The recent Charity Commission report into the collapsed charity Kids Company outlines a number of deep reservations that the Commission had into the conduct of its trustees and makes some timely reminders as to what constitutes reasonable charity trustee behaviour. This ThirdSector article highlights the key themes from the report and principal amongst these is the need for charities to maintain sufficient cash reserves to support their ongoing work.
Inevitably, there is somewhat of a natural tension between a charity's desire to utilise as much of its funds as possible in order to further its charitable purposes (and help its beneficiaries) on the one hand, and the need to preserve such funds for future use on the other. The fluctuating nature of charitable donations, that are inevitably somewhat linked to a country's overall economic performance, can often mean that a charity's annual receipts can increase and decrease significantly year on year. Trustees have little visibility on this, and thus little ability to predict future cash flow.
In spite of this, as is strongly outlined in the Commission's report, maintaining sufficient reserves is often essential to the good governance of a charity. Whilst such reserves may not stave off a charity running out of money, they do provide working capital in an emergency and more time to either tackle the funding shortfall or make decisions to wind up the charity in an orderly fashion. Indeed, in the case of Kids Company, the Commission noted "with a higher level of reserves, it might have been able to avoid insolvency, wind up in a more orderly fashion or merge with another organisation to ensure beneficiaries continued to be supported". Instead, it collapsed overnight, owing its own employees and HMRC substantial amounts.
In light of these findings, there remains a strong argument for trustees to invest a proportion of a charity's cash donations in the medium to long-term in order to offset such threats. Through sophisticated investment, a charity can invest across various asset classes, diversify and offset risk and indeed invest ethically in line with its charitable purposes. Furthermore, it is likely that such investments will generate an income return year on year supplementing the charity's annual donations. Of course trustees should always remain mindful of the risk to such capital reducing, dependent on the performance of any such investments, and keep their investments under regular review in line with Commission best practice.
As a side note, it was also pleasing to see that the Courts did not regard the trustees' conduct as malicious or dishonest, but rather not reasonable on a balanced assessment. This particular criticism likely highlights the need for boards of trustees to consider having at least one of their numbers versed in the financial world and/or to seek out professional investment advice as and when appropriate. Even if the trustees elect not to invest, this at least provides documentary evidence that the option was considered; an evaluation process the Commission would no doubt regard as a reasonable balancing of pros and cons.
The commission report says the charity, which had an income of £23.1m in the year to 31 December 2013, “operated under a high-risk business model”, as shown by the heavy reliance on grants and donations, reliance on Batmanghelidjh as the key fundraiser, a lack of reserves and a demand-led service. The report says that “such a model is not in and of itself unusual”, but “what is unusual is the operation of such a model in respect of a charity of this size”. In a statement accompanying the report, the commission said trustees “should have acted sooner during the period of the charity’s growth to improve its financial stability” by building up reserves and paying off debts.