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.

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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.

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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.

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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 1 – Role of the Audit Committee

The audit committee makes up one of the three pillars of the Board committee system and forms a critical part of the overall framework of corporate governance for medium to large companies, housing associations, charities, academy trusts and public sector bodies. Experience shows that the role is not an intuitive one and there is often confusion about the purpose of an audit committee.

For example, in a recent Education Funding Agency webinar, a leading accountancy practitioner was asked what is the role of the audit committee in an academy trust? He replied that its job was ‘to manage risk in the organisation’. That may be his perception, but in practice how can this group of usually 3-5 non-executive members possibly have eyes and ears in every corner of the organisation? Do they really have the time and resources to achieve that result? Or is it more a case of providing oversight and ‘reasonable assurances’ to the Board and external stakeholders that appropriate systems and controls are in place? In this piece, I look at the role and functions of the audit committee and share some lessons on what makes it effective.

Why have an audit committee?

In the education sector, all academy trusts with an annual income over £50 million are required by the Financial Handbook to appoint a dedicated audit committee (smaller ones may combine this function with other committee business), under the NHS Codes of Conduct and Accountability and the Monitor Governance Code health trusts are required to establish one, local authorities are required by accounting standards to establish one, the National Housing Federation Governance Code requires that ‘All but small non-developing organisations must have a committee primarily responsible for audit, and arrangements for an effective internal audit function’. Similarly, HM Treasury requires that all government departments, executive agencies and arm’s length bodies should establish an ‘audit and risk assurance committee’. UK listed companies are required by law to have an audit committee.

The UK Corporate Governance Code (widely regarded as the gold standard of best practice) requires that boards should establish formal and transparent arrangements for:

  • Consideration of how they should apply reporting and risk management and principles of internal control; and
  • Maintaining an appropriate relationship with the organisation’s external auditors

These functions are discharged by establishing a formal audit committee with clear terms of reference.

The Board must put in place governance structures and processes to ensure that the organisation operates effectively, meets its strategic objectives and provides the Board with assurance that this is the case. However, even the best structures and processes can let down an organisation if they, and the assurances they provide, are not operated with sufficient rigour. Boards are ultimately responsible for assessing risk, signing off financial statements and the accuracy of public announcements. There can be significant personal liabilities for getting it wrong. Board members need to be reassured that they can rely on the information being presented to them.  Boards look to their audit committee to review and report on the relevance and rigour of the governance structures in place and the assurances the Board receives. The Audit Committee supports the Board in this area by obtaining assurances that controls are working as designed and by challenging poor sources of assurance.

What are the functions of an audit committee?

The UK Code lists the role and responsibilities of an audit committee:

  • To monitor the integrity of the organisation’s financial statements and any formal announcements relating to financial performance
  • To review the organisation’s internal financial controls, internal control and risk management systems
  • To monitor and review the effectiveness of the organisation’s internal audit function (if it has one, and if there is not, annually consider whether there ought to be one in the light of current risks and trends in the market)
  • To make recommendations to the board in relation to the appointment, reappointment or removal of the organisation’s external auditors
  • To approve the remuneration and terms of engagement of the external auditors
  • To review and monitor the independence of the external auditors, as well as the objectivity and effectiveness of the audit process
  • To develop and implement a policy on using external auditors to provide any non-audit services
  • To report to the board on how it has discharged its responsibilities.

The Code recommends that part of the organisation’s annual report should describe the work of the audit committee.

The Financial Reporting Council has published extensive guidance on the role of the audit committee. Of particular note are the following points:

  • The organisation’s management is under an obligation to make sure that the audit committee is kept properly informed and should take the initiative in providing the committee with information instead of waiting to be asked – this is crucial since the audit committee can only work properly if it is kept informed.
  • Whilst the core duties of the audit committee are oversight, assessment and review of systems and functions in the organisation, it is not the duty of the committee itself to carry out those functions or to make or endorse substantive decisions. Executive management prepares financial statements, auditors prepare audit plans. Executive management is responsible for actually managing risk (within the risk appetite and tolerances set by the Board as whole). The audit committee’s role is to provide reasonable assurance to the board and external stakeholders that the functions are being carried out properly. They must flag up issues indentified. FRC guidance recognises that, faced with unsatisfactory explanations by management, the committee may ‘have no alternative but to grapple with the detail and perhaps seek independent advice’. They might also from time to time carry out thematic reviews of known areas of high risk on their own initiative.

In the public sector, HM Treasury sees the role of the audit committee ‘is also to act as the conscience of the organisation’ and to provide insight and constructive challenge where required, for example, on risks arising from increasing constraints on resources, new service delivery models, information flows on risk and control and the general agility of the organisation to respond to new risks.

Oversight of risk management and controls

The effective development and delivery of an organisation’s strategic objectives, its ability to seize new opportunities and to ensure its own long-term survival depend on its identification, understanding of, and response to, the risks it faces. In an earlier post we looked at how boards can develop an effective approach to risk management. Risk appetite is the level of risk that the organisation is willing to take in pursuit of its objectives (it can have ‘upside’ as well as ‘downside’). It is concerned with the amount and types of risk the Board would like the organisation to take without a serious threat to its financial stability – it can be quantified so that prudent limits can be set. Setting that level of risk appetite is a key role for the Board as a whole.

The UK Corporate Governance Code requires that ‘the Board should satisfy itself that appropriate systems are in place to identify, evaluate and manage the significant risks faced by the organisation’. The Board should carry out a review of the effectiveness of risk management systems in the organisation. The work of the audit committee helps to inform this, but it must always be remembered that ‘the buck stops’ with the Board.

An internal control system must be effective in preventing losses arising from risk events, identifying risk events and taking corrective action when they occur. An internal control system is concerned with managing business risks which are largely internal to the organisation. Controls will include the policies, processes, procedures, methods, measures, tasks and behaviours to ensure that operational activities progress effectively. It is designed to provide assurance on the achievement of objectives as follows:

  • Effectiveness and efficiency of operations
  • Reliability of financial reporting
  • Compliance with applicable laws and regulations

Internal controls can be classified into 3 main types:

Preventive controls – intended to prevent an adverse risk event from occurring, e.g. fraud by employees

Detective controls – for detecting risk events when they occur, so that an appropriate person is alerted and corrective action can be taken

Corrective controls – measures for dealing with the consequences of risk events that have occurred.

The various sources of assurance make up what is known as the ‘three lines of defence’:

First line: management assurance from frontline or operational areas;

Second line: oversight of management activity, separate from those responsible for delivery (but still part of management chain);

Third line: independent and objective assurances from internal audit and external bodies.

Together these assurances make up the Assurance Framework.

“The Assurance Framework is the ‘lens’ through which the Board examines the assurances it requires to discharge its duties. The key question Board members need to ask is ‘How do we know what we know?’ The Assurance Framework should provide the answer.” (NHS Audit Committee Handbook 2011).

The role of ‘internal audit’ in assisting the committee

‘Internal audit’s role is to enhance and protect organisational value by providing risk-based and objective assurance, advice and insight’–  Institute of Internal Auditors.

The role of internal audit is to provide independent assurance that an organisation’s risk management, governance and internal control processes are operating effectively. Unlike external auditors, they look beyond financial risks and statements to consider wider issues, such as operational effectiveness, the organisation’s reputation, growth prospects, impact on the environment, dealings with employees and compliance with regulations. The internal audit function can be performed by directly employed staff (with appropriate reporting lines), or alternatively the function can be outsourced to a specialist firm. The scale and frequency of activities really depends on the complexity of the organisation. A properly resourced internal audit function can provide management with valuable objective assurance and advice on risk management and controls. The data and reports produced by internal audit will be valuable data to feed into the audit committee meetings, particularly where they highlight trends or recurring problems which the committee may need to probe more deeply.

In part 2, we will consider the composition of the Audit Committee, how it can manage its business effectively and the qualities to look for in effective members.

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 audit committee member for a leading multi-academy trust. Please get in touch info@elderflowerlegal.co.uk or 01625 260577.

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Trustees’ Duties in Academies & Free Schools

Trustees’ Duties in Academies & Free Schools

‘The landscape of schooling in England has been transformed over the last five years. Academy sponsorship has encouraged and facilitated the contribution of individuals not previously involved in education provision and laid down a challenge to maintained schools to improve or face replacement by the insurgent academy model’– Education Select Committee Report, January 2015.

Academy schools are independent semi-autonomous schools funded by the Government. At the time of writing, out of 21,500 schools in England, there are over 4,464 academy schools, made up of 2,385 primary schools and 2,079 secondary schools. The first academies were born out of the City Technology Colleges: schools outside of local authority control, introduced by the Conservative Government in 1988. The policy was continued by New Labour from 2000 under the ‘City Academy’ label. The momentum really began with the passage of the Coalition Government’s Academies Act in 2010, which paved the way for any school to convert to academy status, including secondary schools, primaries and special schools. The momentum continues under the new Conservative administration. Today, many academy schools are part of multi-academy trusts (federations or clusters of schools supported by a common sponsor). This brings economies of scale, can attract more teaching resources and enhanced funding opportunities.

Free schools are usually new schools formed as academy trusts. Whenever a local authority plans to establish a new school to meet demand for more school places, they must now run a competition and promoters of free schools (often parent-led groups) can put in a bid to establish a free school. This will be a completely new school, often in new or converted premises. There are now more than 400 free schools either open or approved. The new Government has said they will approve 500 more by 2020. Some private fee-paying schools have chosen to become free schools to ensure their continuing viability.

Further types of academies have developed over time, such as studio schools, university technology colleges (UTCs), and cooperative schools. Essentially, these are all variations on the same academy trust model, but with different sizes and a specialist curriculum.

An academy trust is a company limited by guarantee with charitable status. As a company, it has an independent legal identity, can enter into contracts, employ staff and be sued in its own name. It enjoys a fair degree of autonomy (within the constraints set by the Department of Education’s Funding Agreement and Financial Handbook), but the trade-off for this is more responsibility on the managers and trustees to run the school’s affairs prudently and professionally. As a company with ‘exempt charity’ status, the trust and its managers must also comply with duties laid down by company law and charity law.

Converting a school to an academy, setting up a new free school and running the new organisation once it is set up, bring a series of opportunities and challenges. Operating under these new arrangements can be quite a daunting experience at first. Following several recent scandals and press coverage there is now an increased focus on good governance and propriety controls in academies, in particular the need to avoid conflicts of interest and to ensure the proper stewardship of public money. It is important that academy promoters, managers, trustee directors and governors understand their responsibilities and duties.

‘Our particular interest is on leadership in relation to financial management and governance...We must respond to increasing calls for greater transparency. This means we must all be open about who is involved in the governance of our public bodies, including academies and free schools, and how they are run‘ – Peter Lauener, CEO, Education Funding Agency, Sept 2015’

Academies often point to the increased freedoms and financial resources that independence from local authority control brings. With those freedoms comes additional responsibility and accountability. Despite the label of being independent state-funded schools, academy trusts are in fact quite heavily regulated by means of the Funding Agreement with the Secretary of State, OFSTED inspection regime, the extensive accounting and reporting requirements, as well as by general company and charity law. These issues are not insurmountable, but they do require a watchful eye on governance and compliance tasks. Elderflower Legal has produced a new concise guide intended to provide an overview of the key points to be aware of, based on our extensive experience of acting as trusted advisor to academies and free schools.

“Academy trusts should be required to appoint a part-time Company Secretary to ensure probity in decisions around the constitution and powers of Boards and governing bodies.” – Education Select Committee Report, September 2014.

As a trusted advisor to academies and free schools, Elderflower Legal can help guide you through the maze of regulation and compliance and help you to put in place effective governance arrangements which ensure the organisation fulfils its mission effectively, as well as providing reassurance to Board members and wider stakeholders that the academy trust is well-managed. Find out more about services for Academy trusts..

Download your free copy of our Concise Guide to Academies & Free Schools. Please feel free to get in touch to discuss any of the issues raised.

 Mark Johnson is an experienced solicitor and company secretary helping academy trusts, charities and social enterprises to manage risk, ensure good governance and protect their legal position. elderflowerlegal.co.uk
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