Trustee Renumneration

To pay or not to pay? In light of the recent trustee remuneration dabate, Andrew Crawford asks why not?

When Helena Kennedy QC accepted the post of Chair of the British Council, the Council's Officers must have been delighted. They must also have been relieved when she continued in office following the cessation of the payment of her honorarium.

While there may be special factors unique to the British Council's honorarium, the publicity that this case has attracted shows that the question of remuneration for charity trustees is becoming a major issue for those running large complex charities, who find that they are fishing for talent in an increasingly over fished pond with little bait. The Charity Commission Consultation document on Trustee Remuneration published in September, comes at an opportune time. It is well worth reading.

Writing in Conveyancer and Property Lawyer earlier this year, and quoting a 1915 legal case called Re Wedgwood in support, Jean Warburton, a part time Charity Commissioner, commented:

"Charities, unlike family or commercial trusts, exist for the public benefit and there is an overall understanding that those who administer such trusts act altruistically and not for profit".

Many may consider that the “overall understanding” she refers to is unrealistic.

Helpfully the Charity Commissions Consultation Paper sets out their policy on remuneration highlighting out the distinction between the way they deal with new charities wishing to pay trustees and existing charities seeking power to pay remuneration.

The Charity Commission states that it can refuse to register an institution as a charity if it is not established for exclusively charitable purposes. The Paper explains:

"The remuneration of a trustee affects charitable status only if the nature and level of the remuneration authorised by the governing document is such that it could exceed what might reasonably be paid for services properly undertaken for the charity. In these circumstances, the benefit obtained by the trustee by way of remuneration would be greater than the benefit given by him to the charity by way of services. He would become, in effect, a beneficiary of the charity and the chargee would not be established for exclusively charitable purposes."

The Commission accepts that anyone starting a charity is free to elect to waive the principle of voluntary trusteeship. It goes on to make clear that the Charity Commission's interest in the charities that have a power of remuneration is ensuring that it is exercised properly. The Charity Commission stresses that the remuneration has to be reasonable for the service performed and the trustees will have to make arrangements to ensure that the resulting conflict of interest is managed so its potential for the holding charities is reduced as far as possible.

The Paper distinguishes the position where a charity is already in existence.

"In considering the trustee remuneration in relation to an existing charity, whilst we take into account the action of the founder or promoter in establishing the charity without a power of remuneration, we are looking to see whether using charitable funds in this way is likely to be an effective way of furthering the objects of the charity and its best interests in the light of the charity's current circumstances. Our starting point, following the lead of the Court, is that the office of trustee is gratuitous and accordingly, it is only if remuneration can be shown to be necessary for the proper administration of the charity that we authorise it."

However, a number of concerns about the inhibitions on charities being able to remunerate trustees were picked up in The Law Commission Report on Trustee's Powers and Duties (No. 260). The Report noted that there was support for the application of a statutory charging clause:

"It is clearly in the best interests of charities that those who have the best qualifications and aptitude for trusteeship should be encouraged to act as charity trustees. Nowadays, such persons will commonly be financial services professionals who cannot be expected to work unpaid ".

"It may be to the economic advantage of a charity for certain specialised functions to be carried out by a trustee who has the necessary expertise (and to allow him or her to charge for so doing) if the alternative is to employ an agent to do so at a greater cost."

However, the Law Commission also acknowledged that strong reservations had been expressed:

“Charities exist for the public benefit. Persons administering charities must act altruistically and not for their own benefit”.

“Providing a universal power for professional trustees to charge for their services might be detrimental to public confidence in the charity sector by undermining its ethos of volunteer management”.

Whilst acknowledging these reservations, the Commission still considered that there was a "strong case" for relaxing the existing Charity Commission position.

The Charity Commission's Paper concerns itself with three board classifications of remuneration.
·the purchase of a service which the Trust needs (e.g. preparing the electrics, plumbing or legal or accounting services);

·the payment for "being a trustee"; and

·the payment for a separate post within the charity, (e.g. Chief Executive, Headmaster) to a person who is also a trustee."

In addition to looking at the significant issue of conflicts of interest, the paper also discusses the position of employees as trustees. It points out that where the trustees of a charity think the best interests of the charity would be served by having an employee on the trustee body, there are a number of additional issues that they need to consider highlighting the particular conflict issues “which may be impossible to handle as there is a permanent state where the individual has two competing responsibilities.”

However, in reading the paper, the trustees of larger charities may be concerned that the Charity Commission has not differentiated sufficiently between the larger and smaller charities. For example, the issues that the Charity Commission want dealt with before it can agree to remuneration (set out in paragraph 46 of the paper) include:-

· What are the trustee's aiming to achieve through their proposals?

· Are the proposals likely to achieve their aim in practice?

· If so, are there any other realistic and economic ways of achieving the same thing which do not involve remuneration or benefits for any trustees.

The Paper then goes on to say that "Payment for such services will be linked only to the provision of the service and if authorised will be confined to the period during which the service will be provided. In addition, there will be an identifiable benefit received by the charity (the value of which can be quantified) in exchange for the payment." The Paper appears to accept that the benefit received by the Charity in exchange for the payment may be difficult to quantify and that remuneration may not be confined to a limited period. The Charity Commission invite comments as to whether this test is appropriate. The trustees of many larger charities may well conclude that it is not and they should tell the Charity Commission.

Another assertion made in the Paper is that paid trustees should always be in the minority - but is this really essential? If the trustee's pay rate is fixed by reference, for example, to particular civil service scale, why cannot all the charity trustees (assuming they deserve it) be paid?

"Altruism" may have been sufficient to attract charity trustees in 1915, however, the regulatory climate in which they operate has changed dramatically. Finding people who have the time and inclination to act as trustees of larger charities is becoming increasingly difficult. Other organisations can tempt potential trustees with equally interesting positions and can pay for their services. For example, there is an increasing demand for experienced businessmen and professionals to act as non executive directors to enable companies to comply with the developing corporate governance regime. Similarly, there are many non for profit organisations that can offer remuneration to part time officials.

As one senior charity employee wearily remarked "many large and complex charities cannot be effectively run by trustees who are either retired or have private means". Helena Kennedy's altruism although apparently the norm in 1915, may be something of a rarity in 1999.

For further information, please contact Andrew Crawford on 0171 367 2867 or e-mail [email protected]

This article first appeared in ThirdSector magazine