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Debts and governors courting disaster

John Graystone calls on ministers to clarify the law on governors' liability if their colleges hit a cash crisis, in the first of his regular advice columns for governors.

In the popular Radio 4 programme Sorry I Haven't a Clue, panelists are invited to make up unlikely quotes, for instance Pete Sampras or Steffi Graf saying at Wimbledon: "It's the British players who worry me."

A highly unlikely statement from a member of a further education college corporation might be that of the infamous pools winner who proclaimed she was going to "spend, spend, spend".

Governors inevitably see their financial responsibilities as of central importance. Reading recent front pages of The TES, many governors may, therefore, have gone pale at reports that "colleges face bankruptcy", more than one in eight colleges are "technically insolvent", and that three-quarters of colleges "ran at a loss". Now more than ever governors need to understand their financial responsibilities and crucially the extent of their liability.

Under regulations agreed with the Further Education Funding Council, governing bodies are responsible for:

* effective financial, planning and other management controls to safeguard public funds; * efficient and economical management of all resources, spending, capital assets, equipment and staff; * ensuring that finances are taken into account when reaching decisions.

Sir William Stubbs, FEFC chief executive, and Sir Tim Lankester, permanent secretary of the then Department for Education, appeared before the Commons Public Accounts Committee earlier in the year. Their words are published in the committee's 36th report - a good read and useful indication of the sector's financial health and governors' performance.

An invitation to appear before the committee may appear a latter-day version of a summons to the Tower. It is, however, a key element of public scrutiny and accountability, as senior MPs examine how public money is spent. The Pounds 3 billion for colleges is a significant sum of taxpayers' money. On this occasion they asked, among other things, how far governors are liable in the event of bankruptcy.

In his evidence, Sir Tim said the FEFC had "satisfactory systems" for effective use of public funds. He also gave reassuring words that sufficient people of quality wanted to serve as governors, except "in isolated cases".

Governors should heed the following exchange between Mike Hall MP and Roger McClure, FEFC director of finance: Mike Hall: "Would (governors) be held personally liable for the money that was lost (in the event of insolvency)?" Roger McClure: "Yes, I think they could be."

Mike Hall: "Can I have a definitive view?"

Roger McClure: "The position is not absolutely clear because there has not been a court case to establish precisely what the position is."

No assurance could be given to concerned MPs that a governor would never face financial jeopardy. A governor might be held personally liable, for example, if he or she acted fraudulently or without the authority of the governing body. However, Mr McClure added, provided that governors acted "within the scope of their functions and procedures, honestly and without ulterior motive...individual governors would be protected against risk to their own assets as a result of a governing body's decision".

On the law relating to personal liability of governors, The FEFC Guide for Governors confirms that "its interpretation is a matter for the courts". Governors can lessen the risk of liability by avoiding conflicts of interest, taking appropriate professional advice and always acting within their powers. An insurance policy covers against most forms of civil action but will not cover claims arising from dishonesty, fraud, slander, libel, and so on.

Under charity law, the Charity Commissioners are able to take proceedings in court to recover from trustees funds lost to charity as a result of breach of trust by trustees.

Directors of public companies have to conform to a whole host of regulations enshrined in various Companies Acts, the Company Directors' Disqualification Act and others. Governors of FE sector colleges sit uncomfortably in the valley between these twin peaks of legislation.

The committee's report says their position needs clarifying. What is urgently needed is a set of guidelines issued by the Department for Education and Employment and the Welsh Office on the extent of liability of governors, not only in FE but also grant-maintained schools and universities.

To expect highly-qualified and able governors to sit back calmly and wait for the courts to clarify matters is asking a lot of people who voluntarily and freely give of their time to help improve the education and training of young people and adults.

The sector is scrutinised as never before: by the committee, funding councils, the National Audit Office, internal and external inspectors and auditors.

In spite of these checks and balances many governors - men and women hardened by the competitive world of business - want to know where they stand. Recent reports on the financial health of colleges emphasise the need for governors to maintain a steady nerve and a cool head. But if one governor is made personally liable, the continued involvement of 7,500 governors will be at risk.

John Graystone is chief executive of the Association of Colleges in the eastern region.

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