Setting up: governance structures and stakeholder involvement

A summary of common governance structures and ways organisations can involve stakeholders.

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  • Running a social enterprise
  • Running a charity
  • Setting up a charity or social enterprise

The basis of most legal forms is a two-tier power structure whereby a small group of individuals is responsible for the running of the organisation (called a board of directors, board of management, management committee, or board of trustees), but is accountable to a wider group of individuals (often called members or shareholders or owners).

This basic structure may be developed in many different ways to suit the particular organisation, but the structures adopted by most divide into the following five types:

1. Foundation

The individuals who make up the board are the same people as the members, and new appointments to the board are made by the board. When someone ceases to be on the board, they also cease to be a member of the organisation. This is a straightforward structure and is common to many charities and social enterprises. It should always be considered by those that are new and still small.

2. Representative

This is used by organisations that wish to have members who are organisations instead of individuals. For example, the members may be local authorities, charities, etc. Each member then appoints an individual to serve on the board.

A version of this model can also be used for 'joint ventures' where two or more organisations (which may be charities, co-operatives and/or private companies) wish to establish a legal form to run a joint project. Each 'owner' of the new legal form has the right to appoint an individual to the board.

3. Membership

This is a useful model to adopt where it is important that a number of individuals or organisations have rights in relation to the organisation. It is sometimes used by community organisations who wish to involve local individuals and organisations. It is also used by national organisations who wish to adopt a democratic structure.

4. Co-operative

The International Co-operative Alliance (ICA) Statement on the Co-operative Identity describes a co-operative as ‘an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise’. All co-operative organisations operate under the ICA co-operative values and principles. While the co-operative organisation is usually first thought of as a registered society (formerly called industrial and provident society), there are many different legal forms that can be used to create an organisation which falls within this definition. One of the key features is usually 'one member one vote'.

5. Appointed board

Here board members may or may not be members of the organisation, and are appointed to provide particular knowledge or skills to the board. Recruitment of board members in this way should be treated with the same care as recruitment of staff, and a number of organisations provide guidance on good practice. 

Boards can also take a hybrid form with, for example, a section of the board elected by the membership and further places available to co-opt appointed members with particular expertise.

Working with stakeholders

Working with stakeholders can be an important factor guaranteeing the success of your organisation. You should think carefully about how you involve stakeholders in the running of the organisation, ensuring that individuals who have responsibility for the organisation have the appropriate freedom to make decisions while allowing stakeholders the opportunity to contribute.

In legal terms, stakeholders can be thought of in three categories; constitutional stakeholders, contractual stakeholder and third party stakeholders. 

Constitutional stakeholders

In most organisations there are two main constitutional stakeholders; the members and the individuals who sit on the board of the organisation.

In law, members of organisations are like the shareholders of a private company. They generally have the powers to amend its constitution, to change its name, to wind it up and to appoint and remove individuals to the board of the organisation.

In some organisations (such as some community interest companies (CIC's) limited by shares and co-operatives) the members also have the right to receive a return from the organisation. Others, particularly charities, are generally prevented from paying any benefits to members.

Sometimes the word members is used for individuals who do not have any constitutional rights but simply have a contractual right to receive certain benefits from an organisation. These benefits might include access to a stately home or a newsletter. It is important that organisations maintain a clear understanding of the different types of membership.

Contractual stakeholders

This category includes staff, funders and customers. These are all individuals and organisations that have a formal relationship with the organisation. Sometimes it may be appropriate to add to it, for example, some organisations are staff co-operatives (Co-operatives UK refer to this as 'worker co-operatives') so that all staff are also members.

Third party stakeholders

This category can include everyone else affected by your organisation. This might include neighbouring businesses, the local authority or people who live locally. 

Pros and Cons of stakeholder involvement

PROS

  • Giving stakeholders a sense of ownership can encourage them to support the enterprise.
  • Involving employees can be good for staff morale and reduce staff turnover.
  • Closer engagement can help with raising finance from stakeholders.
  • Services can be better tailored to user/customer needs when there is a greater opportunity for direct input and/or feedback.

CONS

  • Decision-making can be slower because a wider group of people need to be consulted.
  • Stakeholder representatives may find it difficult to reconcile the interests of their stakeholder group with those of the organisation.
  • Close involvement with the day-to-day running of the organisation can be a burden for stakeholders.
  • Stakeholders may not want to be involved - stakeholder apathy.

Charities, co-operatives and social enterprises often involve their stakeholders to a greater extent than many private businesses. This can often be a great source of strength to the organisation. However, it is worth giving careful thought to exactly how people can become involved, to ensure the organisation can be run effectively. Stakeholder involvement is not an ‘all or nothing’ process, and there are several ways in which people can be involved, from being consulted to taking full control of the business. No method is necessarily ‘better’ or ‘worse’ than any other, and different levels of involvement will be appropriate for different groups or situations. You can include a wide variety of different methods of involvement in your organisational structure.

Stakeholders and conflicts of interest

Many charities, social enterprise and co-operatives have stakeholders on their boards.  Indeed, the Charity Commission encourages this because of the benefits they can bring. However, the charity board members are under a legal duty to act only in the interests of the charity. They cannot make their decisions based on:

  • their own personal interest; or
  • their relations with, or loyalty to, another person or organisation.

From time to time board members may find themselves in a situation where the interests of their organisation conflicts with their own personal interest, or the interests of another person or organisation with which they have links.  This situation is called a conflict of interest.

A conflict of interest automatically exists in the case of most stakeholders who are board members.  For example, a board member who is a service user of the charity has a personal interest in the activities of the charity.  Conflicts of interest can also arise with board members appointed by a local Council with financial or other links with the charity, social enterprise or co-operative.

Examples of ways to manage conflicts of interest include:

  • keeping a register of board members' interests
  • having board members declare any conflict of interest that may arise
  • having those board members with a conflict of interest leave the board meeting at which the matter is discussed and not taking part in the vote
  • having only a minority of board members who are also service users/beneficiaries

It is very important to manage conflicts of interest and comply with your constitution. If conflicts of interest are not properly managed, the decisions of the board may be invalid.  If the organisation is a charity, the Charity Commission may also argue that the failure to properly manage conflicts of interest means that the organisation is not demonstrating sufficiently clearly that it is run for public rather than private benefit.

More information on managing conflicts of interest in charities can be found on the Charity Commission's website.

Document category

Documents

Documents

Documents

  • Running a social enterprise
  • Running a charity
  • Setting up a charity or social enterprise

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