The demise of the Kids Company charity in the UK was a big event. It was a large charity that had close connections with government that very quickly imploded.
The Charity Commission notes:
https://www.gov.uk/government/news/official-report-criticises-former-trustees-of-kids-company
An official report has found that Kids Company operated a “high risk business model”, characterised by a heavy dependence on grants and donations, reliance on a key individual for fundraising, low reserves, and a demand-led service.
The regulator has made a formal finding of “mismanagement in the administration of the charity” over its repeated failure to pay creditors, including its own workers and HMRC, on time.
The publication of the statutory inquiry into the charity follows the conclusion in 2021 of High Court proceedings, in which the Official Receiver was unsuccessful in its attempt to disqualify the charity’s trustees and CEO as company directors. The Commission has had regard to the High Court judgement and agrees with it that there was no dishonesty, bad faith, or inappropriate personal gain in the operation of the charity.
The report finds the charity operated a high-risk business model, having rapidly expanded its operations. The report finds the trustees allowed expenditure to increase without a secure stream of income to cover increased costs or mitigate an unexpected fall in fundraising. Combined with the low level of reserves, this approach, unusual for a charity of its size, made Kids Company vulnerable to external pressures.
The report notes that a higher level of reserves may have allowed the charity to avoid liquidation, to wind up in a more orderly fashion, or to merge with another charity.
You can read the full report here.
A few observations on Kids Company but also more generally about risk management and governance:
- When a high-profile charity goes under with lots of questions from the public it can reduce public confidence in the whole charity sector. The impact is not just felt by the beneficiaries of that charity but also the whole sector.
- While a charity in one context – for example, a review by the Insolvency Service of its practices, may result in one angle (an unsuccessful attempt to disqualify the directors) – a review from a charity law perspective can result in a very different view. There can also be different views from government funders, private funders, the police, safeguarding agencies, etc. Some charities have far more oversight than others and a charity needs to consider the types of oversight that apply to their type of charity or sub-sector.
- Having good books and records is very important. Charities don’t get the benefit of the doubt when records are not created or kept. It is not the job of a charity regulator to piece things together and do a forensic investigation. Failure to keep good books and records is almost certainly going to call other aspects of the charity’s operations into question. As well without good books and records it is almost impossible to run a good and transparent charity.
- It is important for charities to be transparent about their beneficiaries. The charity claimed 36,000 beneficiaries. It was only able to do that by counting for example all the members of the family as beneficiaries when one member is receiving services. You need to be careful about claims relating to beneficiaries and you also need to explain clearly the methodology used. Otherwise some people may feel that they have been misled. Also the public and funders need to be careful – there can be a fixation on “impact” which can lead to certain ‘inflationary’ pressures. In very complicated contexts it is often from hard to impossible to really work out the impact of a particular charity.
- When it comes to beneficiaries you need to be fair in the distribution of benefits and the Charity Commission had concerns that a small number of beneficiaries received bigger amounts of funds perhaps without adequate justification. One needs to have processes and procedures and follow them. “From the limited information that the Inquiry was able to review the Commission saw insufficient evidence of the decision making in relation to some of these payments to be satisfied that they were justified or made in the best interests of the Charity.”
- It is important that charities have adequate reserves. This is a complicated area for directors/trustees as some may want to deploy all resources on a problem but if you have ongoing expenses and liabilities it can be very risky not to have adequate reserves. “The combination of a lack of reserves, reliance on grants, donations and short-term loans, reliance on a key individual for fundraising and operating a demand-led model is high risk”. From a Canadian perspective, CRA discusses reserves in detail in their Guidance on Fundraising and the importance of having a reserve fund policy. “The High Court’s Judgement found that the trustees’ decision to put money into the Charity’s expansion rather than to build up reserves fell within the wide range of reasonable decisions the trustees could make in exercising their discretion. However, in the Inquiry’s view, it would have been prudent for the Charity to seek to build up reserves to provide it with a financial cushion in the event of unexpected expenses or an unexpected fall in income.” The Charity Commission also noted “If the Charity had had a higher level of reserves then it would have been able to utilise these when the Charity faced financial difficulties. Higher levels of reserves may have allowed the Charity to avoid liquidation and to have wound up in a more orderly fashion or merged with another charity, even if it was determined that it could not continue to operate. This would have allowed all relevant records to be maintained and ultimately handed over to another service provider which would have been in the interests of the Charity’s beneficiaries. A risk of maintaining insufficient reserves is that a charity is more vulnerable to external and variable pressures, such as – in this instance – the public allegations against the Charity and the Police investigation that followed which resulted in the withdrawal of support from donors.” So striking the right balance between reserves and spending on mission is tough and if you get it wrong it can be the end of a charity and all its programs. Reserves give a charity a little bit of runway to fix problems or if necessary wind up in an orderly fashion and/or handover programs and records to other charities to continue the work.
- On a related point, the charity was late in paying creditors including staff and paying government remittances. There were definitely some financial management issues. I have seen these sorts of problems with many charities in Canada and it is unfortunate. Often funders don’t pay on time and that can have a ripple effect.
- Although the charity had many skilled professionals on the board there were concerns around lack of diversity of trustees, and whether the trustees had the correct skills for a large and complicated charity of this sort. “The Inquiry also noted that none of the trustees appeared to have any qualifications or experience in the field of youth services or psychotherapy. “
- There were concerns around having a long-term CEO. The CEO had been CEO since 1996. Having the organization being reliant on one CEO who did the fundraising can be a risk. “Nevertheless, a single person holding a senior leadership role in a charity for many years can reduce the level of challenge to long established methods of operating and prevent it from identifying and managing risks that flow from longstanding practice. For example, the charity’s auditors raised concerns with the charity’s low level of reserves and the high number of self-employed staff for two consecutive years (2012 and 2013) prior to the charity’s closure. Whilst the Inquiry accepts that the trustees did hold the Charity’s executive to account, it is its view that the regular addition of new trustees is likely to have challenged the status quo more effectively.” Another good quote from the Commission “Founders of charities also need to be mindful that a permanent leadership role is rarely in the best interests of a charity. There are other ways of harnessing the passion and talent of founders or charismatic individuals, without their having executive or strategic power and responsibility. Asymmetric power or influence can lead to unhealthy board or wider organisation dynamics, and ultimately to poor decision making. No charity should be defined by a single individual. Crucially, all trustees have shared responsibility for their charity, and that responsibility is ultimately theirs, not the CEO’s.” I would also suggest that the same problem can someone rears it head when it is not one individual but one family.
- On the issue of diversity, the Charity Commission notes: “…it is worth stating that diversity – in all its forms – across trustee boards leads to better decision making which can help to mitigate these risks. It is recognised across the sector that diverse boards are more likely to recognise and counter any imbalances in power, perspectives and opportunities in the charity. Such diversity is only effective and sustainable if the board works to be inclusive, ensuring that all trustees are welcomed, valued and able to contribute.”
- There were also concerns around directors serving for very long periods of time. The Charity Commission is not endorsing term limits but more that there should be some turnover and some new trustees to provide a fresh perspective and that there should be careful scrutiny of long-standing directors to ensure that it is in the best interest of the charity to have them continue as directors. There can be advantages of having some trustees serve long periods of time, but if all the trustees are on for a long period that creates another risk. There are also issues around officers and how long they serve. “Charities (of all sizes) could consider setting an agreed term of office for trustees, to bring in fresh perspectives and to avoid complacency. Best practice – set out in the Charity Governance Code – is that longer appointments should be subject to review, taking into account the need to progressively refresh the board, and should also be explained in the trustees’ annual report. Longer appointments should be exceptional, and the Commission would expect clear evidence that a charity had considered the risks and benefits. Trustees – including the chair – may want to consider rotating their roles, allowing for an injection of new ideas, and challenges to the way in which a charity operates.” For smaller and less prominent charities there are sometimes concerns about finding enough directors with the right skills and there is a reluctance to shake things up if the directors seem to be working out appropriately. With more high-profile and larger charities, they are usually better able to find people willing to serve on the board.
- Funders providing restricted gifts that don’t provide any or adequate core operating funds are part of the problem that charities have when trying to run the charity. In fact, many funders should provide all the funds as unrestricted funds if they cared about maximizing assistance to beneficiaries and the long term health of an organization. “When awarding contracts or grants, we encourage all funders including government to consider extending payments beyond the marginal cost of the service concerned, to also contribute to core costs of the charity, such as the building of reserves or covering important overheads like safeguarding. This helps to build the resilience of the charity, supporting in turn the reputation of the sector as a whole.” Maybe the Charity Commission should come to Canada to talk to funders about that point. Most grantees are reluctant to push these issues to far, in some cases at all.
- What is appropriate governance and financial management for a charity at one point, for example when it is small or it only has one straightforward program, may not be appropriate later. “Many charities expand over time, as the outcome of perseverance, hard work, and meeting needs. Risks arise when expansion is not underpinned by processes and structures that support and sustain growth. Kids Company grew quickly – almost tenfold in less than a decade, from an annual expenditure of £2.4m in 2004, to £23m in 2013.” This also dovetails with the charismatic leader who starts a charity may not have the skills needed to run a large or more complicated charity. But sometimes the charisma and close relationship between a CEO and the board can get in the way of appropriate decision-making. “Before expanding, charity trustees should ensure their infrastructure, trustee experience, and staff are well matched to their new size/model. They should have sustainable income to support their growth and understand how these sources could be put at risk. In addition, they should ensure that policies are scaled up to reflect the needs of any expanded or newly introduced beneficiary groups. They must ensure that their governance is robust, ideally with at least one trustee with experience of managing a charity of similar scale on the board. Ultimately, they should make sure that this growth is the best way to further their charitable objects and that the risks of growth do not outweigh the benefits. These considerations should be monitored regularly throughout the expansion process.”
- Risk management is vital. “Charity trustees should regularly review and assess the risks faced by their charity in all areas of its work and plan for the management of those risks. Reliance on a single funder or small group of funders to manage short-term cash flow issues creates a financial risk for charities. Charity trustees need to agree or set, and then monitor, their charity’s overall approach to fundraising. Trustees should be fully aware of their charity’s overall financial position and be able to demonstrate how fundraising supports its long-term strategy for the achievement of its objectives. Trustees should have effective systems in place that enable them to analyse the charity’s sources of income and identify risks from over dependence on any source of funding. Trustees should also ensure that there is a realistic budget for fundraising, against which results are monitored and fundraising performance, including costs and any risks are managed.”
- There was also some discussion of the extent to which the Charity Commission is providing appropriate oversight over charities that may be doing something that is high risk. In the UK there is a “serious incident” reporting system that can alert the Charity Commission to significant problems. We don’t have a similar system here in Canada. Also as we have noted CRA has reduced audits by over 75% in the last 5 years. Hard to find significant problems if you are not auditing enough charities.
- The Charity Commission concluded that there was “no dishonesty, bad faith, or inappropriate personal gain in the operation of the Charity.”
- The Charity Commission notes that there were significant warnings of problems with the reserves for example in the years proceeding the demise of the charity.