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Charity governance: which way after Kids Company?

Author: ICAEW Insights

Published: 10 Jan 2023

The Kids Company debacle has highlighted a huge mismatch between the legal responsibilities of trustees and the expectations of the regulator.

Kids Company founder and former chief executive Camila Batmanghelidjh obtained permission from the High Court in December last year to bring a judicial review of a Charity Commission report criticising management and governance of the failed charity, despite a High Court ruling that made it clear the trustees acted within the range of reasonable decision making.

It’s the latest twist in a plot that has placed the Kids Company insolvency specifically and charity governance more generally under the spotlight. Now some experts fear that the approach regulators have taken, coupled with the negative publicity surrounding the charity’s demise, could significantly inhibit the ability of charities to recruit trustees.

The youth work charity collapsed suddenly in August 2015, just days after receiving a £3m restructuring grant from the Cabinet Office. The Official Receiver brought director disqualification proceedings following the charity’s collapse, based on the allegation that the CEO and trustees “caused and/or allowed Kids Company to operate an unsustainable business model”. However, in her 220-page judgement, judge Mrs Justice Falk dismissed the Official Receiver’s case and praised the trustees as “highly impressive and dedicated individuals”. 

The findings of a subsequent Charity Commission inquiry were nonetheless critical of the management at Kids Company, highlighting failures to make payments to HMRC and one instance when staff wages were one day late. It said the charity operated a “high-risk business model”, heavily reliant on Batmanghelidjh’s skills as a fundraiser, and criticised its failure to keep sufficient levels of financial reserves. 

“By a high-risk business model, the Charity Commission means that its financial viability depended on limited sources of funding (although in this case they were as varied as grants from government, donations from wealthy donors, some corporate donations, and donations from the public), and that it was demand-led. I think that describes 90% of the charities that exist,” says Philip Kirkpatrick, charity and social enterprise lawyer and Deputy Managing Partner at law firm Bates Wells. 

“It is obviously true that there was a low level of reserves, but that is true of thousands of charities and the reality in this case is that no normal level of reserves could have saved the charity,” Kirkpatrick adds.

Kirkpatrick advised the majority of former Kids Company trustees in their successful defence of the Official Receiver’s disqualification proceedings and in relation to the Charity Commission inquiry. He believes the case highlights a huge mismatch between the expectations of regulators on trustees and their actual legal responsibilities.

“I think that people have made up their minds about how Kids Company was governed by reading the press. However, the board of trustees had worked incredibly hard in very difficult circumstances and were rightly praised by the judge for their work. By no means were they unfit to be directors of a company,” Kirkpatrick says. Nor does he believe they were guilty of mismanagement. “After they came through unscathed in the gruelling High Court proceedings, the Charity Commission could have said they respected the court's judgement and moved on, but instead it reversed the bus over them.” 

Kirkpatrick remains concerned about the impact this will have on the pipeline of charity trustees and says the case highlights a distinct lack of understanding by the Official Receiver about non-profits and charities. “If this is how society treats trustees who've done their best and for no reward and barely any public recognition or thanks, why would anyone be a trustee?”

“It’s widely understood, and the Charity Commission endorses this, that as a charity trustee with an employed executive team, you're not expected to be hands deep in the management of the organisation. But it seems that if something goes wrong, the blame will still be placed on you. The courts appear to have a fairer and more forgiving understanding of the expectations of trustees than the Charity Commission (or even perhaps the public at large), but that’s little comfort.”

Kirkpatrick is concerned that the Kids Company case may prompt trustees to become over-anxious, which could prove a major and unnecessary distraction to charities. “I am concerned that worried trustees will get too involved in the management of the charity and begin to micromanage the executive. That is a frequently cited problem in the governance and management of non-profit organisations.”

Kirkpatrick’s conclusion is that the unfair expectations of charity trustees means the current governance model for larger, more complex charities is often not fit for purpose. “The reason I think the standard governance model is flawed is that in large, complex charities trustees can’t reasonably perform their functions in the way the Charity Commission expects of them. I think an entirely new form of governance should be available and would suit many charities, but there is no one size fits all. 

“Lots of charities will be perfectly happy with their governance model, but we still need a model that is fairer on non-executive trustees and that reflects the reality of large, modern charities with complex operations, giving full responsibility to those who are really running the charity – the senior executive team – alongside non-executive trustees.” Kirkpatrick has proposed such a model, which he calls “assured unitary governance”. 

“We’ve reached the point where the demands of the Charity Commission, of Parliamentarians, of the press and of many members of the public have caused a breach of the social contract between society and those who voluntarily devote their time and energy to charitable causes,” Kirkpatrick adds. “The regulator thinks that by coming down hard on charity trustees, it can improve governance. I think it will instead deter good people from serving as trustees.”

There is a role for charity auditors getting in close with the senior management team and the board and talking to them about governance and looking at how the governance systems and processes are working in practice, Kirkpatrick believes.

At the same time, in larger charities that can afford it, Kirkpatrick thinks the use of internal auditors should be encouraged: “It gives trustees assurance without them having to somehow be on top of the executive the whole time.”

“Trustees would have greater assurance under the standard governance model if charities spent more on their governance,” Kirkpatrick adds. “I don’t mean endless external governance reviews, but really making sure you have the right systems and processes in place and checking that they’re working. Internal audit can be a big part of that. Good governance is expensive, but it's a lot cheaper than putting right things that have gone wrong."

  • ICAEW’s Charity Conference will run on 19-20 January, with a programme of sessions covering vital accounting, governance and taxation updates affecting the charity sector and keynotes including Charity Commission Chair Orlando Fraser.

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