Putting governance high on your charity's agenda

Encouraging charity trustees to pursue higher standards of good governance has become a perennial theme for the charity regulators. A spate of recent cases where there were shortcomings in governance standards suggests that some charities have not fully embraced the regulators’ message. But it would be a mistake to think that the charity sector as a whole does not strive for best practice.

The number of regulatory inquiries instigated by the Charity Commission for England and Wales and the Office of the Scottish Charity Regulator (OSCR) is tiny in comparison to the number of registered charities in the UK.

Many examples of governance failings of course do not lead to regulatory inquiries, although some can lead to internal complaint processes being instigated and others will require input from professional advisers. By the same token, a large number of charities seem never to come across governance problems in practice, although this is often by chance rather than by design.

Wherever a charity sits on the governance spectrum, there will be very few charity trustees who will not benefit from a study of lessons learned across the sector as a whole, and a well run board will continually seek out examples as part of ongoing trustee training and induction procedures.

Recent coverage of the failure of Kids Company shows just how serious the impact can be of shortcomings in financial and governance controls. That case is not unique. The regulatory lessons which we may eventually glean from the failure of Kids Company are unlikely to create many surprises. The charity sector has been here before and, if anything, the surprise should be that larger and better resourced charities still demonstrate such a significant failure to learn from other sector precedents.

Early examples

The early reports into the failure of One Plus: One Parent Families, in Scotland, and the Heyday Project run by Age Concern England are two comprehensive guides to some fundamental steps which every charity board should strive to embrace. Although they are now around eight years old, they should be considered important reading for charity trustees.

The lessons which came out of those reports are in some cases so basic that the reports seem to be stating the obvious, but the obvious must be being missed in some cases if those lessons are still not being learnt or adhered to. It is certainly worth charity trustees reminding themselves of the lessons for the sector which came out of those two reports. What charity trustees should be taking away from those reports at the very least should be these key pointers:

• Charity trustees should ensure that collectively they have the right mix of skills and experience for the type and scale of the charity for which they are ultimately responsible.
• Charity trustees must understand the operating environment faced by their charity and the implication the operating environment has for how the charity is managed.
• Overall direction and control of the charity must be maintained by the trustees. In particular, charity trustees must be able actively to hold the chief executive and senior management team to account, as well as providing strategic direction.
• Charity trustees must be able to exercise independent judgment when weighing up or considering plans and proposals from their chief executive or senior management team, while at the same time not undermining management authority or demotivating staff.
• The roles and responsibilities of the board, chair or convenor and the chief executive should all be explicitly defined, including the extent to which there is delegated authority granted to any one or more of them.
• Charity trustees should take ownership of their own board and should implement a programme for board training, building and renewal, which should include regular reviews of performance and skills mix.
• It is critical that charity trustees ensure that they obtain full and up to date financial information to allow them fully to understand the position which their charity is in, and to allow them to take informed decisions.
• Trustees must develop an appropriate risk management strategy which identifies possible risks to the charity and they must establish systems or procedures to minimise those risks where this is reasonably practicable.
• Where any charity is experiencing a time of growth and development, charity trustees must satisfy themselves that the capacity of the charity’s management and governance structures are appropriate for the planned development.
• There should be a direct relationship between the charity trustees and the charity’s auditors in order that an objective and independent view can be obtained from the auditors on financial performance (amongst other matters), and to allow the trustees to gain assurance and advice on control systems and governance matters. Large or complex charities must consider establishing an audit committee to ensure that processes and procedures are monitored and are appropriate for the size and scale of the charity.
• Charity trustees must ensure that their charity seeks external independent professional advice where it faces problems or where it does not have the required in-house expertise to deal with a particular matter.

More recent cases

More recent cases provide similarly useful lessons for the sector. A report by OSCR in 2013 into concerns around the Rangers Charity Foundation provides an overview of the natural difficulty which can arise when dealing with inherent conflicts of interest. In that case, only one of three charity trustees carrying the burden of control and management of the foundation was found to have acted in good faith and in a way which she honestly felt was in the best interests of the charity.

Despite any other failings, the fact that there was a genuine belief in promoting the charity’s best interests probably carried the foundation through its OSCR inquiry to a reasonably satisfactory conclusion (no charity trustees were disqualified and no other regulatory action was taken). But the negative PR from adverse media coverage was not the best that a charity might hope for. The Rangers case is a timely reminder, therefore, that an inquiry with no formal regulatory sanctions at the end can still tarnish a charity’s image in the public imagination.

The most recent high profile reporting in Scotland on the charity front was in relation to the KiltWalk. This fundraising charity organised a number of sponsored walks across Scotland (as the name suggests, participants wore kilts while taking part), with proceeds being distributed to a number of Scottish charities, some of which were predetermined by KiltWalk through partnership arrangements, while others could be selected by individual teams of sponsored walkers.

The success of KiltWalk meant that the number of sponsored walks grew considerably after just a few years of operation. This fact brought with it additional costs for the board: staff were needed to service the increased level of activity, and costs in relation to security arrangements and other essential factors increased.

The practical effect in at least one year’s accounts was that the charity distributed in grants only around 50% of the funds which it had generated as charitable income. Concerns from supporters and the wider public about grant-making levels had grown from a few social media grumbles until the point when the story broke in the national press.

The result of the OSCR inquiry was that no technical breaches of charity law or of fundraising practice were identified, but the damage from the negative press reporting was serious. An external body came in to assist the KiltWalk with its financial and governance processes and ultimately the entire board of charity trustees resigned office and was replaced with new trustees.

The only fault which the charity might have engaged in ultimately was not presenting in a clear enough way how it was going about its work – there was a perception amongst some observers that the charity’s affairs were not sufficiently transparent. That fact alone, however, may have been the major contributing factor to the negative PR which the KiltWalk endured.

Action points

It is crucial that charity trustees should continue to absorb lessons flowing from regulatory inquiries from across the sector. An awareness of formal legal duties is one thing, but boards should also have a clear understanding that adopting principles of good governance can help charities to manage their affairs with greater success and with less risk of formal investigations and complaints.

Charity trustees also need to consider at all times the potential impact of their actions. If a decision could result in negative PR, even when that decision is taken for the right reasons, charity trustees need to have considered that fact and be prepared for media fall-out, even if some of it might be unjustified or used creatively to make a newsworthy story. The underlying requirement is a secure grounding in financial and governance controls to help charities face PR and other more formal regulatory challenges. The lessons are already out there to be learnt.

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