Memorandum from Local Compact Voice
PROTECTION OF
UNPAID TRUSTEES:
CHALLENGING THE
ASSUMPTIONS
Context
On the very public matter of Kids in Communication
(KiC) versus Learning and Skills Council (LSC), the financial
settlement paid by KiC to LSC has left unpaid Trustees of small
charities holding their breath while frantically reassuring their
life partners about personal financial liability. We refer in
particular to Trustees of small charities that deliver public
services on contract.
It should be noted that calls for intervention
by the Compact Commission to the LSC would run with calls for
intervention by the Charity Commission or appropriate body to
KiC.
But to the point; when instances increasingly
occur of unpaid Trustees becoming financially liable and burdened
by court judgements to pay sums out of their own pockets, then
the stability of the Third Sector becomes threatened by a looming
and perhaps inevitable falling off in numbers of new Trustees
with existing Trustees opting out as their terms expire. It is
relevant why these instances occur, but it is both the impact
and the fact that the instances do occur that is the concern here.
Compact Issue
To put it plainly, it is more than just timely,
it is essential all Compact parties revisit the traditional/current
assumptions underlying the protection of unpaid Trustees in a
litigious era when the Third Sector is being called upon to deliver
more and different public services by way of contracts and not
by way of partnerships.
Some charities have a policy of entering into
contracts for public service delivery and hence need protection
against a number of risks. But as a matter of principle other
charities remain chaste and need no protection in a manner of
speaking, and will only deliver a public service through a public
sector/third sector partnership agreement thus sharing risk or
not assuming risk.
Capacity builders and future builders
The foundation of the Third Sector ie Trustees
(who are also volunteers) now need to be strengthened and perhaps
redesigned.
Why? Because the external environment and events
to which this foundation is subject is changing, and also becoming
more severe in potential effect. Thus the builders have to rethink
what protection is needed for the foundation (Trustees) in terms
of material and architecture.
Unpaid trustees
Third Sector front line service organisations
are governed by unpaid Trustees in the main, hence it is entirely
the likelihood and past experience that such Trustees are not
personally financially liable for organisational liabilities which
renews the general supply of Trustees to small charities.
Liabilities
One expects that a charity will pay any organisational
liability from insurance and/or reserves. When either reserves
or insurance do not suffice, then the protection of being a company
limited by guarantee should serve to reassure Trustees that the
likelihood of payment from their pocket is so remote as to be
non-existent.
We do not go here into the reasons for the financial
liability arising whether due from a failure in service delivery
or unforeseen factor. It is a significant question for elsewhere
and the answers will impact on the issue of protection for unpaid
Trustees.
Liability cover
It is instructive to note that contractual relationships
for delivery of public services usually do not result in Third
Sector organisations building a financial reserve over time that
is commensurate with the financial penalty accompanying failure
to deliver the service, whatever the reason. Nor do charities
have access to a Third Sector insurance fund which cover such
a public service risk ie a safety net, since no such fund exists.
Note that charities with assets held in Trusts
are not generally able to apply such assets to cover liabilities
and not even a court judgement could be ordered against such an
asset.
Trustee protection
Unpaid Trustees always face the end prospect
of paying sums out of their own pockets. The point is that being
a limited liability company apparently is no longer an adequate
last line of protection in an era when the Third Sector is being
asked and encouraged in various ways to engage in more and new
areas of public service delivery which carry considerable and
increased risk.
RISK
Such risk can occur not only with the service
delivery itself but is connected to other support functions that
must exist to have the service delivered.
Public Administration Select Committee
PASC—the Public Administration Select
Committee—is inquiring into the role of the Third Sector
in providing services directly to the public on behalf of the
state, and the potential benefits and risks of the Government's
policy of commissioning services from non-government bodies.
Let us refer to the PASC enquiry re Q 3.a Will
contractual relationships with the state improve stability within
the Third Sector?
Answer
"Apparently not!" since the supply
of Trustees is under severe threat from the risks that accompany
public service contracts. In particular we refer to the risks
to unpaid Trustees and the continuity of such supply in the circumstances
as mentioned in this paper.
But to give a bit of detail:
1. Contracts in themselves do not improve
stability unless a state of stability is stated and expressed
in the contract in some form. Contracts bring obligations but
not necessarily equitable relations which is the foundation for
stability.
2. Some stated contract benefit must arise
to the organisation that contributes towards stability or at the
least, does not undermine what stability already exists. Many
say that it is the certainty of the duration of the contract,
but again contract period alone cannot account for stability.
Full cost recovery, for instance, must accompany contract duration.
3. It is clear that the Compact has a part
to play in improving the relationship.
4. Would it be that stability is best attained
by taking proper account of the guidance contained in the Compact
in the pre-contract partnership working, which may then be subject
to judicial review as public policy implementation?
Contract termination
And ensuing liabilities Where charities can
have serious potential liabilities is when they incur high set-up
and contract exit costs. This is a situation where an early termination
of the contract, or even a small unforeseen liability, would leave
most small charities insolvent. Few charities, or more precisely
Trustees led by their chief officers, have the experience and
knowledge to handle this sort of issue and tend to drag out the
contract delivery problems with heroic efforts but in unrealistic
hopes. They postpone the inevitable and make matters worse.
This is why understanding how a charity's costs
behave in changing conditions and scenarios is so important. This
is a point made in a number of reports including "Know your
cost base, Know your charity" from the Charity Finance Directors
Group.
It may well be that the LSC nee Government,
is making a clear statement while some in the Third Sector infrastructure
are burying their heads in the sand, much to the danger of smaller
charities needing early advice and assistance to avoid these situations.
This is a matter for forward looking ie failure to differentiate
between solving a contract delivery problem and making a contract
exit decision or even a timely decision to close the organisation
is a skill lacking in the Third Sector.
Compact
Perhaps it is use of the Compact in pre-contract
discussions/early stages of procurement cycle that will hold water
in the court, and not an implied compact way of working in the
contract. This is based on two intelligent and capable bodies
having agreed on a policy ie the Compact as a voluntarily agreed
public policy. If one refuses to use it, is it not a matter for
judicial review then? Equitable approach is an associated factor
re the compact agreement which promised a bed of roses but with
the thorns included.
June 2007
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