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Academy related party transactions in the media: legally dubious by definition?

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Academy related party transactions in the media: legally dubious by definition?

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Warwick MansellWarwick Mansell is a freelance education journalist. He has written extensively on the academies and free schools policies and the national curriculum, assessment and accountability systems for newspapers including the Guardian, The Observer and the Times Educational Supplement. He is the author of Education by Numbers: the Tyranny of Testing (2007). You can follow Warwick on Twitter at @WarwickMansell.

Did you read the one about the founder or chief executive of an academy chain which was doing business with a company in which he or she has a controlling interest?

You did? It would be surprising if you hadn’t, if you follow education news closely, given the number of such scandals and controversies to have emerged in recent years.

In fact, these arrangements must figure in a very high proportion of all negative articles to have been written about academisation.

So here’s the thing:

All of these and similar “related party” arrangements may be against government legal requirements, almost by definition in the way they have been set up and, crucially, in the way they have been covered in the media.

How can this be?

The key evidence for this is the Department for Education document, the Academies Financial Handbook. This sets out how academy trusts have to act to comply with their funding agreements from the DfE.

On page 25 of the current edition, the DfE states:

“The [academy trust] board of trustees…must [in DfE bold] manage personal relationships with connected parties to avoid both real and perceived conflicts of interest, promoting integrity and openness in accordance with the seven principles of public life.”

I think the key word in the above is “perceived”. It could be argued that, in any case of related party contracts which makes the media and thus leads to widespread questions being asked about the appropriateness of such transactions, the trust has failed in such a duty. This is because in such cases there will clearly be a perception of a conflict of interest, at least among some people reading or listening to the media coverage.

There is a further constraint on trusts’ potential actions in this field. On page 29 of the handbook, the DfE sets out what must happen in cases of what it describes as potentially “contentious” transactions entered into by trusts. It says:

“Contentious transactions are those which might give rise to criticism of the trust by Parliament, and/or the public, and/or the media. Novel and/or contentious transactions must [in DfE bold again] always be referred to EFA for explicit prior authorisation.”

So any academy trust considering entering into transactions which might lead to controversy in a public forum has to seek prior approval from the government. And, as argued above, any transaction which actually garners media coverage in a controversial sense may be taken to imply a failure within the trust to meet the terms of the handbook.

Am I being harsh, here?

After all, isn’t it possible for a trust to have managed any “personal relationships” entirely appropriately, and yet media coverage to have ensued which raised questions about those relationships. So the trust had done all it could reasonably be expected to do to ensure there were no perceptions of conflicts of interest, but perceptions arose anyway.

Perhaps. There will be some who argue that such media coverage may be unfair, although as – hands up – someone who has written a fair number of such stories myself, I find that even academy supporters are not generally quick to defend trusts when such coverage arises.
However, the existence of this guidance seems to me to highlight again just what a murky area the whole field of related party transactions is. It also worth questioning afresh whether the benefits which the DfE and, implicitly, academy sponsors have claimed for these types of business arrangements are outweighed by the downsides.

What is “at cost?”

One aspect of this murkiness is the concept that related party transactions must be “at cost”. This is the stipulation, introduced in 2013, that an academy trust must pay not pay more than the “cost” price for any goods or services provided by its members or trustees or companies they run.

On the face of it, this was a welcome extra layer of regulation which I think probably has limited the ability of companies associated with trusts to profit from positions of decision-making power within trusts.

However, there is considerable confusion about what “at cost” means. If a trust were buying, say, office supplies from a related party company which had, themselves, been bought from another firm, then it would be clear that the related party company would have to be paid only what they had paid themselves for the supplies, so no profit was involved.

But what about cases where a trust is using a consultant who is connected to the trust? Does “at cost” in such cases mean that the individual makes nothing whatsoever from his or her work; in other words, that they are only paid say travel and subsistence?

Or does it mean that they should not be paid more than market rate? If so, surely this is a profitable transaction: if, I, as a freelancer, get a number of days at market rate, this is something from which I profit.

This debate was aired in a report for the Commons Education select committee in 2014 [view PDF] and I am not sure it has ever been properly resolved.

Benefits vs. risks

In its own review of related party transactions in 2014, the DfE argued that

“the vast majority of [such] transactions are properly managed and disclosed”
(Executive summary, page 3Review of related party transactions in academies.)

although how it could be so sure, given that it seems only to have looked at those which were disclosed, is a moot point. More pertinently, the report, which was based in part on talking to academy representatives, said it had found examples of related party transactions which “offered tangible benefits to academy trusts”.

The examples offered in the report suggest that it is the very closeness of relationships between the trust and the related organisation which in some cases brings benefits in terms of working partnerships and sharing expertise. The idea that a related party could give services effectively at a discount compared to charges which might be made by another firm, through compliance with the “at cost” rules, might also be taken to be an advantage.

Yet it strikes me that there is a whiff of informality to such arrangements, however tightly the DfE says they have to be policed. Related party transactions were a feature of the academies scheme from the early days, when sponsors arrived to take over the governance of often struggling schools and sometimes sought to link them to their business empires, to the benefit of the academies, the sponsors would say.

In my view, the policy should be seen to have grown up and become more tightly regulated since then, with thousands of schools now in the academy system and billions of pounds of public money heading its way. It may be difficult completely to outlaw related party transactions (the deeper issue, for me, is whether it has been right to give sometimes small groups of connected individuals power over large sums of public money through academisation).

But, at the very least, those initiating related party contracts should be aware of the potential pitfalls, and not least the potential that such cases might have to fall foul of government rules even in raising perceptions of conflicts of interest.

Image credit: Adapted from handshake sealing the deal by franchise opportunities – licensed under CC BY-SA 2.0.

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