sportscotlands (10) 28
Strategy/Policy Paper:
Funding and Management Agreement
between sportscotland and the sportscotlandTrust Company
Introduction
1At the Board meeting on Thursday 1st July 2010 it was agreed that the proposals regarding the funding and management relationship between sportscotland and the Trust Company should be clarified following receipt of independent advice. This advice has now been received. To help provide a context for the proposals the background section now contains details of the Board’s previous deliberations at its meeting in March 2010 and provides subsequent responses to the Board’s recommendations made at the July 2010 meeting.
Purpose
2The purpose of this paper is to clarify the proposed relationship between the sportscotland Board and the sportscotland Trust Company following receipt of independent advice on the proposals. It recommends a Financial and Management Agreement between the two entities and actions required to address the current financial position of the Trust company.
Scope
3The scope of this report includes information on:
3.1Background
3.2July 2010 Board: Response
3.3Funding position
3.4Proposed Funding Agreement
3.5Recommendation
3.6Appendix: Proposed Management and Financial Agreement
Background
4At its March 2010 meeting the Board approved paper s(10)07 which included recommendations to restructure the composition of the sportscotland Trust Company board of directors and various amendments to the Articles of Association to facilitate the necessary changes.
5Board approval to restructure the Trust Company board of directors followed negotiations with the Office of the Scottish Charities Regulator (OSCR) regarding a potential conflict of interest arising from the previous requirement that all directors of the Trust Company be sportscotland board members. This was deemed to be potentially contrary to the provisions of the Charity Trustee and Investment (Scotland) Act 2005.
6From April 2010, following the sportscotland Board’s approval at its March meeting the Trust Company Board comprises the Chair and Depute Chair of the sportscotland Board together with 4 independent directors, three of whom were ex-sportscotland Board members, which was seen as away of helping to maintain continuity during the initial phase of the reconstituted Board.
7The restructuring of the Trust Board was recognised asa responseto these negotiations and an opportunity to provide additional non-executive input to the direction and management of the National Centres while the Trust company would continue to align its activities and outcomes to the sportscotland corporate plan. Consequentlyline management of the Principals wouldcontinue to rest with the sportscotland CEO and in order to sustain operational efficiencies corporate support would continue to be provided by sportscotland.
8The outcome of these changeswhich were approved by the sportscotland Board in March 2010 means that:
8.1For the purposes of the Companies Act 2006, the Trust Company remains a wholly owned subsidiary of sportscotland,asthe sole member of the Trust Company. sportscotland as sole member retains 100% of the voting rights which may be cast at a General Meeting (i.e. a meeting of the members) of the Trust Company. As was the case before the recent changes, the newly constituted Board of Directors of the Trust Company will continue to be responsible for providing direction to the management of the National Centreswithin the context of the agreed business plan which will be aligned to the sportscotland corporate plan. However it should be acknowledged that as the sole member of the Trust Company, in the event that the sportscotland Board is unhappy with the direction that the Trust Company Board is taking, it retains the right,as set out in the Trust Company’s Articles of Association to terminate the appointment of any Trust Company Director and appoint a new Director in his/her place.
8.2As the Trust Company is a wholly owned subsidiary of sportscotland its accounts should be fully consolidated with those of sportscotland and therefore subject to the same audit process.
8.3Further to the sportscotland’s Board’s decision in March 2010 to reconstitute the Trust Company Board of Directors, the Audit Committee on 21 June 2010 following the external audit of the Trust Company accounts, agreed that a formal agreement should be prepared setting out the funding arrangements between sportscotland and its subsidiary, the sportscotland Trust Company. The need for a funding agreement was subsequently considered together with the need for a formal statement setting out the management arrangements between the two entitites and their respective roles and responsibilities.
8.4A draft Management and Financial Agreement was subsequently reviewed at the first meeting of the newly constituted Trust Board on 26th April 2010 and subsequently discussed at the July 2010 meeting of the sportscotland board.
July 2010 Board: Response
9Taking thisbackgroundinto account,clarification to thekey points (in italics)raised at the July 2010 Board meeting is set out below. The findings have been incorporated in the proposed agreement between the sportscotland Board and the Trust Board and are set out in Appendix 1.
9.1The Board agreed the level of the debtor payment to be made by sportscotland to the sportscotland Trust Company, i.e. £750k
This was reflected in the original paper and continues to be the case.
9.2The Board indicated that the level of the sportscotland guarantee should be limited.
For the purposes of the Companies Act 2006, sportscotland in its capacity as the sole member of the Trust Company, is obliged to contribute up to £1 to the Trust Company’s assets in the event of the Trust company being wound up. However, in practical terms, it is unlikely that the sportscotland Board would want the Trust to fail and would therefore consider meeting any annual funding deficit or shortfall greater than £1 in the event of the Trust company finding itself in financial difficulties. This would be a reasonable position to take as long as the sportscotland Board can be assured that all reasonable actions have been taken by the National Centres and the Trust Board to remain within the agreed annual budget. Should such circumstances arise the Trust Board could be asked to use unrestricted reserves where these exist to help cover any deficit. Within the context of guarantees,it should also be acknowledged that outwith the area of corporate law, sportscotland could have other liabilities to the Trust Company where for instance it had previously agreed to underwrite the latter’s indebtedness and/or provided an indemnity for any of its obligations which could arise in the future.
9.3The Board indicated that the level of reserves to be maintained by thesportscotland Trust company should be discussed with the Centres’principals following consideration of a range of potential scenarios.
Following the Audit Committee’s recommendations made at its meeting in June 2010 and supported by the Board at its July 2010 meeting, it is proposed that for 2010/11 the existing agreedgrant from sportscotland to the Trust Company is reduced by £500k leaving unrestricted reserves of £277k which would leave a ‘cushion’ for the Trust Company. The remaining £250k would be taken into account in the subvention for 2011/12 once alternative scenarios have been developed to help gaugewhat the appropriate level of unrestricted reserves should be within the Trust Company.
9.4At its June 2010 meeting the Audit Committee indicated that the Trust company should have separate audit arrangements i.e. independent of those of sportscotland.
As the Trust Company is a wholly owned subsidary of sportscotland, it has been confirmed by independent opinion that the existing practice of consolidatingthe Trust Company’s accountswith the sportscotland accounts should continue and as such does not require a separate audit process.
9.5The Board indicated that the accountability of the sportscotland Board should belimited to the audit of the grant it provides to the Trust Company.
As stated previously, for the purposes of the Companies Act 2006 the Trust Company is a wholly owned subsidiary of sportscotland by virtue of the latter being the sole member of the former. In addition, the terms set out in para 6.9 of the Financial Memorandum contained in the Management Statement and Financial Memorandum between the Scottish Government and sportscotland dated 14th April 2009 suggest (as this document states that it does not convey any legal powers or responsibilities) that sportscotland does have certain accountability for the Trust Company given that the preceding paragraph in the same Memorandum stipulates:
‘Unless specifically agreed with the Directorate (i.e. the relevant Scottish Government sponsor department) ….. subsidiary companies….shall be subject to the controls and requirements set out in the MS/FS (i.e. Management Statement and Financial Memorandum)’
As sportscotland is a party to this Management Statement and Financial Memorandum then it is reasonable to assume that the Scottish Government will look to sportscotland to ensure implementation of the terms of that document in respect of the Trust Company.
9.6The Board proposed that the annual grant by sportscotland to the Trust Company for services to be provided should be agreed through the budget setting process.
This will be taken forward as part of future budget setting processes.
Financial position
10Financially, the Trust Company currently has a £750k debtor, payable by sportscotland, which is an accumulation of various elements including reduced Gift Aid payments and increased non cash expenditure such as VAT Disallowed and depreciation which has been an issue for a number of years. sportscotland covers these shortfalls.
11The Trust Company has continued to receive grant payments from sportscotlandagainst agreed annual business plans, although these have not been sufficient to meet all requirements including these additional items which have led to this debtor. Under the current arrangementssportscotlandhas a commitment topay£750k toits Trust Company, or to have the Trust Company write this debtor off which would see a major reduction in its unrestricted reserves and balance sheet.
Proposed Funding Agreement
12In order to address the current situation and to ensure a more sustainable arrangement is in place for the future, a draft Financial and Management Agreement between sportscotland and the Trust Company is attached as Appendix 1. This sets out a proposed funding agreement combined with the proposed governance and accountability arrangements between the two entities based on the understanding that the Trust Company is a wholly owned subsidiary of sportscotland, as considered at the March 2010 Board meeting and confirmed by independent legal opinion. The draft governance proposals were considered at the first meeting of the new Trust Board and weremodified in response to its comments.
13The proposed future financial arrangements will require a budget to bedeterminedfor the National Centres as part of the corporate and annual business planning processes. The budget willbe set againstagreed outcomes aligned to the sportscotland corporate plan which the National Centres will be expected to meet. This budget will be used to determine the annual grant awarded to the Trust Company by sportscotland.
14The annualgrantagreed by sportscotland will be on the basis that the Trust Company can generateother trading income from its own activities to help cover running costs and build a small surplus to raise unrestricted reserves to a level approved by the Trust Board of directors. This reflects the importance of the Trust Company maintaining positive unrestricted reserves as charitiesareprohibited from using restricted reserves to fund ongoing activities.
15As a result of the Audit Committee’s recommendations endorsed at the July Board meeting it is proposed that the existing £750k debtor within the Trust balance sheet is paid with immediate effect.
16Further, it is proposed that the sportscotland grant to the Trust Company for 2010/11 is amended so that £500k of the £750k total is set off against this year’s grant. In addition it is proposed that the Trust Company Board is recommended to utilise its reserves to cover any deficit that may arise as a consequence of this reduction. Currently the Trust Company reserves stand at £777k so after taking into account the effects of the £500k amendment to the current year’s grant reserves of £277k will remain. The remaining £250k would be taken into account in the sportscotland subvention to the Trust Company in 2011/12.
17The ongoing viability of its Trust Company is clearly important to sportscotland given the role of the National Centres in supporting the development of outdoor sports and offering facilities for governing bodies, local authorities and schools. The future role and contribution of the National Centres will also be considered through the current update of the corporate plan with the Trust Company Board being engaged in this process. Once this has been concluded the specific remit and role of the National Centres over the next four years will be identified and the level of grant required to deliver the expected outcomes will then be determined through the annual business planning process and within the context of the overall resources available to sportscotland.
Recommendation
18It is proposed that the Board approvethe proposals set out in this paper and the Financial and Management Agreement set out in Appendix 1.
12th July 2010
Appendix 1 – Financial and Management Agreement
Contacts: Gordon Mavor/Stuart Ogg
sportscotlandAppendix 1
Strategy/Policy Paper
Funding and Management Agreement
between sportscotland and the sportscotlandTrust Company
Purpose
1The purpose of this paper is to set out the governance, management and financial arrangements between the sportscotland Board and the sportscotland Trust Company Board.
Scope
2It sets out the:
2.1Trust Company Board roles and responsibilities
2.2Executive Management responsibilities
2.3Financial arrangements
2.4Accountability arrangements
Trust Board Roles and Responsibilities
3The Scottish Sports Council Trust Company is a company limited by guarantee not having a share capital. For the purposes of the Companies Act 2006, as sportscotland is the sole member of the Trust Company, the latter is a wholly owned subsidiary of the former. Accordingly, while the day to day management of the Trust Company remains the responsibility of the Board of Directors of the Trust Company, sportscotland holds all votes which may be cast at a General Meeting (i.e. a meeting of the members) of the Trust Company and as such under company law has control over a number of aspects of the Trust Company including changes to its constitution (i.e. Articles of Association), removal and appointment of Directors of the Trust Company, etc.
4Direction to the management of the Trust Company will be exercised by the Trust Company Board of Directors, in co-operation with the National Centres’ Principals and the sportscotland Senior Management Team.
5The key responsibilities of the sportscotland Trust Company Board are to:-
5.1Discuss, develop and guide the long term strategic direction for the National Centres which must be aligned to the overall sportscotland Corporate Plan and the group’s contribution to ‘Reaching Higher’.
5.2Discuss, help develop and set annual business plans for the National Centres in conjunction with the Centres’ Principals so that they will contribute to the overall corporate plan outcomes for sportscotland and present these for approval to the sportscotland Board.
5.3Undertake periodic reviews of the Trust Company annual business plans and performance to ensure that the National Centres are delivering the agreed objectives and contributing to the delivery of the sportscotland corporate plan within the agreed annual budget.
5.4Ensure the planned and actual activities of the Centres are mutually supportive of the other activities and investments being made by sportscotland to maximise their impact on sport while achieving the optimum use of financial, human and organisational resources.
5.5Guide the development of the annual capital expenditure budget for the National Centres taking account of the overall strategic plans for the Centres and the sportscotland Estates Management strategy, Corporate Plan objectives and budget requirements.
5.6Ensure that the plans and activities of the National Centres maximise the Trust Company’s charitable aims in particular by maximising their income generating capacity and potential to provide new monies for investment. This income will be used to enhance the quality and capacity of the Centres to help further increase their future income generation and to allow the Trust to build up its unrestricted reserves to help accommodate any future operating deficits.
5.7Ensure that the sportscotland Senior Management Team and Board are made aware of any possible shortfalls in income and levels of unrestricted reserves, and/or inability to meet agreed budgets at the earliest opportunity.
Executive Management Responsibilities
6Line management of the National Centres’ Principals will continue to be the responsibility of the Chief Executive of sportscotland. Their annual objectives will be set by the Chief Executive and guided by the Trust Company Chair and Board Members. Likewise the review of their performance will be the responsibility of the Chief Executive of sportscotland with input from the Trust Company Board and Chair.
7The Principals will be responsible for managing the day to day operations of the National Centres, preparing annual business plans with guidance from the Trust Company Board within the context of contributing to the delivery of sportscotland plans and contributing to the wider strategic planning within sportscotland.
8The Secretariat to the Trust Company Board will be provided by the Finance and Governance Team at sportscotland.
9All corporate service functions for the Centres will continue to be provided or supported by sportscotland’s Corporate Service teams to help ensure best use of resources.
Financial Arrangements
10The Trust Company is funded by income from its trading activities and by an annual grant from sportscotland. sportscotland has confirmed that it will continue to provide financial support to the Trust Company on the basis set out below:
10.1A budget will be determined and agreed as part of the normal business planning processesagainst an approved business plan which will deliver specific outcomes aligned to the sportscotland corporate plan. The level of grant will beagreed in advance to deliver these outcomes.
10.2The grant will be approved on the basis that the Trust Company will supplement this source of income by generating sufficient income within the agreed budget to cover some running costs and generate a small surplus which will help maintain unrestricted reserves to a level which is approved by the Trust Board of Directors.