Trust issues

Any lawyer who has ever worked with a charity can testify to the commitment, energy and passion most trustees bring to their roles. Charities work at the heart of society providing huge benefits to a wide range of people and causes '“ from coordinating pro bono legal work to protecting some of our most precious heritage sites.

This work, which is likely to become even more important during the coming months of public spending austerity, would not be possible without the dedication of those volunteering as trustees of charities. However, while the overwhelming majority of trustees do their best for their charities, we are still seeing that many are not aware of or not complying with their legal duties. Some trustees are not taking these duties seriously enough.

As the regulator, it is the role of the Charity Commission to investigate mismanagement or misconduct in charities, and to work with charities where they are at serious risk of abuse or harm. Our work reveals that many of the problems encountered by charities result from a failure on the part of trustees to manage their charities effectively.

Getting back on track

The commission recently published a report highlighting the themes emerging from our compliance work during 2009-10. Entitled Charities Back on Track, the report includes case studies and provides key facts, figures and analysis of the year's compliance activity. This year's report, which is the third of its kind, analyses not only cases escalated to full investigations, but all concerns dealt with in the commission's compliance division that suggest a charity is being put at serious risk of undue harm or abuse.

The report indicates that more than a third (37 per cent) of the 2,615 assessment cases the commission completed during 2009-10 involved significant conflicts of interest, breaches of a charity's governing documents or breaches relating to unauthorised benefits and private advantages. These issues were also prominent themes in the commission's statutory inquiries, reserved for the most serious concerns, which allow it to make use of its powers under the Charities Act 1993, including to freeze a charity's assets or legally direct trustees to take some form of action. A third '“ five out of 15 '“ of the statutory inquiries completed during 2009-10 involved these issues.

The report also reveals significant underreporting by charities of serious incidents. Since 2007, trustees of larger charities have been required to report all serious incidents occurring in their charities '“ such as theft and fraud '“ to the commission. While the number of reports has increased slightly (up from 255 last year to 451 in 2009-10) we believe many trustees are still unaware of this requirement, or are reluctant to contact the commission when things go wrong.

The commission is also concerned about the consistently high proportion of compliance cases involving basic failures of good governance. We are working to raise awareness of trustees' legal duties and responsibilities, including by ensuring our guidance is clear, up to date and easily available to trustees online. We also hope the report helps trustees learn from the mistakes others have made and prompts them to examine the health of their own charities' governance systems.

Striking a balance

Lawyers in particular have an important role to play in helping charities to operate within the legal framework. We know that many within the profession provide their services to charities for free or at low cost and many are trustees themselves. We advise charities of the benefits of including qualified and experienced professionals on their boards. Of course, boards must take decisions collectively, and it isn't good practice to appoint a trustee in the hope that they will 'take care of legal'. But having at least one lawyer on a charity's board of trustees may help ensure the board discusses and takes into account the right legal issues. They can also make sure all the trustees are aware of charity law requirements and the commission's regulatory guidance. In smaller charities in particular, this can make a huge difference.

Many larger household name charities already include trustees with skills and experience in areas such as the law, accountancy and marketing. The commission's guidance The Hallmarks of an Effective Charity identifies the importance of this. It stresses that an effective charity is one which is 'run by a clearly identifiable board'¦ that has the right balance of skills and experience'¦ understands its responsibilities and has systems in place to exercise them properly'.

Our compliance work demonstrates how important it is for charities, particularly those with a smaller number of trustees, to manage any potential conflict of interest and self-dealing issues effectively and properly. This includes appointing a sufficient number of independent trustees to enable decisions to be taken properly.

Whether as trustees or as legal advisers to boards, lawyers have always facilitated the work of charities by ensuring charities pursue their objectives legally and properly. In the current economic climate, in which many charities are seeing their income decline and demands on their services increase, the contribution lawyers make will become even more vital.