Thursday April 15, 2021

Restructuring Advisory Partner, Phil Reynolds and Emma Swann, a Specialist Education Sector Partner at Harrison Clark Rickerbys, explore operational and financial areas to focus on when assessing the health of an academy trust.

If we have a physical illness, we can usually feel the symptoms quite quickly and visit the doctor to diagnose the cause and obtain treatment. However, when it comes to an organisation, it can take a while for the symptoms of poor financial health to fully manifest themselves, and often even longer to identify the root cause. Depending on the size of the organisation and the complexities of the governance and reporting structure, it can take even longer to diagnose a problem and to treat the cause(s) of it.

The Education and Skills Funding Agency (ESFA) have the financial health of the academy sector as one of their key priorities, and the recent expansion of the DfE Restructuring Panel to include trusts within its remit is part of the strategy to enable a more active and robust approach to distress (and to ensure that trustees perform their duties correctly).

Academies therefore need to take a proactive approach to ensuring that their financial and operational health is robust and viable so that they can provide a good service to their students.

Why do organisations fail?

A survey of restructuring professionals as to the causes of failure outlined that issues with management and finance were the reasons behind nearly half (46 per cent) of failures. Therefore, the management and financial skills and experience of both the senior leadership team and that of the trustees is vitally important to ensuring the underlying health of the trust.

Are management really in control?

When reviewing a trust some of the key areas that we would examine on a review include:

Management focus – are the management or trustees too inward-looking and focused on the past?

Risks – are operational risks fully appreciated and are there appropriate contingency plans in place?

Advice – how willing are the management to ask for and take advice? For example, the ESFA School Resource Management Adviser (SRMA) programme provides a free support resource to trusts; this can provide a useful challenge to management and provide guidance on best practice and is not just for poor performing trusts.

Trustees – are the trustees actively engaged with the governance of the trust, carrying out that vital strategic oversight, ensuring that the trust meets its legal obligations and that its finances are properly managed?

Planning and control – are the BFRO and the BFR3 budget documents a fully working part of the control mechanism for the trust with full buy-in, or are they prepared to meet ESFA compliance requirements and sit unused until the next submission process?

Do the monthly management accounts tie back to these forecasts and are material variances examined carefully and fully reported so that lessons can be learned?

The quality and timeliness of management information; the use of KPIs and dashboard or traffic-light reporting can help ensure management or trustees who are not financially trained can fully understand the position and their area of responsibility.

We would also recommend the use of benchmarking to help compare a trust’s income and expenditure with similar establishments. Whilst this is not definitive, it can help inform the overall assessment of performance and health.

Conflict – is there (disruptive) conflict within the trust? When under stress, people will often demonstrate fight-or-flight reactions that can inhibit communication when most needed. The interaction between management and trustees, if dysfunctional, will make any restructure particularly difficult.

Succession planning – is there a succession plan in place for both the management and trustees with appropriate development training?

Structure – is the management structure and control mechanisms sufficient and fit for purpose? The role of the sub committees, particularly the finance committee and their engagement with the wider board, is often an issue and it is vital that their work is not siloed.

Reserves

If an academy does not maintain enough free reserves, it increases the risk of having to go to the ESFA for emergency funding or forced re-brokerage.  A general provision without detailed reference to the specific risk and requirements of the trust is often a symptom of poor financial control.

Academies governance

Academy trustees and members have different roles. Are members, academy trustees and your senior leadership team all clear and fully understand the roles and responsibilities of each? Academy trustees are both charity trustees and company directors of the academy trust. The role of the members is similar to that of shareholders in a company limited by shares. To protect the academy trust, it is vital that academy trustees and members understand their roles and responsibilities and do not act beyond their powers.

Members

Members play a crucial role in safeguarding academy trust governance. They should assure themselves that the governance of the trust is effective, and that academy trustees are acting in accordance with the trust’s charitable object(s).

Powers of the members

Whilst members should not be involved in the day-to-day business of the academy trust, they must use their powers to step in if governance is failing. Members may, by special resolution:

• amend the Articles of Association
• appoint new members or remove existing members (other than, where there is one, the foundation/ sponsor body and any members it has appointed)
• issue direction to the academy trustees to take a specific action.

They may also:

• appoint academy trustees as set out in the trust’s articles of association, and have power under the Companies Act to remove any or all serving academy trustees
• appoint the academy trust’s auditors and receive (but do not sign) the academy trust’s annual audited accounts (subject to the Companies Act)
• change the name of the charitable company and ultimately, wind up the academy trust.

The most robust governance structures will have a significant degree of separation between the individuals who are members and those who are academy trustees. It is recommended that at least the majority of members should be independent of the board of trustees.

It is key that the articles of association of an academy meet the requirements of the Department for Education, and in particular that it is made clear that employees of the academy trust cannot also be appointed to be members of the academy trust as is now set out as a requirement in the Academies Financial Handbook.

Trustees

Trustees must act in the trust’s best interests and comply with the governing document, charity law requirements and other applicable laws. Trustees must also act responsibly, reasonably, and honestly, ensuring that the trust’s assets are only used to support or carry out its purposes and comply with any restrictions on spending funds or selling land.

Trustees are expected to act with reasonable care and skill. It is important that trustees take appropriate professional advice when necessary and give enough time, thought and energy to their role.

Reviewing contracts

Termination

One key action to take to protect your trust, particularly in this current climate of uncertainty, is to review termination provisions in any contracts. Generally, a party may terminate a contract where the other party has materially breached a provision of the agreement, and that breach is substantial and serious. Otherwise, termination will be subject to a notice period (for example, a three-month notice period).

In some instances, there may be a clause which allows for termination for convenience. A provision for the school to terminate for convenience is beneficial, but often the other party will want to have the same right. This can expose the school to an element of risk and should be carefully considered.

Force majeure

When your trust is entering into a contract, it is sensible to ensure that a force majeure clause is included and drafted to best protect your school’s interests. One of the key issues which has come to light during the COVID-19 pandemic is whether Covid-19 will be classed as a force majeure event.

A force majeure clause will excuse one or both parties from performing their obligations under a contract upon the occurrence of certain events which are outside of a party’s control. A force majeure clause may also provide that, where the event continues for a certain period, the contract may be terminated.

Whether the force majeure clause will cover the current pandemic depends on the precise wording of the clause. It is common for the clause to include a list of events with a catch-all provision, such as “or other events beyond the reasonable control of the parties”. However, the catch-all wording will likely be interpreted closely in line with the type of events listed and therefore a pandemic may not be included in the catch-all wording. Equally, a clause that simply talks about “force majeure” without further definition is likely to be too uncertain in its meaning to have any effect.  Do take advice where necessary to best protect your trust’s position when entering into commercial contracts.

Summary

Protecting the financial health of a trust should be the same, building in proper processes, controls, governance, and monitoring performance using both financial and non-financial metrics on a regular basis.

First published in ‘the academy health check’ email newsletter. Co written with Emma Swann, Partner and Head of Academies at HCR in April 2021.