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12th December 2011

Out of the Bath - Strategic Planning & Risk Management

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Charities are advised to act like businesses, as featured in New Law Journal's Charities Supplement.

This time next year

Mention legal responsibilities to a trustee or senior manager and their eyes will glaze over. Sustainability and growth have more meaning. However, these should not be disconnected. Effective delivery is charity-speak for success and, as we shall see, trustees have a legal duty to seek this. Strategic planning, risk management and good governance are legal obligations. The challenge is to move from plans to reality: to get out of the bath with all those change-the-world plans and get on with the job.

Do the right thing

As we know, trustees have many legal duties, with implementation often delegated to senior managers and others. The most important duties include:

Ensure assets are used for the objects;

Ensure the charity delivers public benefit;

Act within their powers;

Act in the best interests of the charity (and promote its “success”, i.e. its objects, if it’s a company);

Manage conflicts of interest;

Generally, receive no payments or benefits;

Act personally, only delegating implementation, not responsibility;

Ensure the charity complies with law and regulation;

Ensure the charity remains solvent;

Manage risks;

Take special care with investing or borrowing;

Take professional advice where appropriate;

In fulfilling their duties, trustees must exercise such care and skill as is reasonable in the circumstances having regard to any special knowledge, expertise or profession they have.

Who’s responsible?

For charities with no staff, trustees bear sole responsibility of course. For others, responsibility is not always clear. Governance was not always such a buzz word and even now no universal definition exists. For present purposes, it will suffice to say it is the exercise of control over the major activities of the charity. But who does this?

Governance extends to senior managers as well as trustees, although ultimate responsibility rests with the latter. Whereas trustees have the legal duties above, senior managers and staff responsibilities are largely contained within their employment contract.

The interaction of board and senior management team, for those charities who have one, provides a good test ground for governance. Each group should hold the other to account whilst the trustees retain overall authority. Board for strategy; executive for action. In practice it can be tricky though.

Good practice includes regular meetings, terms of reference, good communication, being open to challenge, and exercising trust.

Bad practice includes trustees micro-managing, bypassing agreed structures, poor preparation, dormant trustees, and overwhelming personal interests.

Incidentally, the Charities Act 1993 defines charity trustees as “persons having the general control and management of the administration of the charity”. However, this is quite inadequate both as a definition of trustees and to help us understand governance.

This friend of mine …

Some illustrations may help us understand governance in practice:

  • A town charity with three activity streams: grants, almshouses, and providing premises to community groups. Governance here includes overseeing committees’ work, ensuring diversity of investments, setting the grant making strategy, and maintaining the charity’s profile in the town.
  • A conservation charity with a large new project run through a subsidiary. Governance here includes maintaining a balance between this new project and the charity’s other work, ensuring the subsidiary is well run, considering regular project reports, and monitoring project finances and other success indicators.
  • A nursery provider with a dozen sites. Governance here includes ensuring staff training is excellent, child protection is high priority, finances are sustainable, and assessing opportunities for new sites.

Keeping tabs

Note the language: “ensure”, “oversee”, “monitor” and so on. Good governance does not mean ‘doing it all’ but making sure it gets done. This is about having a plan and an effective system to implement it.

If we look again at our conservation charity: the trustees should ensure they can monitor the project (with evidence), justify the charity’s investment, trust project staff, and continually review the project’s viability. Sadly, in real life none of this happened: the charity lost focus, allowed drift, believed waffle, ignored evidence, lost over £1 million, and faced a Charity Commission statutory inquiry.

Herding cats

The charity sector’s diversity is marvellous but it’s hard to impose ‘good governance’ on something so amorphous. We have grant makers, service providers, corporate, non-corporate, and sub-sectors from arts to zoos. What does good governance look like across such a spectrum?

One rule applies universally: a successful charity operates like a business. Some recoil at talk of business plans, risk management and profit. However trustees, employees and advisors must all grasp this.

Take the most controversial point: profit. I recently advised a chairman who was concerned about the legitimacy of his charity’s structure, activities, increasing size and profitability. I congratulated him on his effective governance and reassured him his concern was misplaced! His commercial charity was a viable one.

There are of course dangers in focussing too much on commerciality. Charities might chase a grant by twisting their strategy to fit the criteria, never more so than when tendering for public authority contracts. That way lies ‘objects drift’, and many a charity has fallen for that. Trustees must remain vigilant.

Trustees and their advisors must be able to adapt the principles of strategic planning and risk management for their situation. Risk management is a legal requirement, being a trustee’s duty and a requirement under the charity SORP. However it is also of great value as a strategic planning device.

Risk management principles comprise:

  • Identification: risk management should be everyday behaviour for all decision makers;
  • Assessment: risks must be evaluated and prioritised, usually according to likelihood and impact; Management: action must be taken to manage risks, with responsibilities and timescales set; this forms the risk management strategy;
  • Monitoring: trustees must ensure the plan is followed through, with someone given ownership of managing each risk;
  • Review: risks should be re-evaluated after management, and the risk management plan adjusted as necessary. Risk management thus informs wider strategic planning.

Trustees should engage with risk management along these lines according to their charity’s size, activities and environment. A modest grant making charity will approach this very differently from a large NGO.

The future’s bright

Often strategic planning is about responding to opportunity, though care must be taken not to be simply reactive, perhaps taking the charity off course.

Opportunities in the current environment include:

  • Collaboration: costs savings and increased impact are perennial attractions for collaboration. This might include sharing back-office, broadening expertise, and demonstrating scale and strength to win contracts. Additionally, whilst public sector cuts have hit hard, there are opportunities for outsourcing from public bodies looking to off-load risk or projects to charities which can outperform them.
  • Merger: collaboration, rescue and duplication have all increased merger activity recently. Also, understanding has grown that merger can mean a foundation for future success rather than a mark of past failure.
  • Trading and fundraising: as existing funding streams are squeezed, thriving charities are diversifying their trading activity. Both primary purpose and taxable trading, with appropriate structuring and governance, can provide crucial support for charities. Facilities management, consultancy and management arrangements, mixed developments of community facilities, excellent facilities for service users, and the use of commercial participation, professional fundraisers, patrons and celebrity endorsement: all these can be business critical for developing charities.

The health check

Lastly, no strategic planning, risk management or good governance is worthwhile if it is not maintained. Trustees’ compliance with their legal duties is a constant obligation, not an occasional exercise. However, developing strong governance and ensuring compliance need not hamper operational work.

Building in a health check is a good way of maintaining active governance without disturbing the flow of activity. This may mean, for example, board minutes and papers being reviewed by a professional advisor. Equally, an annual health check is effective in reflecting on the challenges and activities of the past year and planning for development over the next. If particular areas need attention, this can be dealt with. A working group or staff member can work with advisors to inform trustees.

Conclusions

I’m not against baths, but a charity won’t grow if people wallow. We must realise that charities with the best prospects of success are those which are run as businesses: trustees in charge, robust systems for implementing plans, active risk management, alive to opportunity without being blown off course, and having regular health checks. Trustees should get behind this for the success of their charity – it’s the law.

If further information or advice is required on a specific situation please contact Chris Knight, Head of Charities on chrisknight@hewitsons.com or 01604 233233.