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CHAPTER SIX RESEARCH FINDINGS: GOVERNANCE

Summary

In this chapter the review team concentrated on top level financial control and risk issues rather than looking at detailed procedures.

There is a direct link between ASH Scotland's budgets and its strategy and key priorities. The Board approves the overall strategic plan as well as ASH Scotland's annual plan, which flows from the strategy. It may now be necessary to adopt more of a zero-based budgeting approach. (See paragraph 6.7 for an explanation of zero-based budgeting.)

The Board and management have developed a comprehensive risk register covering all the key risks facing ASH Scotland.

It is now acknowledged in the most recent strategic plan that the continuing development and implementation of the fundraising strategy is a priority.

Introduction

6.1 Taking account of the overall objectives of the research, the approach of the review team was designed to complement the existing internal business and performance management systems within ASH Scotland and the processes for external monitoring evaluation, scrutiny and regulation which are already in place.

6.2 ASH Scotland is a mature and established third sector organisation with its own strategic plan and internal performance management systems. It has been an autonomous national voluntary organisation since 1993. The Board of Directors is chaired by a University of Edinburgh Professor of Cardiology. It is a registered charity and therefore subject to the regulation of the Office of the Scottish Charity Regulator. The annual accounts of ASH Scotland are subject to independent audit and the organisation received an unqualified audit certificate in 2006. Consequently, in this chapter the review team concentrated on top level financial control and risk issues rather than looking at detailed procedures.

Governance issues

6.3 The areas focussed on by the review team were as follows:

• do management and Directors review the budget position regularly and on the basis of good, up to date information?
• is grant income spent on what it was given for?
• are grant conditions fully complied with?
• do management and Directors understand the risks affecting the business and take steps to address them?
• are there appropriate internal and external audit inputs and are their recommendations implemented?

The remainder of this section takes each of these questions in turn.

Review of budgets

6.4 Budgets are produced for each of ASH Scotland's operating sections. The Finance Director first produces a draft budget, using the previous year's as the baseline. This draft is then discussed in detail with each of the section directors and signed-off jointly with the Finance Director before being approved by the Chief Executive. This draft budget is then presented to the ASH Scotland Board for formal approval.

6.5 There is a direct link between ASH Scotland's budgets and its strategy and key priorities. The Board approves both the overall strategic plan as well as ASH Scotland's annual plan, which flows from the strategy. The strategy is developed through a process of consultation both internally and externally with ASH Scotland's key stakeholders. ASH Scotland's senior management then translate these high level plans into annual section or operational plans. Finally, these section plans form the basis of individual plans that are used in ASH Scotland for both staff performance management and annual appraisals.

6.6 Budgets are reviewed monthly by the Senior Management Team and then by the Board at each Board meeting. This review process limits the potential for unforeseen cost increases. Variances need to be approved in advance by the budget owner, the Finance Director and the Chief Executive. This approach is consistent with the Langlands Report's ( OPM and CIPFA, 2004) ²⁴ approach to good governance in public practice in that ASH Scotland very clearly states what it is aiming to achieve and communicates this to its wide stakeholder group.

6.7 Notwithstanding this good management practice, it may now be necessary and desirable for ASH Scotland to adapt its budgeting approach by considering more of a zero-based emphasis ( i.e. where budgets are not assumed to be based on last year's baseline figures but assumed to be zero and only increased as agreement to continuing activities is independently established). Forecast budgets are highly correlated to the actual expenditure for the previous year. Using last year's budget as a starting point for determining what may be reasonable for next year works well when activities are relatively well known and where the risk of funding failing to materialise is limited. However, the Scottish Government is ASH Scotland's major funder, providing between 75% and 80% of its income in the three years 2004-05 to 2006-07 (see Table 6-1). With a very tight funding settlement for the next three years, the Scottish Government's ability to fund all that ASH Scotland may request would seem less likely than in previous years. However, as Table 6-1 also highlights, ASH Scotland's expenditures are fairly fixed in nature, with almost 90% of its costs either wage or property related. Any measurable reduction in its core income will leave ASH Scotland severely exposed given a reducing contingency reserve; staff reductions may not be easy to implement quickly or be unachievable with a zero cost implication.

Table 6-1 ASH Scotland Core - Annual Budgets^ix, 2004-05 to 2006-07

Source: ASH Scotland budget statements, various years

6.8 ASH Scotland does not have formally written guidelines for appraising any major new investments. Nonetheless, given the tight control the Finance Director, Chief Executive and Board have over the budgeting process, any such investment would not be undertaken without their prior approval.

Grant spent on objectives

6.9 As stated earlier, when making grant applications to the Scottish Government ASH Scotland links these directly to the strategic plan and to the underlying operational priorities contained within this key document. The Board is presented with a Measurements Matrix report which highlights how ASH Scotland has performed against these predetermined outputs. This would suggest all within ASH Scotland i.e. its management, staff and the Board, are clear about where income should be allocated to ensure it delivers against its targets and objectives.

Fulfilment of grant conditions

6.10 The Scottish Government's grant funding for ASH Scotland's activities is linked to the delivery of pre-agreed outputs and outcomes. Each grant offer is made subject to the recipient meeting associated conditions covering, inter alia, the need to provide the Scottish Government with regular reports on performance.

6.11 Performance against objectives varies between the types of funding offered. In the case of grants allocated for the PATH and the Tobacco and Inequalities projects, assessment of performance is undertaken via discussions at Advisory Groups that the Scottish Government either chairs or of which it is a formal member. At these Advisory Groups ASH Scotland provides formal reports on performance.

6.12 Assessing performance of funding allocated to cover ASH Scotland's core activities is less formal. Work plans drawn up in advance are reported on throughout the term of the grant. Critical in the development of these work plans is the ASH Scotland Strategic Plan. This outlines what ASH Scotland aims to achieve over the plan period and is what the Scottish Government seeks to have delivered in return for funding ASH Scotland's core activities.

6.13 The grant conditions do require ASH Scotland to provide annual audited accounts as well as 6-monthly written reports of performance. The former reporting requirement has been fulfilled and whilst the latter has not, the Scottish Government ensures ASH Scotland has fully complied with its grant conditions via regular verbal briefings. Both ASH Scotland and the Scottish Government contest that these regular face-to-briefings provide a clear picture of the range of ASH Scotland activities and offer regular reassurances that ASH Scotland is delivering against work plans and the Strategic Plan.

6.14 Whilst it is reassuring that regular briefings occur and an analysis of ASH Scotland's performance does take place, written reports to back up these regular discussions would seem essential to ensure full accountability and transparency of any grant funding allocated in the future. These reports would also assist in the determination of any future VFM analysis, as these should set out the outputs to be delivered by ASH Scotland and an indication of how well it is achieving its aims.

Risk management issues

6.15 The Board and management have developed a comprehensive risk register covering all the key risks facing ASH Scotland. This was developed following intervention from one of the Board who has significant knowledge of how such systems operate in the private sector.

6.16 Whilst the departure of the Chief Executive is a key risk to be managed, the risk register highlights two further risks facing ASH Scotland currently: skills gaps on the Board and the over reliance it has on the Scottish Government for its funding.

Board skills

6.17 The Board has considered a number of papers on both the make-up and constitution of the ASH Scotland Board to take account of changes to both company and charities law as well as to reflect the recommendations arising from the in-house Strategic Review undertaken in late 2003.

6.18 The following were identified as areas where additional Board members could help fill key skills gaps:

• education / prevention
• substance use
• community development
• legal
• fundraising
• public relations ( PR)/lobbying
• research
• tobacco control
• public health
• cessation
• evaluation

6.19 The review also identified a wide array of possible candidates. As with most charities, however, identifying gaps as well as possible candidates to fill them does not necessarily mean getting the right skills mix will be easy to accomplish. No fee can be paid for such services and individuals need to be willing and able to commit not inconsiderable time and effort to be of value to ASH Scotland's management team.

Funding issues

6.20 As has already been highlighted, ASH Scotland relies significantly on the Scottish Government for most of its income. To attempt to change this, ASH Scotland undertook an assessment of how it might broaden its funding base. This assessment took longer than had originally been anticipated and, although the review did suggest ASH Scotland should seek to obtain funding for a dedicated fundraiser, it is not certain whether this post would be able to secure alternative funds in the time scale necessary. The proposal for such a post has not to date been approved by the Board.

6.21 The Scottish Government funding settlement from Whitehall for the period 2008-09 to 2010-11 is lower in real terms than it has secured in the last 2 spending rounds. Consequently, even if it wished to continue funding all of ASH Scotland's current activities, it is likely that the real value of any Scottish Government award will be lower over the next 3 years. The 2007-08 experience may well be repeated where the cash value of the Scottish Government award was held flat thus reducing the real terms value, ie, taking into account underlying inflation.

6.22 Fundraising for charitable causes has become both highly competitive as well as more sophisticated. Asking someone not only to raise funds for their own post, but also to raise funds that substantially change ASH Scotland's funding mix will not be an easy task in the current climate. Indeed, to attract the most appropriate candidate may require the Board to approve a reward package that is at odds with the terms and conditions of employment of the rest of the organisation.

6.23 It is perhaps inevitable that in a period of intense and focussed external activity, which cumulatively secured substantial increases in funding - enabling ASH Scotland access to more resources via partnerships - diversifying its funding base received less attention within ASH Scotland than in hindsight might have been desirable. It is now acknowledged in the Strategic Plan that the continuing development and implementation of the organisation's fundraising strategy is a priority. We would recommend that ASH Scotland ensures that any fundraising strategy is regarded as a "whole organisation" responsibility and that, regardless of the recruitment of a specific fundraising resource, it maps out an action plan for how this can be reflected across the organisation and at different levels within it. Also, we recommend that the senior management team considers in detail the key interactions required between the different sections in implementing and reviewing the fundraising strategy, the most effective method of achieving and co-ordinating these and how they will dovetail with the role of the new Board member who brings expertise in this area, and the role of the proposed dedicated post of fundraiser.

6.24 The interdependency of ASH Scotland's fundraising strategy and its external communications and relationship building is acknowledged internally. The outline fundraising strategy reported to the Board in August 2007 makes mention of PR, relationship building, marketing, publicity materials, the website, supporters base, and pursuit of ASH Scotland's selection as a nominated charity for corporate support - all activities with a key communications component.

6.25 The risk register goes to the Board on an annual basis. It would be sensible for the next review of the risk register to involve, inter alia, a statement of what resources are needed to manage the inherent funding risks and to specify the timescale for any contingency arrangements to be put in place. In this way the Board can not only confirm it agrees with the organisational risks but it also sets management targets and gives it the resources to manage them effectively.

Internal and external audit inputs

6.26 The external audit of ASH Scotland confirms its financial statements give a true and fair view of the state of the company. No adverse statements exist in relation to ASH Scotland's compliance with its grant terms and conditions and the ASH Scotland Board receives reports on performance against the Strategic Plan.

6.27 Nonetheless, as the funding climate tightens, ASH Scotland may wish to consider implementing some element of 3 ^rd party scrutiny of its achievements and its compliance with any grant terms and conditions.

Conclusion

6.28 ASH Scotland is aware of the imperative to diversify its income sources. In the light of the far tighter public sector financial climate, it may now be necessary to adopt a zero-based budgeting approach. It is important that ASH Scotland ensures that the fundraising strategy is regarded as a "whole organisation" responsibility and that, regardless of the recruitment of a specific fundraising resource, it maps out an action plan for how this can be reflected across the organisation and at different levels within it. Finally, whilst it has systems in place that monitor performance against targets, ASH Scotland may now wish to formalise the external reporting of its achievements to ensure a clear and auditable trail against grant terms and conditions.

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