Malcolm Gillies' departure as vice-chancellor of City University London, apparently due to differences of opinion with the external members of City's governing council, raises renewed questions about what role externals should play.

Despite the University of Oxford's decisive rejection in 2006 of plans for a majority of externals on its council, and the University of Cambridge's refusal to have more, the assumption that universities are obliged by charity law to have a majority remains puzzlingly common. In fact, the assumption is wrong, and undue pressure for an external majority from the Higher Education Funding Council for England may be open to legal challenge.

The misconception is probably based on Section 73A of the Charities Act 1993, which requires that in any charity, the trustees who receive remuneration for services from the charity must "constitute a minority of the persons" serving as charity trustees and cannot be a majority on the charity's governing body.

However, while academics are paid for their services by universities, they fall outside the scope of this restriction. Section 73A goes on to say that the restriction does not apply where services are provided "under a contract of employment": something all academic employees of a university have. Section 73A was added into the 1993 Act by the definitive Charities Act 2006, so its drafting refutes any argument that a majority of externals is a legal requirement. This point seems to have been understood by the Charity Commission, which is acting as charity regulator for Oxford and Cambridge colleges. The commission is (rightly) concerned that colleges put rules in place to avoid internal conflicts of interest, but it has not tried to insist on external majorities on their governing bodies.

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However, since Hefce is the awarder of public money to universities and is also their charity regulator (since universities decided against using the commission), could it not impose more strenuous terms? As awarder of public money, it is empowered under Section 65 of the Further and Higher Education Act 1992 to attach such "terms and conditions" as it thinks fit to "grants, loans or other payments" to universities. In practice, such conditions are imposed under the Financial Memorandum, and Hefce emphasises that it generally expects external majorities on councils.

Despite the terms of the Charities Acts, couldn't Hefce increase the pressure for external majorities using its position as charity regulator? In fact, this is unlikely. Hefce is a public body. It is open to judicial review if it steps outside its statutory powers, whether as funding body or charity regulator, and regardless of relevant statutory wording, courts use a set of overarching rules when interpreting the limits of a public body's powers. Decades of case law make clear that "such conditions as it may think fit" provisions, such as that found in the 1992 Act, may not be used in a manifestly unreasonable or procedurally unfair way.

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In cases dealing with local authorities and planning permission, for example, courts have required conditions to relate "fairly and reasonably" to a particular development. Logically, Hefce should be similarly restricted under the 1992 Act, meaning that if challenged, it would need to produce convincing evidence to support its actions.

Hefce is restricted in just the same way when using its powers under the charity legislation. Since this allows a majority of governing body members not to be externals, Hefce might also - if it tried to make an external majority a condition for approving a university's charity registration - fall foul of the rules that public bodies may not act outside the terms of legislation or unduly restrict their options when applying it. All of this suggests that universities wanting to retain internal majorities should not be afraid - at least, if they are successful institutions - to stand their ground.

In reality, externals have a mixed track record, as the Gillies affair demonstrates. Some certainly offer valuable advice on specific (most obviously, financial) matters falling within their field. However, others carry with them assumptions that are inappropriate in the university context: in particular, that a "business model" should be followed instead of an academic one (seemingly the situation at City) or that they are "non-executive directors" whose job it is, bank-style, to back the "chief executive" regardless of internal criticism.

Academic governing body members, by contrast, tend to be better equipped to understand the practical shortcomings of a university's administration and to have appropriate suggestions for its improvement (and conflicts of interest can always be avoided with appropriate rules).

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There is no clear statutory requirement for external, non-academic majorities, and the policy case is in no sense the convincing one that some assume.