Excessive executive salaries and related party transactions are amongst six concerns set out in a report from the Public Accounts Committee (PAC) on academy schools’ finances, published on 30 March 2018. Committee Chair Meg Hillier MP said that it is “crucial that [academy trusts] show the highest standards of governance, accountability and financial management”, whilst the report criticised both academy trusts for “too often … falling short of these standards” and the Department for Education (DfE) for being “too slow to react”. The committee also called on the DfE to be timelier in the production of annual report and accounts for the sector so that stakeholders can use it “more effectively” to “hold the Department and academy trusts to account.”
Excessive executive salaries
Although the “overwhelming majority of trusts (96%) do not pay anyone over £150,000”, there were “102 instances of trustees being paid salaries which were in excess of £150,000 in 2015–16”. In response to these findings, the PAC said “unjustifiably high salaries use public money that could be better spent on improving children’s education and supporting frontline teaching staff, and do not represent value for money.” The committee also suggested that if excessive pay continues then this could be seen as the norm, and highlighted that high salaries “when overall funding is not increasing at the same rate add to the financial pressures faced by schools.”
Based on its findings, the PAC has recommended that the DfE challenges all academy trusts “paying excessive salaries and take action where these cannot be justified” including asking trusts where their executive leader is paid in excess of £150,000 to provide further information on the rationale for this level of pay.
Governing boards have a direct responsibility to determine what the senior executive leader is paid, with limited guidance in the Academies Financial Handbook stating that trustees “must ensure that their decisions about levels of executive pay follow a robust evidence-based process and are reflective of the individual’s role and responsibilities.”
Gillian Allcroft, deputy chief executive at the National Governance Association commented, “Setting executive pay in academy trusts is wholly the responsibility of the trustees who govern the trust. They have a duty to remunerate their executive leaders appropriately whilst remaining mindful that this is public service using public money. Whilst it is challenging for for trustees to know what represents an appropriate sum due to a lack of guidelines, there are a number of considerations they can make. Benchmarking against trusts that are similar in size and complexity can provide a useful starting point, but benchmarking doesn’t provide an excuse for a race to the top. Ensuring that the board can provide solid justification for any decision should underpin what decision is made. Trustees should also consider the differential in pay between executive leaders and school staff, including what rises other staff are receiving, remember that they are bound by the Nolan principles and that ethos and culture start at the top of an organisation.”
Related party transactions
The report also noted concerns on related party transactions, particularly regarding the frequency at which the transactions are occurring. In the year ending 31 August 2016, “40% of academy trusts engaged in related party transactions, worth a total of £120 million.” Surmising that the DfE’s rules on this are “too weak to prevent abuse”, the committee was also “not convinced” by the DfE’s explanation that “related party transactions can be beneficial to academy trusts, for example, where a trustee provides goods and services free or at a reduced cost.” Whilst rules on related party transactions prohibit related party transactions being carried out for profit, the PAC said that “working out what constitutes the cost of providing a service can be complex and open to manipulation” because “whether a service has been delivered at cost is dependent on information from the supplier, who may have a vested interest in manipulating or inflating this information and is in a position to do so.”
The committee also added concerns that the rules on related party transactions “are difficult to police” and that “abuses only come to light after the fact, often as a result of the year-end audit, or whistle blowing.” Rated party transactions should be “by exception”, the committee says.
Gillian Allcroft, deputy chief executive at the National Governance Association commented “Related party transactions present a huge potential conflict of interest for trustees and it is our view that trusts start from the position of trying to avoid or minimise conflicts rather than from the premise that, providing they fall within the Academies Financial Handbook guidelines, they are acceptable.”
The other issues identified in the report are:
Ensuring the accounts support transparency and accountability
Information about the extent of asbestos in schools
Financial pressures on schools
Impact of multi-academy trust failure