impact?

• What should be disclosed in the annual report?



Volunteers“Where a charity makes significant use of volunteers in the course of undertaking its charitable or income generating activities this should be explained. Whilst measurement issues, including attributing an economic value to such unpaid voluntary contributions, prevents the inclusion of such contributions within the statement of financial activities, it is nevertheless important for readers to be provided with sufficient information to understand the role and contribution of volunteers. Such information may, for example, explain the activities that volunteers help provide, quantify the contribution in terms of hours or staff equivalents, and may present an indicative value of this contribution.”(2005 Charity SORP, paragraph 51)

The use of volunteers is one of the ways in which the charity sector is set apart from others. Many charities place a huge reliance on support from volunteers, who perform a wide range of tasks. According to the UK Civil Society Almanac 2013, the most recent such report published by the National Council for Voluntary Organisations (NCVO), 22.7 million adults formally volunteer at least once a year, with 15.1 million doing so at least monthly.

Of the top 100 charities, 59 refer in their annual report to the use of volunteers. The best disclosures give examples of work done, and attempt to quantify the impact of volunteers. This can be an important way of recognising the contribution of this important stakeholder group. More widely, recognising the contribution of volunteers helps to inform annual report readers about a charity’s non-cash activities.

Example disclosure:“The Hospice’s Management Team acknowledges and greatly appreciates the high contribution which volunteers make to the Hospice with their enthusiasm and dedication. There were 662 volunteers active during the year and they contributed 63,010 hours of their time (2012 – 628 volunteers and 72,681 hours). The hours have an estimated financial value of £500,000 (2012 – £586,000). As well as their time, they also bring the local community into the Hospice, so that St Raphael’s is truly an integrated part of the society to which it belongs.

Volunteers spend their time in a broad range of direct services – care on the ward, pastoral care, in bereavement support, helping with art and music, acting as beauticians, hairdressers, manicurists, and complementary therapists – and in indirect activities – chauffeuring, on reception, gardening, flower arranging, in the library, administering, helping with finance, serving on the Advisory Committee and working in the charity shops.”

(Extract from Congregation of the Daughters of the Cross of Liege’s Annual Report for the year ended 31 March 2013)

The use of volunteers is one of the ways in which the charity sector is set apart from others. Many charities place a huge reliance on support from volunteers, who perform a wide range of tasks.



7

21

41

15

DOES THE CHARITY’S ANNUAL REPORT DISCUSS THE USE OF VOLUNTEERS?

No mention of volunteers

Yes – acknowledgment of volunteer work, but no examples of where they are used

Yes – examples of volunteer work included

Yes – examples of volunteer work included, including the numbers of volunteers Yes – examples of volunteer work included, including the numbers and some attempt at quantifying their value/impact

Volunteers key questions for trustees to consider:

• What policies and procedures are in place for volunteers?

• How are volunteers used? Could they be used more effectively?

• How is the contribution of volunteers recorded?

• What risks are associated with volunteers? How are these mitigated?

Of the top 100 charities, 59 refer in their annual report to the use of volunteers. The best disclosures give examples of work done, and attempt to quantify the impact of volunteers.

16



Social mediaSocial media offers many opportunities for charities to engage with their supporters, staff and wider stakeholder base. Many charities consider it an important channel for delivering communication and fundraising goals, and some use it to deliver services.

Most top 100 charities use social media to some extent. Seventy six, up two from last year, are on all three of the main social media platforms (Facebook, Twitter and LinkedIn). Surprisingly, a minority (eight) do not use any of the main platforms. This is despite the fact that charities are attracting more social media attention: charities on Twitter averaged approximately 94,000 followers during the assessed period, up from around 78,000.

An increasing number of charity chief executives also use Twitter, with 37 having profiles on the platform. This compares with 29 last year. As with followers of the charities’ Twitter accounts, the number of CEO followers has also increased; the most tracked chief executive has more than 11,000 followers, compared with 7,000 during our previous research.

11Extract from Grant Thornton’s report on social media, Growing Communities – How Charities Govern Social Media – available at: http://www.grant-thornton.co.uk/Documents/Growing_Communities_Charity_Social_Media_Report.pdf

Social media Six questions every board should ask11

1 What part does social media play in our strategic plan, who reports to the board about social media strategy and outcomes, and what is their level of experience?

2 Do we have guidelines for those staff and volunteers using social media and how do we encourage use while mitigating risk?

3 How can social networks promote internal communication and break down silos across a charity?

4 What resources have we allocated to social media projects and how do we measure our return on investment?

5 How can we monitor online discussions that our charity should be involved in?

6 Can any of our services be delivered through social media to reach new beneficiaries?



74

76

Only Facebook

Only Twitter

Only LinkedIn

Only Facebook and LinkedIn

Only Twitter and LinkedIn

All (Facebook, Twitter and LinkedIn)

2

2

3

3

6

2

7

7

4

4

9

0

01

IS THE CHARITY ON SOCIAL MEDIA PLATFORMS? 2015 2014

CHARITY TWITTER FOLLOWERS NUMBER FOLLOWING THE CHARITY’S CHIEF EXECUTIVE ON TWITTER (AS AT AUGUST 2014)

0 0

1 110 1020 2030 3040 4050 5060 6070 7080 8090 90100

100

200,000 2,000

400,000 4,000

600,000 6,000

800,000 8,000

1,000,000 10,000

1,200,000 12,000

Num

ber

of fo

llow

ers

Num

ber

of fo

llow

ers

Top 100 charities Top 100 charities

Only Facebook and Twitter

None



Understanding risk “Risk is an everyday part of charitable activity and managing it effectively is essential if the trustees are to achieve their key objectives and safeguard their charity’s funds and assets.”(‘Charities and Risk Management’ (CC26), the Charity Commission)

In changing times, the importance of regularly reviewing risk at the right level cannot be overstated. In larger charities, a board’s role rarely involves day-to-day management of risks. However, the board needs a deep understanding of the risks a charity faces to ensure that they are managed properly and considered in all its deliberations and decision-making.

Risk needs to be integrated into a charity’s thinking; risk management and reporting should be an integral part of day-to-day operations. Risk management processes must be tailored to the needs of the organisation; there is no ‘one size fits all’ solution to charity risk management.

However, we found that 23% of charities do not disclose how often they review their risk register or risks (compared with 34% in 2014). Sixty per cent of charities disclose the use of a risk register, an increase of 14% since our previous review. The failure to disclose a review does not mean that

What every board should know about social media

Last year #nomakeupselfie raised £8 million for Cancer Research UK in six days. Then #icebucketchallenge generated $100 million for the ALS [amyotrophic lateral sclerosis] Association. Still not convinced that social media is a huge area of growth for charities?

So what do boards need to know about social media? While it may not be necessary to understand the finer nuances of every platform, it is good governance to be aware of the risks and opportunities involved. Every trustee should ask these key questions:

1. What do we want to achieve on social media? Your charity shouldn’t join Twitter or Facebook simply because everyone feels it should. Your staff may well have clear goals, encompassing everything from fundraising to developing corporate partnerships and securing media coverage. Establish the most important KPIs. Could social media be used to achieve anything else in the corporate strategy? Why not invite key digital staff to brainstorm on this with the board?

2. How can I use social media to help my charity? If you are on social media why not talk about what your charity does and why you are proud to be a trustee? Forward-thinking leadership teams use their social media profiles to build valuable relationships that help their charities. Make sure you have a good social media policy in place so that everyone knows their remit.

3. How quickly can we mobilise on social media? Whether it’s seizing the moment for the next big viral campaign, or tweeting a press release, social media is one of your most crucial and visible channels. Your staff must feel empowered to act quickly. I recommend that charities ‘scenario plan’ for how they will use social media to capitalise on opportunities and manage crises. The Fawcett Society used Twitter brilliantly last year when the press wrongly accused it of promoting t-shirts made in ‘sweatshop’ conditions. The charity discussed the issue openly with its audience, clarified its position and ultimately turned the story into a positive one.

In 2015 we’ll see further growth in charities’ use of social media. Is your board ahead of the curve?

Zoe Amar Founder and director, Zoe Amar Communications



Example disclosure:The Trustees are responsible for ensuring effective risk management, and that internal controls are in place to appropriately manage the risk exposure of the British Heart Foundation (BHF). In March 2014, the Trustees completed their annual review of the BHF’s risk management strategy. In the course of this review, the Board has considered:

• the major risks to which the BHF is exposed;

• the potential impact and probability associated with each risk;

• existing internal controls and accountability for them;

• mitigating actions needed to reduce each risk to a level that the Trustees considers to be acceptable.

This position is recorded in a risk register, which will continue to be formally reviewed by the Trustees every year and is regularly monitored by the Executive Group and Audit Committee.

The major financial risks are each subject to ongoing monitoring and management. Our investments are regularly reviewed by our Investment Committee. Income, stock generation and cost control are subject to detailed review and challenge on at least a monthly basis. Major projects have formal project boards that scrutinise their progress and ensure they are properly planned and implemented.

The BHF’s internal audit function delivers a rolling programme of risk-based audits approved by the Audit Committee, which reviews progress of audits and follow-up by management. The Audit Committee also reviews more detailed reports from senior management on key areas of risk. We are at the final stages of outsourcing components of our internal audit function to external professional consultants.

Risk Management

Changes to the economic environment or other external factors significantly impacting income generation with impacts to funding of current and future grant commitments.

• Annual budgeting and ongoing management reporting and monitoring of financial performance.

• Ten year financial modelling helps ensure resource appropriately managed to meet both short-term objectives and longer-term strategies of the BHF.

Impact of changes to regulatory environment and changing government policy which could impact research funded by the BHF or income generation.

• BHF Risk Management, Legal and Policy teams monitor public policy and the regulatory environment on an ongoing basis to ensure potential risks can be pro-actively managed.

• An active programme of senior level engagement to ensure our views are shared.

• Continued programme of advocacy and influencing.

(Extract from the British Heart Foundation’s Annual Report for the year ended 31 March 2014)

Risk needs to be integrated into a charity’s thinking; risk management and reporting should be an integral part of day-to-day operations. Risk management processes must be tailored to the needs of the organisation; there is no ‘one size fits all’ solution to charity risk management.

it is not taking place. However, it would be good governance to disclose the frequency of review and who executes them. Outlining the steps taken to mitigate risk in this way helps to demonstrate accountability to key stakeholders.

The gradual increase in the number of risk committees continues. Twenty five per cent of charities disclose a risk committee this year (compared with 20% in our 2014 review and 15% in 2013). This remains less than in the commercial sector, where all financial services entities are required to have a separate risk committee. Outside of this sector, 38% of the FTSE 350 have a risk committee. In housing, 53% of the top 60 registered providers report a joint audit and risk committee.

We assume that where no committee has the word ‘risk’ in its title, the audit committee will generally take responsibility for reviewing the risk register. Whatever the arrangements, it is essential that the whole board is clear on the importance of risk and the charity’s risk management processes.



Disclosure of main risks“The report must explain ... a description of the principal risks and uncertainties facing the charity and its subsidiary undertakings, as identified by the charity trustees, together with a summary of their plans and strategies for managing those risks.”(Charity SORP (FRS102), paragraph 1.46)

The Companies Act 2006 requires directors of all medium and large companies to disclose within the annual report the principal risks and uncertainties facing their organisation. The requirements of the new Charity SORP bring the disclosure requirements for unincorporated charities into line with those required for companies. This will be an increased requirement compared with the 2005 Charity SORP which requires a statement that the major risks to which the charity is exposed have been reviewed and systems are in place to manage them.

We found that the average number of risks disclosed by the top 100 charities was consistent with our previous report (3.7 this year, compared with 3.6 in 2014). We found that the number of risks disclosed by the top 100 charities varies considerably.

Fourteen do not disclose any main risks in their annual report (of the 14, three are incorporated), and a further six disclose only one main risk. On the other hand, five charities disclose 10 or more main risks.

Given that our sample encompasses organisations with a wide range of activities, it is unsurprising that the risks disclosed vary considerably. However, consideration of the risks provides a useful overview of the key issues and themes that charities are facing. Continued availability of funding or loss of key contracts is the risk cited most often, edging out last year’s main risk, the ongoing impact of the economic climate. This is not surprising given that, for the voluntary sector as a whole, the National Council for Voluntary Organisations estimates income from central and local government will fall by £1.7 billion between 2010/11 and 2017/18.12

This year, 16 charities cite child protection/safeguarding as key risks, up from nine in 2014. This increase is likely to reflect recent high profile media cases in these areas.

12Counting the Cuts: The Impact of Spending Cuts on the UK Voluntary and Community Sector – 2013 update, the National Council for Voluntary Organisations.

What does good look like? Disclosure of principal risks:

• Sufficient detail to clarify the risks and how they relate specifically to the charity

• Indication of how the charity’s strategy affects the risk profile

• Analysis of the potential impact of each risk

• Information on how each risk is mitigated

• Detail on how each risk is monitored and measured



None 1 2 3 4 5 6 7 8

More t

han 8

12

14

16

18

20

0

2

4

6

8

10

0

HOW MANY MAIN RISKS ARE MENTIONED IN THE REPORT? (%)

14

6

10

19 19

5

13

10

4

Risk key questions for trustees to consider:

• What is our overall attitude to risk, our risk culture as an organisation, and is it what we want it to be? Does our culture encourage the right behaviours?

• Does the Board really understand risk, and get the right assurances over how risks are being managed?

• How far are the concepts of risk and risk management genuinely embedded in management’s day to day decision-making and actions?

• Are we keeping watch over how risks that might affect us – both internal and external – are changing, and are we able to respond to those changes?

• How often do we challenge ourselves on our views of risk, and are we making too many assumptions?

• Do we all have a consistent view of what risk means to our business, and do we know what our major exposures are today?

• Do our risk management capabilities keep improving, and if they do, are they keeping up with business or environmental changes?

We found that the average number of risks disclosed by the top 100 charities was consistent with our previous report (3.7 this year, compared with 3.6 in 2014). We found that the number of risks disclosed by the top 100 charities varies considerably, from none to 14.



0 10 30 5020 40 60 0 10 30 5020 40 60

IT/information management

Child protection/safeguarding (including

vulnerable people)

Delivery of service

Public attitude

Not meeting objects

Health and safety

Reputational

Change in government policy

Loss or availability of key contracts/ funding streams

Trading risks

Recession based/going concern (including broad

economic uncertainty)

Security or maintenance of assets or staff

2015 2014 2013

0

2

RISK ANALYSIS (%)

1919

11

16

3738

17

149

21

2422

21

1815

10

2018

8

1815

4741

9

1413

5

3443

58

1921

18

Retention or quality of staff

1315

14

Pensions11

54

Performance of investments

1015

10

Fundraising0

109

Foreign exchange/working in foreign

countries

96

4

Shared services or reliance on partners 0

98

Governance7

54

Regulatory4

511

Fraud2

489



Case study: Defining a healthy risk appetite

The King’s Fund is an independent charity working to improve health and healthcare in England. It helps to shape policy and practice through research and the provision of leadership development programmes.

ObjectivesThe Fund has a well established risk management framework, supported by a programme of independent assurance. To develop and embed this framework, and to support better decision-making, the fund’s senior management team and trustee board wanted to progress the concept of risk appetite. The team held a workshop, facilitated by Grant Thornton as the internal auditor, to develop the concepts so they could be clearly expressed for trustees.

ProcessThe workshop was structured using the main areas of risk already familiar from the risk register. These were: reputational, compliance, financial, operational (including underlying systems and technology), external (including both political/environmental risks and those arising from competition for services), strategic and governance.

For each area, there was discussion of two factors that should be considered when taking on a new project or investment. First: will the proposed project take the fund too far out of its ‘comfort zone’? This defines the ‘gross’ level of risk appetite. Second: how much work is required to bring the risk down to an acceptable, manageable level (the ‘net’ level of risk appetite). There are a number of published examples of this, including a policy paper prepared by the University of Edinburgh.13

The results were plotted on a simple chart (see illustration). This shows that the organisation would be prepared to take on, for example, a reasonably challenging operational project, but that it would want to manage the net risk so that it is quite low. On the other hand, its appetite for compliance risk (that is, breaking the rules) is very low, and a project that might challenge this is unlikely to get approval.

(Illustration)

OutcomesAlthough there were initially some doubts, the full team saw how the resulting map of risk appetite could be used in management meetings to express the overall corporate position and might also help in day-to-day decision-making. The map now helps to inform and guide decision-making around what projects to take on, what policy-based publications to develop, and a range of other investment choices.

“The workshop discussion was itself highly valuable, in enabling the group to reach a genuinely collective view and to challenge each other on their individual risk thinking. For the trustee board, it has provided insight into the management team’s thinking, and allowed them to provide genuine strategic guidance, focused on the things that really matter.”Melanie Chandler, Head of Operations, The King’s Fund

13http://www.docs.sasg.ed.ac.uk/GaSP/Governance/RiskManagement/RiskAppetite.pdf

Willingness to accept risk

Low appetite High appetite

1 2 3 4 5 6 7 8 9 10

Financial

Operational

Compliance



The strategic report“The strategic report should be comprehensive but concise.”(FRC Guidance on the Strategic Report, 6.7)

The requirement for a strategic report was introduced to provide “a holistic and meaningful picture of an entity’s business model, strategy, development, performance, position and future prospects”.14

A strategic report is required for periods ending on or after 30 September 2013, and is applicable only for charities incorporated under the Companies Act. Just 61 of the top 100 are registered companies, with the remainder consisting mainly of unincorporated charities (22), charities incorporated under Royal Charter (eight), and exempt charities (seven).

Only eight of the top 100 charities include a strategic report within their annual report. We anticipate, therefore, that the number of future charity annual reports with a strategic report will rise, especially as the majority of the top 100 (58) take the legal form of limited companies. Of those charities

with a strategic report, 75% have a separate report and 25% integrate it with the trustees’ report.

Those charities that include a strategic report have, on average, a longer annual report than those that do not (64 pages compared with 59). The commercial sector has seen a surge in the size of annual reports; the average FTSE 350 publication now has 154 pages, compared with 143 a year ago. Of this increase, an average of four pages has been attributed to the strategic report.15

Whether this growth will be replicated in the charity sector remains to be seen. In many cases, an annual report is simply added to as new requirements are introduced, meaning that the report continues to get longer. We suggest that the introduction of new requirements, including the strategic report or the new Charity SORP, will provide a good opportunity for trustees to review the content of their annual report, ensuring it remains fit for purpose.

“The strategic report is a distinct report in its own right and requires separate approval by the company’s directors (who are also the charity’s trustees). However, as most of the information required by the strategic report is already required under SORP 2005, to remove unnecessary duplication, the strategic report should be included within the trustees’ annual report as a separate clearly delineated section headed strategic report.”(Information sheet 5: ‘The Strategic Report and Company Charities’, the Charity Commission)

14Guidance on the Strategic Report – June 2014 – FRC15Grant Thornton Corporate Governance Review 2014



Key performance indicators“Where relevant, linkage to and discussion of key performance indicators (KPIs) should be included … in order to allow an assessment of the entity’s progress against its strategy and objectives. Similarly, emphasising the relationship between an entity’s principal risks and its ability to meet its objectives may provide relevant information.”(Guidance on the Strategic Report, 7.10, FRC)

“It will often be helpful to identify any indicators, milestones and benchmarks against which the achievement of objectives is assessed by the charity.”(Charity SORP 2005, p53)

Disclosure of key performance indicators (KPIs) provides the framework for a charity’s view of its performance, and can provide essential context of the non-financial performance indicators used by the trustees.

Only 23 of the top 100 charities disclose the use of KPIs within their annual reports. Where indicators are disclosed, the quality of disclosure varies considerably. Some charities

simply mention the use of KPIs without details of those used. Better disclosures, for a range of financial and non-financial indicators, include specific details of the benchmark set for each indicator, the performance against the benchmark, and appropriate commentary.

Disclosure of KPIs is considerably more common within the corporate and housing sectors. Our review of the FTSE 350 found that only 1.6% of large corporates fail to disclose KPIs within their annual reports. All large companies are required to include KPIs within their annual reports, whereas the Charity SORP 2005 states that it “may be helpful”. This will partially explain why KPIs are less commonly used in the charity sector. Use of KPIs in the housing sector sits between the charity and corporate sectors. Our review of the top 60 registered providers found that, in their value for money statement, only 23% refer to their targets and how they performed. A further 27% list their KPIs, but do not reveal performance.

The number of KPIs disclosed by charities varies between one and 44, with an average of 9.5. This compares with an average of 8.6 within the FTSE 350.

KPIs key questions for trustees to consider:

• Does the charity have KPIs in place?

• When were the KPIs adopted, and do they remain the most appropriate?

• Do the trustees review KPIs and are they reported on regularly?

What does good look like? Disclosure of KPIs:

• Details of each benchmark set

• Performance against the benchmark

• Comparative information, so the reader can assess the direction of travel

• Commentary explaining significant variances against the benchmark

Only 23 of the top 100 charities disclose the use of KPIs within their annual reports. Where indicators are disclosed, the quality of disclosure varies considerably.



Reporting performanceAlmost all charities give details of their performance in the year, with only one providing a minimal review of its activities. The majority (72) provide good or excellent disclosure of the activities undertaken. Many charities publish details of specific projects, or case studies, helping to ‘tell the story’ of their work during the year, explaining not only what they do but how they do it.

It is important that charities go beyond an explanation of what they do, to outline the impact of their work on their beneficiaries. Almost half of the

top 100 charities review each of their activities together with details of what they achieved, supported by factual data. A small number of the top 100 (11) prepare a separate impact report which they post on their website.

The annual report should also be a forward-looking document. Outlining how future plans will be achieved is a valuable way for charities to communicate their vision to stakeholders, enabling them to set out the importance of continued support.

Almost all (91) charities give some detail about future plans, while 55

provide good or excellent disclosure. However, fewer organisations offer detail of how these plans will be achieved. Just over a third (34%) provide good or excellent detail as to how they will realise future plans, with 18% offering minimal or no disclosure.

Example disclosure:8,438 employers were helped to train apprentices through grants. In recent surveys for CITB Managing Agency, 84% of learners are satisfied with their training and progress to their qualification, which is demonstrated through the continued rate of framework achievement, exceeding 2012 levels (74%) in 2013, with a 76% result. Though income targets for our charitable trading were missed, it was a credible performance in tough trading conditions, and a focus on cost management was effective in achieving the surplus target. NCC achieved a small growth in income (1.7% over 2012). Testing and Card Services performed well with sales exceeding plan by 8%, while the Awarding Body saw sales fall by 7% – less than expected – following the split with City & Guilds. The cuts and delays in public skills funding also affected income. The overall Employer Satisfaction result was 75% against a target of 76%. However, the result has remained at this level since 2009. The survey showed a strong endorsement of all of our new strategic priorities, and support for Levy increased. Employee engagement came in at 71% against a target of 72%, and was inevitably influenced by uncertainties around the Triennial Review and leadership changes.

Activity Industry challenge

Impact measure Our 2013 target Our 2013 performance

Employer funding Employer engagement

1. Generate additional investment for industry through Levy-matched funding bids

£20m £16.4m

2. Create an extra 1,400 employer grant claimants 15,667 14,281

(Extract from Construction Industry Training Board (CITB) Annual Report and Accounts 2013)

It is important that charities go beyond an explanation of what they do, to outline the impact of their work on their beneficiaries.

13

40

9

23

15

2319

18

25

15



DISCLOSURE ON PLANS FOR THE FUTURE (%)

No details Very brief and in general terms Brief, but in relevant terms to the

charity and its objects Yes – including reference to its

aims and objectives Yes – including reference to the

charity’s aims and objectives and how it will monitor them in the future

No Yes – in very brief general terms

(eg to continue as they have been) Yes – brief, but in relevant terms to

the charity and its objects Yes – including reference to its

aims and objectives Yes – including reference to

specific plans and linked into its aims and objectives

Strategic planning key questions for trustees to consider:

• What is the audience for the plan?

• What is the right timeframe for the plan to cover?

• Is the strategic plan influenced by the charity’s mission and values?

• What are the financial implications of the plan?

• Does the charity need outside support to develop its plan?

• How will support from key stakeholder groups be ensured?

• When and how will progress against the plan be reviewed?

• How will the charity know if the plan has been achieved?

DOES THE REPORT EXPLAIN HOW PLANS FOR THE FUTURE WILL BE ACHIEVED? (%)

Reporting financial performance“The report should contain a review of the financial position of the charity and its subsidiaries and a statement of the principal financial management policies adopted in the year.”(Charity SORP 2005, p55)

The majority of charities continue to include a separate financial performance section within their annual report. As in 2014 and 2013, this section varies in length from a short paragraph outlining the surplus/deficit to several pages of explanations. More than two thirds (68) of the top 100 provide good or excellent disclosure in this area, with only three providing minimal or no disclosure. As noted in our previous charity governance reviews, we believe that best practice involves linking financial performance to a charity’s strategy, its investment and reserves policies, and its impact.



Reserves“A reserves policy explains to existing and potential funders, donors and other stakeholders why a charity is holding a particular amount of reserves. A good reserves policy gives confidence to stakeholders that the charity’s finances are being managed and can also provide an indicator of future funding needs.”(‘Charities and Reserves’ (CC19), the Charity Commission)

The 2005 Charity SORP requires charities to state their level of reserves and why they are held. The vast majority (96) of the top 100 give some details of their reserves. However, disclosures are often very general. Thirteen organisations state only that reserves are held for the use of the charity with no specific details. A further 45 charities state in general terms what some of their reserves are held for, but do not cover all reserves. The best disclosures cover all reserves, and provide a time limit for their use. This is important given the legal requirement that charity income must be spent within a reasonable period of receipt. Charities should also demonstrate why they hold funds and why they should continue to be supported and funded in future.

“The income of a charity must be applied for its purposes within a reasonable period of receipt, unless the trustees have an explicit power to accumulate it. Without such a power, the trustees should not allow the charity’s income to accumulate unless they have a specific use for it in mind.”(‘The Essential Trustee: What you Need to Know’ (CC3), the Charity Commission)

Going concernThe majority of charities (67) mention their status as a going concern, with a minority (15) including good or excellent disclosure in this area. The best disclosures provide a detailed account of why the organisation is considered a going concern, supported by figures and other appropriate information. Good practice requires a paper to be regularly produced for, and discussed by, a charity’s board, which sets out the basis on which the going concern principle is applied, including any key assumptions. The main points of this paper can then form the basis of the disclosure within the financial statements.

Example disclosure:Citizens Advice has adequate financial resources and is well placed to manage the business risks. Our planning process, including financial projections, has taken into consideration the current economic climate and its potential impact on the various sources of income and planned expenditure. We acknowledge our pension fund obligations and have a clear strategy to recover the deficit over the next 20 years. We have a reasonable expectation that we have adequate resources to continue in operational existence for the foreseeable future, and believe that there are no material uncertainties that call into doubt the ability of Citizens Advice to continue as a going concern.

(Extract from Citizens Advice Annual report and accounts for the year ended 31 March 2014)



Size of the boardThe size of the average charity board has remained consistent since last year (13.0 members, compared with 12.8 in 2014). This continues to be at the high end of the range suggested in studies, and remains significantly above FTSE 350 companies, which have an average of 9.5 board members.

Overall, charity boards continue to vary significantly in size. The smallest has four members, the largest has 33, and eight have 20 or more. In some cases, board size is determined by the constitution of the charity; for example, reflecting a need to represent specific

geographies or stakeholder groups. The need to both comply with such requirements and ensure an appropriate mix of skills and experience may explain the larger than average board size.

Most charities (84) provide some information about the recruitment of trustees. In a minority of cases (23), this is a general statement to the effect that trustees are recruited and appointed as required. Better disclosures mention the committee or panel charged with recruitment and appointment, with details of their activities.

“An effective charity is run by a clearly identifiable board or trustee body that has the right balance of skills and experience, acts in the best interests of the charity and its beneficiaries, understands its responsibilities and has systems in place to exercise them properly.”(‘The Hallmarks of an Effective Charity’ (CC10), the Charity Commission)

AVERAGE NUMBER OF BOARD MEMBERS

Size of the board key questions for trustees to consider:

• What is the optimum size for the charity’s board?

• When was the size of the board last reviewed?

• What skill base does the board need? Are there any gaps compared to the current board composition?

• When was succession planning last considered?

Top 100 charities FTSE 350

Top 60 housing associations

13.0 9.5 11.4



Getting the right people on board

Before a recruitment campaign begins, a number of crucial areas must be discussed and addressed. Critically, you must decide what you are looking for. Certain organisations might want specific skills to support the achievement of strategic objectives, some might want to attract the best and brightest talent and minds, and others might want to sign up individuals with contacts and a high profile.

It is important to consider the part played on the board by beneficiaries and those who offer specific skills for altruistic reasons. It is important to achieve a balance between the non-execs who challenge and those who offer support, but this does not have to be mutually exclusive.

Your search should cover a wide field to heighten the chances of finding the ideal trustee, rather than one with just some of the desired skills. Diversity in its broadest sense brings real strength to an organisation, not just in terms of age, gender and ethnicity, but also in regard to regional and economic background. You should also consider what groups are important to the charity and whether their representation would be useful in achieving your objectives.

Once you are clear about what you need, it is important to define the process, confirm your timetable, gain the commitment of key people, and develop the communications strategy and marketing material to support the campaign. This is no different to recruiting a paid member of staff. Outline what you want from a potential trustee, including the required level of commitment. Agree your shortlist and interview criteria and make sure these will be teased out in the application and interview process.

Consider where the people you want to attract are and how to develop their interest. Don’t forget to promote the benefits of joining your organisation. If you intend to use a recruitment agency, consider their track record in your area.

Once potential candidates have been identified conduct your due diligence: it can be useful for them to observe a board meeting. On appointment, a comprehensive induction should take place.

Philip Nelson Principal Consultant, Prospectus



Board evaluation“The board should state in the annual report how performance evaluation of the board, its committees and its individual directors has been conducted.”(UK Corporate Governance Code, B.6.1)

Compared with the commercial sector, where it is a requirement of the UK Corporate Governance Code, relatively few charities report board evaluations. The majority (78) make no reference to having undertaken one at all. Of the charities that do, more than half (13) mention merely that the charity evaluates its board. This compares with the FTSE 350 where 45.2% of companies describe what performance reviews of their board, committees and individual directors involve, and summarise the findings. The remaining charities provide more comprehensive disclosure, including indications of when the board was last evaluated and when it will recur. The best set out details of the themes undertaken. In the corporate sector, some annual reports take these disclosures even further, such as detailing how the board will address specific issues raised in the evaluation.

As well as helping to assess board performance, board evaluations and appraisals can identify gaps in skills, experience and knowledge which can then be resolved through training and recruitment. More widely, an evaluation provides a good opportunity for the board to ‘step back’ and assess the way it operates.

Example disclosure:“The Board reviews its effectiveness annually through a questionnaire completed by each Trustee, which assesses performance in five areas:

• Vision, mission and strategic direction

• Performance and corporate behaviour

• Legal and regulatory compliance

• Guardianship of the BM’s [British Museum’s] assets

• Capacity to govern

A report of findings is considered by the Nominations and Governance Committee and action points agreed by the Board. At least every three years, the review includes an element of independent assessment. An independent evaluation of Board performance was conducted in 2013. This showed that the Board was fundamentally effective in all areas and that there were no significant weaknesses.”

(Extract from The British Museum Trustees’ and Accounting Officer’s Annual Report for the year ended 31 March 2014)

Board evaluation key questions for trustees to consider:

• When did the board last discuss carrying out an appraisal?

• Have all findings from the last board appraisal been addressed? If not, what follow-up actions are needed?

• Is external support needed in evaluating the board’s performance?

• What are the measures the board should be evaluated against?

Compared with the commercial sector, where it is a requirement of the UK Corporate Governance Code, relatively few charities report board evaluations. The majority (78) make no reference to having undertaken one at all.



Taking care of the elderly

The Orders of St John Care Trust (OSJCT) provides care services for older people guided by the Christian principles of its founding Orders, the Sovereign Order of Malta and the Venerable Order of St John. It operates 69 care homes and other care facilities caring for more than 3,600 frail elderly people, principally in Wiltshire, Gloucestershire, Oxfordshire and Lincolnshire, with over 4,700 staff and a turnover in 2014/15 of £116m. Virtually all trust income is derived from fees for its care operations with only a tiny proportion coming from bequests and fundraising.

As a charity we focus closely on good governance and the appropriate use of funds for the wellbeing of the beneficiaries of the trust, our elderly residents. The guardians of this principle of service are the non-executive trustees who make up the board of management and give their time without remuneration. The trustees have the fiduciary duty for the good governance of the trust.

In recent years the dependency of the people we care for has increased dramatically. In turn, the level of external scrutiny from the public, press and other stakeholders has increased, as has the extent of regulation by the Care Quality Commission. The board decided upon a governance review in early 2014 to look at ways in which we could make the best use of trustee

time to establish the strategy for the organisation, develop a corporate plan and, most importantly, scrutinise the trust’s day-to-day performance.

The trust engaged an external consultant to facilitate the governance review. A key recommendation was the formation of an audit and risk (A&R) sub-committee as an additional resource for the board to review and scrutinise operational and financial risk. Trustees were clear that, as a board, they did not wish to lose control of critical elements of the operation of the trust. Consequently, the A&R committee has limited delegated authority, with its principal role being to enable more detailed review of the executive’s proposals and to provide focused advice to the main board.

My expectation is that this sub-committee will provide us with a forum to develop our ideas, with a smaller group of executive and non-executive (trustee) colleagues working together away from the pressures of a tightly packed board agenda. The requirement to report back for approval maintains the primacy of the board and ensures that all trustees continue to be engaged in the continued good governance of the trust.

Andrew J Cheesbrough Chief Executive, The Orders of St John Care Trust



Induction and trainingEighty nine of the top 100 charities disclose a trustee induction programme, in line with the 2005 Charity SORP’s required disclosure of “the policies and procedures adopted for the induction and training of trustees”. Quality varies considerably, with only 8% providing a full disclosure of induction and training arrangements. This compares with approximately 35% of the FTSE 350 which provide good or detailed descriptions of their arrangements.

The best disclosures extend beyond details of the initial induction, to include the ongoing support provided to enable trustees to fulfil their responsibilities.

0

5

10

15

20

30

25

35

40

Detaile

d

disclo

sure

Reas

onab

le lev

el

of dis

closu

re Some

disclo

sure

Limite

d

disclo

sure

Minimal

or

no di

sclos

ure

2015 2014 2013

DISCLOSURE ON TRUSTEE INDUCTION (NUMBER OF CHARITIES) (%)

8 9

5

23

17 18

2528

3633

29

20

11

17

21

What does good look like? Trustee induction process:

• Introductions to key individuals within the organisation and stakeholder groups

• Provision of an induction pack containing information on the role and responsibilities of a trustee and key documents such as the charity’s strategic plan, annual report, and minutes of recent meetings

• Invitations to meetings and events. Some charities use attendance at meetings on an observer basis to familiarise the new trustee with their culture, values and challenges

• Support from the wider trustee board. In some charities, an experienced trustee acts as a mentor to guide new trustees through the induction process

Example disclosure:“For new trustees, Macmillan has a wide-ranging induction programme, which is also open to existing trustees to attend. The programme includes visits to Macmillan services, coverage of the charity’s aims and how they are being fulfilled, the role and duties of the trustees, company and charity law and governance, and financial and risk management. Further ongoing training is arranged for trustees individually or the board as a whole. The trustees undertake an annual board effectiveness review, to help identify any actions that may be needed to improve the board’s governance, ways of working, or to meet trustee training needs.”

(Extract from the Macmillan Cancer Support Trustees’ Report for the year ended 31 December 2013)

Trustee induction key questions for trustees to consider:

• When did the board last review its trustee induction process?

• Have recent new trustees fed back on the induction process?

• Do any changes (regulatory or internal) mean the trustee induction process should be reviewed?



Attendance at meetings“The main strategic decisions of charities are made at full trustees’ meetings. The governing document of the charity may specify the frequency of meetings and will usually detail the procedure for calling and running trustees’ meetings. The frequency of trustees’ meetings should reflect the needs of the individual organisation.”(‘Charities and Meetings’ (CC48), the Charity Commission)

There is little guidance on the frequency of full board meetings, with the UK Corporate Governance Code stating only that “the board should meet sufficiently regularly to discharge its duties effectively”. There is a wide variety of practice within the top 100 charities, which reflects their differing activities and governance structures.

The majority of the top 100 (65, up 10 on 2014) disclose the number of board meetings held in the year. The number ranges between two and 13, with an average of six. This is consistent with 2014 but remains considerably lower than the FTSE 350, where there is an annual average of 8.2 meetings. More than a quarter (27) of the top 100 charities disclose attendance rates at key meetings, up three since 2014. Such disclosures help convey the involvement and commitment of the board of trustees.

A new world of regulation

Paula Sussex, the Charity Commission’s new Chief Executive, has emphasised the commission’s transition from being a friend to the sector to becoming a more robust and proactive regulator. Charities, she has said, will no longer get “the benefit of the doubt”.

All trustees must ensure they are fully aware of the duties and responsibilities of the role, notwithstanding the fact that it is voluntary. Under the Charities Act 2011, trustees are “the persons having the general control and management of the administration” of a charity. The critical element is the control and direction of management. Actual management will usually be the preserve of the senior management team. Indeed, too close an involvement in operational detail can impede the essential strategic and monitoring role of the board.

Charity trustees are expected to deliver high standards and exercise all reasonable care and skill. As well as leading the charity in such a way that it is best placed to carry out its objects, the board must also ensure that the organisation operates within a coherent framework of controls that enable risks to be assessed and managed and regulatory requirements met. To do so a board must be properly informed and ensure that it obtains all the advice needed to make sound decisions. Once strategy is set or decisions made, the board has collective responsibility and should speak with one voice. Adhering to the principles of ‘cabinet collective responsibility’ builds strong and coherent leadership.

The great majority of boards are never subject to Charity Commission regulatory intervention. In reality, a charity with a good trustee board already has the most effective regulator a charity can have.

Ann Phillips Stone King LLP



RemunerationThe role of a trustee is a significant commitment yet the vast majority are unsalaried. Just 17 of the top 100 charities pay one or more trustees for their time, with overall trustee remuneration totalling £2.8 million, compared to £13 billion spent on charitable activities. The number of trustees receiving payment is relatively small (99), compared to the total number of top 100 trustees (approximately 1,300).

Those trustees who are remunerated get an average of £28,364. This is higher than the average pay non-executives receive in the housing sector (£9,784). However, the paying of housing non-executives is a much more widespread practice: 83% of the top 60 registered providers pay their non-executives.

The vast majority of charities (89) report paying expenses to trustees. The average expense claim per trustee is £3,148. As with remuneration, the amounts vary considerably, ranging from (approximately) £200 to more than £1 million. The charity disclosing expenses over £1 million is an outlier in the population; no other charity discloses expenses exceeding £150,000.

Trustee remuneration key questions for trustees to consider:

• When was trustee remuneration last considered?

• If trustees are remunerated, how often are the arrangements reviewed?

• How is the remuneration determined?

Those trustees who are remunerated get an average of £28,364. This is higher than the average pay non-executives receive in the housing sector (£9,784). However, the paying of housing non-executives is a much more widespread practice.



0

5

10

15

20

30

25

35

40

None (or none disclosed) 1 2 3 4 5 More than 5

2015 2014 2013

NUMBER OF COMMITTEES (%)

68

36 6

8 7 79

15 15 14

28 28

18

13 1311

2523

37

Board committeesMany boards make use of committees, to allow them to discuss certain areas in greater detail than is possible at full board meetings. This can help to ensure the relevant level of scrutiny is applied and can relieve time pressure on full board meetings. While detailed discussions may be delegated, committees should report back to the full board with details of their findings and recommendations.

The use of committees within the top 100 continues to vary considerably, with some not deploying them and others having a wide range. The number of committees ranges from none to 16, with an average of 4.4 (compared with 4.2 in 2014).

Audit committees continue to be the most common committees. Eighty three charities report an audit committee,

down three from our previous report. Fifteen charities still combine their audit and finance committees. As noted in our 2014 report, we believe that the activities of the audit and finance committees are best kept separate to allow for a full focus on both areas.

Despite the importance of the audit committee in a charity’s governance structure, relatively few organisations provide specific detail of its work. Eleven charities detail the remit of their audit committee, but without providing particulars of its activities in the year. The best disclosures include details of what their committees actually did, a level of disclosure reached by just eight of the top 100 charities.

The remuneration committee is the second most common committee, with 57 of the top 100 charities including

one in their governance structure, up from 55 in 2014. Given the increasing focus on payment within the sector, we believe that using a remuneration committee and reporting on its work in the annual report can be an important way of demonstrating transparency.

Board committees key questions for trustees to consider:

• When was the committee structure last considered?

• How is committee performance assessed?

• When were the committee terms of reference last reviewed? Are they still appropriate?



Senior management remunerationSenior management remuneration attracted increased attention in 2014. In April 2014, the National Council for Voluntary Organisations published a report following its inquiry into executive pay in the charity sector.16 It suggested that the exact salaries of named, senior staff members should be published and that such information should be accessible in no more than two ‘clicks’ from a charity’s homepage. The report has generated considerable debate, with many organisations adopting a ‘wait and see’ approach to ascertain the wider sector reaction.

Consistent with the 2005 SORP, the new SORP requires disclosure, in bands, of employees earning over £60,000. However, further information is required in setting remuneration for key management personnel. Specifically, the new SORP requires that trustees’ reports prepared by large charities include “the arrangements for

setting the pay and remuneration of the charity’s key management personnel and any benchmarks, parameters or criteria used in setting their pay”.In addition the new SORP encourages further disclosure, stating that “it may be helpful to provide details of the employee benefits received by the charity’s chief executive officer or highest paid staff member”. While this information is not mandatory, the attention that senior management remuneration has received within the sector is likely to increase the focus on clear and transparent disclosure in this area.

We suggest that large charities should have a remuneration committee with a clear remit to benchmark and review pay. We further suggest that the committee’s work is detailed in the annual report, ensuring a transparent approach to setting remuneration.

“All charities must disclose the total amount of any employee benefits received by trustees and its key management personnel for their services to the charity. The trustees of charities, particularly larger charities (charities subject to charity audit), should give consideration to the information needs of their funders and other stakeholders in making their accounting disclosures. For example, it may be helpful to provide details of the employee benefits received by the charity’s chief executive officer or highest paid staff member, or alternatively a charity may choose to disclose the amount of employee benefits paid to its key management personnel on an individual basis.”(Charity SORP (FRS102), paragraph 9.32)

16www.ncvo.org.uk/images/documents/about_us/our-finances-and-pay/Executive_Pay_Report.pdf

We suggest that large charities should have a remuneration committee with a clear remit to benchmark and review pay. We further suggest that the committee’s work is detailed in the annual report, ensuring a transparent approach to setting remuneration.



Towards a new code of corporate governance for the voluntary sector?The Charity Commission provides a framework for governance in ‘The Hallmarks of an Effective Charity’ and in its support for the voluntary code, ‘Good Governance – A Code for the Voluntary and Community Sector’.17,18 There are presently two versions of the code: the full code and another for smaller organisations. The latter contains all of the detail but is written from the point of view of the smallest charities, with no paid staff and a low annual income. Therefore, very similar guidance is currently used by all types of charities, from complex multinationals to local groups.

We believe that guidance should be appropriate to the scale, complexity and level of public interest in a charity. Given the size and complexity of the

largest charities, we believe that it may now be time to develop a bespoke code of corporate governance for them. This would also enable the setting of a ‘gold standard’ for reporting by large charities, helping to ensure transparency with stakeholders and the wider public. This may also help to further address those areas, such as remuneration, where there are increasing levels of public interest. Such a code could draw on those areas of best practice we describe throughout this review, including areas of the UK Corporate Governance Code which are appropriate to the sector. However, while disclosures are important for ensuring transparency, it is vital that they are underpinned by formal statements of good practice.

17www.gov.uk/government/publications/the-hallmarks-of-an-effective-charity-cc10/the-hallmarks-of-an-effective-charity18www.governancecode.org/full-code-of-governance

Given the size and complexity of the largest charities, we believe that it may now be time to develop a bespoke code of corporate governance for them. This would also enable the setting of a ‘gold standard’ for reporting by large charities, helping to ensure transparency with stakeholders and the wider public.

Around

officesworldwide

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Combined

revenuesUS$4.5bn

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About us

Dynamic organisations know they need to apply both reason and instinct to decision making. At Grant Thornton, this is how we advise our clients every day. We combine award-winning technical expertise with the intuition, insight and confidence gained from our extensive sector experience and a deep understanding of our clients.

Through empowered client service teams, approachable partners and shorter decision-making chains, we provide a wider point of view and operate in a way that’s as fast and agile as our clients. The real benefit for dynamic organisations is more meaningful and forward-looking advice that can help unlock their potential for growth.

In the UK, Grant Thornton provides services to over 40,000 privately held businesses, public interest entities and individuals. It is led by more than 185 partners and employs more than 4,500 of the profession’s brightest minds.

Grant Thornton in the charity sectorWe have a national team of knowledgeable specialists who form effective partnerships with our charity clients working from seven regional locations around the UK.

Our UK Not for Profit group works with over 800 clients generating revenues of £30m and it is one of our largest global sector groups with revenues of £130m, led by Carol Rudge both in the UK and globally. The group is therefore of the utmost importance to us and we invest in ensuring we have the right resources.

Our team understands what is important to large charities and we help them achieve best practice through thought leadership, events and sector involvement.

Our involvement in the sector is extensive. We:• have created NFP Interchange,

a forum for non-executive directors (NEDs) of not for profit organisations, run in partnership with The Guardian, to enable NEDs to debate topics that resonate across the sector on subjects such as governance, strategy and values

• are members of a number of key sector bodies including the Charity Finance Group and ACEVO

• provide a varied and topical annual seminar programme for the sector

• contribute to cutting-edge thinking by being involved in sector studies

• have members on regulatory technical boards including the SORP Committee and ICAEW Charities’ Technical Sub-Committee

• produce regular technical literature, including newsletters, factsheets and responses to regulatory consultations

• develop thought leadership demonstrating our in-depth knowledge of the sectors in which we specialise.

Bringing international experience to bearGrant Thornton UK LLP is a member firm of Grant Thornton International Ltd. With other Grant Thornton member firms, we are committed to providing an international perspective on the challenges our clients face in delivering high-quality services, while managing their limited financial resources. We support charity clients by monitoring market developments in other jurisdictions, advising on best practice and drawing on bespoke skills and experience from other member firms, many of which are members of our global Not for Profit group.

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Contact us

For further information on any of the issues explored in this report, please contact:

Carol RudgeHead of Not for Profit – UK and GlobalT 020 7728 2400E [email protected]

Simon LoweChairman, The Grant Thornton Governance InstituteT 020 7728 2451E [email protected]

South West, Thames Valley & WalesSally McKinlay T 0117 305 7703E [email protected]

West MidlandsKyla BellingallT 0121 232 5359 E [email protected]

Scotland & Northern Ireland Diana PennyT 0131 659 8508E [email protected]

Yorkshire, Humber & North EastGraham NunnsT 0113 200 2538 E [email protected]

London & South EastCarol RudgeT 020 7728 2400E [email protected]

East Midlands & East AngliaBill DevittT 01908 359663E [email protected]

North WestJoanne LoveT 0161 953 6945E [email protected]

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The Grant Thornton Governance Institute

Governance matters

Corporate Governance Review 2014

Charity Governance Review 2015

Local Government Governance Review 2015

NHS Governance Review 2015

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For further information, visit: www.grant-thornton.co.uk/governancematters

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