Trustee Responsibilities in Higher Education · Getting to grips with Trustee Responsibilities in...

Trustee Responsibilities in Higher EducationA guide for governors

Getting to grips with

Getting to grips with Trustee Responsibilities in Higher Education www.lfhe.ac.uk

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ContentsAcknowledgements 01Overview: Key takeaways 03Chapter one: Introduction 04Chapter two: The legal context for HEIs as charities 07Chapter three: Charitable objects, purposes and public benefit 11Chapter four: Key duties of HEI trustees 16Chapter five: HEI trustee board reporting 22Chapter six: The HEI trustee board and trustee relationships 28Chapter seven: HEI trustee boards and finance 32Wider reading 40

AcknowledgmentsThis guide has been written by Dr Adam Dawkins, head of governance and secretary to the board, Northumbria University.

We are grateful to all those who have given generously of their time, knowledge and enthusiasm in the development of this guide. Particular thanks are due to the following for reviewing drafts of this guide:

Aaron Porter, associate director (governance), Leadership Foundation for Higher Education

David Williams, governance adviser, Leadership Foundation for Higher Education

Julian Knight, assurance consultant, Higher Education Funding Council for England

John Rushforth, executive secretary, Committee of University Chairs

Smita Jamdar, partner, Shakespeare Martineau

I would also like to take the opportunity to thank Dr Adam Dawkins for his work.


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Higher Education institutions are complex organisations, and the majority of UK higher education institutions are also charities and this brings a raft of benefits and responsibilities. As a result, these governing bodies have a number of obligations and individual governors will in addition have trustee responsibilities. I am therefore delighted to write this foreword for the latest guide in our ever popular Getting to Grips for governors series on ‘Trustee Responsibilities in Higher Education’.

There has been much made of the changing more competitive landscape in higher education however it is crucial that we do not lose sight of our charitable obligations and our trustee responsibilities.

The Getting to Grips series, has proven to be a highly accessible format which is expressly for the attention of governors. The series aims to brief you on the higher education context, to help you consider your responsibilities, and to reflect on practice. The guide will explain how governors can comply with the requirements placed on them in all instances, with the prevailing form being exempt charities. We also explore the nature of ‘public benefit’, your core duties under charity law and regulation, personal liability and the nature of assurance that should be sought from senior management.

The materials are intended to be used in different ways: as resources for individual governors; by higher education institutions to support your in-house governor development; or as web-based materials (see www.lfhe.ac.uk/governance). Trustee Responsibilities does not consider broader issues concerning the overall responsibilities of governors and how their effectiveness might be determined, these need to be addressed more holistically alongside other materials and resources.

I would also like to take the opportunity to thank Dr Adam Dawkins of Northumbria University, for his work in writing this document. I am delighted to commend this guide to you, and hope you will find it useful to further understand your trustee role as part of your journey as a governor in the higher education sector. n

Foreword Gillian Camm, Chair, Leadership Foundation for Higher Education

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Overview: key takeaways


y The majority of higher education institutions (HEIs) covered in this guide are exempt charities. Exempt-charity HEIs have broadly the same obligations under charity law as those HEIs registered directly with the relevant charity regulator. A minority of HEIs in England, and all in Wales, Scotland and Northern Ireland, are directly registered charities. (Chapter Two)

y The trustees of an HEI’s governing body will benefit from understanding which legal form their HEI takes and its governing instrument, and what its core charitable purpose in the “advancement of education” means in practice. (Chapters Two and Three)

y Governing bodies that observe the CUC Higher Education Code of Governance (2014) requirement that trustees “must comply with legislation governing charities and case law” (1.4), and adhere to their HEI’s governing instrument and relevant funding council regulation, are unlikely to breach charity law

y The nature of “public benefit” delivered by HEIs through the advancement of education needs to be understood by, and publicly disclosed on behalf of, the HEI trustee board (Chapters Three and Five). Students constitute an acceptable section of the “public” to satisfy the public benefit criteria of the charity regulators. (Chapter Three)

y Understanding their core duties under charity law and regulation is a key responsibility of an HEI’s trustees, in the context of the HEI’s and governing body’s powers as set out in the governing instrument. Alongside this, trustees may refer to The Essential Trustee guidance on the Charity Commission website and equivalent guidance from the Northern Ireland and Scottish charity regulators. (Chapter Four)

y The personal liability of HEI trustees for breaches of trust or duty in undertaking their role would be rare, providing that the trustees have acted with reasonable skill and care, and in the best interests of the HEI. Most HEIs have directors’ and officers’ insurance in place, which, in most instances, indemnifies trustees against mistakes made or omissions in undertaking their duties. (Chapter Four)

y The trustee board may wish to seek assurance from senior management that “serious incidents” as defined in charity regulation are reported to the governing body, appropriately managed and responded to, and establish controls to reduce the risk of recurrence. This includes ensuring such incidents are reported by senior management to either or both of the relevant principal regulator and charity regulator, as appropriate. (Chapter Five)

y HEI trustees will benefit from a general understanding of institutional activities that are, or may be, non-charitable, and how these could be legally structured to avoid compromising or bringing into question the HEI’s charitable status. (Chapter Six)

y All HEI trustees are of equal status in performing their trustee role. The general responsibilities and rights of HEI trustees is no greater or lesser between membership classes or categories on an HEI’s governing body. (Chapter Six)

y Trustee boards will benefit from an understanding of the key features of an HEI’s finances as it links to its charitable status and responsibilities. This includes the different types of endowments held by the HEI, the acquisition, disposal or leasing of land or property and fundraising. (Chapter Seven)

y The remuneration of HEI trustees for undertaking this role is permitted under charity law, subject to the HEI having the authority to do so, concluding that it is in its best interests, and that the level of any payment made is reasonable for the duties undertaken. (Chapter Seven)

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01Introduction

Scope of the guideThis Getting to Grips Guide focuses on trustee duties and responsibilities for those individuals serving on the council, board of governors, courts1 (in the Scottish institutions) or other name for the governing body as the “trustee board”2 of a higher education institution (HEI) with charitable status in England, Wales, Scotland or Northern Ireland. The guide places specific trustee obligations in the context of charity legislation, regulation and HEIs’ governing instruments.

Successive higher education codes of governance and funding council regulation have been consistent in confirming the status of HEI governing bodies as “unambiguously and collectively accountable for institutional activities, taking all final decisions on matters of fundamental concern within its remit”.3 This includes ultimate accountability for the safeguarding of assets, financial sustainability, educational character (in the post-1992s), staff terms and conditions, the appointment and, if necessary, removal of the vice-chancellor or principal or the secretary or clerk. However, the guide is not an exhaustive exploration of the wider legal and fiduciary roles and responsibilities of council members or governors serving on HEI governing bodies.

Despite this caveat, it is not always meaningful, or even possible, to separate out or ringfence the charity-related aspects of trustee duties from a wider set of governor or council member duties. To illustrate, the core charitable purpose of HEIs is the “advancement of education” which encompasses student “beneficiaries”, as a section of the “public”, and other stakeholder groups benefiting from an HEI’s educational influence and reach, including research created and disseminated. Given that students are core beneficiaries of an HEI’s activities, more than ever trustee boards will be expected to be more student-centred in their oversight of the HEI in light of the Higher Education and Research Act 2017 and its impact on the regulatory architecture and role for the higher education sector.

Despite a shift in expectations placed on HEI governing bodies, what still holds is the distinction between governance and management, and a “noses in, fingers out” role for HEI trustees. Recognising this paramount principle of corporate governance, the guide contains information on areas including reporting on the public benefit of HEIs, and financial considerations linked to their charitable status. These are intended as reference points for HEI trustees in developing a general understanding of these topics in the context of overseeing the HEI as a charity.

The intention of the author and the Leadership Foundation is that the guide is accurate and contains up-to-date information at the point of publication. The guide is not a substitute for trustee boards or an HEI’s senior management team engaging their own external legal or policy advice on topics covered in the guide.

The guide covers trustee arrangements in the funded and regulated HEI sector in England, Wales, Scotland and Northern Ireland. Where relevant, distinctions are made between different arrangements across the four administrations. However, for practical purposes, given that the English higher education sector comprises the majority (approximately 80%) of HEIs in the UK higher education sector, charity legislation and regulation as applied to England forms the main reference point in this guide. The four nations have more in common than not in relation to the core principles of charity law, including only minor differences in the charitable purposes set out in law, and equivalent requirements that charities demonstrate that they operate for the “public benefit”.

1 The “courts” established by a number of predominantly pre-1992 HEIs in England as a conduit for wider civic and community engagement do not constitute governing bodies. 2 Chapter Seven refers to endowments which HEI trustees may be responsible for administering. However, the “trustee board” means the governing body unless otherwise stated. 3 The Scottish Code of Good Higher Education Governance similarly describes the governing body as “unambiguously and collectively responsible for overseeing the institution’s activities” (July 2013, 3).

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The guide is an accessible reference tool for HEI trustees seeking information and practical guidance and resources on charity law and regulation as applied to the role of the trustee board. Information is provided which will also be helpful to senior management, including vice-chancellors or principals and teams in discharging their executive responsibilities and interactions with the governing body. For example, Chapters Two and Three address the responsibilities of trustees as set out in charity regulation and the governing instruments of HEIs, which may be informative to senior managers in navigating their duties and how these are distinct from trustee duties. This distinction will be particularly relevant to the vice-chancellor or principal in negotiating the dual roles of chief academic, executive and accountable officer, and being a trustee in their own right. Chapter Seven addresses aspects of an HEI’s finances as these pertain to charity law and regulation, which may provide guidance for senior management in presenting business proposals to the trustee board, and supporting trustees in delivering their obligations in this regard.

All chapters contain information to support secretaries and clerks of governing bodies. To illustrate, Chapter Five is intended to help steer the secretary or clerk in ensuring reporting to the trustee board from senior management and the governing body sub-committees is effective. Chapter Six is aimed at supporting these role-holders in their advisory role to the chair, the trustee body as a whole, and facilitating effective trustee relationships with each other, senior management and other bodies. The guide may be reference point for delivery of induction and ongoing development sessions for trustees.

Setting the scene: HEIs and “charity”The Charitable Uses Act 1601 in England, also known as the Statute of Elizabeth, is regarded as the foundation for defining charitable purposes, unchanged until the legislative reforms of the last decade or so. The preamble to the 1601 Act identifies “Schollers of Universities” as worthy beneficiaries of charitable giving. Over time, the offering of scholarships or board and lodgings for scholars grew into greater acts of philanthropy, and was influential in the establishment of a number of the Oxford and Cambridge colleges.

The founding, and subsequent growth and development, of many HEIs is linked to acts of philanthropy pre-dating the statutory recognition of HEIs as charities. Many of the redbrick and civic HEIs of the 19th century can trace their roots to the rise of “industrial paternalism” (Moon, 2014) and the philanthropy of entrepreneurs seeking to extend educational opportunities for mercantile and other groups in the provinces. The historian Jill Pellew (2013) charts the patronage of local business families through substantial donations in the form of land, buildings and endowment in the founding of several now major universities. The key role of the Wills family as tobacco manufacturers and investors in founding Bristol University, or the contribution of the Palmers family (of the Huntley and Palmers biscuit dynasty) to the establishment of Reading University represent major instances of charitable giving. These business-entrepreneur benefactors of “non-conformist stock” (Pellew, 2013b: 203), expanded educational opportunities and higher education beyond Oxbridge and London. Perhaps the most famous example is that of retail chemist Sir Jesse Boot, who was instrumental in the development of the first University College Nottingham. Starting with a £1 gift to support the College Prize Fund, Boot gave a £50k legacy and donated Highfields Park, now home to the university’s main campus, to support the growth of what is now the major global institution we know as Nottingham University. Philanthropic giving has also been linked to trusteeship at the level of the governing body for the 19th-century civic institutions of higher learning founded during this period. As well as the examples provided, the early incarnations of Newcastle, Leeds, Sheffield, Birmingham, Dundee and Liverpool universities played a “major role in soliciting funds from private benefactors (some of whom were themselves lay members of court or councils” (Moodie and Eustace, 1974, 30) which drove their development into the major HEIs they are today.

At a time when the income mix for HEIs is shifting and volatile as a result of reduced government funding of the sector and an increase in quasi-private tuition fee revenue, it is easy to forget that “until the introduction of the post-1945 welfare state, private contributions towards English institutions of higher education were both generous and essential” (Pellew,2013b:203). An HEI’s fundraising - including through charitable giving - is therefore likely to become a more important contributor to its revenue, as is the case for many of the well-endowed US universities and colleges. Many UK HEIs are improving their performance in securing major funds and gifts. Fundraising success is no longer the preserve of Oxbridge and the most prestigious pre-1992 HEIs, as all HEIs foster and build on existing links and meaningful relationships with influential and high net-worth individuals, such as De Montfort University’s work with the Sunwah Foundation and the multi-million pound endowment given through it to support a number of strategic initiatives at the university, including help to establish the Dr Jonathan KS Choi Business School. Charitable endowments in the higher education sector and the role of trustees in their oversight will be discussed in more detail in Chapter Seven.

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However, philanthropic giving to HEIs requires sensitive considerations to be made on behalf of the receiving institution, responsibility for which ultimately rests with the governing body. Several high-profile donations made to HEIs have been associated with controversy, which may surface many decades after such legacies were first established. For example, Cecil Rhodes, financier and diamond entrepreneur, left £6m to the University of Oxford as an enduring legacy to fund Rhodes scholarships. These have been contentious at different points in their history due to a strict application of the original eligibility criteria set by the benefactor that excluded women and black Africans. This is no longer the case but the recent controversy surrounding a statue of Rhodes at Oriel College and its call by some to be removed as a redundant symbol of empire, point to the political and moral hazards of accepting charitable donations. The importance of governing body oversight of major charitable donations solicited and accepted on behalf of an HEI was recommended in the Woolf Report (2011). The report identified the lack of information provided to the council of the London School of Economics (LSE), and insufficient scrutiny by LSE’s council and leadership to satisfy itself that appropriate due diligence had been undertaken, and conflicts of interest flagged and resolved, on the source of a £1.5m gift offered to the School through the foundation of recent PhD alumnus, Said Gaddafi. The Woolf recommendations led to many HEIs strengthening their governance and policy framework in this area, including the role of development committees and ethics frameworks for reviewing and accepting donations. n

The Charitable Uses Act 1601 in England,

also known as the Statute of Elizabeth, is regarded as the

foundation for defining charitable purposes.

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02 The legal context for HEIs as charities

Charity trustees are defined in s97 (1) of the Charities Act 1993 as “the persons having the general control and management of the administration of a charity”. This definition does little to explain what it means in practice to be a trustee. The most relevant reference points are the duties of trustees as set out in the relevant charity regulator’s guidance (eg the Charity Commission for England and Wales), and the Higher Education Funding Council for England (Hefce) Memorandum of Assurance and Accountability with HEIs (2016). While it does not define the role of “trustee”,4 the Hefce memorandum states that as trustees, governing body members “must apply the HEI’s charitable assets for the charitable purposes of the HEI”. How this might be interpreted and applied by HEI trustee boards will feature throughout this guide.

HEI trustees are likely to benefit from a broad understanding of the legislation regarding “charitable purposes” and “public benefit”, how it has evolved and how it is applied in delivering an HEI’s “objects”, and the obligations of the governing body in this regard.

No HEI falling under the regulation of any of the higher education funding councils within the UK higher education sector takes for its principal structure any of the following charity legal forms: an unincorporated association (which does not have a legal personality and therefore could expose trustees to unlimited liability), a trust5, a charitable incorporated organisation (CIO), or the SCIO as the Scottish equivalent.6 However, there are a number of HEIs which are directly registered charities and private companies limited by guarantee, which is a model adopted by many large to medium-sized charities wishing to secure limited liability for trustees.

The reasons most HEIs in the UK have different legal structures is based on their diverse histories and origins, or landmark legislation. While these factors pre-date the major changes in charity law affecting HEIs, the three main legal forms adopted by the majority of HEIs are wholly compatible with an HEIs’ status as a charity. These are:

y Chartered corporations formed through the granting of a Royal Charter by the Privy Council7, which is the model for the majority of pre-1992 HEIs.

y Higher education corporations (HECs) established by the Education Reform Act (ERA) 1988 as designated statutory HEIs, independent of the local authorities from which they separated. These were granted university status following the passing of the Further and Higher Education Act (FHEA) 1992. This explains the prefix, ‘post-1992’ for a significant segment of the sector.

y Companies limited by guarantee is a form adopted by a number of HEIs, including the former London polytechnics when they separated under the 1992 legislation from the relevant borough control such as London Southbank and Greenwich universities, and many small, specialist institutions. All companies limited by guarantee are subject to the Companies Act 2006 and Companies House registration and filing.8

Key charity legislationFrom the Charitable Uses Act 1601 onwards, the most relevant recent key legislation is the:

y Charities Acts 1992 and 1993 – the latter provides a definition of charity trustees.

y Charities Act 2006 (and the Charities and Trustees Investment (Scotland) Act 2005).

y Charities Act 2011.

4 While this guide is UK centred, a wider definition which goes beyond the technical duties of the trustee roles is useful. In the US, the Association of Governing Bodies (AGB) of HEIs and Colleges defines HEI trusteeship as that which: captures the idea of reliable citizens (and not the government) who are entrusted with holding an institution’s cross-generational future in their hands. 5 HEIs may have relationships with trusts and be responsible for their administration, which may include trustees appointed from the HEI’s trustee board. 6 The CIO was brought into law as a newly designated form in the Charities Act 2006 and which became available for use in 2013. This provides a single route of accountability to the Charity Commission (without dual reporting to Companies House). A Scottish Charitable Incorporated Organisation (SCIO) was established under the Charities and Trustee Investment (Scotland) Act 2005.

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The 2006 Act represented a major overhaul of charity legislation in England and Wales in devising a new set of charitable purposes, the principle of charities performing a “public benefit” and new rules for the regulation of exempt charities, each of which is relevant to HEIs. However, the 2011 Act will be the most common reference point in this guide as it incorporates and supersedes many of the provisions in the 2006 Act.

It is not until the 2006 Act that charitable activities moved beyond case law into statute. Prior to this point, the four key charitable purposes set out in the 1601 legislation had stood the test of time: the relief of poverty, the advancement of education, the advancement of religion and the catch-all “other purposes” beneficial to the community. Section 2 of the 2006 Act codified an expanded menu of 13 charitable purposes, at least one of which needed to be satisfied for a body to qualify as a charity in England and Wales:

y The prevention or relief of poverty.

y The advancement of education.

y The advancement of religion.

y The advancement of health or the saving of lives.

y The advancement of citizenship or community development.

y The advancement of the arts, culture, heritage or science.

y The advancement of amateur sport.

y The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity.

y The advancement of environmental protection or improvement.

y The relief of those in need because of youth, age, ill-health, disability, financial hardship or other disadvantage.

y The advancement of animal welfare.

y The promotion of the efficiency of the armed forces of the Crown or of the efficiency of the police, fire and rescue services or ambulance services or

y any other purposes recognised as charitable under the law before the 2006 Act, or analogous to or within the spirit of existing charitable purposes.

While the 13 charitable purposes in the 2006 Act remained the same in the 2011 Act, a number of the definitions were expanded. However, the principal change in the 2011 legislation was the need for charities to demonstrate that they deliver public benefit linked to one or more of the charitable purposes. While this had always been an assumed, it was not until the 2006 Act that it became an explicit requirement. Chapter Three will address the different purposes, how these might apply to HEIs, and how trustees boards have regard to delivery of the purposes for the “public benefit”.

The Charities and Trustees Investment (Scotland) Act 2005 introduced 16 largely equivalent charitable purposes of Scottish charities, delivery of which would satisfy the “charity test”. The Charities Act (2008) (as amended) for Northern Ireland introduced 12 charitable purposes.

The broadest and most relevant of the purposes to HEIs, which is common to the 2006 Act in England and Wales, the 2005 Act in Scotland and the 2008 Act in Northern Ireland, is the “the advancement of education”. How this object is interpreted through reference to the governing instruments of HEIs, which in most cases will pre-date the charity legislation, will be covered in Chapter Three.

7 A number of HEIs granted Royal Charters may initially have been established by Act of Parliament, or subject to subsequent Acts of Parliament amending their structure and powers. 8 The majority of HEIs designated as private universities or “alternative providers” operating within the UK higher education sector are private limited companies with a share capital and are therefore able to generate profits, often forming part of a wider global group structure, such as Kaplan University or BPP University Limited. These organisations by virtue of their legal status and profit motivation are not eligible to be charitable entities.

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Directly registered HEI charitiesThe Charity Commission for England and Wales is a non-ministerial government department responsible for the regulation of charities, which includes the minority of HEIs within its jurisdiction directly registered with it. Outside of England, charity regulatory oversight of HEIs is as follows:

y The nine HEIs in Wales9 are directly registered with the Charity Commission for England and Wales, with Cardiff HEI being the first to register from among this group in 2010.

y All Scottish HEIs are directly registered with the Office of the Scottish Charity Regulator (OSCR), formed following the passing of the 2005 Act in Scotland.

y In Northern Ireland, the two HEIs (and the HEI colleges associated with Queen’s Belfast) are classed as “deemed” charities, overseen by the Charity Commission for Northern Ireland from the point at which the Commission began charity registration in late 2013. Both Northern Ireland HEIs and their associated colleges are now registered with the Commission.

HEIs that are directly registered charities, as with many of their exempt counterparts, are large organisations relative to most charitable organisations in terms of income and expenditure. For example, Cardiff HEI is listed as the ninth largest charity on the Charity Commission’s entire register, based on annual income of almost £500m, and the seventh largest based on charitable spend.

“Exempt” charitiesThe majority of HEIs in England are exempt charities as per Schedule 2 of the Charities Act 1993 and section 22(1) of the 2011 Act. This means that these HEIs hold charitable status and are required to comply with charity law, but are not required to register with the Charity Commission and fulfil its associated reporting and filing requirements. Part 3 of the Charities Act 2011 identifies principal regulators as “any body or Minister of the Crown” having direct oversight of exempt charities on behalf of the Charity Commission, and “must do all that the body…reasonably can to meet the compliance objective in relation to the charity” and the trustees’ obligations (s26 2-3). In the case of England, since 1 June 2012 Hefce has performed the role of “principal regulator” of exempt-charity HEIs. Of the 131 HEIs that are charities in receipt of Hefce funding, 105 are exempt charities, with the remaining 18 registered directly with the Charity Commission.10 The majority of trustee boards in the English higher education sector will therefore have no direct reporting relationship with the Charity Commission as this is satisfied through reporting to Hefce, and the public disclosures made by each HEI.

Hefce’s dual role as funder and regulator of exempt-charity HEIs was identified as a potential conflict of interest at the time that potential principal regulators for the English higher education sector were being debated. However, any conflict was considered outweighed by the reduction in regulatory burden for HEIs in removing the need to report directly to the Charity Commission, or to an alternative regulator identified or established to oversee them.11

A memorandum is in place between the Charity Commission and Hefce to clarify their respective roles and responsibilities including risk-based regulation, information sharing, the locus of responsibility for investigation and sanction where causes of concern are upheld.

A number of HEIs and higher education-related bodies lost their exempt status in the 2006 Act, including the HEIs in Wales and the autonomous colleges and halls of Oxford, Cambridge and Durham (which had enjoyed this status since at least the Charities Act 1960). Students’ unions were also affected. This required each of these students’ unions to register with the Charity Commission. The reason for this is “that it was not possible to identify an acceptable principal regulator for them” (Bates, Wells and Braithwaite, 2016, 63). This is with the exception of the unions of small, specialist HEIs holding “excepted” charity status. See Chapter Six of this guide.

09 The HEI of Wales will incorporate as part of HEI of Wales Trinity Saint David in 2017. The Open HEI in Wales is not included in this figure 10 Information extracted taken in February 2017 from the Hefce website: www.hefce.ac.uk/reg/charityreg/charinfo 11 As a comparative example, Universities Australia lobbied the Australian Charities and Not For Profit Commission (ACNC) to gain exemption for its 39 HEI members from reporting to both the funding regulator and registration with the ACNC following the passing of the Charities Act 2013.

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Other charity legislation and the interplay between charity legislation and other lawsThe Charities (Protection and Social Investment Act) 2016 is signposted in Chapters Five and Seven in relation to revised criteria for the disqualification of trustees and changes to fundraising regulation.

The Equality Act 2010 is an important piece of legislation in resonating with both the substance but the spirit of charity law as applied to HEIs, and HEI trustees are likely to be familiar with its key obligations. All HEIs designated as public authorities, irrespective of which legal form is adopted, are statutorily obliged to comply with the public sector equality duty introduced by the Act to address socio-economic equalities and the nine “protected characteristics”. Ensuring that students – as the direct beneficiaries of HEIs – and staff, visitors and partnership bodies are not discriminated against on the grounds of any of the protected characteristics, is a core responsibility with which trustees need to ensure compliance. Arguably, HEIs have an obligation to surpass legal compliance, and “promote equality and diversity” as a feature of one of the charitable purposes under the 2006 and 2011 charities acts. In turn, integral to the advancement of education purpose is the role of HEIs in reducing social inequalities by opening access to higher education and transforming the life chances of individuals, including those from less advantaged backgrounds. n

The majority of HEIs in England are exempt charities.

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03 Charitable objects, purposes and public benefit

Governing bodies that observe the CUC Higher Education Code of Governance (2014) requirement that trustees “must comply with legislation governing charities and case law” (1.4), and that adhere to the HEI’s governing instrument and relevant funding council regulation, are unlikely to breach charity law. The purpose of this chapter is to provide information to HEI trustees on how charitable objects and purposes are defined, and how these might be pursued to deliver the public benefit and pass the “charity test”. Satisfying this test allows registration with, or oversight by a principal regulator on behalf of, the relevant charity regulator and the range of benefits holding this status brings. This will support HEI trustees in interpreting and assessing how their HEI’s core object - the advancement of education - is fulfilled.

The Charity Commission defines a charity’s objects as its statement of purposes set out in its constitutional document. The OSCR, which oversees a similar system in Scotland based on the 2005 Act, describes the charitable purposes neatly as “what your organisation has been set up to achieve, and should reflect its broad aims, not the detailed individual activities it carries out on a day to day basis”. In line with charity law in England and Wales, legislation in Scotland and Northern Ireland requires a charity’s objects to be exclusively charitable – that is those purposes which are integral to its fundamental purpose and aims, and without which its mission would not be achieved, or would be fundamentally different. This does not mean that the charity cannot undertake other activities. Some activities undertaken may be closely linked and “incidental” to the delivery of its core charitable purposes, while others may be non-charitable, such as non-educational commercial pursuits to generate revenue. Ways in which HEIs can manage their non-charitable activities will be addressed in Chapter Six.

Trustees will wish to have a basic understanding of the section in the charter and statutes (in the pre-1992 HEIs), instrument and articles of government, or articles of association on their HEI’s “powers”. The governing instrument sets out the powers of the governing body, the vice-chancellor or principal, and the academic board or senate. This is important for a number of reasons, including ensuring the governing body operates within its legal powers on behalf of the HEI. However, it is specifically important in the context of charity law, as this is where the objects of the HEI are set out. The language used may not always mirror or borrow from the terminology used in the charity legislation, as the constitution of HEIs in most cases pre-dates this legislation. This is a position accepted by the charity regulators but it does not abdicate trustee boards from being responsible for ensuring that the HEI delivers its core purposes as charitable ones, and having regard to the public benefit requirements of the 2011 Act. The three most common legal structures under which the majority of HEIs in the UK higher education sector are formed, and through which these HEIs derive their charitable status - the chartered corporation, higher education corporations (HECs) as statutory HEIs, and a minority of companies limited by guarantee - will now be discussed. The distinctions between the legal powers of the three legal forms and their governing bodies are helpfully summarised in Farrington and Palfreyman (2006, 2012) and will not be discussed here, in order to focus instead on the common charitable purposes they share.

Chartered corporationsChartered corporations are a way of incorporating a body or organisation under law. The majority of pre-1992 HEIs have been granted a Royal Charter by the Privy Council, from Cambridge and Oxford in the 13th century through to those universities formed in the 19th and 20th centuries. Doing so means satisfying a range of criteria set down by the Privy Council. This includes the need to demonstrate why being granted a Royal Charter would be in the “public interest”. This is different from, but linked to, satisfying the “public benefit” test for charities, as will be discussed at the end of this chapter. Many organisations granted a Royal Charter are also charities, such as the British Red Cross Society, and the majority of chartered HEIs hold this dual status.12

12 The University of Law, as an alternative provider, is an example of an HEI granted a Royal Charter that does not hold charitable status.

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The majority of pre-1992 HEIs set out their “objects”, and use similar wording in the charitable purposes (variations of the “advancement of education” purpose). Some examples drawn from the charters of pre-1992 HEIs include:

y “The advancement and dissemination of learning and knowledge by teaching and research” (Open University).

y “To provide the highest specialised instruction and the most advanced training, education, research and scholarship in science, technology and medicine” (Imperial College).

y “To advance education, knowledge and wisdom by research, scholarship, learning and teaching for the benefit of individuals and society at large” (Manchester University).

y “To advance knowledge, wisdom and understanding by teaching and research and by the example and influence of its corporate life” (Lancaster University).

A number of HEIs which have modernised their governing instruments have used this as an opportunity to couple charitable purposes with public benefit, to remove any doubt about their charitable role:

“The Objects of the HEI are to engage in and promote scholarship, education and research and such other activities as are necessary or desirable to support these Objects, for the public benefit” (Reading University, draft revised Charter, s.1.1).

In January 2016, Bristol University successfully petitioned the Privy Council to rename its council as the board of trustees as part of a wider governance review and amendment of its charter and statutes, with the aim of aiding transparency and reflecting the regulatory reality of its most senior corporate governance body.

Higher education corporations (HECs)The instrument and articles governing the constitution and conduct of the higher education corporations (HECs) formed under the Education Reform Act (ERA) 1998 do not refer explicitly to the objects, or the charitable basis of this. Hefce guidance states that “the objects of a higher education corporation can be inferred” from section 124 of the ERA 1988, including “to provide higher education”, “to provide further education” and “to carry out research and to publish the results of the research”. It is reasonable to infer that these represent “powers in the nature of objects” and are charitable purposes given the focus on advancing education.

Companies limited by guarantee13

A number of HEIs in the sector are companies limited by guarantee, including many of the former London polytechnics, and are therefore also subject to company legislation, namely the Companies Act 2006. One of the core objects listed in the articles of association as the governing instrument of the companies limited by guarantee may include “to advance learning and knowledge in all their aspects and to provided industrial, commercial, scientific, technological, social, culture and professional education and training” (London South Bank University). A number of HEIs which are companies limited by guarantee do not hold exempt charity status, and are registered with the Charity Commission, including small, specialist institutions such as the conservatoires for music and/or drama, and those HEIs in the Cathedrals Group.

Charitable purposesThis section will look at the charitable purposes of HEIs in more detail. As addressed in Chapter Two, the 2006 and 2011 Acts set out a series of 13 “descriptions of purposes” and the latter removed the presumption that charitable purposes are automatically delivered for the public benefit, with the need for a public benefit test under the Act. This is particularly important for HEIs, where the advancement of education had been assumed under law prior to the change in legislation to be an automatic benefit to a range of beneficiaries, as had the advancement of religion (which remains part of the charitable purposes of a small number of HEIs).

13 The Royal Agricultural HEI (RAU) is distinctive in the not for profit higher education sector in being a limited company with a “share capital”.

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The advancement of educationThe objects and activities of most HEIs fall firmly within the “advancement of education” charitable purpose. The Charity Commission elaborates on areas of coverage that would ordinarily fall within this definition, including delivery of formal programmes of education, less structured education delivered in work-based or community settings, vocational training, and publishing and communicating the results of research. An anticipated outcome for learners is the development of individual capabilities, competences, skills and understanding as a wider part of the learning journey and student experience, and mentoring and coaching. Educational outreach and community engagement activities, such as with schools and colleges, are also components of this charitable purpose. Developing critical reflection and other higher level skills as a learning outcome of higher education provision means that HEIs would readily satisfy the Charity Commission requirement that education should go beyond the imparting of information, to develop “an individual’s intellectual, physical, emotional and spiritual capabilities” (Charity Commission: The Advancement of Education for the Public Benefit students and other participants as beneficiaries, 13). The role of an HEI’s trustees in ensuring this happens is necessarily limited, but the trustee board will seek assurance from the senate or academic board on the quality and standards of the education offered as part of its role in protecting “the collective student interest through good governance” (CUC Higher Education Code of Governance 2014). Alongside this is the regulatory responsibility under Annual Provider Review (APR) for the governing body of HEIs in England to assess the effectiveness of mechanisms and methodologies to maintain and enhance the student experience and outcomes.

Advancing education versus promoting a particular point of viewThe Charity Commission guidance expects that education deemed to be fulfilling a charitable purpose is based on broad, shared values which are uncontroversial, but which also accommodate a range of viewpoints and challenge orthodoxy and convention. This is significant in light of the legal responsibility of HEI governing bodies under s202 of the ERA 1988 to uphold academic freedom for academic staff to “test established ideas received wisdom and present controversial or unpopular points of view” with no jeopardy of those staff losing their jobs. HEIs are unlikely to fall foul of these nuanced distinctions if a balanced and challenging curricula is delivered which encourages independent and critical thinking in learners.

The advancement of religionThe advancement of religion is more than ancillary or incidental to the advancement of education for a small number of HEIs. A number of the 16 HEIs in the Cathedrals Group are registered charities. The foundation of many of these as teacher training colleges in the Church of England, Roman Catholic or Methodist faiths means that the advancement of religion or equivalent purpose in their objects sits alongside that of educational advancement. However, while the advancement of religion may be core to the very foundation and ongoing ethos of the HEI, many HEIs to which this purpose applies balance remaining faithful to this pursuit with the secular aspects of educational delivery. The University of Gloucestershire’s recently revised Articles of Association include “the advancement of education in the United Kingdom for public benefit” (s.2 Articles) and a carefully worded sub-provision which balances the secular and sacred purpose of “its activities and work, to reflect and show both its civic and evangelical Church of England foundations”.14 The Charity Commission has also recognised that the advancement of non-religious beliefs for the public benefit can be charitable, including based on arguments submitted by the British Humanist Association.

Other charitable purposesMany of the other remaining charitable purposes may sit alongside the core object of education. However, many of these are likely to be a consequence of education in its broadest sense, such as undertaking research advancing health and the saving of lives. HEIs’ drama, dance, music and cultural provision, whether through teaching and research or university-owned museums and galleries, advance culture, heritage and science. In turn, the advancement of environmental protection will be a feature of HEIs’ teaching and research, as well as their sustainability agendas and targets, such as carbon reduction or waste management.

14 A number of HEI chaplaincies were initially set up as charities for the fulfilment of this charitable purpose, although the majority have since been dissolved as charities and incorporated into their HEI’s mainstream organisational structures and multi-faith provision.

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Public benefitFollowing an examination of charitable purposes and how these operate in an HEI context, trustees require an understanding of the need for public benefit to be both achieved and demonstrated for the charitable purposes delivered. Public benefit is not defined in the 2006 or 2011 Acts (whereas it is in the 2005 Scottish legislation). However, under law the Charity Commission is required to issue guidance on what it means by the public benefit test and how charities are measured and assessed against this.

The Charity Commission provides a more detailed definition of public benefit as applied to charitable purposes whereby it must be beneficial, identifiable, able to be evidenced and apply to a section of the public or the public in general. The harm and detriment caused by delivering the objective must not outweigh its wider benefits. The Charity Commission’s guidance states that the class of people constituting a section of the public do not need to be based in England and Wales to benefit from a charity’s work. The education of international students registered with the HEI and based at an offshore campus would legitimately be part of the HEI’s purpose to advance education for the public benefit. The Public Administration Select Committee (PASC) which reviewed the public benefit requirement as originally instituted in the 2006 Act, highlighted the significant administrative burden on the Charity Commission to assess whether charities satisfy the test. In the case of HEIs, the majority of HEIs are not directly registered as charities reduces this burden on the HEIs and the Charity Commission. In the table below, the definitions set by the commission are identified in the first column, and the second column provides some measures HEI trustees might wish to review in evaluating the public benefit of an HEI’s advancement of education purpose.

Public benefit elements Advancement of education measures for HEIs

A purpose must be beneficial in a way that can be identified and evidenced

y Number of students participating in academic programmes at the HEI.y The educational merit of those programmes.y Numbers of graduates and indicators of the impact that their education has had on their

employability or further study opportunities.y The quality of research and its dissemination.

Any detriment or harm arising from the purpose must not outweigh the benefit

Trustees must identify and minimise risks of harm for its beneficiaries and those engaged in supporting them in advancing education. It also overlaps with the governing body’s obligations to comply with the Health and Safety at Work Act 1974.

It must benefit the public in general or a sufficient section of the public

The education of students, including international students of an HEI or based at an overseas campus of the HEI, would be considered sufficiently broad in scope to constitute a “public class” of people. This includes specialist institutions offering a limited number of academic programmes.

The widening participation measures of HEIs, in terms of providing access to education and progression through it to disadvantaged groups of the public, strengthens the public dimension.

HEIs’ civic and public engagement role in offering public lecture programmes, short courses and participating in community and outreach activities.

It must not give rise to more than incidental personal benefit

Personal financial benefits through the payment of staff is a necessary by-product of advancing education.

Benefits to trustees - the law states that trustees cannot receive any benefit from their charity, including in return for any service they provide to it, unless they have legal authority to do so. The remuneration of HEI trustees is covered in Chapter Seven.

HEIs fall firmly within the

“advancement of education”

charitable purpose.

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HEIs already registered as charities or holding charitable status would readily satisfy the public benefit test, given that the advancement of education guidance places HEIs firmly in the arena of acting in the public benefit. However, while this is regarded as an “automatic public benefit” for HEIs (Rammell, 2016, 19), trustee boards would not wish to be complacent in consideration of the core charitable purposes of the HEI and how these constitute a public benefit. Tuition fee charging has been a contentious area and the Independent Schools Council has been in protracted legal challenges with the Charity Commission around being deemed not to satisfy the public benefit test, as will be discussed below.

Tuition fees and the public benefitThis chapter concludes with reference to the charging of tuition fees and the public benefit, given that HEIs are fee-charging charities, and tuition fees are still the major source of income for most HEIs. The Charity Commission guidance makes clear that charities, including HEIs, can charge for services and facilities provided it is needed in order to carry out the charity’s purposes. Charging tuition fees to cover the broad range of costs associated with delivering education is therefore reasonable. However, the benefit to sections of the public must not be “unreasonably restricted” by the ability to pay any fees charged, and trustees must make provision for the poor that is more than minimal or tokenistic. Unlike a number of independent schools deemed to not fulfil the public benefit test in relation to provision to the poor, HEIs are unlikely to be caught by this ruling because of a commitment and accountability to meeting targets to allocate a proportion of tuition fee income for bursary, scholarships or fee discounts, including for financially disadvantaged students. However, in acting in the best interests of the HEI in a period of increasing challenge, trustee boards’ decision-making may need to balance tuition fee levels and the most effective allocation of finite resources for financial support packages to assess the impact on widening access to the HEI by disadvantaged applicants.

This chapter will conclude by touching on current debates about the role HEIs play in serving the wider public interest in the new legislative and competitive environment, and how this broader term may be interpreted by trustee boards in ensuring the HEI delivers its charitable purposes for the public benefit. The public interest of HEIs encompasses a wider social good, including the role of higher education as an engine of social transformation, the creation of a highly skilled workforce, and the generation of cultural value through the contribution to civil society of education, research, thought leadership and community and public debate. A number of commentators, including Bill Rammell in a 2016 publication for the Higher Education Policy Institute (Hepi) on the topic, advocate moving away from narrow conceptions of the role HEIs play in delivering public benefit, such as receiving value for money from the public funds given to HEIs, to prioritise the higher education sector’s sustained contribution to wider society. Those holding this perspective regard the major legislative and regulatory changes as a risk to the public interest role of HEIs in society, through reduced direct public funding of HEIs, combined with an intensification of competition between them. n

Question:As a trustee, are you aware of your HEI’s level of expenditure in the form of tuition fee waivers, assisted entry, scholarships and bursaries for students from financially disadvantaged backgrounds?

What was the outcome of any discussions your governing body has had on tuition fee charging and widening participation, and how it links to your HEI’s mission, values and objects?

HEIs, can charge for services and facilities provided it is needed in order to carry out- the charity’s purposes.

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04 Key duties of HEI trustees

This chapter will address the key trustee duties of HEI governing body members. As covered in the previous chapter, the collective duties specific to an HEI’s trustees are derived principally from the powers of the governing body set out in its governing instrument. The statement of primary or principal responsibilities of the governing body, and role descriptions for trustees as used for appointment purposes, are also useful reference points to draw on. Prior to referring to the general Charity Commission guidance on trustee duties, and applying it to an HEI context, higher education-specific guidance as it pertains to trusteeship will be signposted.

The wider context for the duties of a trustee, in acting in the best interests of the HEI in the current competitive environment, arguably requires additional governing body stretch and ambition, less risk aversion and bolder decision-making than has perhaps been needed historically. This challenges more traditional tenets of trusteeship that regard stewardship as a steady hand on the tiller and safeguarding an HEI’s assets based principally on maintaining the status quo. This approach is unlikely to be tenable for most HEIs, or an acceptable response from senior management and the trustee board in a changed funding and operating context, where the trustee board’s risk appetite may need to be greater than it was in more stable regulatory and operating environments.

Reference is made in the Higher Education Code of Governance (2014), and in most HEIs’ role descriptions for trustees, to the Committee on Standards in Public Life and its founding Nolan Principles of selflessness, integrity, objectivity, accountability, openness, honesty and leadership. “Selflessness” embodies an expectation that “holders of public office should act solely in the public interest” which links with trustees’ responsibilities to ensure that “public benefit” is delivered, as covered in Chapter Three. While HEI trustees are not, strictly speaking, holders of trusteeship constitutes public office, and may be regarded increasingly as less so, in a private-public economy of higher education funding and regulation, they are nonetheless helpful reference points that resonate with higher education trustee duties and behaviours.

Statutory reference points and Charity Commission guidanceAs with other charitable bodies and executive and non-executive directors, trustees of HEI governing bodies have a fiduciary role to perform – one of fidelity to the HEI. Farrington and Palfreyman (2006) sum up the obligations common to both trustees of an HEI and the fiduciaries of specific “trusts”:

“the standard of care expected of HEI officers and members of the council/members of the board of governors as fiduciaries in managing the HEI’s assets as a charitable corporation …will be much the same, albeit perhaps not quite as onerous as for the trusteeship of a specific trust. However, the standard required may probably be more onerous than the levels of honesty, propriety and good faith, integrity, skill and care currently required of a company director” (136).

The standards expected of company directors quoted in the final sentence above is arguably no longer less onerous with the codification of directors’ duties in the Companies Act 2006. Trustees’ duties as set out by the respective charity regulators are not legally codified in the way directors’ duties are in the Companies Act 2006. However, clear principles and obligations are published by the Charity Commission, the OSCR and the Charity Commission for Northern Ireland, which HEI trustees may draw on. See Appendix Two for a summary of the similarities between directors’ and trustees’ duties.

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Before providing an overview of the key duties of trustees, it is appropriate to summarise trustee appointment processes. Nomination committees of HEI governing bodies will oversee trustee appointments in line with the governing instruments, and relevant charity regulator guidance on the appointment of trustees. However, ultimately this is a collective governing body responsibility. The secretary/clerk will support the chair in overseeing an appropriate appointments process for new trustees (where not elected or appointed from among the staff or students). This includes checking that new trustees are eligible for appointment and are at least 16 years of age, and a disclosure to be completed by the proposed appointee ahead of appointment, to confirm that appointees are not disqualified as trustees or as directors of another organisation.

The core duties of charity trustees in the HEI contextThe six core duties set out by the Charity Commission in the Essential Trustee Guide are adapted below to make them relevant to the HEI governance context:

y Ensure the HEI is carrying out its purpose for the public benefit through the advancement of education.

y Comply with your HEI’s governing instruments, eg charter, statutes and ordinance or instrument and articles and legal obligations.

y Act in the HEI’s best interests.

y Manage the HEI’s resources responsibly.

y Act with reasonable skill and care.

y Ensure the HEI is accountable for its core purpose of advancing education as a public benefit, ultimately to the charity regulator, government, funders, sponsors and, most importantly past and present beneficiaries.

HEI trustees may be familiar with the overarching “duty of prudence” and “duty of care” that trustees are expected to perform, which are implicit in each of the core duties. The duty of prudence includes ensuring the solvency of the HEI, and the responsible and reasonable use of funds and assets to further its objectives or purposes, avoiding undue risks which might place its reputation or resources at risk. A duty of care is a key consideration for an HEI’s trustees, to act with reasonable care and skill to ensure that the HEI is well run, that its beneficiaries are protected from harm. As discussed later in this chapter, duty of care may include trustees seeking independent advice from the secretary/clerk, or an external professional opinion on any matter of concern for the governing body.

Ensuring the HEI is carrying out its purpose for the public benefit through the advancement of educationIn an HEI context where learning and teaching, research and innovation and engagement activities are fundamental features of HEI strategic plans, this will be apparent and self-evident. However, it is important that trustees are mindful of how the charitable purpose and public benefit principles marry with the commercial activities undertaken by a HEI, and how any risks arising from these to the status of the charitable purposes are mitigated. For example, income derived from the estates and residences and conferences facilities, and other non-charitable activities such as catering services, are not incompatible with delivering the core purposes of the HEI. It is wholly legitimate to generate income and surplus from these activities for re-investing back into the HEI’s core educational activities. The role of subsidiary companies as vehicles for housing an HEI’s non-charitable activities will also be addressed in Chapter Six.

On occasions,

an HEI trustee may

face perceived or

actual conflicts.

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Complying with your HEI’s governing instrumentsAll trustees on HEI governing bodies will comply with the “laws” set out in the governing instrument, standing orders and other regulations. As mentioned in Chapter Three, the powers of the governing body and rules and principles by which trustees are expected to abide are often not couched in the language of charity obligations. Complying with the HEI’s governing instruments is both an individual and a collective responsibility of trustees. Ensuring the powers of the governing body are not exceeded, by it making decisions it is not empowered to and which require a decision of a senior external body, such as the privy council or sector body, is a key board function. Decisions made which are later contested on the grounds of validity, or which need to be rescinded by the governing body, can be costly in terms of time, money and credibility. The flipside of this is that the HEI’s governing instrument will specify decisions that the governing body is not authorised to delegate to a more junior body, individual trustees or senior managers. These include the approval of the annual accounts and financial statements, the budgets and forecasts of the institution and the appointment and dismissal of the chair or the vice-chancellor or principal. In turn, the CUC Higher Education Code of Governance (2014) and Illustrative Practice Note on Academic Governance (2017) reinforce the importance of effective dialogue between trustee boards and academic boards and senates, while respecting their respective remits.

Acting in the HEI’s best interestsTrustees on HEI governing bodies, whether endorsing the proposals of senior management or taking the collective decisions with which it is charged, must do so with the intention of acting in the best interests of the HEI. This will include taking a long-term view or an institution-wide stance in order to safeguard its assets and reputation. On occasions, this will mean making decisions that are unpopular but which are deemed ultimately for the long-term and wider benefit of the institution. These might include a governing body decision (or endorsement of a senior management one) to not enter into a new student market or institutional partnership, or withdrawal from these, or divestment in an academic discipline and department which is not performing across a range of measures, and any adverse intellectual and staffing and student consequences of this.

On occasions, an HEI trustee may face perceived or actual conflicts of interest when undertaking the role, given that HEIs engage and contract with multiple bodies and organisations, and common relationships and interests to both parties may be mutually beneficial where managed effectively. However, trustees’ personal interests should not have a bearing on their responsibility to the HEI as a charity. The avoidance of actual or perceived conflicts of interest is a requirement featuring in all HEIs’ governing instruments, to ensure any conflicts are either eliminated, or that steps are taken to reduce the conflict so it is not seen to be at odds with the interests of the HEI. The Higher Education Code of Governance (2014) states that trustees act impartially and disclose pecuniary, family or other personal interests, and this duty will feature in the governing instrument or standing orders of the HEI.

Managing the HEI’s assets responsiblyIn order to exercise their responsibility in the governing instrument for ensuring the solvency of the HEI, trustees will need assurance that effective financial accounting and reporting systems are in place to account for income, expenditure, borrowing and investment. This provides a framework for assuring that the assets of the HEI are effectively managed, deployed or held, and that the trustee board ensures that there is effective stewardship of all of the HEI’s assets and funds and not just those that derive from public funds. An HEI’s finance committee will play a key role in monitoring expenditure to ensure the affordability and appropriateness of expenditure alongside the HEI’s other commitments, and this may require onward governing body approval in key areas such as estates and other major capital projects. Responsible use of assets also means ensuring that use of an HEI’s assets are maximised to their full potential, such as generating commercial income from its physical estate or specialist equipment to re-invest in the core charitable purposes. The disposal of land or other major assets to secure value for money in the best interests of the charity is covered in Chapter Seven. In turn, and an area of increasing public scrutiny, and focus of HEI remuneration committees is the setting and reviewing vice-chancellor remuneration, and ensuring an effective system is in place where this is delegated to the head of institution, for senior staff (e.g., those earning over £100k per annum). For governing bodies as trustee boards, setting and reviewing senior salaries includes ensuring that remuneration levels are an appropriate use of charitable funds and assets and are only to further the charitable purposes of their HEI. The same principles apply to severance packages and exit payments.

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Acting with reasonable skill and careActing with reasonable skill and care as an HEI trustee means:

y Ensuring that in making a decision all relevant information and evidence is provided to make an informed, collective decision.

y The specific skills and insights of trustees are brought to bear in assessing the proposals and recommendations, while noting that the final decisions are always for the trustee board as a whole.

y Engaging relevant professional advice to inform any final recommendations or decisions made by the trustee board.

y Ensuring decisions are taken on the most thorough information available at the time.

Principle 5 of the Higher Education Code of Governance (2014) states that the governing body should work with senior management to ensure that effective controls are in place and due diligence are undertaken for strategic projects requiring governing body oversight or a decision, and that the risk appetite of senior management and trustees is agreed in relation to specific ventures and activities. This might include the agreement of a new strategic partnership, where the legal, contractual and reputational issues require a higher standard of care to be exercised than normal. Trustee care and attention includes ensuring that sound business judgment is exercised in taking necessary risks, rather than restricting the role to that of the prudent trustee proceeding cautiously (Farrington and Palfreyman, 2006, 148). Effective trustee boards will wish to be confident in deferring a decision or seeking further information or independent assurance on any matter brought to it, where this is appropriate. There are clearly ways of managing this sensitively, including seeking assurance through the secretary/clerk, the vice-chancellor or principal, or through delegation of this responsibility to a sub-set of trustees who could provide onward assurance to the governing body as a whole. A contributory factor in the majority of higher education governance breakdowns is not simply that of procedural breaches, but acts or failures to act, by individuals, or groups of senior managers or the trustees (Shattock 2006), and the absence of a culture where trustee boards ask the right questions of often persuasive and personable, dominant or defensive senior managers. In the wider third sector, the collapse of Kids Company in 2015 signals some of these and other shortcomings in governance.

Ensuring the HEI is accountableHEI trustees’ accountability to students as beneficiaries, staff, regulators, funders and society more widely underpins the five other trustee duties covered in this chapter. The HEI’s governance structure and committee system, as its machinery of self-regulation, and its wider internal controls, support trustee boards to exercise ultimate accountability for all HEI activities, including through holding the vice-chancellor or principal to account for the effective management of the HEI. As discussed in Chapter Two, external accountability for running the HEI as a charity is discharged to Hefce as principal regulator for HEIs in England. In contrast, HEIs in Wales, Scotland and Northern Ireland are directly accountable to their nations’ charity regulators.

HEIs and campaigning activityThe role of HEIs as charities and how this fits with political campaigning and activity engaged in on their behalf under charity law is outlined in this section. HEIs’ governing bodies are independent bodies, as both legal and symbolic embodiments of the autonomous organisations they govern. As Element 2 of the Higher Education Code of Governance (2014) states, a governing body “must ensure that its decision-making processes are free from any undue pressures from external interest groups…or political interest groups” (2.4). This legal and moral principle includes the trustee board being immune to political interference and upholding the collective and individual political objectivity of the trustees.15 However, UK higher education finds itself in unprecedented times, in light of major sector statutory and regulatory reform and the geo-political challenges and opportunities arising from the UK’s exit from the EU. More than ever, this may mean that trustee boards are presented with a situation where direct lobbying of government on the HEI’s behalf (rather than through UUK for example), may be expected of them by students, staff and other stakeholders, to serve the HEI’s best interests.

15 A number of commentators on the Higher Education Governance (Scotland) Act 2016 have raised concerns about the risks of external political interference on HEI governing bodies, through a requirement for a HEI-wide election process to select the governing body chairs (the “senior lay member”) and the guaranteed representation of an academic staff and a professional support staff trade union nominee on the governing body.

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The Charity Commission’s Speaking out: guidance on campaigning and political activity by charities (CC9) (2008) confirms the following points:

y Charitable purposes and political ones are incompatible, and therefore political organisations would not satisfy the charity test. Campaigning and political activity can be legitimate and valuable activities for charities only in the context of delivering their charitable purposes.

y A charity must ensure that any involvement it has with political parties is balanced, and not give support or funding to a political party, candidate or politician.

y A charity may give its support to specific policies advocated by political parties, only if this helps achieve its charitable purposes. However, the trustees should not allow the charity to be a vehicle for the expression of political viewpoints.

y Trustees must consider and assess the benefits and risks in deciding whether any campaign is likely to be an effective way of furthering or supporting the charity’s purposes.

The lead-up to the referendum on the UK’s future as a member of the EU highlighted the potential for HEIs to engage in political activity and campaigning at the corporate level of senior management and the governing body. This included the importance of there being a clear distinction between [a] the head of the institution or other colleagues presenting a ‘personal’ position to staff, students and the public on whether remaining in the EU was favourable to higher education and to the institution and [b] a ‘corporate’ position which might be adopted by the trustee board on behalf of the institution, and any resulting campaigning to further such a position. UUK, the Charity Commission and Hefce published guidance for HEIs to assist them in any formal, corporate stance that the HEI trustee board might have chosen in relation to campaigning ahead of the 2016 referendum on the UK’s future in the EU. A small number of institutions adopted a corporate position - by the governing body - to remain within the EU on the basis that doing so would contribute to their charitable purposes.

This position would empower those HEIs to undertake proportionate campaigning in line with charity and electoral law. Also, HEI trustees need to be clear that any decision to engage in political campaigning ensures that the academic freedom of academic staff, and freedom of speech for staff, students and visitors is secured in relation to holding and expressing personal political views.

Scenario: In the lead-up to the EU referendum, the vice-chancellor’s message to all staff and students explained why her personal view was that remaining in the EU was beneficial for the HEI and the UK HE sector more widely: for the diversity of student and staff, international student recruitment income and EU research collaborations and partnerships. An encouragement was given for all staff and students to vote in referendum, whichever way they intended to vote. Following the EU Exit outcome, a proposal has been brought to a meeting of the governing body from a group of staff who request that the HEI should be formally represented in a city-wide event in favour of overturning the referendum outcome, including providing financial support for the event and encouraging student and staff participation in it. The governing body of the HEI is unclear how to respond. One of the independent governors is a lawyer and has put together some key questions for the trustees to help consider the request, drawing on the advice of the vice-chancellor and secretary. Reflect on the questions below, and how they might then apply to any political activity, including events, which your HEI may have been asked to support?

1. If the governing body officially supported staff and student participation in the event, would this amount to political activity and campaigning by the HEI, noting that doing so is generally not acceptable for charities?

2. What circumstances would allow the HEI to campaign where this is legitimate to help achieve its specific charitable objects? Could a City-wide event involving many stakeholders be considered specific enough to the HEI and supporting its best interests?

Continued

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Trustees’ personal liabilities and indemnificationThe final section of this chapter addresses the personal liability of HEI trustees in undertaking their duties. It is a common question fielded by chairs and secretaries/clerks at the point of trustee selection and induction or when the governing body discusses a particular activity that may expose the HEI to risk. The Association of British Insurers (ABI) in its Trustee Liability Guidance (2013, 2) states that “the prosecution of trustees who have acted in good faith is a rare event”. Alongside this is the limited liabilities of trustees as individuals given the legal personality of HEIs. HEI trustees will hopefully take some comfort from this general position.

The 2011 Charities Act authorises charities to take out trustee indemnity insurance, and fund this from the charity’s resources. Each HEI’s insurance portfolio will include professional indemnity insurance for directors and officers (which includes council or board of governors acting in their capacity as trustees). The purpose of the insurance is to indemnify trustees and senior managers against personal liability for breaches of trust and duties as addressed earlier in this chapter, or any negligence committed in their capacity as directors or officers. The indemnification would extend to liability arising from “wrongful acts” linked to damages, contributions, settlements or claimants’ or court, tribunal or other legal bodies’ costs. Mistakes and omissions made by trustees are therefore normally covered by insurance if that which led to their occurrence was in good faith and could not be construed as a deliberate act to deceive or mislead. Such insurance may extend to circumstances where governing body trustees are also trustees of a HEI-administered pension scheme. It would not extend to fines for criminal proceedings, such as penalties levied by regulators, costs where a trustee is convicted of an offence of dishonesty, or breaches from which the trustee has personally benefited. Section 10 of the Charity Commission’s The Essential Trustee guidance states that the Commission and the courts are empowered to relieve an individual from personal liability arising from a breach of trust or duty if they acted reasonably or honestly. Trustees acting in the best interests of the HEI and complying with the trustee duties set out in this chapter represents the most effective safeguard against exposure to personal liability. n

3. Would it be a proportionate use of the HEI’s resources (finances, staff time, the estate or equipment) if support were provided for the event?

4. What likely impact and effect would the HEI campaigning through the event have on the outcome of the original referendum decision? Political campaigning would need to have a reasonable prospect of success to merit use of HEI resources for this purpose.

5. If the trustees were confident that participation was in the best interests of the HEI, how would academic freedom and/or freedom of speech be safeguarded, particularly where opposing views to the campaigning were voiced?

6. In the event of the governing body taking a decision to not endorse the event, how could it support the political engagement of students and staff on this subject in other ways?

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05 HEI trustee board reporting

This chapter explores the requirements for reporting to and from HEI trustee boards in the context of charity regulation. It focuses specifically on reporting by exempt charities (as the majority of HEIs in the scope of this guide) in relation to:

y The online disclosures which exempt-charity HEIs are required to make in lieu of submitting published returns to the relevant charity regulator.

y Public benefit reporting.

y Serious incident reporting.

Secretaries/clerks of HEI governing bodies have a key role in working with the chair, committee chairs and members and colleagues within the HEI to ensure that reporting requirements are well-understood by trustee boards, and that such disclosure activities are not seen as an afterthought, or solely as a compliance exercise. Arrangements are recommended to collate and review the information required and timely reporting on it.

Exempt charity reportingSince 2011, exempt-charity HEIs in England are required to make key corporate and charity-related information available on the institution’s website, accessible through a gateway page, clearly routed to and from the homepage. The information should be published and reviewed annually, in lieu of annual reporting to the Charity Commission. The purpose of the gateway page is to make the following key information readily accessible, which is relevant to the charitable status of the HEI:

i. The legal name (as stated in the governing instrument) and the preferred name (which is often the trading or promotional name) of the HEI.

ii. The governing instrument as the “main constitutional document”, such as the Royal Charter, statutes and ordinances, or the instrument and articles of government which sets outs the objects and powers of the HEI.

iii. The names of the trustees serving on the governing body as of 31 January each year.

iv. A list of the other trusteeships held by an HEI’s trustees.

v. A minimum of five years of consecutive financial statements of the HEI.

Annually, Hefce monitors the completeness and currency of the core information above and requires that the information for each HEI is up to date no later than six months after the end of the previous academic year. The secretary/clerk would normally be responsible for undertaking this task. Satisfying the reporting requirements becomes business as usual and easy to manage if:

y The list of trustees is up to date. For most HEIs a dedicated council or board membership webpage provides key information, terms of office, committee memberships and biographies of trustees.

y The list of trustees is checked so that any changes are clear, including membership changes since these were published in the financial statements for the year ending 31 July.

y The list of other trusteeships held by the HEI’s trustees is already captured through an up-to-date entry in the register of interests for each trustee. To make the process straightforward, the secretary/clerk should ensure that instructions on completing the register of interests asks trustees to identify other trusteeships they hold, including key information such as terms of office and the full name of the charity, to enable the secretary/clerk to easily identify the charity and its registered number and its purpose, for example. This information should be updated on an annual basis to ensure what is disclosed is current.

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y There has been effective liaison with the finance department and communication and publication teams to ensure that the financial statements are published soon after being adopted by the governing body and submitted to the funding council.

Public benefit reportingThe definitions and interpretation of public benefit, and its relevance to HEIs, is covered in Chapter Three. The requirement that HEIs demonstrate how they deliver their defined charitable purposes for the public benefit requires timely and effective reporting. As addressed earlier, HEIs cannot rely on the assumption that the public benefit derived from the core charitable purpose of advancing education is self-evident, an “automatic public benefit” (Rammell, 2016, 19), without the need to demonstrate this. The 2011 Act requires each registered charity to include in their trustees’ annual report:

y A statement that they have had due regard to the Charity Commission’s public benefit guidance.

y Information about how the trustees have delivered the charitable purposes for the public benefit.

Hefce, and the 2014 Statement of Recommended Practice (SORP): Accounting for Further and Higher Education, require HEI exempt charities as “public benefit entities” to publish this information in their narrative report in the annual report and financial statements.16 Most HEIs include core information in reporting the public benefit of their HEI, alongside the mandatory confirmation that the trustees have had due regard to the Charity Commission guidance. As would be expected, the vast majority of HEIs focus principally on the delivery of public benefit through the advancement of education. The nature of the reporting includes narrative and data on the number of educational programmes and volume of students registered on them, tuition fees charged, financial support offered through bursaries, scholarships or fee exemptions for the period, demographic data linked to an HEI’s widening participation, school outreach programmes and supported admission to the HEI. Increasingly, public benefit statements include material and evidence of research, which demonstrates the advancement of education purpose and, through the subject matter of the research and impact on beneficiaries, may support several other charitable purposes identified in Chapter Two.

Effective public benefit reporting should not be an afterthought of strategic and financial reporting in the financial statements, or subject to only minor revisions to the previous year’s statement. The below excerpt from one HEI’s 2015/16 public benefit statement refers to the strategic objectives and values underpinning the public benefit work of the HEI. While the range of principles is similar to those set by many HEIs, it helps position the HEI’s public benefit role as integral to the purpose of the HEI:

We underpin our public benefit work with the following principles:

y Improving student satisfaction by empowering students as participants in a community of learning in which staff and students work together to learn, create, solve problems and research.

y Inspiring and engaging students in their chosen course through a range of techniques which encourage lively, interactive learning and by drawing on relevant research and professional practice.

y Improving the learning environment to maximise student achievement and completion.

y Assisting students in achieving their further study, career or self-employment aspirations.

y Undertaking research which is applied in nature, based on excellence and delivers beneficial impact to the economy or society in the short to medium term.

y Aspiring to be a “global” university.

y Being a sustainable university by securing financial sustainability, investing in the development of our staff, continuously improving our processes, ensuring environmental sustainability, and building lifetime relationships with our alumni.

16 The Statement of Recommended Practice (SORP): Accounting for Further and Higher Education (2014), states that HEIs (and further education colleges) in Wales are also expected to publish a public benefit statement. A separate statement is not required in the annual accounts of HEIs in Scotland, although the OSCR expects the delivery of public benefit to be addressed throughout the narrative report of each Scottish HEI. Northern Ireland HEIs are required to follow the Charity Commission for Northern Ireland reporting requirements.

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Public benefit statements may demonstrate delivery of a number of the other charitable purposes. In its 2015/16 annual accounts, Birmingham City University (BCU) refers to the delivery of several charitable purposes, including the advancement of health and saving of lives; citizenship and community development; arts, culture and heritage; environmental protection or improvement; and the promotion of equality. It also provides graphically presented data to clearly show performance against Hesa Widening Participation Performance Indicators. Another example is Salford University’s 2015/16 financial statements, which describe a public benefit strategy with a wider beneficiary base than former or current students, through a “multi-dimensional process of engagement and interaction with the wider community resulting in mutual benefits and enrichment of the staff and student experience”. Salford’s statement also demonstrates how, during the reporting period, the university has invested in responsible fundraising and the generation of philanthropic income as a means of furthering its charitable purpose and public benefit impact.

In summary, effective public benefit statements include case studies, materials and evidence that bring to life the positive impact of the HEI’s charitable contribution beyond the immediately obvious indicators of educational delivery. Trustee boards are encouraged to see these as a key component of the annual report and financial statements to review and seek clarification on where necessary.

Question: As a trustee, look back on the most recent public benefit statement you signed off as a governing body when it adopted the annual report and financial statements.

Does the statement go beyond the minimum reporting requirements set down by Hefce, another funding council, or the relevant charity regulator?

If not, how could the statement be improved to demonstrate and promote your HEI’s delivery of public benefit more effectively? Are there distinctive areas of public benefit in your charitable purposes which could be illustrated in the public benefit statement?

Serious incident reportingThe serious incident reporting guidelines produced by Hefce derive directly from Charity Commission guidance first published in 2007 following the 2006 Act, which put into law a responsibility for the Commission to investigate alleged misconduct in the administration of charities.17 Those HEIs in England and Wales registered with the Charity Commission are required to report serious incidents directly to the Commission. The OSCR has a broadly equivalent policy reflecting similar duties and powers of investigation through its raising concerns and inquiry policy, which Scottish HEIs would observe. The Charity Commission’s guidance on reporting serious incidents states that it is a core responsibility of the trustees of a charity to report serious incidents to the Commission as soon as they become aware of the incident. This reinforces the proactive responsibility of the trustees to report serious incidents associated with their charity. It does not exclude the possibility that events constituting serious incidents may be raised by a public interest disclosure (whistleblowing) by students, staff members or members of the public.

In its interpretation of the Charity Commission guidance, Hefce defines a serious incident as:

“one which has resulted in, or could result in, a significant loss of funds or a significant risk to a charity’s property, work, beneficiaries or reputation. HEIs must report serious incidents at the time when they are identified”.

17 In 2014/15, the Charity Commission received 2129 reports of serious incidents relating to registered charities.

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In its Memorandum of Assurance and Accountability with HEIs, Hefce identifies a number of incidents or events that require reporting, listed in the table below, alongside related key legislation:

Incident/activity Key legislation

Loss of assets through fraud, theft or other cause where the value of the loss is in excess of £25,000

Fraud Act 2006

Donations of more than £25,000 from unknown donors, or where the source cannot be verified

Money Laundering Regulations 2007Proceeds of Crime Act 2002Terrorism Act 2000The Finance Act 2011. See s27 on trustee oversight of tainted donations.

Abuse or mistreatment of a charitable beneficiary involved in activities of the HEI

Children Act 2004Rehabilitation of Offenders Act 1974Health and Safety at Work Act 1974Safeguarding Vulnerable Groups Act 2006The Care Act 2014Protection of Freedoms Act 2012: creation of the Disclosure and Barring Service

Disqualification of a trustee Charities Act 2011, s178Company Directors Disqualification Act 1986Company Directors Disqualification (Northern Ireland) Order 2002

Known or alleged links (other than for bona fide academic reason) with proscribed organisations or terrorism; this applies to trustees, staff, students, or anyone else associated with the HEI

Terrorism Act 2000Counter Terrorism and Security Act 2015 and associated Prevent Duty Guidance

The purpose of referring to the range of legislation relevant to the categories of serious incident identified by Hefce is to impress upon trustees the importance of ensuring that adequate policy and procedures are in place within the HEI to limit their occurrence in the first place, and adequately respond to them if a serious incident arises. In the event of reporting a serious incident by an HEI, Hefce - and other external authorities to which reporting may also be required - would expect to see the frameworks and controls in place.

Loss of assets through fraud, theft or other causeIt is perhaps not surprising that Hefce - as funder as well as principal regulator - places the loss of assets at the top of a list of mandatory markers for reporting. However, it is important to note that assets are not simply money, but may also be information assets such as data and datasets of value or other valuables owned by the HEI. Other causes might be loss associated from damage to property through natural causes such as storm or flood. Normally HEIs would be insured against such incidents, but this may not always be the case.18

Donations of more than £25,000 from unknown donors, or where the source cannot be verifiedAs fundraising and advancement become more prominent activities for HEIs, trustees will need to be satisfied that their HEI has robust procedures in place for the management of donations, including the risk appetite for accepting unknown donations where due diligence is therefore not possible. HEIs should have effective anti-money laundering procedures, including for cash receipt and management, and have identified a designated money laundering reporting officer for reporting concerns, including to the National Crime Agency (NCA).

18 The Charity Commission guidance foregrounds other aspects of fraud, such as failing to disclose information, or the abuse of position in to make a gain or loss to another, which are perhaps less prevalent features in HEIs than loss of assets or theft.

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Abuse or mistreatment of a charitable beneficiary involved in activities of the HEIHEIs are required by law to have safeguarding arrangements in place for children and vulnerable adults who come into contact with the HEI. Most HEIs have published child and vulnerable adult protection procedures. These go beyond relevant staff, students and contractors being subject to Disclosure and Barring Service (DBS) checks where they have substantial unsupervised contact with children or vulnerable adults.

Disqualification of a trusteeHefce requires that the disqualification of a trustee is reported as a serious incident. Presumably, this is where the trustee board determines to disqualify a trustee, or where it is known that an HEI trustee has been disqualified from a trusteeship role outside the HEI. The 2011 Act empowers the Charity Commission to take positive action to remove trustees under circumstances identified above, and the principal regulator therefore needs to ensure that HEIs are taking appropriate action. An HEI may determine to remove a trustee in line with its governing instruments, including:

y If they had been convicted of an offence involving dishonesty or deception which is unspent.

y If they are an undischarged bankrupt or are entering into a formal arrangement with a creditor.

y They have been removed as a company director or charity trustee due to wrongdoing.

The Charities (Protection and Social Investment) Act 2016 gives the Charity Commission the powers to issue a discretionary disqualification order against a trustee when specific statutory criteria are met, where the relevant charity has failed to do so, enabling disqualification for a period of up to 15 years. The Act, which is now in force, also extends the scope of convictions for which an individual would be disqualified from acting as a charity trustee, namely terrorist-related, money laundering or sexual offences and misconduct in public office. Any individual listed on the sex offenders register will automatically be barred from being a charity trustee.

Many HEIs’ governing instruments may refer to a governor being judged “unfit” to be a trustee, which reflects the language in the Company Directors Disqualification Act 1986 as a basis on which shareholders could seek to disqualify a company director. Noting the powers to disqualify that may be exercised by the relevant charity regulator, the decision to disqualify an HEI trustee would be a matter for the governing body as a whole, as specified in the governing instrument of the HEI. The disqualification may be a potential indicator or symptom of a more serious set of shortcomings in the governance of the HEI.

A number of HEIs have forms for completion by new appointees to confirm that they understand the charitable duties of being an HEI trustee, and that they are not disqualified from serving as a trustee, or company director. An appropriate vetting procedure should be in place, to include:

y Ensuring that the HEI officers supporting the selection process, such as the secretary/clerk or Human Resources team, undertake a search to confirm whether the applicant has been disqualified from another body and, if so, to provide details of any court orders related to this.

y Ensuring that the register of interests for each trustee is updated annually, or as interests change, so that other trusteeships and directorships held are clearly identifiable and current. The registers of the Charity Commission, the OSCR and Companies House Register, provide online search tools to identify disqualified trustees and directors.

Known or alleged links (other than for bona fide academic reason) with proscribed organisations or terrorism for trustees, staff, students, or anyone else associated with the HEI

Hefce requirements set out the statutory duty of the HEI governing body as “proprietor” under the Counter Terrorism and Security Act 2015 to put in place arrangements to comply with the Prevent Duty: to have due regard of the need to prevent people from being drawn into terrorism. The CUC’s Illustrative Practice Note (IPN) 3 (2016) highlights the specific duties of the trustee board in ensuring that effective arrangements are in place. This includes the HEI’s trustee board ensuring that senior management has mechanisms for identifying incidents linked to the HEI which may be terrorist or extremist in nature, while safeguarding freedom of speech, and ensuring that speakers and events held on, or off-campus, where sufficiently affiliated to, or funded by the HEI, do not incite racial or religious hatred or violence. In turn, trustee boards have a responsibility to ensure that arrangements are put in place by management to reduce the risk of HEI community being exploited by individuals involved in, or linked to, terrorist organisations, including sham charities on campus, as vehicles to raise or launder money to support criminal, including terrorist activities.


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The trustees’ statutory duty under the prevent duty is to ensure adequate controls form part of an HEI’s risk assessment to mitigate the likelihood of a terrorist and radicalisation related incident occurring.

When to report a serious incidentHefce states that HEIs must report serious incidents at the time when they are identified. Firstly, it is important that the HEI has serious or major incident reporting procedures in place to enable internal assessment and reporting. This may not always be straightforward as the details of an incident may gradually unfold, and the severity of the incident in meeting the criteria identified are not initially clear. For example, key considerations for the institution ahead of, or alongside, reporting to Hefce include:

y Reporting to other external bodies, including the police, local authorities or statutory regulatory or investigatory bodies such as the Health and Safety Executive (HSE) or Information Commissioner’s Office (ICO).

y A duty of care to prevent further loss in an event such as fraud or further harm in the case of a serious health and safety incidents.

y Internal reporting: ensuring that a reporting procedure and protocol is in place specifying which role-holders report on which types of incident or event which is understood by key staff. This would include the stages of escalation whereby senior management informs the governing body, the audit committee and internal auditors and keep them apprised throughout. Such a protocol may form part of a wider major incident planning or business continuity policy.

y Cases of money in the HEI’s possession which is alleged to be linked to money laundering and the proceeds of crime would require a suspicious activity report to be submitted to the National Crime Agency, which must be done confidentially to avoid the offence of tipping off those who may be complicit with the activity.

However, it is important to ensure that Hefce, or the relevant charity regulator in the case of HEIs as registered charities, is notified at an early stage, even where the details or implications of an incident are not yet clear. Hefce officers may be able to provide confidential advice in relation to responding to the incident, based on their knowledge of incidents that have occurred at other HEIs. Ongoing updates and fuller reports from Hefce will subsequently be required to provide assurance that the incident is being appropriately managed.

In line with the Charity Commission’s annual reporting requirements, Hefce’s annual assurance return requires the trustee board to make a specific declaration that serious incidents have been appropriately reported. Incident reporting should not wait until the annual return submission where it is sufficiently serious.

The Charities (Protection and Social Investment) Act 2016 requires registered charities which are audited to include key information in the annual report narrative about their approach to fundraising and the role of professional and commercial fundraisers; monitoring of third-party fundraisers; complaints received connected to fundraising; and safeguarding of vulnerable individuals and the public more generally from undue pressure or persistent calls from fundraisers to elicit donations. While these obligations do not apply by law to exempt charities, Hefce has encouraged HEIs to disclose this information on a voluntary basis and some are already doing so, like the Salford example cited in 5.9, as part of its public benefit statement. Trustee boards may wish to reflect on whether to disclose information in this regard, to provide improved transparency around and confidence in the HEI’s fundraising practices. n

It is important

that the HEI

has serious or

major incident

reporting

procedures in

place.

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06 The HEI trustee board and trustee relationships

This chapter provides an overview of the constitutional and organisational relationships HEI trustee boards might enter into with other entities, owned or associated with the HEI, including charities and non-charitable companies. The charity law and regulatory considerations involved in setting up, structuring and managing these relationships are explored. It also summarises issues around the equal status, obligations and rights of trustees under charity law.

Structural and constitutional relationships and connections with other bodiesThe trustee board would rarely be involved in detailed discussions or decision-making on many of the relationships entered into on behalf of the HEI. However, the trustee board is legally responsible for the HEI and its overall structure and, as a minimum, HEI trustees need a general understanding of those activities which are considered non-charitable, and how these are legally structured and organisationally managed, to avoid bringing the HEI’s fundamental charitable status into question.

Relationships with other charitiesStudents’ unionsThe students’ union19 is one of the major and closely related bodies with which an HEI and its governing body has a statutory relationship. The 2006 Act required students’ unions in England and Wales with an income exceeding £100k to register as a charity with the Charity Commission from 2010 onwards. This is the case for the majority of students’ unions. A minority of students’ unions of small, specialist institutions, including conservatoires of music and/or drama or art colleges, are not required to register with the charity regulator, as their income falls below the threshold. These students’ unions are granted “excepted charity” status, which afford the benefits of charitable status while providing relief from registration with the charity regulator and associated reporting. Equivalent registration requirements are in place for the students’ unions and associations in Scotland and Northern Ireland.

The majority of registered charity students’ unions are incorporated as companies limited by guarantee.20 The 2006 Act does not supersede or replace the requirements of the Education Act 1994, Part II of which defines students’ unions as an “association of the generality of students” (s20, 5) and places responsibility on an HEI’s governing body to take steps to ensure that students’ unions operate in a fair and democratic manner; have written constitutions; enable students to opt out of union membership; place limits on sabbatical terms of office (up to two years); and require governing body approval of union budgets and monitoring of its expenditure.

Alongside the legal relationship between the HEI and the students’ union, the partnership is important for several reasons. Most importantly, the reciprocal charitable purposes of the HEI and the students’ union are key, and a constructive and open relationship is therefore essential for the benefit of students as beneficiaries of both bodies. The objects of students’ unions align closely to the advancement of education purpose of their HEI, with their constitutions referring to a purpose or object to promote or advance the “educational interests and welfare of students” through a range of membership and support activities. The linkage between a students’ union as charitable entity and its HEI is also secured through the president of the students’ union (and possibly another sabbatical officer) being an HEI trustee board member.

19 The body is referred to as the Guild in a small number of HEIs, and Student Association is a common reference in Scotland. 20 Alternative charitable structures have been adopted by a minority of institutions. Harper Adams University students’ union, have incorporated as have incorporated as a Charitable Incorporated Organisation (CIO). See Chapter 2.

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Linked charitiesCharities are “linked” if they are administered by or on behalf of an exempt charity, and have exempt status in their own right. These are sometimes referred to as “paragraph 28” charities as they fall within paragraph 28 (1) in Schedule 3 of the 2011 Act.21 The legislation refers to them as “connected institutions” to the exempt charity, “administered by or on behalf of” and “established for the general purposes of, or for any special purpose of, or in connection” with the other exempt charity. Hefce has published guidance on the identification and management of linked charities by HEIs to ensure that they are appropriately regulated and reported on. In 2010 HEIs were asked by Hefce to identify their linked, associated or subsidiary charities as a one-off exercise, including the name and charitable purpose, opening balance and annual income and expenditure for those with an income over £100k. An annual identification of linked charities is published in each HEI’s audited financial statements.

HEIs may create, or establish relationships with, linked charities as a vehicle to manage and administer a specific or general activity, such as educational trusts or scholarship funds administered to support a group of institutional beneficiaries.22 For example, several charities are “linked” to the University of Oxford, including a Development Fund, College Contributions Fund, Law Foundation and Boat Club. The legislation states that the colleges and halls of Oxbridge and Durham, or students’ unions across the sector, do not constitute linked charities of the HEI, as the majority of these are directly registered with the Charity Commission in their own right.

Linked charities, while exempt from registration with the Charity Commission, remain subject to charity law and the law of trusts. Occasionally an HEI’s trustee board members may also be appointed as a trustee of a linked charity. Even where this is not the case, it is important that the trustee boards, through audit committees and the external auditors, ensure that the status of any charitable bodies with which they are associated are reviewed regularly in conjunction with being linked to the university and the liabilities which arise from this.23

Community interest companies (CICs)Community interest companies (CICs) are a specially designated charitable structure providing limited liability to the trustees of it, and were first established in 1995. CICs are overseen by the Office of the Regulator of Community Interest Companies within the Department for Business, Enterprise and Industrial Strategy. While not widespread as subsidiary vehicles for HEIs, CICs have a community benefit and social enterprise focus, and are strictly not for profit. An “asset lock” exists to ensure that its assets are retained within the company to support its activities, or used for the wider community benefit. A further safeguard in ensuring CICs support the community interest is that dividends payable to investors in the CIC are capped. We may witness more HEIs and students’ unions establishing CICs as vehicles to deliver and manage social enterprise activities as an emerging space within the third sector and business. Coventry University Social Enterprise CIC is an example of this, as a company in its “group” structure, in which the social enterprise activities of students, staff and alumni are located.

Non-charitable relationships: subsidiary companiesMany HEIs operate some form of group structure, comprising one or more companies such as wholly owned subsidiaries of the HEI as the parent undertaking or body. Wholly owned subsidiary companies would normally be set up as a company limited by share capital (in which the HEI would hold the share/s). This provides a useful means of separating out any non-charitable activities of the HEI from its charitable educational purposes. As the Charity Commission guidance (CC35) states, “there are restrictions on engaging in trades, the objective of which is to generate funds for the charity. In particular, charities may not engage in such commercially oriented trades where a significant risk to their assets would be involved”.

HEIs set up wholly owned subsidiary companies for a range of non-charitable activities, including:

y CPD, enterprise, consultancy and training: while research is generally categorised as charitable, training delivered by a HEI, such as that tailored to specific clients and markets, would not normally be considered a charitable purpose or a wider public benefit.

y HEI-owned residential accommodation and conferencing facilities: providing and charging students for residential accommodation is considered charitable as it is related to the core charitable purpose to advance education. In turn, conferencing facilities linked to the core educational offer of the HEI would be considered charitable. However, generating income by providing accommodation or hiring out conferencing facilities to non-charitable third parties would not generally be considered charitable.

21 “Paragraph w” charities - to describe linked charities in the 1993 and 2006 Acts - no longer applies. 22 Independent educational charities to which a HEI’s students apply for financial support purposes would not be classed as connected to the HEI. 23 Examples exist whereby another body becomes a linked charity to an HEI, where the other partners withdraw and the university is then in the position of exercising control.

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y Satellite campuses or HEI colleges: these are often set up as separate entities to the HEI. While they may offer the same or equivalent educational programmes, they may also undertake non-charitable activities or operate different tuition fee pricing models or different employee terms and conditions from the HEI which make a separate legal status attractive.

There are tax benefits to the subsidiary company and the HEI of taxable profits generated by the non-charitable activity of the company. This is where the subsidiary company may Gift Aid its profits to the HEI and reduce or eliminate the company’s corporation tax liability as a result. The law has been interpreted that only “distributable profits” recognised at the time of making the donation by the subsidiary can be transferred to the parent charity. In turn, such profits may only be donated where doing so would not lead to the company being in a negative asset position. Chapter Seven provides more information on taxation, charity law and HEI activities. Senior management teams would require external taxation and legal advice to ensure that they had appropriate arrangements in place to manage intra-group transactions of this type.

Most HEIs will operate at least one or two subsidiary companies. You will be able to find information on the HEI’s wholly owned / majority-owned subsidiary (and possibly joint venture) companies in the last set of audited financial statements signed off by the governing body. Separate accounts will also exist where the companies have substantially traded during the period. If you cannot locate this information ask the secretary to your governing body for it. The information can also be accessed by an online search on the Companies House register.

Once you have this, seek assurance from the secretary on the governance arrangements, including who the directors are, the financial performance of the companies, and whether any contribution has been made to the HEI by Gift Aid.

Would you as a trustee, and the governing body as a whole, benefit from knowing more about the role and performance of your HEI’s subsidiary companies?

Key relationships and HEI trustee boardsThis section will not discuss in detail key role-holders on the governing body, such as the leadership of the chair, or the importance of the “triadic relationship” (Llewellyn, 2009, 18) between the role-holder, the vice-chancellor and secretary/clerk. These relationships are of general interest in exploring the effectiveness of HEI corporate governance arrangements but are not specific to the topic of trusteeship. In turn, the Charity Commission recommends that, aside from the chair of the board of trustees, a treasurer is appointed to advise on the charity’s financial management and reporting, solvency and investments and borrowing. Many pre-1992 trustee boards have a treasurer role normally held by the lay officer responsible for chairing the finance or general purposes or equivalent committee of council, where this sub-committee exists. The role of treasurer does not feature on the more company-like boards (Bennett, 2002, Shattock, 2006) of the post-1992 HEIs, which are not required under their governing instruments to appoint a treasurer. Despite the continued presence of treasurers on many pre-1992 councils24, the executive authority vested in the chief operating officer or finance director for institutional finances are core senior management roles in all HEIs.

24 The continued prevalence of these lay officer appointments to the pre-1992 councils is arguably a legacy of a period when lay oversight of finances was required, when university leaders were principally derived from academic authority and representative of the scholarly community rather than requiring executive management responsibilities.

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The equal status of HEI trusteesOne area of regular debate around the composition of HEI governance bodies is the status of, and relationship between, members as determined by legislation, governing instruments as appropriate, and the Higher Education Code of Governance (2014). Governing body membership is covered because of charity law implications for the general and equal status of trustees. Section 177 of the 2011 Act provides a blanket or levelling definition of charity trustees as those persons “having the general control and management of the administration of a charity”, which looks beyond the different classes of membership we see on a governing body. In an HEI’s governing instruments, different membership categories for the trustees of the council or the board of governors will apply. For example, many pre-1992 statutes designate “classes” of council members broken down by pro-chancellors (often but not exclusively the chair and vice-chair of council), other lay council members, the vice-chancellor and the treasurer, a limited number of senior academic officers, such as a pro-vice-chancellor or vice-principal role holder appointed by the council, staff and student appointees. In turn, the post-1992 HEIs are bound by the ERA 1988 and the FHEA 1992 which specify board composition and ratios.

While valuing the different experiences of trustees and a drive to improve diversity, parity in trustees’ status, as well as equal expectations of them and their obligations to the HEI is paramount. As the Charity Commission states, taking decisions jointly and collectively as a trustee board requires the chair to ensure that all trustees have the opportunity to participate. As an illustration, the Scottish Charity Regulator, the OCSR, alluded to the parity of status and obligations on trustees in its response to the consultation on the Higher Education Governance (Scotland) Bill 2016. OSCR highlighted that the proposal in the legislation to place ultimate responsibility for the leadership of the governing body on the chair did not sit well with charity law, on the basis that the general duties placed on trustees do not apply more strictly or strongly to a chair that any other trustee.

This includes, as Schofield et al (2006 and 2012) observe, staff governors being on a level playing field with independent governors. The CUC Higher Education Code (2014, 11) makes clear that “staff and student members of the governing body share the same legal responsibilities and obligations as other members and must not be routinely excluded from discussions”. The “insider” status of staff trustees provides benefits in ensuring that the governing body has to take account of the realities of organisational life. However, it also poses potential conflicts of interests in circumstances where staff trustees may find it difficult to act as critical friend to the executive management when they report to them. In turn, there may also be occasions when balancing staff trustees’ personal perspectives and insights as academic or professional support staff with decisions which are not going to be popular within the institution, but which the trustee board deem to be in the best interests of the HEI. n

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The purpose of this chapter is to provide an overview of key financial considerations of trustees on HEI governing bodies. The key message conveyed is the fundamental fiduciary duty of HEI trustees to ensure the solvency and long-term financial sustainability of the institution of which they are stewards, and safeguarding its assets through the avoidance of risks leading to their loss or depletion. This is enshrined in the governing instruments of HEIs. For example, an HEI trustee board signing off a highly speculative major expenditure such as the establishment of an overseas campus, without effective due diligence and a clear understanding of deliverables and return on investment, would not represent effective financial governance. Contributing factors in recent high-profile collapses of charities such as Kids Company in 2015 and the adverse impact of this on its young beneficiaries, include breakdowns in financial oversight and control at the level of the trustees, through the continued operation of an unsustainable business model. In turn, it is the role of an HEI’s trustees to “ensure that the charity has the means to meet its obligations when the HEI is entering into substantial contracts or financial commitments” (Hefce Memorandum of Assurance and Accountability, 2016) on behalf of the HEI.

While not all members of an HEI’s trustee board are expected to hold and apply a detailed working knowledge of commercial and financial strategy, financial reporting, regulation and investment and borrowing, trustee boards do require independent trustees with professional backgrounds and standing in these areas. However, all trustees having a general understanding of financial governance and stewardship as applied to HEIs will help ensure the right questions are asked in relation to income, expenditure, cash, reserves and the affordability of major investments undertaken, or other strategic matters linked to estates and resources, such as the disposal of HEI land or other major assets, and fundraising.

The 2014 Statement of Recommended Practice (SORP): Accounting for Further and Higher Education, applies to HEIs as public benefit entities. For HEIs this takes precedence over the Charities SORP issued by the Charity Commission and OSCR. Those trustees who are members of the HEI’s audit or finance committees may have a more thorough knowledge of the SORP and financial reporting standards as applied to the sector.

Taxation and the charitable status of HEIsGiven the complexity of taxation law and its application to the breadth of an HEI’s activities, the importance of senior management teams engaging professional taxation and legal advice is stressed. This overview is not a substitute for seeking specialist advice, but is intended to support an understanding of how HEIs as charitable bodies are treated for corporation tax purposes. The charitable status of HEIs in the UK directly influences how they are treated for tax purposes. Even HEI trustees appointed on the basis of their professional experience in finance and accounting may not be experts on taxation law as it applies to their HEIs. The charitable status of HEIs brings with it a number of tax benefits and relief for them as regulated by HMRC. HEIs will not pay corporation tax on “profits” generated through “primary purpose” trading - that is, activity associated with the charitable purpose to advance education. Examples include:

y Property income, such as rental income from its estates, and capital gains when land is disposed of.

y Investment income and non-trading profits from loans entered into.

y Fundraising income for a VAT-exempt event.

y Income and gains arising from intellectual property created by the HEI. Spin-out companies will be touched on in the section on research income.

07 HEI trustee boards and finance

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A number of activities connected to the charitable purpose of the HEI will also qualify for exemption from corporation tax being paid on the income generated, including academic conferences, academic publishing or printing activities, and delivering catering, accommodation, cash and vending machine services. However, there are grey areas on which expert advice needs to be sought. These include commercial income-generating activities that may not reasonably be seen as part of the wider purpose and package of support provided to advance education, such as providing catering or entertainment facilities to the wider public. Non-charitable income forms part of a “non-primary purpose pot” for assessing an HEI’s corporation tax liability, which may benefit from being undertaken by an HEI’s tax or legal advisors.25 A key consideration of the trustee board is to understand the impact of proposed strategic business initiatives andinvestments presented to it, and where these might fall outside the primary educational and, therefore, charitable purpose of the HEI, or pose a risk to the responsible use of the assets of the HEI. The use of subsidiary vehicles of the HEI as charity to separate out these activities and transfer the risks from the parent charitable body is one safeguard against this, as discussed in Chapter Six.

HEIs may be required to pay VAT on goods and services, which would incur additional expenditure which otherwise could be used for core charitable delivery. It is possible that HEIs may be granted relief, and able to reclaim and be exempted from the VAT charged for goods and services linked to the HEI’s charitable activities. The “supply of education” in a wide sense is exempt from VAT, as is goods or services closely related to education. This will normally only mean those services such as accommodation and catering offered to students, and not more general goods and services supplied by the HEI.

HEIs as charities and research incomeGiven the significance of research grants and contracts as income and expenditure streams, trustees’ general understanding of how the HEI’s charitable status affects research expenditure and research costing may be of use. The corporation tax and VAT implications of research undertaken by the HEI are as follows:

y For corporation tax relief, HMRC confirmed in 2015 that HEIs and charities are not allowed to claim research and development tax relief, or research and development expenditure credit for costs, as they already benefit from corporation tax relief for these activities.

y VAT liability will depend on the status of the other party and the nature of the contract that HEI has entered into with them to fund research. The income received by HEIs for publicly funded research, such as that provided by the research councils and UK charities, is outside the scope of VAT, as these funded activities are considered for the public good. VAT may also be reclaimed where it is not automatically exempt, such as that charged on commercial research grants. VAT relief may also be given to HEIs for certain equipment used to carry out medical research, or for advertising costs, and on some buildings.

The costing of research funded at HEIs by other charitable bodies is an area where a degree of relief has been provided. UK HEIs are required to understand the full economic cost (FEC) as the actual cost of delivering research made up of: directly incurred costs; directly allocated costs; and indirect costs, which may have an overheads element for estates, infrastructure or professional support staff costs associated with undertaking the research. Grants disbursed to HEIs by other charitable bodies are seldom likely to meet the general running or indirect costs associated with delivering a grant. These costs are therefore incurred by HEIs if they are not offset by the research. Each of the funding councils has established specific revenue streams to help meet these indirect costs. In England and Scotland charity research support funding is an element of quality-related (QR) funding awarded to HEIs on the back of their performance in the Research Excellence Framework (2014). From 2017-18 onwards, it is not confirmed whether this form of funding will be retained, and this will be a matter for Hefce and its successor UK Research and Innovation to address.

HEIs establish spin-out companies to exploit commercially and bring to market UK research and innovation ideas generated by staff within the organisation. As with wholly owned subsidiary companies, spin-out companies are an arms-length means of managing research and innovation activities which could be deemed to be non-charitable in purpose. However, spin-out companies are complex, and HEI trustees may benefit from a general understanding of the governance and financial transactions linked to their HEI’s spin-out companies. An HEI’s trustees need to ensure that investment in the spin-out company is an appropriate use of the HEI’s funds, to ensure that this is in the best interests of the HEI as a charity, and the balance between short, medium and long-term returns on investment. The function of spin-out companies to commercialise new ideas or novel applications arising from research may be deemed high risk, with the possibility of financial returns only likely to flow through to the HEI in the long-term.

25 The British Universities Finance Directors Group (BUFDG) has published The Corporation Tax Treatment of HEIs (2014) as guidance on this topic.

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Other charity-related issues for an HEI’s trustees to bear in mind with spin-out companies include:

y Any tax relief granted to shareholdings given to staff linked to the spin-out company.

y The management of potential conflicts of interest of staff involved in the spin-out company and the HEI shareholders to ensure the best interests of the HEI as a whole are maintained.

y Whether intellectual property rights (IPR) arising from the activities are assigned to, or licensed through, a trading vehicle of the HEI or the spin-out company, as commercialising the IPR could be classed as non-charitable trading.

Donations and endowmentsThe strength and size of endowments made by private benefactors to HEIs is often seen as one indicator of its status and reputation and what it might mean to be world-class (Salmi, 2009). The US Ivy League institutions and Oxbridge, for example, are examples of institutions endowed with multi-billion dollar or pound sums. Disparities across the sector in endowment income is stark, and while this includes significant variations between many Russell and other pre-1992 HEIs, no post-92 HEI exceeded the £10m threshold based on their 2015/16 accounts, with many below £1m. Despite these differences, endowments and donations as supplementary charitable income sources are an area of increasing interest and focus for HEIs. Trustees’ awareness of the different types of endowment their institution might hold merits discussion.

A HEI’s trustee board is unlikely to have oversight for specific endowments and trusts, but may be represented on a fund or trust board in place to administer one or more funds. The governing body will be responsible for appointing individuals and/or a body as a trustee of a designated fund. The different types of donations and endowments will now be covered.

Donations may be restricted or unrestricted. A restricted donation means that its purpose is ring-fenced as part of the terms on which it is awarded to the HEI. This might be such as to help fund research in a particular field, an endowed chair or scholarships to support a specific academic programme or discipline, or a beneficiary meeting specific criteria. Restricted donations are a key component of the restricted reserves. Unrestricted donations do not limit how or what the donation is used to support, provided it supports the general charitable purposes of the HEI. A fundraising strategy which clarifies not just the level of donations sought, but the objectives and purposes for which donations secured will be used is key. The wider principles for trustees to consider in relation to fundraising strategy and governance is covered in the next section of this chapter.

Endowments take the form of a fund, as a type of charitable trust, retained for the benefit of the HEI, and split between a “capital” and an “accumulated income” element. These elements need to be clearly distinguished and divided for the purpose of managing and reporting on the endowment. An expendable endowment will need to be invested to produce income. This may allow the trustees to convert all or part of the fund into income to be spent for charitable purposes. There is no requirement to retain the original capital, so the endowment may be spent in full. Whether or not the fund is restricted or unrestricted will depend on the donors’ terms. A permanent endowment is the property of the charity: as a physical asset, such as land, or a building, or money or investment that cannot be used as if it were income. What this means in practice is that the inherent capital in the asset must be retained and held indefinitely but the trustees have the power to spend the income from investment and interest accrued on the capital as permitted by the Charities Act 2011. The permanent nature of the endowment if, for example, it is a building does not mean that the building forming the original endowment needs to be permanently retained, but it may be sold and reinvested in another to remain as part of the endowment. The investment income from permanent endowments may be restricted as to what it can spent on or unrestricted, depending on the terms set by the donor.

The detailed financial treatment of endowments and donations in line with financial reporting standards will not be addressed here. Permanent and endowment funds would be distinguished in an HEI’s audited financial statements. However, trustee boards will wish to seek assurance via the audit committee and the external auditors that the appropriate accounting principles have been applied. Where HEIs have substantial or complex endowment portfolios, the trustee board may benefit from engaging investors to help spread investment risks and maximise the return on the income expended. A number of UK HEIs are establishing unrestricted permanent endowment funds as a focus for generating regular income for the HEI.

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FundraisingFundraising, as the lifeline for many charities, is likely to become a more significant income source for HEIs in a period where more pressure is being exerted on traditional tuition fee, research grant and contract income streams. According to the 2016 Ross-CASE survey report, Giving to Excellence: Generating Philanthropic Support for Higher Education, fundraising has increased significantly, amounting to £860m in 2014-15 for the two-thirds of HEIs which participated in the survey. Investment by the sector in fundraising, including staff and targeted campaigning activity, has also increased. The Sutton Trust has called on the UK government to do more to incentivise UK HEIs to increase their assets through fundraising, including as a means of widening access through higher levels of financial support to disadvantaged applicants.

Trustee boards in HEIs have a role to play in the fundraising strategy of the institution and ensuring that mechanisms exist for the due diligence of donations and donors. Not doing so could risk breaching trustee duties, such as being complicit in money laundering. From a charity perspective, weak controls at the level of the governing body could be contrary to the best interests of the HEI, compromise its ethical principles and damage the reputation of the HEI, as well as its future fundraising capacity. Since the Woolf enquiry (2011) cited in Chapter One, many HEIs have reviewed or developed fundraising codes of practice and controls around major and high-profile giving, which require final consideration and approval by the trustee board after acceptable due diligence. The Charity Commission has published a guide on trustees’ responsibilities for fundraising, which are a general reference point for HEI trustee boards.

The 2015 Etherington Review led by the NCVO’s chief executive recommended strengthened fundraising regulation. The report acknowledges that “public bodies such as schools, hospitals and HEIs are now more likely to depend upon fundraised income in their resource mix” (2015, 14). However, the implications for HEIs are largely overlooked in the review, on the basis of a generally strong record in responsible fundraising practices. The report positions trustees as the first line of defence in ensuring that fundraising is not just compliant with the law but reflects high ethical standards in the wake of poor practices by some charities in eliciting funding and the approaches made to donors which, in some cases, have bordered on harassment. The establishment of the fundraising regulator as an independent body for England and Wales has produced a Code of Fundraising Practice to regulate the charitable sector. Also created is the Fundraising Preference Service, whereby individuals could opt out of charities contacting them for fundraising purposes. This could bring potential barriers to HEIs fundraising through their alumni, which according to the Ross-CASE report constitutes 79% of all pledges made to the sector.

In November 2016, Hefce signed a memorandum of understanding with the fundraising regulator to co-regulate exempt-charity HEI fundraising and a protocol for acting on inappropriate fundraising practices of HEIs. However, Hefce is not responsible for monitoring the fundraising activities of HEIs as exempt charities, and HEIs as exempt charities are not obliged to report on these. Its public interest disclosure (whistleblowing) policy would be the channel for raising concerns about a HEI. Hefce encourages exempt-charity HEIs to register with the fundraising regulator, apply the new fundraising code and states that the fundraising regulator has confirmed that most exempt charity HEIs have paid the £1000 flat-rate levy on expenditure, to contribute to the regulator’s costs.

Question: As a trustee:Are you aware of your HEI’s fundraising code of practice or policy, including acceptances of major donations and gifts?

Has fundraising activity been an area discussed by your governing body recently, including the new requirements of the fundraising regulator?

Is your HEI’s development or fundraising function registered with the fundraising regulator?

Are there major gifts or donations reported in your recent financial statements which the governing body or one of its committees has considered?

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Trustees and the sale, leasing and disposal of HEI propertyHEIs’ estate strategies entail major capital commitment and investment, increasingly funded through their own funds or through borrowing or other means of raising finance. It is therefore important that HEI trustee boards understand the commercial and charitable costs and risks to ensure the assets of the HEI are protected and maximised. The governing instruments of HEIs include the powers to buy, sell or lease land and property on behalf of the HEI. This includes the governing body disposing of land or property for which it acts as trustee, subject to restrictions that may be placed on it doing so, such as through a permanent endowment, which may require the relevant charity regulator’s approval to vary or be released from. However, as charities, HEIs are required to follow the relevant charity regulator’s requirements in relation to land and property.

An overarching principle is that HEIs, whether as registered or exempt charities, must apply the property only for the purposes set out in the governing document. The main difference between exempt and registered charities is that exempt charities are not subject to a number of restrictions placed on registered charities in Part 7 of the 2011 Act on the disposal and mortgaging of land. These obligations are not straightforward given the often vast and mixed type, condition, locations and uses of property owned by most HEIs. However, in entering into sales or leases of HEI land or property, the trustee board would need assurance from senior management and their professional advisors that key principles have been applied. These include that:

y The HEI has permission under its governing instrument to sell or lease the property, and owns the title to it. This applies to the specific terms of land or property held on trust. This includes confirmation that the HEI owns the title to the land or property, and that statements are provided to the purchaser or lessee on how the land is held and by what sort of charity, and that it is being disposed or leased legally.

y The sale or lease is in the HEI’s best interests to deliver its purposes.

y The sale or lease is on the open market, and advertising the sale or lease unless professional advice is to the contrary. An independent and professional valuation is also required in most instances.

y The value for the charity from the sale or the lease is maximised, which is normally the sale price or rental return, although there may be other benefits such as continued access by students to leased sport fields, for example. Less onerous expectations of securing the best return may not apply where selling or leasing to another charity, to ensure that the purchasing or leasing charity is not unduly advantaged.

In entering into a lease or seeking to acquire land or property on behalf of the HEI, the trustees need to ensure that the same duties of skill and care are observed as identified in the paragraph above. Trustee boards may be asked to observe and confirm that they have complied with the charity regulator’s guidance in relation to disposing of land. In the case of the Charity Commission for England and Wales, guidance document CC28 is a key reference point.

Investment, cash and reserves

Investment of unrestricted HEI income generated through its principal educational and charitable work must be within the powers of trustee boards and for the purpose of benefiting the HEI, such as long-term financial return for re-investment back into the HEI to deliver its core activities. However, investment of HEI income raises a number of areas for trustee boards to carefully consider:

y That the trustee board, or its finance or investment committee, is aware of the quantum of investment, and the terms and conditions attached to it.

y Ensuring that specific investment activities are undertaken by experts, independently engaged by the HEI.

y Spreading and limiting risk through a mixed portfolio of investments rather than investing in a single, high-risk investment opportunity.

y Ethical considerations arising from HEI investments. Directly or indirectly investing in companies or organisations - or countries in which they are based - that have poor human rights or environmental records or are linked to areas such

as armaments, military drones or drugs (including tobacco or alcohol) may be a source of challenge from students, staff and other HEI partners. While this does not represent a breach of trustee duties, the potential reputational damage for the HEI, and contradiction between a controversial investee body and the values that the HEI is intending to uphold, may be significant. Any adverse impact on its ability to deliver its purposes arising from inappropriate investment decisions of this type is therefore a serious matter for the trustees. Many HEIs have adopted an ethical investment policy, or equivalent set of principles to guide investment decisions, approved and reviewed by the trustee board.

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The importance of healthy cash flows and strong liquidity to manage day-to-day business commitments, and the generation of a surplus for re-investment to deliver the HEI’s core charitable purposes, are key obligations of effective HEI trusteeship. As Hefce notes, as charities HEIs are obliged to ensure that they are sustainable and do not expose themselves to undue risk, which could undermine or reduce their ability to support their beneficiaries. HEI trustee boards are the appropriate custodians of a reserves policy to enable financial resilience in the event of unforeseen and volatile conditions that could lead to an erosion of reserves. However, while discretionary cash reserves (eg unrestricted endowments) being built up the HEI sector is increasing, and forecast to rise to £17.3bn by 2018, this “masks a significant spread of financial strength”26 across HEIs, as indicated by the variable endowment fund profiles identified earlier in the chapter.

Remuneration of HEI trustees other than employeesThe CUC Guide for Members of Higher Education Governing Bodies (2009) refers to “exceptional circumstances” in which it may be deemed appropriate to remunerate a “lay officer” – that is one of the independent governors or external council members. However, the successor higher education Code of Governance (2014) shifts this stance to reflect gradual changes in arrangements, by replacing “exceptional circumstances” with the moderated observation that “current normal practice is to not remunerate external members”. Non-payment of trustees reflects a long-held position that trusteeship is based on the principle of voluntarism widespread in parts of the third sector. In the higher education sector, a public service ethos arguably still prevails, with trusteeship at an HEI recognised as a reward in its own right, particularly for those appointees with former and ongoing links and associations with the HEI.

However, there is a gradual but real interest from HEIs in exploring options around the remuneration of what have previously been voluntary appointments. The remuneration of chairs and other lay/independent members of HEI governing bodies more frequently registers on the radar of board discussions around corporate governance policy and practice. In turn, secretaries and clerks are exploring the pros and cons of remunerating one or more independent, external or lay officer trustees. Also, the topic increasingly arises at Leadership Foundation and CUC discussions in relation to governor recruitment, retention, reward and recognition more generally, and many HEI governing bodies may use an in-depth evaluation of governing body effectiveness to reflect on remuneration as a form of recognition and development for the chair of the governing body and/or other key members. While still in the minority, an increasing number of English HEIs have introduced into their governing instruments the power to remunerate trustees for performing these duties, and several governing bodies, including Northumbria, Leeds Beckett, Salford and Bradford universities, exercise this power and several of these have done so for a number of years.27

The HEI may, and may only, confer benefits on members of the board of governors if the benefit has been authorised by the board of governors in accordance with the regulations. In this clause, “benefit” includes:

(a) Buying any goods or services from the HEI.

(b) Selling goods, services, or any interest in land to the HEI.

(c) Being employed by, or receiving any remuneration from the HEI.

(d) Receiving any other financial benefit from the HEI.

26 HEFCE’s analysis of the Financial health of the Higher Education Sector, 2014-15 to 2017-18 forecasts. 27 In the UK, many higher education sector bodies remunerate, or offer honoraria, non-executive directors or lay trustees on their boards, including Hefce and the funding councils, with enhanced payment for chairs. Remuneration of HEI governing body chairs is more prevalent in other countries. A number of Australian HEIs remunerate independent council members, including their chancellors (the term for council chairs), including in their capacity as part-time statutory and non-statutory officers and appointees of state governments.

Question: If your HEI has an investment portfolio, is it underpinned by an ethical investment policy or principles?

How regularly does the governing body, or one of its committees use it as a reference point for recommendations and decision-making on HEI investment?

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The charitable status of HEIs is sometimes referred to as a reason for ruling out the remuneration of independent governors or council members. However, charity law states that a charity may confer benefits on its trustees in those circumstances where permitted by its constitution, by statute, the Charity Commission or the court. In the case of HEIs, the authority to remunerate trustees derives from its governing instrument, into which such a power may be incorporated. Additional guidance is set out by the Charity Commission in its Trustees Expenses and Payments (CC11) document, which is the main external reference point for HEIs considering payment of trustees. Many HEIs already have a clause in their governing instruments on the conferment of benefits, including the power to pay independent governors or council members. This power may be held in reserve and therefore not exercised by the governing body. A model paragraph (agreed by the Charity Commission and the then BIS) would be incorporated into the governing instrument of the HEI on the approval of the Privy Council, along these lines, supplemented by a set of regulations governing the detail of the payment approval and review process.

The potential reasons for rewarding the chair or a tier of lay officers or independent governor in monetary terms beyond the intrinsic reward of serving on a governing body are many and varied. One reason is that remuneration is offered to reflect an increase in the responsibilities and demands placed on HEI governing body chairs, which is borne out of the CUC’s Chair Support Survey 2017.28 A pragmatic reason for remunerating trustees is highlighted by the Leadership Foundation’s Guide for New Secretaries and Clerks of Governing Bodies of HEIs in the UK (2012) which states, “that HEIs do not as yet pay fees to board members may stand in the way of attracting the best candidates” (p18). Each HEI trustee board would need to consider collectively whether remuneration of any of its trustees is required or desirable and would be in the best interests of the HEI. For example, for some HEIs, remuneration of a chair may have aided the recruitment of a talented candidate to the governing body, who would otherwise not be in a position to accept a voluntary position in a market where paid non-executive directorship opportunities might arise. For other HEIs, this may be a factor helping the retention of a key trustee where external opportunities arise, or it may simply be some modest financial recognition for the significant commitments expected of the chair and committee chairs by many HEIs, the demands of which go beyond a calendar of formal meetings.

Trustee boards of HEIs, as with other charities, would need to ensure that a range of safeguards are in place prior to remunerating trustees, as set out in the Charities Act 2011, including that:

y A collective decision is made by the trustees that it is in the best interests of the HEI to remunerate the trustee(s) for the services provided.

y The maximum amount is set out in a written agreement and such amount is not exceeding what is considered reasonable in the context of the HEI’s scale, complexity and finances.

y Perceived or actual conflicts of interest arising from the decision to remunerate are managed and mitigated. This includes ensuring that any payment would not jeopardise a trustee’s independence and that their personal interests do not conflict with their duty to act in the interests of the HEI.

y Parity of the status of HEI trustees is not undermined by remuneration. See Chapter Six.

Payment of trustees who are not employees of the HEI or a related body (eg all members other than the head of institution, staff trustee and student trustees) does not of itself confer employee status on these individuals. Given this, consideration could be given to processing these payments through the HEI’s payroll to ensure their transparency, for taxation, national insurance, audit and other disclosure purposes. Where a decision is taken to explore remuneration of one or more trustees, some key points for consideration are:

y Reflecting fully on whether remuneration is in the best interests of the HEI, including whether other forms of benefit as outlined in the benefits clause might be more appropriate, and recording why these alternative options have been discounted.

y Ensuring the proposed remuneration is reasonable and informed by benchmarking where possible, including other HEIs already exercising the power and a number of board appointments on higher education sector bodies. The remuneration of independent and external directors of other relevant non-corporate bodies, such as non-executive directors of NHS Foundation Trust Boards may also be informative, given some similarities (and relationships) between the size and complexity of some trust structures and HEIs.

28 Of the 77 respondents to the survey, 99% of respondents believed that responsibilities had increased and 95% believed they would increase further.

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y Remunerating the role and not the role-holder. A “best interests” approach ensures that the rationale for remuneration is linked to designated roles in the governance system, eg where there are demonstrable additional accountabilities and demands of duties and times associated with specific roles such as the governing body chair.

y Ensuring transparency of payment, and avoiding making payments through a personal service company of which a governor or their relative is a director, which while more tax efficient for the individual, is less visible to users of the HEI’s financial statements.

y Setting out written expectations associated with the remuneration, which are communicated to and agreed by the individual receiving remuneration. While these do not constitute terms and conditions, they need to specify the enhanced duties and responsibilities of being a chair, or chair of a board committee, any performance review system in place and payment particulars.

y Ensuring recipients of payment receive copies, and confirm understanding of, the Charity Commission Trustees expenses and payments (CC11) guidance, the benefits clause in the HEI’s governing instrument and full Regulations associated with this.

y Ensuring that a review process is in place for the chair or other beneficiaries which make reference to the remuneration received which involves the governing body as a whole.

Other forms of supportIt is recognised that monetary recognition, however modest, is only one form of support that might be given to chairs. The CUC conducted a wider survey of chair support, focusing on chairs of HEI governing bodies. The results were made available in May 2017 and gathered feedback on the responsibilities on chairs, the time spent in undertaking their role and with key role-holders in the governance system, and what wider support could be provided for them, including dedicated office support and space, access to IT equipment such as a laptop, tablet device, mobile phone or a printer, an honorarium or stipend to cover miscellaneous costs, through to continuing professional development (CPD), including online courses, attending Leadership Foundation programmes and seminars, national conferences and external courses. Many HEIs will already be providing a range of these types of support to chairs and the other trustees already, but the survey indicates that support is variable. n

The wider reading identified is intended to signpost trustees and other readers to some key documentation that may be of interest in exploring policy, regulation and a limited amount of academic literature relating to higher education trusteeship in more detail. It is not a bibliography or comprehensive set of references used in writing this guide.

Core readingCharity Commission for England and Wales (updated 10 July 2015), ‘The essential trustee: what you need to know, what you need to do’. Available at: www.gov.uk/government/publications/the-essential-trustee-what-you-need-to-know-cc3/the-essential-trustee-what-you-need-to-know-what-you-need-to-do

Charity Commission for England and Wales (14 February 2014), ‘Public Benefit: rules for charities’. Available at: www.gov.uk/government/collections/charitable-purposes-and-public-benefit

Charity Commission for England and Wales (16 September 2013), ‘Public Benefit Reporting’ (PB3). Available at: www.gov.uk/.../publications/public-benefit-reporting-pb3

Charity Commission for England and Wales (16 September 2013), ‘Charitable Purposes’.Available at: www.gov.uk/government/publications/charitable-purposes

Charity Commission for England and Wales (November 2013), ‘The advancement of education for the public benefit’.

Higher Education Funding Council for England (Hefce) (2016/12). Memorandum of Assurance and Accountability. See in particular Annex E on Exempt Charities. Available at: www.hefce.ac.uk/reg/MAA/

Higher Education Funding Council for England (Hefce), ‘Regulating higher education institutions as charities’. Available at: www.hefce.ac.uk/reg/charityreg/These pages contain a wealth of information about the status of funded HEIs in England and Wales, Hefce’s role as principal regulator and a range of disclosure requirements.

Office of the Scottish Charity Regulator, ‘The advancement of education’. Available at: oscr.org.uk/charities/guidance/meeting-the-charity-test-guidance/b-the-advancement-of-education

Office of the Scottish Charity Regulator (4 April 2016), ‘Guidance and Good Practice for Trustees’. Available at: oscr.org.uk/charities/guidance/guidance-and-good-practice-for-charity-trustees

Schofield, A. (2006) Getting to Grips with Being a Governor. Making Sense of Governance in Higher Education. A Programme for Members of Governing Bodies in Universities and Colleges. London: SCOP Ltd.

The Charity Commission for Northern Ireland, ‘Charity Essentials’ portal. Available at:www.charitycommissionni.org.uk/charity-essentials/

The Committee of University Chairs (CUC). (November 2014) ‘Higher Education Code of Governance’. Available at URL: www.universitychairs.ac.uk

The Committee of University Chairs (CUC) (November 2016), Illustrative Practice Note (IPN 2). ‘The Prevent Agenda’. Available at: www.universitychairs.ac.uk

The Committee of University Chairs (CUC) (January 2017), Illustrative Practice Note (IPN 3). ‘Academic Governance’. Available at: www.universitychairs.ac.uk

Appendix one: Wider reading

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Further Reading

Association of Chief Executives of Voluntary Organisations. (2013). The Good Pay Guide for Charities and Social Enterprises’ Available at https://www.acevo.org.uk/good-pay

Bates, Wells and Braithwaite (2016), ‘The Charities Act Handbook. A Practical Guide’. London: Lexis Nexis.

British Universities Finance Directors Group (BUFDG) Briefing (March 2014), Latham, H. ‘HEIs and Tax’. Available at:www.universitychairs.ac.uk/wp-content/uploads/2014/12/BUFDG-Briefing-2-HEIs-Tax.pdf

British Universities Finance Directors Group (BUFDG) (June 2014), ‘The Corporation Tax Treatment of UK Universities Guidance Note’.

Charity Commission for England and Wales (CC9) (01 March 2008), ‘Speaking Out: guidance on campaigning and political activities by charities’. Available at: www.gov.uk/government/publications/speaking-out-guidance-on-campaigning-and-political-activity-by-charities-cc9

Charity Commission for England and Wales (2009), Research by Higher Education Institutions Available at: www.gov.uk/government/publications/research-by-higher-education-institutions

Charity Commission for England and Wales (CC11) (01 March 2012), ‘Trustee Expenses and Payments’. Available at: www.gov.uk/government/publications/trustee-expenses-and-payments-cc11

Council for the Advancement and Support of Education (CASE). ‘Giving to Excellence: Generating Philanthropic Support for Higher Education. Ross Case Report 2016’. Available at: rosscasesurvey.org.uk/

Farrington, D and Palfreyman, D (2012, 2nd Edition), The Law of Higher Education. Oxford University Press: Oxford. In particular Chapter Three on the ‘Legal Status of Higher Education Institutions’ and Chapter Seven, ‘Charity Trusteeship and Personal Liability’ are relevant.

Moon, J (2014). ‘Corporate Social Responsibility: A Very Short Introduction’. Oxford University Press: Oxford.

Pellew, J (2013b) ‘A Metropolitan University fit for Empire: the role of private benefaction in the early history of the London School of Economics and Political Science and Imperial College of Science and Technology, 1895-1930’. History of Universities, XXVI/1, pp. 202-245.

Pellew, J (2013a), ‘For the public good’, History Today, 63/7, pp18-20.

Rammell, B (October 2016). ‘Protecting the Public Interest in Higher Education’. Higher Education Policy Institute (HEPI) Occasional Paper (No 15). Available at: www.hepi.ac.uk/2016/10/13/protecting-public-interest-higher-education/

Statement of Recommended Practice for Further and Higher Education (SORP) (March 2014). Available at: https://www.bufdg.ac.uk/sorp

Woolf, HK (November 2011). ‘An Inquiry into the LSE’s links with Libya and Lessons to be learned’. Available at: woolflse.com/

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The table below sets out the trustees’ duties defined by the Charity Commission, and the comparable directors’ duties alongside them:

Trustees’ Duties Directors’ Duties

Ensure the HEI is carrying out its purpose for the public benefit through the advancement of education

s.172 - duty to promote the success of the company for the benefit of its members as a whole

Comply with your HEI’s governing instruments

s.171 - duty to act within powers

Act in the HEI’s best interests s.172 as above ands.173 - duty to exercise independent judgment

Manage the HEI’s resources responsibly ss 171 and 172 as above ands.177 duty to declare interests in proposed transaction or arrangement

Act with reasonable skill and care s.172 - as aboves.173 - as aboves.175 - duty to avoid conflicts of interests.176 - duty not to accept benefits from third partiess 177 -as above

Ensure the HEI is accountable All of the above

Appendix two

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More about Governance at the Leadership Foundation

The Leadership Foundation is the leading provider of governance advice and support across higher education and Andy Shenstone, Director of Consultancy and Business Development is responsible for and oversees our approach to governance, the governor development programme and research activity that relates to governance. The governor development programme is led by Aaron Porter, Assistant Director, Governance, who is also our lead contact with the Committee for University Chairs and other relevant higher education networks and organisations.

For 2017-2018 our theme for higher education governance is Governance to 2020 and beyond: Improving Effectiveness for a New Age. In these times of transition and change and our governance provision offers the opportunity to anticipate and evaluate the impact of change, while offering practical support and advice about how to successfully navigate the changes. In addition to focusing on a changing policy environment, new to GDP are a national conference – Governance: Improving Effectiveness for a New Age: and we will begin the 2017-2018 year with a debate on the Challenges facing good governance. Also newly available is the revised governance effectiveness framework and associated survey tools. These are in addition to the series of Governor Development Programme events that are taking place throughout the year, full details are at www.lfhe.ac.uk/gdp n

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Dr Adam Dawkins is head of governance and secretary to the board, and university executive member at Northumbria University, Newcastle. Prior to 2011 when he took up the role, Adam was assistant registrar (council and governance) at Queen Mary, University of London, held management roles at the University of London International Programmes, and started his career at the predecessor body to the Arts and Humanities Council (AHRC). Adam’s Doctor in Education (EdD) degree from UCL’s Institute of Education was based on research examining higher education governance and governing body visibility within the governed HEI as a variable in its effectiveness. Since 2015 Adam has been an external trustee of Liverpool Guild of Students (Liverpool University).

Adam has published articles on governance and higher education policy in the Journal of Applied Research in Higher Education, Governance and Compliance (ICSA global membership magazine) and was a contributor to the Leadership Foundation/Hefce Prevent Duty training materials. Most recently, Adam has a journal article in publication on HE governing body visibility in Educational Management Administration and Leadership (Sage). n

Biography of Dr Adam Dawkins

Also in this series

Getting to Grips with...Series oney Audity Estate and infrastructurey Finance (Updated 2015)y Human resources management y Risk (pub: 2009)

Series twoy Academic standards, quality and the student experiencey Internationalisation y Research and knowledge transfer (pub: 2011)

Series threey Being a new governory Information and communications technology (pub: 2013)

Series foury Procurement (pub: 2015)

Series fivey Efficiencyy Trustee Responsibilities (pub: 2017)

www.lfhe.ac.uk/G2G

Notes

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This publication is part of the Getting to Grips series that include: being a new governor; information and communications technology; audit; estates and infrastructure; risk; HR management; internationalisation; academic standards, quality and the student experience; and research & knowledge transfer.

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