<<

. 27
( 131 .)



>>



If the sole trader incurs a liability in the course of his business his personal
assets will be at risk. When that happens, there is no differentiation between
the assets employed in the business and personal assets outside the business.
All the sole trader can really do is:
Trade honestly and carefully;
Choose and supervise employees, agents and contractors carefully (he may
be liable for their mistakes);
If appropriate in the business, trade only on the terms of the written trading
terms and conditions limiting the extent of responsibility. This option is not
generally available to the professions;
Insure against loss and liability;
Operate good financial and credit controls; and
Consider transferring personal assets to someone else (before liability arises).
Paying lawyers to draft a tailor-made set of trading terms and conditions is
likely to be expensive, but should be cost effective in the long term. Sometimes
Part A “ Overview of Risk Management
118



membership of a trade association enables the member to use the association™s
own standard trading terms and conditions designed to protect its members.
One-off liability insurance policies can be expensive. Sometimes a better insur-
ance deal is also available through membership of a trade association.
The sole trader may consider forming a limited liability company (of
which more below) through which to operate his business. He can do this and
still be a ˜one man band™ in reality. He should then be careful to make it clear to
those with whom ˜he™ trades that he is not the person with whom they do busi-
ness (particularly if his clients/customers have become used to dealing with
him as a sole trader). He is merely the agent (as a director) of the company.
These days many companies, including major companies, engage consult-
ants to work on a regular basis but without the consultants becoming employ-
ees of the company. Sometimes, to avoid it being said that the consultant has in
reality (and in the eyes of the Inland Revenue) become an employee or part-
time employee of the company, the company insists that each individual con-
sultant must render his services as a limited company. This is an example of
how a sole trader, otherwise content to trade as such, may decide to conduct his
business through a company even though, when one looks behind the com-
pany, there is no one there except that former sole trader. The limited liability
company option has been considered further above.


Charities: issues of transparency

Governance of charities
Just as business is now operating in an era of exacting requirements of cor-
porate governance, as has been touched upon earlier, charities are simi-
larly impacted. Moreover those companies that donate to charities should
ensure that the non-profit organisations that they support are following
correct procedures.



Trustees duties: governance for non-profits in the US
Meanwhile the corporate governance debate in the United States is spreading
from the for-profit to the non-profit world. Well-publicised controversies at
organisations such as The Nature Conservancy, the American Red Cross and
the James Irvine Foundation have even caused observers such as Eliot Spitzer,
the Attorney General of New York State, to suggest that the Sarbanes-Oxley Act
should be applied to non-profit boards. To be sure, those boards operate under
unusual constraints, for example directors:
Volunteer their time;
Play an important role in raising funds; and
In some cases are so numerous that board meetings resemble conferences
rather than deliberative assemblies.
Chapter 6 “ Risk and corporate organisational areas: an overview 119



They also answer to a wide range of stakeholders who may lack a single com-
mon goal, such as increasing shareholder value. Thus it comes as no surprise
that a recent McKinsey survey of executives and directors of not-for-profit
social service organisations found that only 17% of the respondents felt that
their boards were as effective as possible.
To improve the governance of non-profits, their boards must venture
beyond the traditional focus on raising funds, selecting CEOs and setting high-
level policy. McKinsey™s research indicates that the best boards also:

Provide professional expertise;
Represent the interests of their non-profits to community leaders;
Recruit new talent to the organisation; and
Provide the more rigorous management and performance oversight that fun-
ders increasingly demand.
In the US over the longer haul, however, not-for-profit organisations have no
choice but to rethink the way they replace and recruit directors. Regular evalu-
ations can help by:

Setting out expectation;
Indicating when a change of behaviour is needed; and
Motivating underperforming directors to leave.

As for the recruitment of new directors, a standing nominating committee
should have the responsibility for creating a board on which each member
brings not only the all-important fundraising capabilities but also necessary
skills or relationships with community leaders, politicians or regulators. The
committee should recruit candidates from as wide a range of channels as pos-
sible and recognise that sustained cultivation may be needed to get the best
possible directors. This should be compared with the Higgs Review in the UK.


The Tyson Report
In view of the finding from the Third Sector Survey that charities are moving away
from short-term financial agreements with companies to look for longer-term rela-
tionships and real partnerships the Tyson Report is particularly relevant.
The Tyson Report called for more diversity on company boards so that they
included more NEDs from non-traditional backgrounds, such as the voluntary
sector. It is evident that, compared with the voluntary sector, listed companies
are very rigid about appointments. The voluntary sector is more flexible while
commercial organisations are awaiting more guidance in order to implement
the Tyson Report. Tyson™s remit was to develop the ideas raised in the Higgs
Report on corporate governance. The role of NEDs is regarded as increasingly
important given the high profile corporate failures at companies such as Enron.
Tyson argued that companies would benefit from recruiting a more diverse
board and that the non-commercial sector was a fertile source of NED talent for
UK companies.
Part A “ Overview of Risk Management
120



The Tyson Report also led to hopes that companies would take advantage
of specialist registers that include top people from non-commercial sectors.
Companies need to decide not only whether they want a more diverse board
but also whether they would recruit other than by word of mouth or other trad-
itional methods, thereby changing the culture.


Reporting requirements
Since the introduction of the SORP accounting framework in England in the 1990s
charities have had to comply with increasingly rigorous requirements in accor-
dance with the Charities Acts. SORP has been updated to cover the need for char-
ities to explain their activities and their achievements. This has of course increased
the pressure on charities to be transparent in their objectives and operations.
More recently a new tool has been introduced: this is known as the Standard
Information Return (SIR). The SIR was proposed in 2002 by the Strategy Unit in
its report on charities with a view to raising transparency and accountability in
the voluntary sector. It has been agreed that SIR will be added to the reporting
requirements for charities that have an income in excess of one million pounds
(£1 000 000). Therefore where small business representatives make a decision
to invest in such charities they should ensure that the beneficiary organisation
is following the procedure and fulfilling the requirements once the SIR is
implemented.
The SIR is intended to be a two page statement that includes a range of
topics, such as:
The charity™s achievements over the reporting period;
Its aims that it intends to achieve in the forthcoming year;
Information on the sources of support; and
Information on the charity™s spending.


Purpose of SIR
The intention of the SIR is that donors, funding organisations and other
stakeholders will be able to appreciate quickly:

* What a charity does;
* The financial base of the charity; and
* Whether it is fulfilling its objectives.
The Charity Commission will run SIR and the information will also feed
into the Guidestar online charity information website. The main idea is
that donors, funders and stakeholders will be able to understand clearly
and quickly:

* What a charity does; and
* How it is doing.
Chapter 6 “ Risk and corporate organisational areas: an overview 121



Considerations of the Strategy Unit
The Strategy Unit proposed the SIR essentially on the basis that many of the
reports and accounts of charities submitted to the Charity Commission were
˜inaccessible and often ill-suited to the public™s needs™. The Commission has
added that it was especially difficult to find credible information about per-
formance or outcomes. It has also expressed concerns that it has been hard to
make any meaningful comparisons between similar charitable organisations.


Accountability and corporate giving
When discussing risk and organisational concerns a sensitive area relates to
corporate giving and issues over donations and the legal bodies involved. On
the one hand the not-for-profit sector is being encouraged and support for good
work recommended, and on the other hand the need to ensure that the use of
funds is clear and above board is paramount. In the UK the Charity Commission
has been widening the not-for-profit sector into a now more accessible area and
has been reviewing hybrid legal bodies to encourage creativity in the sector
such as charitable companies. As a general principle in this age of growing
accountability, wherever a charity operates clarity over donations is at issue
since corporate support is vital to several key areas of the voluntary sector, such
as the art world and other non-profit-making ventures. The giving is highly
influential as well as tax efficient. While this has been true for some time in the
US, for instance, the tax implications have become increasingly important in
the UK. Therefore as far as concerns both the donor and the donee, trans-
parency is most important. As in the US, in general since the collapse of the
stock market, charities are finding that there is greater public interest from both
taxpayers and shareholders in who is giving to charity and why. Moreover there
has been a heightened state of interest as a result of the global concerns regarding
terrorism.
One noteworthy example illustrating the increasing connections between
charities and corporate giving in the US is the connection between Enron and
the foundation associated with Kenneth Lay, the company™s disgraced former
chairman. The full extent to which charities favoured by Enron directors bene-
fited from Lay and his company™s patronage is unknown, due to the complexity
of the arrangements and lack of information (see also Chapter 22). What is clear
is that much of corporate philanthropy is strategic. It is giving that ultimately
affects a company™s bottom line. It is not just about being a good corporate citi-
zen. Bearing in mind the significance of governance both for corporations and
charities even small business should ensure that it is clear about donations.
Many companies simply do not know exactly how much they give to charity
and from where because the giving is diverse “ from small donations to local
community groups to charity functions used as marketing events. There should
be clarity from both sides to ensure the trend in favour of greater transparency,
such as that demonstrated by SIR, is followed.
Part A “ Overview of Risk Management
122




The SIR
The SIR is another indication of the growing importance of transparency
and governance. While stakeholders have generally welcomed the intro-
duction of SIR in principle, they have indicated that there are issues to be
dealt with regarding the use of the SIR as a tool for comparison. It is to be
hoped that in time the SIR can be implemented to the positive satisfaction
of donors and donees alike. Meanwhile this is a matter of interest to organ-
isations, including small business, and should be monitored carefully.




Concerns over SIR
Accountants and some charities in England have, nevertheless, raised concerns
over the new tool. Their argument is that it will be very hard to define and accur-
ately set out the work of a charity in the small space available. This could mean
rough rankings of charity performance. This could in turn bring about the pos-
sibility of league tables that the regulator might also use as a tool in its armoury.
The consultation process with key groups of charities and donors has therefore
focused on the format of SIR and the extent to which the topics covered can be
dealt with in the two page statement. There is no doubt that this will be a real
challenge in practice. The Strategy Unit proposed nine categories of informa-
tion, including:
Achieving against objectives;
Stakeholder involvement;
Governance;
Fundraising;
Trading; and
Reserves and investment.
However, there remain real concerns, demonstrated by the consultation process
that a two page statement cannot represent the correct position of the charity,
thereby going against the objective of transparency.
Another concern is whether the SIR should be audited like the charity™s
accounts. This has yet to be resolved. The Strategy Unit has stated that: ˜in order
to confer some external scrutiny, the information provided should be profession-
ally audited and where possible should make use of accredited processes (such
as use of accredited quality tools)™. However, the Charity Commission™s head of
policy, Rosie Chapman, has said that the SIR will be certified rather than exter-
nally audited. The lack of audit could mean that there is a risk that SIRs will lack
credibility among the public, again rather defeating the object of transparency.
There is a risk that the SIR could be considered to be a marketing exercise unless
charities are able to support their statements in the SIR with credible evidence.
As regards the future, some accountants believe that there will be a com-
pulsory audit. This is largely because of the issues mentioned above and because
Chapter 6 “ Risk and corporate organisational areas: an overview 123



funders are increasingly requiring detailed reports from charity applicants with
verification by accountants.

<<

. 27
( 131 .)



>>