About Mark Johnson

Mark is an experienced commercial solicitor and company secretary working with clients to manage risk, assure compliance and protect their legal position.

PSC Register: Enhancing Transparency in UK Companies

The Register of  People with Significant Control (‘PSC Register’)  is a new statutory register which most UK companies and LLPs are now required to keep from 6 April 2016 to identify ultimate beneficial owners and controllers. Failure to comply is a criminal offence.

The Small Business, Enterprise and Employment Act 2015 introduced a number of measures to increase the accountability of companies by making it easier to see who owns or controls them. One part of this was to establish a new central public register of ‘people with significant control’ (PSC Register). This will make it possible to see not just who owns shares in a company, but also who influences or controls a company behind the scenes, for example by being able to vote on shares owned by other people, or exercising control under shareholders or other agreements. Until recently these people or organisations may have been under no obligation to declare their interest. The measures promoted by the UK at the G8 summit are designed to help combat tax evasion, money laundering and terrorist financing and foster investor confidence.

All companies and limited liability partnerships (including community interest companies, companies limited by guarantee, academy trusts and charitable companies) must now compile and hold a PSC register. Listed companies and those quoted on AIM are exempt because they are already under stringent disclosure requirements as part of their admission to the market. Cooperatives and community benefit societies, charitable incorporated organisations (CIOs) and limited partnerships are currently exempt as well. From 30 June 2016 companies will have to give this information to Companies House when they deliver their confirmation statement. (From that date the obligation to file an annual return will be replaced by the requirement to “check and confirm” various matters by filing a ‘confirmation statement’ with Companies House, notifying any changes at least once in any 12 month period). Companies House will hold PSC information online for all UK companies by April 2017. This will then be freely available in one central, searchable public register.

Who is a ‘person with significant control’?

An individual with significant control must meet at least one of the following five conditions:

  • directly or indirectly holds more than 25% of the nominal share capital; or
  • directly or indirectly controls more than 25% of the votes at general meetings; or
  • directly or indirectly is able to control the appointment or removal of a majority of the board (Any such rights in shareholders’ or joint venture agreement could be caught by this condition); or
  • actually exercises, or has the right to exercise, significant influence or control over the company; or
  • actually exercises or has the right to exercise significant influence or control over any trust or firm (which is not a legal entity) which has significant control (under one of the four conditions above) over the company.

Both the Act and the Regulations contain detailed provisions relating to the interpretation of these five conditions.  Whilst the first 3 categories are reasonably easy to spot, the fourth and fifth are more tricky. The Government has published statutory guidance on the meaning of ‘significant influence or control’ to help with the classification.

Whilst a person with significant control is usually an individual, there is also an obligation to disclose in the register any corporate entity which holds similar influence (known as a ‘relevant registrable entity’). For example, if a company has 4 shareholders who each hold 25% of the shares and one of them happens to be another limited company, details of that company would have to be entered into the register, along with the 3 individuals. In the case of a company limited by guarantee, (where often the members are the same people as the directors), if there are 4 or fewer members, then usually each will hold 25% of the voting rights and each would need to be entered in the register. In the case of a charity with a wholly-owned trading subsidiary, the trading subsidiary would need to record in its PSC register that it was owned 100% by the parent charity. The PSC register cannot be blank. Even if there are no persons to disclose, you should write “The company knows or has reasonable cause to believe that there is no registrable person or registrable legal entity in relation to the company”. Remember that the position can change over time if the number of members changes and it is important to keep the register up to date.

What steps do companies need to take?

In order to compile its PSC Register, a company is under a duty to take reasonable steps to find out if anyone is a registrable person or registrable legal entity in relation to it and to identify them. Investigations should be made by the company . The Act and guidance set out detailed requirements for serving notices. If an individual or legal entity fails to respond to a company’s enquiries, the company will ultimately have the power (without a court order) to remove the shareholder’s voting rights, and impose other restrictions on any shares held by them (‘disenfanchisement’). If the company has not sent the necessary notices requesting PSC information, the registrable individuals and relevant legal entities concerned still have an obligation to inform the company proactively of their interest, and any changes to it. The requirement to keep a register of members (shareholders) and directors has always been an important duty imposed by company law, but I suspect one which is more honoured in the breach than in the observance by many smaller companies. In view of these new requirements it will be a very important piece of housekeeping to keep on top of. I have seen many difficult situations where companies have been unable to identify or contact their members, with a paralysing effect on their ability to take key decisions which require a members’ resolution.

There are new criminal penalties for companies and all their directors and the relevant individuals or legal entities for failing to keep a register (fine of up to £1000 plus daily penalty of £100), failure to provide the information or providing false information (up to two years in prison and or an unlimited fine).  For the individuals or legal entities concerned,  the threat of losing voting rights and dividends which be an effective deterrent against non-compliance. We may yet see these disenfranchisement provisions being abused by some in an attempt to deny shareholders their rights.

Compiling the PSC Register

Create a new tab in your statutory books labelled ‘PSC Register’.

Personal information: For individuals on the PSC Register certain personal information will need to be disclosed:

  • Name
  • Date of birth
  • Nationality
  • Country, state or part of the UK where the PSC usually lives
  • Service address
  • Usual residential address – If the residential address has already been given because it is also the service address, then you do not need to give it again
  • The date when the individual became a PSC in relation to your company
  • Which of the five conditions for being a PSC the individual meets, with quantification of the interest where relevant – For a PSC who meets one or more of conditions (i) to (iii) your company is not required to identify whether they also meet condition (iv) – You must use the official wording, (see Annex 2 of Guidance)
  • Any restrictions on disclosing the PSC’s information that are in place (eg where confidentiality order is in place)

The Act and the Regulations contain safeguards on how this personal information may be used and disclosed.

For a corporate entity, you will need the following information:
  • Name of the legal entity
  • The address of its registered or principal office
  • The legal form of the entity and the law by which it is governed
  • If applicable, a register in which it appears (including details of the state) and its registration number
  • The date when it became a registrable entity in relation to your company
  • Which of the five conditions for being a PSC it meets, with quantification of its interest where relevant – For an entity that meets one or more of conditions (i) to (iii) your company is not required to identify whether they also meet condition (iv) – You must use the official wording, (see Annex 2 of Guidance)

Status of investigations: The Regulations require that where a definitive position as to ultimate control has not yet been determined, or where the disenfranchisement provisions have been invoked, the PSC Register must include certain statements by the company confirming what steps have been taken to identify registrable persons or legal entities and the position in relation to any restrictions notices issued. If it is a work in progress you can state, “The company has not yet completed taking reasonable steps to find out if there is anyone who is a registrable person or a registrable relevant legal entity in relation to the company”.

A company’s PSC Register will be kept at its registered office (or other inspection address) and must be available for public inspection in the same way as the register of members.  The information on the PSC Register will also need to be confirmed to Companies House at least every 12 months and will be held  on a public searchable database. From 30 June 2016 companies will be able to elect to keep their PSC Register (as well as all their other statutory registers) at Companies House. Companies will be obliged to provide copies of the PSC Register to any person on request and will be able to charge a small fee for this.

The major issue facing companies and LLPs required to keep the new PSC Register will be putting in place the internal processes necessary to enable them to compile and keep the register updated.  The possibility of criminal sanctions indicates that regulators will take the new duties seriously. This underlines the importance of having a good company secretarial service, whether in-house or outsourced to a cost-effective professional provider like Elderflower who can provide peace of mind.

 

 


If you need any help in understanding the implications of these changes and ensuring compliance, get in touch today, info@elderflowerlegal.co.uk or 01625 260577.

If you would like to be kept up to date on similar topics to this one, then why not sign up to receive our regular newsletter.

Due Diligence for Schools Joining a Multi Academy Trust – Part 2

In Part 1 we examined the purpose of due diligence when a school joins an academy trust. In this Part 2 we look at workforce aspects and financial due diligence.

Workforce

Payroll costs typically account for 75-80% of a schools’ expenditure (DfE, 2013) so this is obviously an area to pay careful attention to. When a school joins a MAT, normally the MAT is the legal entity which will become the employer of the staff. In a community school, the existing employer will usually be the local authority and so the HR department of the authority will have a key role to play in providing information about the workforce and smoothing the transition. However, in voluntary aided schools it is usually the governing body that is the employer. Even in some maintained schools, the governing body may be the legal employer of certain staff (e.g. premises assistants, community workers, nursery staff). This is a trap to watch out for since it is the existing employer that has legal duties to comply with.

The new joiner school will want to understand what will happen to its staff when they join the group. Under the new structure, who will have the power to suspend staff, appoint performance management reviewers, undertake threshold assessment or exclude pupils?

The MAT, on the other hand, will be interested in the profile of the staff it will be taking on, and the associated payroll costs and liabilities. The transfer of teaching and support staff will be covered by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) and the contractual terms of the Commercial Transfer Agreement (CTA). The practical effect of this is threefold:

  • The new employer inherits the contracts and payroll costs (including pension entitlements) of the staff who transfer; the ability to make changes to employment contracts or release staff is very limited and requires specialist advice.
  • The current employer and new employer need to inform staff and consult with them about the transfer arrangements – failure to do so can result in a financial penalty.
  • Any existing grievances or claims relating to the staff transfer to the new employer and become their problem to manage.

Remember that TUPE can also apply to staff employed by external contractors. So, if the joining school has a contract for maintenance or cleaning with an outside provider with staff who spend most of their time servicing that location, and the intention is that these functions will in future be performed in-house by the MAT, these staff may also end up transferring onto the MAT payroll as well.

Some key questions to probe:

  • Obtain an organisation chart and biographies of key staff. Check historical and projected headcount. Any recent changes of leadership or restructuring?
  • Details of all staff, including date of birth, age, date of starting employment, length of service, salary, benefits, notice period, pension details.
  • Are appropriate contracts in place for all staff? Arrange to review a sample. Any consultants or self-employed contractors who regularly provide services?
  • Have any verbal assurances or agreements been made with staff outside of their formal contract?
  • Are personnel records up to date and securely stored? Will they be handed over on the transfer date?
  • Are payroll records up to date and complete? Have all necessary deductions been made and accounted for to HMRC and others? Do the figures tally with the contractual entitlements?
  • What are the figures for staff turnover? Are there any pending disciplinary or grievance investigations? Have any staff been dismissed recently?
  • Details of sickness records, employees on maternity leave or secondment.
  • How will occupational health support be provided in future?
  • How will absence management be dealt with post-transfer?

Stakeholders

Both the new joiner and the MAT will have a range of stakeholders whose views and attitudes can shape the future success of the integrated organisation. These will include parents and carers, pupils, former pupils, the staff, the local authority, external sponsors or foundations (such as the local diocese in the case of religious schools), local residents, local media, the Regional Schools Commissioner. It is important to map out these stakeholders, solicit their views and decide how best to consult with them and keep them informed about future plans. What are their hopes, fears and dreams for the future? A stakeholder communication plan should be drawn up. Digital communications and social media could play an important role in doing this cost-effectively. Surveys, press reports and Google searches may produce useful insights.

Financial

Financial due diligence should determine the current financial position, as well as identifying any support or training needed for managers going forward. New joiners will need to understand how the ‘top slice’ deduction to their school budget to pay for central support services will be applied and whether it represents value for money. Typical rates can vary from 3% to 5%, in some cases even 7%. Are the service levels to be expected from central support services in return for this deduction clearly documented?

Typical areas requiring examination will include:

  • Income/ Expenditure Budget reports and cashflow projections
  • Summary of month end bank and cash book position for current year and last two years, explanation of variances and major inflows/ outflows
  • Five-year financial forecast for the school. Are assumptions realistic? Particularly with respect to pupil numbers, which is ultimately the key financial driver.
  • Any negative balances, deficits or outstanding loans (e.g. for capital projects funded by local authority, Priority Schools Building Programme or Targeted Basic Need)?
  • Any grant funding with restrictive conditions or claw-back provisions (e.g. for sports facilities)?
  • Details of revenue generating activities – e.g. room or outdoor space hire, paid-for services.
  • Any significant debtor balances?
  • Any significant off balance sheet liabilities (e.g photocopier leases or vehicle leases)?
  • Any VAT or corporation tax issues?
  • Any pension fund deficit?
  • How is payroll currently organised? Do all staff have up to date contracts?
  • How is banking currently organised? Who are the signatories on accounts?
  • What are the financial controls and checks?
  • What are the main risks facing the organisation? Are these documented in a risk register?
  • Discussions with the relevant section of the Local Government Pension Scheme should take place early in the process to find out their methodology regarding transfer values, which will have an effect on future employer contribution rates.
  • What accounting systems and current reporting arrangements are in place?
  • The new joiner will be keen to see the last 3 years’ audited accounts for the MAT and the auditors’ management letters

The most common areas of fraud in academies identified by the National Audit Office (2015) were:

  • Inappropriate expenses claims or undocumented salary increases
  • Inappropriate or unauthorised purchases (e.g. luxury goods, alcohol, cars)
  • Non-compliance with procurement and tendering rules for major purchases or building projects
  • Related party transactions (i.e. buying from business connected with management or governors)

Next time –  In Part 3 of this post, we will look at commercial and asset-related issues of due diligence for schools joining an academy trust.

Find out more about our Due Diligence Service here.

 


 

Mark Johnson is a highly experienced independent solicitor & chartered company secretary helping schools and academies with conversions, creation of MATs, legal and governance issues. We can help your academy to flourish. Find out more at elderflowerlegal.co.uk.

If you would like to be kept up to date on more topics like this, then why not sign up to receive our regular newsletter.

Due Diligence for Schools Joining a Multi Academy Trust – Part 1

Due Diligence for Schools Joining a Multi Academy Trust

The Department for Education has signalled clearly that the future development of academies lies in the consolidation of more schools into multi-academy trusts (MATs). Primary schools, in particular, will be encouraged to join existing clusters and groups of schools. In future, we may see schools deciding to leave one MAT and join another, where the grass is greener – a bit like footballers at transfer season! The decision of a single school to join a MAT family of schools requires careful thought on both sides. For the new joiner school, (which could be a community school, a church school or a standalone converter academy), the headteacher and governors will need to be satisfied that the match is a good one, the cultures are aligned and that operating at scale will bring the expected benefits for pupils. Equally, the board of the MAT will need to be satisfied that the school they are ‘acquiring’ or partnering with will fit well with the aims and ethos of the group, will not create unmanageable risks or liabilities for the future, nor de-stabilise the group as a whole. Both partners in the relationship need to undertake some detective work and analysis before signing on the dotted line. The technical term for this exercise is ‘due diligence’.

In our work with academy converters and MATs, we often find due diligence is often not given the priority and resources it deserves. In the wider corporate sector, research has found that 70% of mergers and acquisitions fail to deliver the expected benefits (IoD, 2012). The reasons most often cited for failure are (1) misguided strategy in pursuing the merger (e.g. ‘empire building’ or hubris) (2) overly optimistic expectations and (3) failure to manage the integration process properly. It is important that leaders of both parties spend quality time on this aspect to discharge their duty to promote their organisation’s best interests and enhance the chances of success.

Purpose of due diligence

Due diligence is the process by which the parties gather information about each other to ensure the integration process proceeds smoothly. In particular, it is used to identify risks, liabilities, cultural differences and practical issues that may cause difficulties later. The key objectives are:

  • To test the strategic rationale for the tie-up: will it improve the life chances and attainment of pupils and is it really financially and operationally attractive for both sides? What are the prospects for the future? Do the partners have the capacity and capabilities to pull it off?
  • To inform negotiations, identify liabilities and make sure the legal documents pick up risks and allocate them appropriately by using warranties and indemnities (legal clauses which require one party to compensate the other if a risk materialises and costs are thereby incurred). The general rule is that liabilities whose origin is pre-transfer belong to the transferor (local authority and/or diocesan trustees), and those whose origin is post transfer belong to the transferee (the MAT).
  • To lay the foundations of the future integrated organisation and build its culture. The process should combine an ‘outside in’ approach with an ‘inside out’ approach to understand the schools’ relative position in the local education system, as well as understanding the internal capabilities, strengths and weaknesses.
  • To examine broader issues of culture, systems and processes, management structures, future opportunities and business plans.

Is there a framework for due diligence?

In our work with academies, we are often asked about the best way to approach due diligence when a new school is joining a MAT. Effective due diligence needs to look at a range of factors to form a complete picture. It is not just about examining the accounts of the organisation, reading the last OFSTED report or even reviewing the staff list. Ideally, it requires a project team of people with different perspectives to pick up both hard and soft issues, the nuances vital to successful integration. Much of the information will come from interviews with open ended questions. As a mentor of mine once said: “Ask the question. Shut up. Listen”. Using two interviewers, one to listen and the other to observe body language can be useful. This is our suggested roadmap for success.

Strategy

Start with ‘Why?’ For the new joiner, what is in it for you by joining a larger group? Have you clearly articulated the list of benefits you expect to get out of the ‘merger’ and communicated these explicitly to your prospective partners (for example, more funding and resources, enhanced resilience, better support services, staff training, enhanced career opportunities)? Are they documented somewhere so you can monitor progress and hold your partner to account later? For the acquiring MAT, is it part of your strategy to grow by acquiring new schools? Do you genuinely have the capacity, resources and support systems to absorb and nurture the staff team, pupils, buildings, contracts and liabilities you will be taking on?

What does this particular school bring to the party, as compared to others you could work with? Benefits for the MAT might include, securing your future enrolments, access to more funding, spreading overheads to achieve economies of scale, better preparation of pupils for secondary school life, enhanced opportunities for income generation. Have you clearly communicated to the new joiner the ethos, culture and behaviours expected of those joining your MAT? Have they explicitly accepted them?

Performance

Both parties need to understand where the other currently stands at the moment in performance terms.

Key questions to consider might be:

  • What is the scope of educational activities? How has the organisation developed and what is the rate of expansion?
  • Is there a documented vision, mission, values, strategy and objectives? How are they performing against these at present?
  • What are the achievement levels of pupils – gain an overview of attendance, attainment and the progress of pupils within the schools
  • How is the learning rated for pupils with SEN, disabled, BME groups and looked after children?
  • How is the quality of teaching rated?
  • How is attainment and progress measured and rated?
  • Quality assurance – how well does the MAT know the performance and the strengths and weakness of its academies?
  • What are the procedures for challenging individual schools and identifying the support they need;
  • How coherent and adequate is the model for providing school improvement support – whether through MAT specialist staff, external consultants, academies in the group, other schools or a mix of these approaches?
  • What do the latest OFSTED reports say and are the areas identified for improvement and action being addressed?
  • For the MAT, what are the critical success factors and KPIs that you will use to measure performance of schools joining the group? Are these explicitly clear, (e.g. ‘all our schools are expected to be rated good or outstanding by OFSTED within 2 years of joining the MAT’)

Leadership & Governance

Leadership and governance will be critical to future success. How would you rate the quality of the MAT Board? Is there a good mix of skills and experience? Do trustees actively challenge and question the management team or do they rubber stamp decisions? Can you see the minutes of the MAT Board meetings and committees? Have any performance evaluations been carried out for the Board and can you see them?

What do the last two OFSTED reports say about leadership, management and quality of governance? What governance issues is the Board struggling with at present?

How will governance be organised after the transfer? What roles will the governors of the new joiner play after the transfer? Will any of them be invited to join the MAT board or will they function as a Local Governing Body with some delegated powers?

Review the proposed Scheme of Delegation – what functions will actually be devolved to the local governing body and which will be retained by the MAT? In what circumstances could the delegation be suspended?

Are role descriptions of the SMT, governors and key staff clearly documented so it is clear who is responsible for what?

Does the MAT have a full suite of up to date policies and procedures in place and how do they work in practice?

Can you be confident that the organisation has applied the highest standards of propriety and internal control to avoid reputational damage? Do they manage board members’ and the management team’s conflicts of interest properly and avoid ‘related-party transactions’ (e.g. awarding contracts to a relative’s business)? Consider reviewing the register of business interests and board minutes to check this. Are you satisfied that the organisation is transparent in all its dealings?

Next time – In Part 2 of this post, we will examine the workforce issues and financial aspects of due diligence.

Find out more about our Due Diligence Service here.


Mark Johnson is a highly experienced independent solicitor & chartered company secretary helping schools and academies with conversions, creation of MATs, legal and governance issues. We can help your academy to flourish. Find out more at elderflowerlegal.co.uk.

If you would like to be kept up to date on more topics like this, then why not sign up to receive our regular newsletter.

Health & Safety Duties for Directors

What are the main duties of Directors under Health & Safety laws?

Health and safety is integral to success. Board members who do not show leadership in this area are failing in their duty as directors and their moral duty, and are damaging their organisation.”   Health & Safety Executive 

The main duties for directors are as follows:

  1. The organisation must appoint a competent person to help meet the health and safety duties: someone with the necessary skills, knowledge and experience to manage health and safety across all the organisation’s activities– i.e. not just on the premises but also when undertaking off-site trips and activities.
  2. Ensure you have an appropriate health and safety policy in place which details how you will manage health and safety. This should detail who does what, when and how.
  3. Undertake an appropriate risk assessment. Risk assessments will identify potential risks and then identify reasonable steps to control those risks. You should record the findings and then start to implement the control measures.
  4. Keep up to date with Health and Safety Executive guidance (e.g. on specific hazards and activities). There needs to be a very good reason for a failure to adhere to this guidance on best practice.
  5. Staff should be aware that any concerns should be reported to the Health and Safety lead.
  6. Ensure that appropriate policies are in place for managing any identified risks. Policies should be kept up to date and disseminated to staff and used in practice.
  7. Provide clear information and training to employees. Ensure they have the appropriate tools to do their job safely. Both long-standing employees and new joiners should receive appropriate training
  8. Keep good records and clear documentation.

The main obligations of an organisation to its employees and visitors are derived from various pieces of legislation, including the following main provisions:

Health and Safety at Work etc Act 1974 (HSAWA) : The Act places a duty on every employer to ensure, ‘so far as is reasonably practicable’, the health, safety and welfare at work of all their employees, and also ‘to conduct the undertaking in such a way as to ensure, so far as is reasonably practicable, that persons who are not in their employment who may be affected thereby are not thereby exposed to risks to their health or safety.’

The Management of Health and Safety at Work Regulations 1999 : This details the steps employers are required to take to manage their health and safety obligations under the HSAWA. These include: employers to carry out risk assessments, make arrangements to implement necessary measures, appoint competent people to oversee health and safety and arrange for appropriate information and training for staff and visitors.

Workplace (Health, Safety and Welfare) Regulations 1992 : These cover a wide range of basic health, safety and welfare issues such as ventilation, heating, lighting, workstations, seating, drinking water and welfare facilities.

Personal Protective Equipment at Work Regulations 1992 : Require employers to provide appropriate protective clothing and equipment for their employees.

Provision and Use of Work Equipment Regulations 1998 : Require that equipment provided for use at work, including machinery, is safe.

Health and Safety Information for Employees Regulations 1989 : Require employers to display a poster telling employees what they need to know about health and safety.

Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1995 (RIDDOR) : Require employers to notify certain occupational injuries, diseases and dangerous events to the relevant authorities.

Control of Substances Hazardous to Health Regulations 2002 (COSHH) : Require employers to assess the risks and control substances which are hazardous to health, such as asbestos, cleaning products and chemicals.

Employer’s Liability Insurance

If you have employees or apprentices you must carry employer’s liability insurance. This insurance will enable you to meet the cost of compensation for your employees’ injuries or illness whether they are caused on or off site. You must be insured for at least £5 million. However, you should look carefully at your risks and liabilities and consider whether you need more than £5 million. In practice, most insurers offer cover of at least £10 million. You must display a copy of the certificate of insurance where your employees can easily read it.

You can be fined up to £2500 for any day which you are without suitable insurance. If you do not display the certificate of insurance or refuse to make it available to HSE inspectors when they ask, you can be fined up to £1000.

The buck stops with the Board

The directors are ultimately responsible for health and safety, and there must be a visible and active commitment from the board. Board members should consider what information they need to receive and review to enable them to monitor health and safety effectively. Ideally the issue should be a standing item at board meetings. Although prosecutions are frequently bought as a result of an accident in which someone has been hurt, a company can be liable even where no personal injury has occurred. All that the prosecution need prove is that a state of affairs existed that posed a real risk to the health and safety of employees or others.

If there is a prosecution it is likely that one or more directors will required to attend court to defend the organisation’s position.  If it can be shown that the offence has been committed with the ‘consent or connivance’ of a director, or the incident is his attributable to his neglect, he or she may face prosecution in a personal capacity as well. ‘Consent’ and ‘connivance’ requires that the defendant knew the material facts that constituted the offence by the company and agreed to conduct its business on the basis of those facts, ignorance of the law being no defence. ‘Neglect’ does not necessarily require knowledge on the defendant’s part of the material facts giving rise to the breaches, but can include the situation where he ought to have been aware of those circumstances.

Prosecutions for breach of health and safety laws are increasingly common and can result in hefty fines and adverse publicity. The Corporate Manslaughter and Corporate Homicide Act 2007 made it easier for organisations to be held corporately accountable for deaths caused by their failures. An organisation can be guilty of a criminal offence under the Act if ‘the way in which its activities were managed or organised’ caused a person’s death, and amounted to a ‘gross breach’ of a relevant duty of care owed by the organisation to the deceased. Convicted organisations can receive an unlimited fine, and can be required to publicise the fact that they have been convicted. The number of prosecutions has been gathering momentum with over 18 cases since April 2008. Directors and officers insurance may provide some cover for the costs of successfully defending court proceedings, but will not cover the fine itself.

Compliance with health and safety provisions is an essential part of the Board’s duty to monitor risks. For more on the duties of directors download our FREE Guide to Directors’ Duties.


Mark Johnson is an experienced solicitor & chartered company secretary supporting businesses, charities, social enterprises & academy trusts on governance, compliance & legal affairs. Please get in touch info@elderflowerlegal.co.uk or 01625 260577.

If you would like to be kept up to date on more topics like this, then why not sign up to receive our regular newsletter.

 

Could New Models of General Practice Provide Safe Haven?

GPs Facing Perfect Storm – Could New Models of General Practice Provide Safe Haven?

General Practice is in the middle of a perfect storm of multiple pressures: growing and unsustainable workloads, rising public expectations, a harsh funding environment, a crisis in recruitment and retention, as well as falling morale. According to research by the BMA, 90% of GPs report that unmanageable workloads are undermining the quality of care that they provide to patients

[1].

Urgent solutions are required to build resilience and scale in general practice. This would see GPs working in larger teams but retaining the crucial benefits of independent contractor status and the professional autonomy that brings. It seems clear that a practice based on a small ‘cottage industry’ model is no longer sustainable.

If properly constructed, new models of GP practice can bring clear benefits:

  • allowing GPs to retain autonomy, self-determination and independent contractor status, whilst improving work-life balance
  • cost efficiencies through operating at scale – procurement costs savings of 20-30%, savings on CQC fees, audit and medical indemnity premiums
  • achieving operational efficiencies from operating at scale and ability to secure and afford essential key strategic corporate and business services as spread across a much wider base
  • securing investment in premises, new technology and information systems to enable you to provide a first class service to your patients
  • building multi-disciplinary care teams offering new career pathways which can help to recruit and retain the best people
  • capacity to bid for new contract opportunities as they arise, as well as resilience to cope with peaks and troughs in workload
  • opportunities for working across communities with charitable and voluntary organisations, social enterprises, housing associations and educational establishments

In developing models at scale, it is inevitable that individual GPs and practices will need to cede a degree of autonomy and authority to a central leadership team. They key question: is that loss of sovereignty and independence more than compensated for by the economies of scale, resilience and increased bargaining power the new grouping can bring?

“The best organisations seem to have an inner self-confidence and discipline to pursue their mission and implement change despite wider turbulence in local or national systems” – Mark Britnell, HSJ January 2013

What are the options for future models of general practice in the light of the NHS Five Year Forward View and the Sustainability and Transformation Planning Guidance 2016/17? What are the features of different legal formats and what commercial issues do GPs need to consider?

Forward View Group, in association with Elderflower Legal, has published a special report examining the options for GPs and commissioners to design new models of practice. Download your free copy here.

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[1] BMA, Future of General Practice (2015)

 


 

Mark Johnson is Chair of Forward View Group – a consortium of values-driven professionals passionate about creating new service models which enhance health and wellbeing for both patients and practitioners: forwardviewgroup.com

 

The Hallmarks of Good Governance in Academy Trusts – Part 4

A series of posts examining what good governance in an academy trust looks like and how boards can create a framework to deliver their core purpose and properly discharge their duties. In part 3 we looked at Stewardship of Finance and Resources. In this final part 4 we examine..

How to get governance right from the outset

The Department of Education’s view is that effective governance requires the following key ingredients:

  • The right people with the necessary skills, time and commitment, and sufficient diversity of perspectives to ensure internal challenge, all actively contributing in line with clearly defined roles and responsibilities under an effective chair and an explicit code of conduct, and with active succession planning
  • Clear governance structures and documentation with tightly defined remits, particularly in relation to functions delegated to committees or other bodies
  • Clear separation between the strategic and operational in terms of the role of the board and the school management
  • A positive relationship between the board and its school management enabling robust constructive challenge on the basis of a good understanding of objective data, particularly on pupil progress, staff performance and finances
  • The support and advice of an independent and professional company secretary
  • Robust processes for financial and business planning and oversight and effective controls for compliance, propriety and value for money
  • Processes for regular self-evaluation, review and improvement including; skills audits, training and development plans, and independent external reviews as necessary.

“Governors and trustees are engaged and energetic non-executive leaders who are driven by their core strategic functions of setting the vision, holding the Headteacher to account or results and making sure money is well spent; they sit on boards no bigger than they have to be; are curious about what’s going on in the classroom and aren’t afraid to innovate; they focus ruthlessly on what really matters: raising standards”  – Schools Minister, Lord Nash, 2013

Ensuring continuous improvement

Achieving high standards of governance and accountability requires sustained effort and resources – it isn’t easy. With all aspects of good governance, the effectiveness ultimately depends on the skills, knowledge and behaviour of those responsible for operating the system. The board must set the desired values, ensure they are communicated, incentivise the desired behaviours, and sanction inappropriate behaviour. Academy Trust boards can benefit greatly from an external review of their governance structures and/or an independent review of their board’s effectiveness. In response to the growing need for improvements, Elderflower Legal has developed fixed price review packages which can be delivered quickly, confidentially and with the minimum of fuss to help trustees and school leaders get a picture of how they are performing and what areas of practice need to improve. You can find out more about our review packages here.

Final thoughts

One of the difficulties in embedding sound practice is a current lack of clarity about who is responsible in academy trusts for setting up the framework for sound governance and embedding good practice.  CEOs and Executive Principals may not be the best people to lead on this – they are tasked with driving the organisation forward and taking measured risks. Similarly Finance Directors and School Business Managers may be too immersed in the day to day operations and short of time to take an overview of governance. The best person to implement your system is trained governance professional, such as an ICSA-qualified chartered secretary. They have the necessary experience and rigorous qualifications beyond financial and legal aspects to make things happen and help you succeed. Chartered secretaries can work for your trust on an outsourced or employed basis, depending on your budget.

A sound system of governance isn’t a ‘nice to have’, an exercise in box-ticking compliance or even a brake on progress: it is an essential foundation stone on which the whole institution is built. Get it right and it can be enabling and empowering: get it wrong and the academy trust’s whole purpose and even its survival may be compromised.

If you have enjoyed these posts, we have compiled the series “The Hallmarks of Good Governance in Academy Trusts” into a FREE downloadable Special Report.  The report can be downloaded here.


Mark Johnson is a highly experienced independent solicitor & chartered secretary supporting academy trusts, free schools & other education providers with their governance arrangements, legal and compliance matters. He is an independent member of a MAT audit committee. He offers a cost-effective governance review GovernanceCHECK360™ for academy trusts elderflowerlegal.co.uk.

If you enjoyed reading this series of posts on Good Governance in Academy Trusts and would like to be kept up to date on similar topics like this, then why not sign up to receive our regular newsletter.

The Hallmarks of Good Governance in Academy Trusts – Part 3

This series of posts examines what good governance in academy trusts looks like and how boards can create a framework to deliver their core purpose and properly discharge their duties. In Part 2, we examined the framework of governance in academy trusts. In this Part 3, we examine….

Stewardship of finance and resources

The academy trust board is responsible for the proper stewardship of trust funds, including regularity and propriety, and for ensuring economy, efficiency and effectiveness in their use. The Financial Handbook states “The board of trustees has wide discretion over its use of the trust’s funds, which it must discharge reasonably and in a way that commands broad public support”. This is hinting at the reputational risk of expenditure which could be perceived as inappropriate.

Further, the governing body has a responsibility, under the Academies Financial Handbook, to appoint an Accounting Officer, normally the headteacher or CEO, who has specific responsibilities for financial matters. This role includes a personal responsibility to Parliament, and to the Secretary of State, for the financial resources under the trust’s control.

The Accounting Officer must take personal responsibility (which must not be delegated) for assuring the board that there is compliance with the Financial Handbook and the Funding Agreement. The Accounting Officer must advise the board in writing if, at any time, in his or her opinion, any action or policy under consideration by them is incompatible with the terms of the Articles, Funding Agreement or the Financial Handbook.

Trustees have a number of legal duties that must be met in relation to accounting and financial reporting. These include:

  • keeping ‘sufficient’ accounting records to explain all transactions and show the trust’s financial position
  • preparing an annual report and statutory accounts meeting legal requirements, including the EFA’s Accounts Direction (updated annually) and the Statement of Recommended Practice (SoRP) for charity accounts.
  • considering the need for a reserves policy, managing the level of reserves held and the disclosure of any reserves policy in the Trustees’ Annual Report
  • formally approving the Trustees’ Annual Report and accounts at a minuted board meeting
  • ensuring that accounts are subjected to an external audit
  • ensuring that the Trustees’ Annual Report, accounts and annual return are filed on time with the EFA and Companies House.

Financial information should be provided at each trustee meeting which include details of the academy trust’s financial position and performance. The financial information should be sent to each trustee before each meeting and will typically include:

  • the latest management accounts
  • a comparison of budget to actual figures
  • an explanation for variances between forecasts and what actually happened
  • details of cash flow and closing bank balances

The meeting should set aside a specific time within the agenda for discuss of financial matters and allow the trustees to raise any issues of concern.

Systems of internal control

The Funding Agreement contains a range of obligations in relation to accounting and financial records. There is a general obligation to comply with the requirements of the Financial Handbook published from time to time.

The trust’s internal control framework must include arrangements for:

  • co-ordinating the planning and budgeting processes
  • applying discipline in financial management, including managing banking, debt and cash flow, with appropriate segregation of duties
  • preparation of monthly budget monitoring reports
  • ensuring that delegated financial authorities are respected
  • effective planning and oversight of any capital projects
  • the management and oversight of assets
  • the propriety and regularity of financial transactions
  • reducing the risk of fraud and theft
  • ensuring efficiency and value for money in the organisation’s activities
  • a process for independent checking of financial controls, systems, transactions and risks

Executive management and the trust’s staff are responsible for ensuring that the controls put in place by the trustees are implemented. There should be a culture of control embedded in the operations of the organisation; this culture is created by the trustees and senior management, who should lead by example in adhering to the trust’s internal financial controls and good practice.

All academy trusts are now required to include a statement about their governance arrangements in their annual report and accounts and to publish details on their website. New trusts are also required to complete an EFA online financial management and governance self-assessment within 4 months of opening. This includes questions such as:

  1. Has a named individual been designated as the accounting officer and does this person fully understand the duties and responsibilities of the role?
  2. Does the accounting officer, under the guidance of the board, ensure appropriate oversight of financial transactions by having all the trust’s property under the control of the trustees, measures in place to prevent losses or misuse; having bank accounts, financial systems and financial records operated by more than one person; keeping and maintaining full and accurate accounting records; and preparing accruals accounts, giving a true and fair view of the trust’s use of resources, in accordance with existing accounting standards?
  3. Do the board and appropriate committees meet at least three times per year and conduct business only when meetings are quorate?
  4. Does the board receive and consider information about the financial performance of the trust at least three times a year?
  5. Has a chief financial officer, with appropriate qualifications and/or experience, been appointed by the board?
  6. Has the board approved a written scheme of delegation of financial powers that maintains robust internal control arrangements?
  7. Has the board approved a balanced budget for the financial year and has the approval been minuted?
  8. Has the board been made aware of the requirement to obtain approval from EFA where it is considering borrowing funds or entering into liabilities such as leases or tenancies beyond delegated limits?
  9. Has an appropriate internal control framework been established?
  10. Has a contingency and business continuity plan been prepared?
  11. Have the risks arising from your operations been assessed?
  12. Has adequate insurance cover been obtained?
  13. Has the board been informed of the requirement to obtain approval from EFA before making any novel or contentious payments?
  14. Have all trustees completed the register of business and outside interests?
  15. Has the academy trust published on its website the relevant business and pecuniary interests of trustees and members?
  16. Are there measures in place to manage any conflicts of interest?
  17. Has the board approved a competitive tendering policy?
  18. Do senior officers’ payroll arrangements meet tax obligations fully?
  19. Has the board been informed that goods or services provided by individuals or organisations connected to the trust must be provided at ‘no more than cost’, on the basis of an open book agreement and supported by statements of assurance, in accordance with the conditions set out in the Handbook?
  20. Has a set of accounting policies been approved?
  21. Has an external auditor been appointed?
  22. Has an audit committee or a committee that fulfils the functions of an audit committee been established?
  23. Has a process for independent checking of financial controls been implemented?
  24. Has an appropriate committee agreed a programme to address the risks to financial control?
  25. Has the board been informed of the requirement to report to EFA any instances of fraud or theft: above £5,000 against the trust whether by employees, trustees or third parties; or where fraud is unusual or systematic in nature? Full details must be provided in the commentary section where any such fraud or theft has occurred.

EFA Chief Executive Peter Lauener set out further key questions which accounting officers and trustees must be able to answer on an ongoing basis in a letter dated June 2013:

  • Are you confident you are procuring all goods and services in an open and transparent way?
  • Are you ensuring that your cashflow reflects the activity at the trust and that it is properly reconciled at least monthly?
  • Do you have robust controls for payroll arrangements – particularly important in a multi-academy trust – including checks that any amounts paid out are the right amounts and paid to bona fide employees?
  • Do you have appropriate segregation of responsibility in your finance section (i.e. cross-checks and approvals)? And are you providing proper management support to your finance staff to operate in a role where they are well-placed to provide you with a “first line of defence” in terms up upholding propriety, regularity and value for money in the use of public funds?
  • Are you making sure conflicts of interest are avoided and that you are keeping registers of interest up to date?
  • Are you confident senior staff and trustees are not gaining any private or personal commercial or financial benefit as a result of their position, other of course than under their contract of employment?
  • Are you sure that your academy trust is not being exploited for personal/private benefit and that any fees for consultancy work are where appropriate being properly accrued to the academy trust rather than to individuals?
  • Do you have robust procedures for the recording, documenting, evidencing and monitoring of information and especially the reasons for entering into major spending commitments?
  • Do you have properly constituted arrangements for internal audit to give you and trustees a further safeguard that everything is in order?

Combating Fraud

To reduce the risk of fraud, academy trusts are recommended to consider the following actions:

  • ensure anti-fraud and whistleblowing policies are in place and regularly update these and communicate them to staff
  • conduct regular anti-fraud awareness training events for finance staff
  • highlight to staff that they can also contact theEFA with any concerns of possible irregularity or fraud (the EFA publishes financial management and governance reviews on its website)
  • management communications to pursue identified incidents of fraud
  • ensure financial controls are regularly assessed and are well designed and implemented
  • ensure that there is appropriate segregation of duties in your controls
  • review your processes for references and background checks on new employees
  • scrutinise significant business transactions and personal relationships to avoid possible conflicts of interest
  • install a physical security system to protect the trust’s assets

The most common abuses identified by auditors were set out in a National Audit Office report of 2015:

  • misuse of funds by headteachers using academy funds for personal gain
  • inappropriate expense claims for both staff and trustees and unjustified salary increases
  • transactions in breach of the Academies Financial Handbook and not in line with Parliamentary intentions
  • poor oversight of activities of individual schools in a group, or weak controls at the trust level
  • weaknesses in procurement (that is, non-compliance with EU procurement rules, and employment or contracting with related parties, or both)
  • Related-party transactions (that is, whether they have been entered into on an arms-length basis and are in line with the new ‘at cost’ requirement.

The EFA publishes regular reports of investigations it has carried out into financial mismanagement and governance issues on its website.

Next time – How to get your governance right from the outset.


Mark Johnson is a highly experienced independent solicitor & chartered secretary supporting academy trusts, free schools & other education providers with their governance arrangements, legal and compliance matters. He is an independent member of a MAT audit committee. He offers a cost-effective governance review GovernanceCHECK360™ for academy trusts elderflowerlegal.co.uk.

If you would like to be kept up to date on more topics like this, then why not sign up to receive our regular newsletter.

The Hallmarks of Good Governance in Academy Trusts – Part 2

This series of posts examines what good governance in academy trusts looks like and how boards can create a framework to deliver their core purpose and properly discharge their duties. In Part 1, we examined the importance of governance and the role of the Board of an academy trust. In this Part 2 we examine..

The framework for good governance in academy trusts

There are now a wide variety of structures used for academy trusts. All Academies are established as independent companies limited by guarantee with exempt charitable status. The following are the usual key players in the structure (see Figure 1):

Members

Members are akin to the shareholders of the company. They have ultimate control over the academy trust, with the ability to appoint or dismiss some or all of the trustees and the right to amend the trust’s articles of association (subject to approval by the Secretary of State). Unfortunately, in many cases the members are often the same people who sit on the board as trustees. This weakens accountability since there is a danger of creating a self-serving oligarchy. Alive to this risk, the Department now recommends that there are at least 5 members, the majority of whom are not trustees. Employees of the trust cannot be members. In most current structures the role of the members is very muted. The members will meet perhaps once a year to approve the accounts and re-appoint auditors. A truly mature model would allow parents, and even pupils, to exercise the full rights of members. For example, the Cooperative Academy model articles provide for pupils, parents, staff, community and alumni to all become members. In theory, they could exercise their powers to dismiss individual directors, or the whole board. For more on the rights of members see here. The Trust must notify the EFA of the appointment of any new members within 14 days.

Trustees

Persons appointed to sit on the board of the academy trust are both company directors and charity trustees. They are responsible for the operation of the trust. They set the strategic direction and are accountable for finance and academic standards. The trustees have duties under charity law to ensure that the academy complies with its governing document and the law, to take reasonable care that the trust is managed efficiently and effectively, and to ensure that resources are used appropriately and protected for the benefit of the charity. They have duties under Company Law to act in the best interests of the company, to avoid conflicts of interest and to perform their duties diligently, as well as wider duties under the general law for the management and safety of premises, safeguarding, data protection, non-discrimination and under employment law. They also have specific contractual duties to the Secretary of State under the Funding Agreement, such as providing information to the Department, providing places to pupils with SEN, providing free school meals and compliance with the Admissions Code, as well as adhering to the Academies Financial Handbook. Trusts must notify the EFA of the appointment of any new trustee within 14 days. The board may establish sub-committees to manage particular strands of its work, such as finance and risk, audit and internal controls, premises and nominations (recruitment & succession planning), curriculum and pastoral care.

Sponsors

Sometimes there may be one or more external sponsor, which could be another high-performing school, a charity, university, commercial organisation or faith organisation. The sponsor may have a right to appoint members and sometimes trustees, which gives them a degree of influence or control. Usually some form of agreement will be in place with the sponsor setting out the scope of their involvement and the terms on which they may receive start-up grant funding. The Department may insist on a ‘tripartite agreement’ which regulates the sponsor’s ability to charge for services only ‘at cost’.

Secretary of State

Despite the rhetoric about academies enjoying a high degree of autonomy, the Secretary of State (through the Education Funding Agency) enjoys very significant controls over academy trust’s freedom of action: firstly, through the Funding Agreement, which provides a wide range of contractual rights for the Department; and secondly, in its capacity as ‘principal regulator’ of an academy’s trust’s compliance with charity law (functions having been asssigned to her under a Memorandum of Understanding with the Charity Commission).

Local Governing Bodies

The role and powers of a local governing body depend on the precise local arrangements. A multi academy trust which runs several schools may devolve powers and functions to a local governing body based on ‘earned autonomy’ (i.e. better performing schools are able to take more decisions locally, whereas others may be purely ‘advisory bodies’). The details about precisely which functions have been delegated by the trust board should be contained in a clear Scheme of Delegation. Local governing bodies may operate as sub-committees of the Board. Key decisions on big ticket issues such as setting vision, policies, governance procedures, contracts and procurement, health and safety, HR matters, the budget and staffing structures usually sit with trustees at the trust board level. There is discretion over whether the local governing body should have any role in:

  • determining the individual school’s vision ethos and direction
  • recruitment of the Headteacher
  • performance management of Headteacher
  • delegated responsibility for the budget

The Local Governing Body may have delegated authority in relation to:

  • recruitment and performance management of staff, other than the local headteacher
  • monitoring of teaching standards
  • admissions and exclusions
  • Appeals Panels
  • term and holiday dates
  • reporting to parents

The trust board will usually reserve the right to suspend delegation and intervene in the event of falling standards or a serious risk to welfare of children.

Academies Governance Framework

The Department is now considering allowing trusts to either scrap local governing bodies or give them powers to oversee more than one school, with a less prescriptive requirement that the governance of each school should be ‘informed by local intelligence’. This should help remove possible confusion between accountability of local heads and managers to the overall CEO and executive management vs. accountability to local governing bodies. It is important to remember that, even where trustees have given delegated authority for certain functions to local governors or sub-committees, the trustee board as whole remain accountable and responsible for these functions. The ‘buck always stops’ with the board of trustees. It is important that the trust board receives written reports and minutes from sub-committees and local governing body meetings so they have ‘eyes and ears’ on what is happening across the organisation. As the academy trust grows to take in more schools, so the complexity and risk grows: systems and roles may need to evolve. Leaders need to be aware of the organisation’s capabilities and capacity to grow. DfE research (2015) has shown that the key pinch points usually occur when the grouping reaches 5 schools, 11 schools and then 20 schools.

You can read more detail about the governance arrangements and legal duties of trustees of an academy trust in our concise guide.

Getting the documentation right

The main documentation needed to set up the governance framework for an academy trust will include:

  • Articles of Association (largely in the form prescribed by the Department with little flexibility to change)
  • Funding Agreement(s) with Secretary of State
  • Tripartite Agreement with Sponsor and SoS, Letter of Grant, where applicable
  • Standing Orders & Financial Regulations, including Tendering and Procurement Policy
  • Schedule of Reserved Matters for the Board
  • Scheme of Delegation
  • Company Registers (Members, Directors, Secretary, Persons with Significant Control)
  • Minute Books
  • Board Code of Conduct
  • Statutory Policies (e.g. Charging, Behaviour, Sex Education, SEN, Data Protection, Complaints, Health & Safety)
  • Terms of Reference for Board Committees, such as Audit, Finance, Premises and Nominations.
  • Register of Business, Outside Interests & Family connections – which covers members, trustees, local governors and senior leadership team and must be published on the trust’s website
  • Conflicts of Interest Policy
  • Board Induction, Training and Evaluation Procedures
  • Vision, Mission and Values statement
  • Strategy Document (see more)
  • School Development Plan, including defined KPIs to monitor and measure progress, for example on pupil attainment, quality of teaching, pupil wellbeing, staff morale, effectiveness of communication, future aspirations of pupils.
  • (Balanced) Budget
  • Risk Register (see more)
  • Business Continuity Plan
  • Appropriate Insurance Covers
  • External auditor appointment letter (setting out their responsibilities)

As the trust grows, there will inevitably be a need for more sophisticated and standardised processes for governance and oversight, including systems for reporting and analysing performance data, financial planning and control, management, HR, teaching and learning methods.

Next time: we look at stewardship of finances and resources.


Mark Johnson is a highly experienced independent solicitor & chartered secretary supporting academy trusts, free schools & other education providers with their governance arrangements, legal and compliance matters. He is an independent member of a MAT audit committee. He offers a cost-effective governance review GovernanceCHECK360™ for academy trusts elderflowerlegal.co.uk.

If you would like to be kept up to date on more topics like this, then why not sign up to receive our regular newsletter.

The Hallmarks of Good Governance in Academy Trusts

This series of posts examines what effective governance in academy trusts looks like and how boards can create a framework to deliver their core purpose and properly discharge their duties.

With the demise in the role and capacity of local education authorities, England’s state education system is moving inexorably moves towards a school-led system with a diverse landscape of structures, partnerships and institutions entrusted with delivering statutory education with public funds. The need for robust governance and accountability has never been greater. At the same time, schools are subject to so many regulations and reporting requirements, it can be difficult to see the wood for the trees. The spotlight from Government and regulators on sound governance in the education sector has never been stronger. However, trustees face a daunting task in assembling a picture of all the requirements: so in this series of posts we aim to provide a route map, explain and demystify.

What is governance and why is it important?

A system of governance is all about the way organisations are directed, controlled and held accountable to deliver their core purpose over the long-term. The organisation’s structure, practices and procedures should all be organised so that the organisation achieves its core purpose, mission and goals, whilst complying with the law and sound ethical practice.

A sound governance framework will:

  • Set out the shared purpose, vision and values of the trust
  • Enable the trust to develop an agreed strategy to implement the purpose
  • Ensure oversight and monitoring of the organisation’s performance along the way
  • Ensure the organisation remains accountable for delivering its mission.

Positive benefits of good governance in academy trusts include:

  • People will trust and respect the organisation (including pupils, parents, funders, regulators, suppliers and the wider community)
  • The organisation will know where it is going
  • The board will be fully connected with management, the academy’s operations and wider stakeholders
  • Good and timely decisions will be made
  • The board will be better able to identify and manage risks
  • The organisation will avoid mistakes and have greater resilience to cope with problems
  • The organisation should enjoy improved financial stability

Where governance is strong, standards of attainment are likely to be higher because pupils are known and supported to be their best, the quality of teaching is a constant focus of attention, and the leadership of the academy is held to account for the performance and wellbeing of the children.” – Collaborative Academies Trust, 2014.

The pivotal role of the Board

The academy trust’s board is at the epicentre of the system of governance. They must set out the academy’s vision (what the school will look like in 3-5 years time) its values, the shared moral purpose that should run through all the academy’s actions. In most cases, this will be about improving children’s lives through excellent teaching and learning and preparing young people for the challenges of later life.

The model Articles for an academy trust (the main governing document) usually contain an anodyne statement that its object is “to advance for the public benefit education in the United Kingdom…by establishing, maintaining, carrying on, managing and developing a school offering a broad and balanced curriculum.” It therefore falls to the Board to put the flesh on the bones of this and stamp their particular vision and ethos on the trust.

The Department of Education’s view (Governance Handbook, 2015) is that the Board has three core functions:

  1. To ensure clarity of vision, ethos, strategic direction and structure
  2. Hold the Headteacher to account for the educational performance of the school and its pupils and the performance management of its staff;
  3. Oversee the financial performance of the school(s) and make sure money is well spent.

Those are certainly three key strands to the Board’s work, but there is a lot more besides! One of the key challenges for members of an academy trust board is to think and act strategically. The Board should continually review and evaluate the strengths, weaknesses, opportunities and threats and consider how best to play to the organisation’s strengths, or bolster the required competencies. Board members are not there to provide operational oversight or ‘second guess’ the executive managers. Nor are they there to represent or advocate for a particular constituency or interest group. The primary consideration must always be what is best for the pupils. The changing landscape and increasing levels of accountability and responsibility will require high calibre trustees with specific skills and attributes, who are able to step out of their comfort zone to lead school improvement, provide a high level of professional challenge and work as team players on dynamic boards. Running an Academy trust is like running a business, albeit one with a social purpose. Board members must understand that they have corporate collective responsibility and can be personally liable in some circumstances in the event of regulatory action or a legal claim (e.g. breach of trust, accounting irregularities, or negligence leading to personal injury).

The trend now is towards smaller, more strategic and skills-focused board, with less prescriptive structures and a definition of purpose more aligned to the new educational landscape. The National College of Teaching and Learning (Governance of MATs, 2015) has set out the skills and attributes required of trustees. Trustees should:

  • constantly focus on what’s best for the school and pupils by challenging in a constructive manner, asking probing questions, and visualising the strategic picture, in terms of both the trust and the schools within it. See more on developing strategy.
  • understand and effectively carry out their roles, responsibilities and accountabilities, with the ability to take risks and consider dynamic and innovative options
  • be able to analyse data, measure and lead school improvement and drive the necessary changes – useful starting points for monitoring data include the OFSTED data dashboard, Fischer Family Trust Governor dashboard (which measures ‘value added’ by the school based on socioeconomic factors) and the Wellcome Trust Questions for Governors.
  • understand the financial and the business aspects of leading a trust, as well as the legal implications and how the trust and the business work
  • work as part of a team and accept shared responsibility and accountability, as well as undertaking frequent self-evaluation in order to remain effective
  • act with a strong moral purpose, integrity and honesty, and as an advocate for the trust’s values, ethos and philosophy
  • express disagreement in a rational and professional manner
  • adopt an entrepreneurial mind-set in order to see and make the most of opportunities that are outside the day-to-day practices of the trust or schools
  • be innovative, creative and open-minded by engaging in futures thinking and ‘horizon scanning’
  • ensure that they have the commitment and stamina to drive forward the trust, as well as the will to abandon the ‘good’ in order to find the ‘outstanding’.

Composition of the Board

The model Articles state that the number of trustees shall be at least 3, but not subject to any maximum. The Chief Executive / Executive Principal may choose to act as a trustee, but is not obliged to. No more than one third of trustees can be paid employees of the trust. Normally, there must be at least 2 parent trustees (who are parents or carers of a registered pupil at the school) and who are properly elected by parents/ carers. However, (somewhat controversially) in the case of a multi-academy trust, this requirement can be dispensed with, if there is parent representation on local governing bodies. Care must be taken if appointing persons who are employees or councillors of a local authority – their involvement must be kept below 20% of the membership to avoid accounting difficulties.

Beyond that, there is some flexibility to decide the composition of the Board. There will usually be a specified number of trustees appointed by the members and by the external sponsor (if there is one). The Board can co-opt further trustees as it wishes. In practice, trusts have usually adopted one of three models – the traditional model where trustees are drawn from the stakeholder groups such as parents, staff and the community; representation model where there is a group of schools, the board is made up of representatives from each constituent school- the problem is that this can become unwieldy as the group grows and there is potential for inherent conflicts of interest; the third model, usual in sponsored academies, is for the sponsor to appoint the majority of trustees.

The default term of office for a trustee is 4 years, however, trusts may instead opt for retirement by rotation on an annual or bi-annual basis, in which case an annual general meeting of the members may need to be held to deal with appointments. The National Governors Association recommends that Chairs should serve no more than six years and no trustee should serve more than two terms.

The Financial Handbook requires that Board meetings take place at least three times a year (and business can conducted only when quorate), although trusts may consider it appropriate to meet more frequently, particularly in medium-sized and larger trusts with more complex structures, and any undergoing a period of change.

There is no perfect model for the Board, although the trend recently has been toward smaller boards, with an emphasis on getting the right skills mix. The starting point is to get the right people round the table.

Recruitment and succession planning

There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board’ – UK Corporate Governance Code

There are various sources of potential new trustees, including the Chamber of Commerce, local charities or housing trusts, or through organisations such as Academy Ambassadors, SGOSS, Inspiring the Future. It is important to cast the net wide and consider what skills the candidate needs to bring.

Succession planning is a key factor which ensures expertise is shared across the system and prevent boards stagnating or individual trustees or governors gaining too much power and influence. Ideally there should be an annual re-election of Board and committee chairs.

The absence of a succession plan can undermine a company’s effectiveness and its sustainability. It can also be a sign that the trust is not sufficiently clear about its purpose, and the culture and behaviours it wishes to promote in order to deliver its strategy

The Chair’s role is pivotal

The Chair of the academy trust plays a key role in giving the board leadership and direction, ensuing that trustees work as a team and understand their accountability and role in the strategic leadership of the schools and in driving improvements.

The Chair must be able to:

  • Articulate the vision, shape the culture, build a team and attract trustees and local governors with the necessary skills, values and principles, ensuring that tasks are delegated, followed up and accomplished, and who can ensure board members feel that their skills, knowledge and experience are used
  • Develop a positive relationship with the CEO/ Executive Principal as a critical friend offering support, challenge, and encouragement, holding the CEO to account for outcomes across the trust and ensuring there is rigour in the management of their performance
  • Pursue a relentless focus on school improvement – this should be the focus of policy and strategy and scrutiny and challenge by the board and its committees should reflect this
  • Leadership – ensuring that systems are in place to meet statutory obligations, terms of Funding Agreement, value for money from resources that board business is conducted effectively, including effective minute-taking and agendas.

You can read more on the role of the Chair here.

Given the increasing demands on trustees and governors, it perhaps not surprising that HM Chief Inspector of Schools, Sir Michael Wilshaw last November called for Chairs and Vice Chairs to be paid for their work. “The role is so important that amateurish governance will no longer do. Goodwill and good intentions will only go so far,” Wilshaw said. He was also concerned about governors who “lack curiosity” and hold “an overly optimistic view” of how their school was performing.

In all their dealings Academy trustees local governors and the Accounting Officer are expected to adhere to the Nolan Principles of Public Life: selflessness, integrity, objectivity, accountability, openness, honesty, and leadership. See more.

Next time: we will examine the framework of governance in academy trusts.


Mark Johnson is a highly experienced independent solicitor & chartered secretary supporting academy trusts, free schools & other education providers with their governance arrangements, legal and compliance matters. He is an independent member of a MAT audit committee. He offers a cost-effective governance review GovernanceCHECK360™ for academy trusts elderflowerlegal.co.uk.

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What Does an Effective Audit Committee Actually Do? – Part 2

In Part 1 of this post, we considered the role and functions of the audit committee in overseeing risk management and internal controls, and monitoring the effectiveness of internal and external auditors. In this post, we explore the practical arrangements which make the audit committee successful.

Composition of the Audit Committee

The UK Code states that an audit committee should have at least 2 members who are independent non-executive directors (3 for listed companies). (i.e. they are not salaried employees, ex-employees or otherwise in a business relationship with the organisation). Appointments should be made by the Board in consultation with the Audit Committee chair. Usually appointments are made for 3 years, extendable for further periods. At least one member should have ‘recent and relevant financial experience’ and ideally a professional accountancy qualification. The role of the Chair is critical to success of the committee. A good chair will be independently minded, promote open discussion, manage meetings to cover all business and encourage a candid approach from all participants. An interest in and knowledge of financial and risk management, audit, accounting concepts and standards, and the regulatory regime are also essential. A specialism in one of these areas would be an advantage. Outside the formal meetings, the chair will usually meet periodically with the CEO, finance director, external auditor and head of internal audit, as well as the Chair of the Board.

The committee will need access to suitable resources to ensure agendas, board packs are distributed in advance and timely, accurate minutes are prepared. As a matter of good practice, the company secretary should normally act as secretary to the audit committee. Audit committee members must be given suitable induction and ongoing training, which should include understanding of financial statements, application of accounting standards, regulatory and legal developments affecting the organisation’s business, as well as risk management techniques. Internal and external auditors could usefully help with this as part of their retainer.

What makes an effective audit committee?

Recent research by Grant Thornton (Knowing the Ropes, 2015) found that the following qualities are found in effective audit committee members (ranked in order):

  • Ability to ask challenging questions
  • Recent and relevant financial experience
  • Audit experience
  • Ability to think clearly
  • Experience from being an executive team member elsewhere
  • Relevant industry background
  • Good listening skills
  • An eye for detail
  • Experience of other audit committees
  • Team-working skills

The FRC has recently proposed an amendment to its guidelines which recommends the audit committee should include competence relevant to the specific sector in which the organisation operates.

Some key questions which the audit committee should address include:

How do we know that there is a comprehensive process for identifying and evaluating key risks across the organisation and deciding what levels of risk are tolerable?

How do we know that the culture of risk management in the organisation is appropriate and how well people are supported to manage risk well?

How do we know how well the organisation identifies and reviews emerging and novel risks?

How do we know that the internal audit strategy is appropriate to deliver reasonable assurance on risk, controls and governance?

How do we know that accounting policies, financial management, and accounts are highlighting hidden financial risks?

How appropriate are the anti-fraud, whistle-blowing and conflicts of interest policies?

How do we know that management follows up on recommendations by auditors?

How do we know we are being effective in our work as a committee and making an impact on the organisation?

Running the audit committee

The audit committee chair should decide the timing and frequency of committee meetings, and the committee should meet as many times as the role and responsibilities require – typically there will be 3-4 meetings per year. FRC Guidance suggests the following:

  • There should be at least 3 committee meetings per year, timed to coincide with key dates in the financial reporting and audit calendar, for example, to examine the audit plan before it commences, and to review the draft annual report and accounts before approval by the Board; to review the effectiveness of the audit process once it is complete.
  • Sufficient time should be allowed between audit committee meetings and meetings of the main board to allow work arising from the committee to be carried out and reported to the Board as a whole.
  • Only the audit committee chair and members are entitled to attend meetings of the committee. Salaried executives attend by invitation and may be asked to leave for certain items of business. It is usual for the Accounting Officer (usually the CEO) and Finance Director to attend regularly.
  • At least once a year, the audit committee should meet the external and internal auditors, without management being present, to discuss its responsibilities and any issues arising from the audit.
  • Work continues outside of formal meetings, with the Chair keeping in contact with key people such as the Board Chair, CEO , Finance Director, audit lead partner and head of internal audit.

It is very important to have a clear channel of communication between the audit committee and main Board. If the audit committee chair does not sit on the main board, it will be necessary to arrange for the chair of audit to meet with the Board to report on any findings and programme of work carried out. FRC Guidance recommends that the report should cover:

  • Any significant issues found with the financial statements and how these were addressed
  • An assessment of the effectiveness of external audit and recommendations on the selection, reappointment or removal of the auditor
  • Issues where the Board has asked for the audit committee’s opinion

A typical cycle of meetings might be

Meeting 1

  • approval of internal audit plan for following year in conjunction with review of risk register
  • consideration of external audit pre-scoping report
  • review of routine internal audit reports

Meeting 2 

  • presentation of draft accounts and statement of internal control
  • review of external audit report on accounts
  • review of annual internal audit report for year
  • review of other assurance reports for year
  • review of risk register

Meeting 3

  • post audit effectiveness review
  • review of routine internal audit reports
  • review of strategic and operational risk registers
  • ‘deep dive review’ of a key risk area

Meeting 4 

  • review of routine internal audit reports
  • review of risk registers
  • ‘deep dive review’ of a key risk area

Strive for continuous improvement

Audit Committees should assess their performance annually. Typically, this review will cover areas such as reviewing and, if necessary, updating their terms of reference, assessing whether sufficient resources have been deployed to support their activities, the effectiveness of meetings, procedures for induction, training and succession planning,  and the quality and value of internal and external audit activities. An external review can help to bring an independent perspective. The Committee should draw up its own plan for improvement as a result of the self-assessment, either  requesting future training or development for members, or in changes to its processes and procedures.

Final thoughts

Audit Committees have a crucial role to play in the governance of any organisation – unless they report effectively on the relevance and rigour of the underlying structures and processes and on the assurances that the Board receives, the entire governance framework can be compromised. Effective audit committees provide comfort and reassurance to senior managers, ensuring that the organisation has a sound base for growth and protection against nasty surprises. Audit Committee members must therefore take responsibility for scrutinising the risks and controls affecting every aspect of the business. Whilst the role of an Audit Committee member is demanding, it can also be an enriching and rewarding experience.

If you need help in establishing an audit committee, an independent review of its effectiveness or advice on any other aspect of corporate governance, please get in touch.

 


Mark Johnson is an experienced solicitor & chartered company secretary supporting businesses, charities, social enterprises & academy trusts on governance, compliance & legal affairs. He also serves as an independent audit committee member for a leading Multi-Academy Trust. Please get in touch info@elderflowerlegal.co.uk or 01625 260577.

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