Reviewing and Adapting Corporate Governance Policies in Response to the COVID-19 Pandemic
Corporate governance is one of the areas that has come under the spotlight as charities face unprecedented challenges due to the COVID-19 pandemic. In this update we are looking at duties and potential liabilities of charity trustees under UK law; considerations around holding of meetings remotely; decisions to use reserves and restricted funds in the current crisis; and at developing risk management policies to deal with the current challenges.
Trustees’ Duties and Liability
While charities may have different legal structures, all trustees are in a so-called fiduciary position to their charity – one that requires high standards of trust and confidence beyond simple honesty and good faith.
Trustees’ duties include the duty to promote the charitable purposes of their organisation; the duty to operate the charity for the benefit of the public; the duty of undivided loyalty to the beneficiaries of the charity; the duty to act at all times in the best interests of their charity and its beneficiaries; the duty to act in good faith; and the duty of prudence. All of the charity trustees are collectively responsible for decisions that have been validly made by them (even if a charity trustee was absent from the meeting at which it was made).
While charities obviously want to help in efforts to deal with the impact of COVID-19, it is essential to check that any proposed programmes are permitted under the charitable objects in your charity’s governing documents. While some charities may have a general object that allows them to act for any charitable purposes, or an object that allows them to support the general benefit of a local area, others may have more restricted purposes.
A trustee may be personally liable for any loss to the charity if he or she allows its assets to be used for a purpose other than the specific charitable purpose for which it has been set up (even if that other purpose is also charitable).
Note that you may be able to change the charitable objects of your charity (but, for example, companies and charitable incorporated organisations need consent from the Charity Commission for such change).
In its COVID-19 guidance, the Charity Commission assured charities that their approach to regulation during this uncertain period will be as flexible and pragmatic as possible in the public interest.
Holding Meetings Remotely
The ‘shelter at home’ restrictions will mean that your organisation will likely not be able to hold physical trustee and general meetings in the near-term future.
You should check whether your governing document allows you to hold trustee meetings by phone, video conference or other electronic means. Even if your governing document does not expressly allow you to hold trustee meetings remotely, there is case law which states that you can still hold a valid meeting, where the trustees can both see and hear each other, unless the organisation’s governing document specifically prohibits this.
A telephone conference would ordinarily not be sufficient in such circumstances (because you cannot see each other). However, the Charity Commission in its COVID-19 guidance said that it will understand if you decide to hold meetings over the phone or using digital solutions, even when there is no such clause in your governing document. Nevertheless, you should record this decision and explain that you have done this to demonstrate good governance of your charity.
You may also consider passing a written resolution instead of holding a meeting. You should again check whether the governing document has specific provisions governing written resolutions. A resolution in writing, signed by all of the charity trustees, will be valid unless the governing document specifically prohibits this.
The Charity Commission also advised that if you have no choice but to decide to cancel or postpone your annual general meeting and other critical meetings, you should record this decision to demonstrate good governance of your charity. Where the situation impacts on the completion of annual returns and accounts, charities with an imminent filing date are advised to email the Charity Commission at [email protected] (including your charity name and registration number).
Using Reserves and Restricted Funds
Similar to businesses, charities may also find themselves in financial difficulties in the current situation. The Charity Commission encourages trustees to think in the first place about whether or not certain projects, spends or activities can be stopped or delayed in order to focus on essential spending if the charity is facing financial challenges at this time.
However, the Commission also confirmed that reserves can be spent to help cope with unexpected events like those unfolding at present. Reserves are that part of a charity’s income fund that is freely available for its general (unrestricted) purposes, i.e. the resources the charity has to spend for all or any of the charity’s purposes, once it has met its commitments and covered other planned expenditure.
Certain funds may have limits on their use. For example, a fundraising appeal may restrict funds to a specific purpose, or if you have a permanent endowment, it may have restrictions on selling it to release funds. While in some instances there may be ways to amend these restrictions, the Commission urges trustees to carefully consider the wider and longer-term impacts of making such a decision on your financial resilience and donor relationships.
Developing Risk Management Policies
Duty of prudence requires trustees to carry out their duties according to the standards of an ordinary prudent business person. The Charity Commission strongly recommends that charities have a clear risk management policy and process (see link to their risk management booklet below). Certain types of charities are also required to include a risk management statement in their trustees’ annual report or directors’ report.
Putting in place adequate risk management policies and observing them helps to evidence that charity trustees have discharged their duties diligently. Risk management becomes particularly important at times like these when charities are facing significant health and safety, financial, personnel and other risks. While the COVID-19 pandemic presents unprecedented challenges that may not have been foreseen in your existing risk management policies, we would encourage charities to review their policies, identify key risks that the current situation presents to their organisation and amend policies as appropriate.
- Charity Commission’s COVID-19 guidance
- Charity Commission’s booklet on trustee’s responsibilities
- Charity Commission’s booklet on risk management
- Charities Resources on Practical Law’s COVID-19 website (paid resource)
Information in this update has been provided by A4ID’s Legal Partner Kirkland & Ellis (International) LLP and does not constitute legal advice. If you require specific legal advice arising from the matters outlined in this update please contact the Pro Bono Legal Services Team at [email protected].