On 1 February 2016, the Public Administration and Constitutional Affairs Committee (PACAC) published its damning report into the collapse of charity Kids Company (“the PACAC Report”). This is the second PACAC report to be published in 2016 focusing on charity governance. The first was published in January following investigations into the sector’s failings in relation to fundraising.
The latest Report takes a probing look at the unconventional practices of Kids Company in an effort to draw out lessons for trustees, the Charity Commission and Government. In this article, we explore the PACAC report and comment on the guidance it purports to offer those in the charitable sector.
The Buck stops with Trustees
The overriding message from the PACAC Report is that trustees will always be primarily responsible for the governance of their charity. The Report recognises that in order to run a large and complex charity effectively, the Board of Trustees needs to “demonstrate leadership, judgement and a willingness to challenge assumptions”. In the case of Kids Company, it was found that none of the Trustees had relevant expertise in the field of youth services or psychotherapy and this was a major failing.
All charities, regardless of their size, must take seriously the importance of recruiting competent and engaged trustees who will actively probe and question the governance arrangements of the charity. When recruiting new trustees, charities should assess the range of skills and expertise on the Board, ensuring that each Trustee is able to contribute actively to the running of the charity. This extends beyond mere governance issues as at least some of the Trustees should have knowledge and experience of the charity’s activities, such as youth services in the case of Kids Company. Training of trustees can also be a useful way of reminding Trustees of their duties and obligations. Charity Commission guidance on the role of trustees is constantly evolving and there is no room for complacency as the buck will stop with the trustees.
There will, of course, be times when the Trustees need external advice from lawyers and accountants. It is important to appoint advisors who understand and have experience of charity law issues. Specialist firms provide regular updates and training to the sector, some of which is available at no charge to trustees.
Money, Money, Money
The PACAC Report criticises Kids Company’s demand-led operating model which meant that there was a high risk that the charity would not be able to ensure its commitments would be matched by its resources. As the Report notes, Kids Company failed to build up reserves, was close to insolvency on more than one occasion and struggled to meet HMRC obligations. Unsurprisingly the Charity Commission’s guidance is that “Trustees must avoid exposing the charity’s assets, beneficiaries or reputation to undue risk and take care not to over-commit the charity”.
There are clearly several issues that arise for Trustees in relation to financial management. Firstly, charities need to maintain healthy levels of cash flow and reserves to protect the financial buoyancy of the charity. Funding concerns are often at the forefront of charity trustees’ minds, particularly those running small- to medium-sized charities. The tide is now turning with more and more charities having to become commercially astute including bidding for grants/service contracts, rather than relying on donors’ goodwill and underlying investments as the main source of their funding. Good governance includes close scrutiny by the Trustees of how those funds are used and preserved to ensure the long term financial health of the charity.
Turning a Blind Eye
Numerous third parties, including Ofsted and external auditors, scrutinised the activities of Kids Company. However, according to the PACAC Report, the Board of Trustees either repeatedly turned a blind eye to the issues that were raised or were simply not aware of them. As acknowledged in the Report, assessment of a charity’s governance and controls that looks only at systems and processes is not acceptable. “Without reviewing, for example, decision-making, attitudes and habits of behaviour, risk-management and strategic objectives in the organisation, a contractor could not assess the effectiveness of the charity’s governance and controls.”
Good governance cannot be regarded as a tick box exercise whereby charity trustees simply pay notional attention to risk analysis before moving on to more glamorous tasks. In light of the PACAC Report, there will be renewed focus on trustees’ ability to identify, manage and minimise risk. Many charities engage positively with third party auditors to manage risk but as the PACAC Report comments, there can be no substitute for trustees actively engaging on governance matters and steering from the helm. This approach can often be made harder by long standing members of the Board, or long-serving CEOs, as in Kids Company, leading to what some describe as ‘founder syndrome’. All trustees have a duty to scrutinise, question and challenge those around them to ensure that the Board acts in the best interests of the charity. As the PACAC Report notes, a failure to refresh leadership can cause a failure to correct weaknesses in any organisation.
Big Brother is Watching
Despite all the focus on charity trustees being responsible for good governance, the PACAC Report claims that other stakeholders also have a part to play. The Charity Commission is encouraged to do more to make the public aware that they can raise concerns about a particular charity. Likewise, the Report calls for the Commission to actively investigate adverse media reports about charities and to encourage journalists to make formal complaints, rather than waiting for the Commission to pick up on potential abuses via the media. Donors, employees and beneficiaries are also amongst those identified in the Report as being crucial stakeholders with the ability to raise concerns with the Charity Commission if they have concerns about the governance of charities. These recommendations raise obvious questions about the Commission’s ability to deliver all that is asked of it without additional resources.
Some might argue that trustees could find themselves caught like rabbits in a headlight, subjected to the constant scrutiny of stakeholders, auditors and regulators. However, the findings of the PACAC Report cannot be ignored and charity trustees must accept that the focus on good governance is here is stay.
source Rebecca Ward, Anthony Collins Solicitors.