What can charities learn from the Charity Commission’s Kids Company report?

Last week, the Charity Commission published its long-awaited report into the closure of Kids Company, six years after the charity closed its doors. Most of this delay was due to the official receiver seeking to disqualify the former trustees and chief executive as company directors – an action rejected by the High Court last year.

While the Commission found no misconduct by the trustees, it did find that the repeated failure to pay HM Revenue & Customs and staff on time amounted to mismanagement.

The report highlighted:

  • the charity’s risky demand-led model and the lack of reserves to support this
  • a lack of transparency when talking about the number of beneficiaries
  • a lack of specialist expertise in youth services and psychotherapy on the board
  • concerns about staff destroying records when the charity collapsed – though it noted the trustees stopped this when they became aware.

Why was the High Court verdict different?

Some have asked why the Charity Commission has been critical of the trustees, when they were exonerated by the High Court last year.

The short answer is that the High Court was looking at this through a different lens. It considered only whether the trustees had shown a ‘high degree’ of incompetence – enough to warrant their disqualification as company directors. As the Charity Commission report points out, a range of conduct would constitute misconduct or mismanagement from their point of view, which wouldn’t meet the high bar set by the High Court’s unfitness test.

The judge expressed the view that disqualification proceedings should only be taken against charity trustees in the most serious cases and was critical of the official receiver for initiating this action.

What can charities learn from this?

While Kids Company was unusual in operating a demand-led model at this scale, some of the dynamics that led to its collapse will be familiar to those in the sector. If you’re a trustee, it’s worth considering whether your board can apply the following lessons to your organisation.

Diversifying funding

Many charities will recognise Kids Company’s reliance on a small number of sources of funding, and an apparent inability to secure funding that isn’t tied to service delivery, in their own operations.

The funding landscape is now particularly challenging. During the pandemic, many charities relied on close relationships with their funders.

There’s nothing inherently wrong with charities adopting a small number of funders or a reliance on project funding. However, trustees should recognise the risks of this situation, closely manage the relationships with funders and plan for sustainable income.

They also need to balance the demand for funding with the needs of those supported by the charity to have consistent and predictable support. And clearly, as a charity grows and supports more people, the risk to that service will be of greater concern.

Our funding and income planner can help you plan for sustainable income.

Considering how to use reserves

Reserves policies have become a bit of a thorny issue in the sector. In the past, the press has targeted charities for having too much in reserve, as well as too little.

What’s appropriate for your organisation will depend on several things, including:

  • your charity’s costs
  • how predictable your organisation’s income is
  • the inherent risk involved in delivering the charity’s work.

During the pandemic, many charities relied on their reserves to stay operational, and many will now be looking to rebuild these levels to help resist future shocks. But for many charities, hedging against future events means not spending on services today, and so many are understandably reluctant to build up large reserves.

Different charities will need to take different approaches, but boards should generally aim to hold three-to-six months of operating costs in reserves.

And it’s important that every charity considers how to determine what their reserve levels should be. If your charity doesn’t have a reserves policy, our reserves policy resources can help you develop one.

Balancing risk

Risk is inevitable in charities, so effective risk management is an important oversight function for boards. After all, trustees’ core duties include managing a charity’s resources responsibly and taking reasonable care in their decisions.

However, trustees also must ensure their charity is advancing its purpose and delivering benefit. Charities often provide innovative solutions to entrenched and systematic problems. Trustees may decide that a high-risk approach may be the only way to provide a particular service or create change. Risk management does not mean irradiating risk and we should be careful of encouraging too much risk-averse behaviour in charities.

Risk is often dependent on context – for example, a small community-based charity closing can be difficult, but it might be seen as an acceptable level of risk compared to the closure of a charity providing services to thousands of people across the country. Boards should consider the risks their charity is facing, and where possible, take action to mitigate against these.

If you’re a member of NCVO, you can access our tools and resources designed to help boards manage risk.

Reviewing governance and succession planning

One of the issues that’s been repeatedly identified in looking at the closure of Kids Company is the lack of change in leadership over many years.

Before the charity closed, the chair had been in post since 2003, alongside a chief executive who had been in charge since 1996. The Commission highlighted that there were gaps in relevant expertise on the board, including in youth services, psychotherapy, and experience in managing a large charity. It suggested that more regular turnover may have led to greater challenge.

It’s good practice for boards to establish term limits for trustees and to plan for their own succession. This typically involves regularly assessing the organisation’s needs against the skills and experiences of the board, and agreeing a plan for how to recruit new trustees. For support in this area, read our guidance on governance reviews.

The Commission’s report shows that where a single person holds a senior leadership role in a charity for many years, this can reduce the level of challenge to long-established operating methods. In these circumstances, trustees need to actively identify and manage the risks associated with longstanding management practice.

Trustees of larger charities are encouraged to review their governance annually, and to carry out a formal governance review with external support every three to five years. To support these efforts, you may want to use the Charity Governance Code to inform the principles your board is working to.

Should trustees be worried?

Some trustees may be concerned about the implications of the Kids Company case. But you shouldn’t despair, or fear being blamed for things outside of your control if things go wrong.

The High Court ruling should reassure trustees that reasonable mistakes made in good faith should not lead to legal consequences. What’s more, when there are failings, the Charity Commission’s oversight helps charities across the board to learn and make improvements. Ultimately, these lessons will help the sector continue to support those in need, when they need it most.

For more support instilling good governance in your organisation, explore NCVO’s guidance on governance, or visit the Charity Governance Code.

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Chris is NCVO’s public affairs manager, focusing on parliamentary work. He started his career working for several MPs in Parliament, and has also worked in public affairs and policy roles for the Federation of Small Businesses.

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