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What can the Education Act 2002 school company teach us about tool-kits for employee ownership, and structuring ownership and governance generally?Existing legislation gave a maintained school limited What can the Education Act 2002 school company teach us about tool-kits for employee ownership, and structuring ownership and governance generally?

Existing legislation gave a maintained school limited power to form its own company. It took Chapter 3 of the Education Act 2002  (and The School Companies Regulations 2002 (the "2002 Regulations")) to enable such a school (with a designated budget) to join with others to form a company. These "others" can,  although no-one seems to have promoted this idea, include employees.  Typically, school companies (also called collaboration companies) have been used for partnership working among schools.

It is interesting to look at school companies from a public service mutuals ("PSMs") perspective.  As is clear from the Cabinet Office's useful Mutuals Information Service, the education sector is a thriving source of PSMs including 3BM.  Strong themes when structuring PSMs to date have been achieving independence from the public sector and the scope to expand activities . Field Fisher Waterhouse LLP advised 3BM on its structure: it is a company limited by shares, with unlimited objects and ownership divided between former Council staff employees and a private sector partner, Prospects Services. However, if a PSM would benefit from the governing body of a maintained school as a member, then would a school company be up to the task?

The school company may be a company limited by guarantee or a share capital company; it could be established as a charity. This is a flexible starting point.

There are various restrictions on the commercial freedoms of a school company, including:

  • a school company has to limit its activities to those within Chapter 3; broadly, purchasing goods or services for schools in the company, providing services or facilities to other schools either directly or facilitating that provision by a third party, or exercising functions which a local education authority is able to contract out.  Annex B to archived Guidance on School Companies gives examples;

  • only certain institutions may be members. Other than various educational bodies, a private sector member would need to show that a significant proportion of its business is the provision of education or educational or ancillary services or goods;

  • it has to have a local authority as a supervising authority, with responsibilities towards the relevant school governing bodies but the remit is wider (see below) including to approve any borrowing, whether secured or unsecured; and

  • there are restrictions on the funding a governing body can provide and the governing body may have to withdraw if it goes into special measures etc.

Obviously these restrictions will not fit every PSM business plan but given the willingness of some PSMs to operate as CICs (e.g. City Health Care Partnership CIC) they may well be acceptable in some cases. There are other constitutional requirements in the 2002 Regulations but again given the good governance standards of PSMs it should not be a problem to accommodate these i.e. to set out whether or not (and if so, how) profits would be paid out, deal with directors' conflicts of interest and to provide for a high level of non-executive director ("NED")  involvement: there must be an all NED remuneration committee and 40% of the directors must be NEDs .

The 2002 Regulations are not ideal for introducing direct employee ownership: 12 weeks' notice is needed to withdraw as a member, which will require some bespoke drafting in the articles of association to deal with employee members leaving, and anyone employed by the governing body of a maintained school or who is employed by a local education authority is excluded from individual membership.

Indirect employee ownership, as now encouraged by the Government, is problematic because the 2000 Regulations did not anticipate anyone wanting an employee trust as a member.

Nevertheless the school company holds up well as a possible legal structure for a PSM in some circumstances.

One of the wider lessons for structuring a business is to note the impressive list in Schedule 1 to the 2002 Regulations of disqualified individuals and to consider re-using many of its categories elsewhere.

The 2002 Regulations also contain a possible precedent, for employee-controlled companies,  for the duties of the trustee of an employee benefit trust as a supervisory body. The supervising authority in a school company is required, in particular, to monitor the management and finances of the school company; and notify members of the company and relevant local education authorities if it considers that the company is poorly managed or there is a risk of the company becoming insolvent.

There is a precedent constitution for a school company, in archived guidance, which needs updating for the Companies Act 2006 but otherwise remains helpful. The lesson for employee ownership tool-kits is to keep them up to date and easily available.

In conclusion, following recent debate on the role of co-operative principles in schools and the need to broaden legal models, it is enlightening  how an existing model, that of the school company, could be adapted to meet new needs; namely PSMs. Although, there are lessons to be learned about future-proofing or revisiting models to keep them relevant, and keeping tool-kits up to date. The latter tasks could be important ones for the proposed new Mutual and Employee Ownership Institute.

Graeme Nuttall is a Cabinet Office Mutuals Ambassador.

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