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11th February 2012

Avoiding Disaster

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On 1 February the Government published the report of the Public Administration and Constitutional Affairs Committee on the collapse of Kids Company.

This covers governance, the role of professional advisors, the Charity Commission, and the relationship with government. The full report can be read here. This report is damning for virtually all involved and trustees and advisors of all charities need to heed the lessons. Before we look at those lessons, here is a brief summary of findings:

  • Primary responsibility for the fate of a charity rests with its trustees. In the case of Kids Company, the report concludes the trustees were negligent. Too much reliance was placed on the energetic founder / CEO, whilst the trustees remained inactive.
  • There were continually insufficient reserves and precarious funding streams. The trustees allowed this weak financial position to persist and ignored repeated auditors’ warnings as to precarious finances. This negligent financial management meant the charity was not capable of surviving failure of its funding streams.
  • An unqualified audit is not a guarantee of financial good health. Kids Company had 19 years of such audits, though with grave warnings in accompanying management letters from the auditors. The Charity was wrong to rely on these audits as a reassurance and the auditors were wrong not to have issued even sterner warnings and to have alerted the Charity Commission to the dangers.
  • There were no trustees with expertise in the area of work in which the Charity was operating: vulnerable young people with complex needs. This seriously inhibited their capacity to understand and question the strategy, activities and effectiveness of the Charity.
  • The trustees failed to address other weaknesses in the Charity’s operating model: it was demand-led, which meant resources would never be sufficient and this risk was met with optimism by the CEO and inactivity by trustees; the scale of the Charity’s work was inflated and robust evaluation of effectiveness was absent.
  • The Government repeatedly failed to exercise proper due diligence and the correct tendering process in considering making grants.
  • The Charity Commission’s ability to intervene was limited both by its powers and resources.

Putting aside for now the difficulties highlighted regarding founder syndrome, audit firms, the Commission and the Government, what lessons are there for trustees? There are two such lessons.

The key relationship in a charity is the one between trustees and others with a significant role.

  • It is correct to say trustees are in control but they cannot be everywhere and cannot do everything. Where matters are delegated to committees, staff or external professionals, there must continue to be interaction for the trustees. We see, time and time again, difficulties where this has broken down: Kids Company is merely another example, though a high profile one. The relationship and continued interaction must involve the ability of trustees to understand what is going on at any time, to ask questions and challenge, to have access to any information necessary, and to rely on clear processes so that senior staff and others do their job in collaboration with the trustees rather than in parallel.

Recruitment, induction and training of trustees is a critical process and strong governance depends on it.

  • It is no good having the great and the good, a representative of a key funder, an ex officio trustee, or a friend of someone in the charity, unless they also possess the right skills for the job as trustee. Once suitable candidates are on board they must be given all the documents and information which will enable them to understand their job. All trustees should obtain training when appointed and at regular intervals after that, at least every 5 years. There are fundamental mistakes in the way Kids Company was governed, which we also see often in our own work, which would almost certainly not happen if trustees were properly recruited and trained.

Of course it requires effort and expense to deal with these two issues but surely this investment is better than the alternative risk. Trustees want their charity to succeed; dealing with these fundamental issues is an essential foundation for that.

If you want to discuss these issues in relation to your charity, please contact Chris Knight on 01604 463103 or click here to email Chris. Please visit our Charity service page for more information.