38: Kids Company – Charity Commission Inquiry Report – what does it mean for charities?
On 10 February 2022, the Charity Commission published its long-awaiting Report (the Report) on its statutory inquiry into the charity Keeping Kids Company (Kids Company). After a long line of reviews and inquiries since the charity collapsed in 2015, including a significant High Court decision last year, the Report is the first one which looks at what happened from a strictly charity law and regulatory point of view. The Report contains important guidance for charity trustees about governance and financial management, including steps to plan for, and preferably pre-empt, financial distress.
Kids Company was registered as a charity in 1998 with objects framed around supporting children. It worked in challenging circumstances with very vulnerable beneficiaries and operated a demand-led model with an ethos of never turning a child away.
The charity grew rapidly, its annual expenditure increasing from £2.4 million in 2004 to £23 million in 2013. By 2013, it had 495 employees and contractors, spending £15.4 million on staff costs and its annual accounts reported that it was supported by 11,000 volunteers between 2011 and 2013.
The charity was heavily dependent on grants and donations and on the fundraising skills of its founder, who had been its CEO since 1996 and was the main face of the charity. There was a relatively low turnover on the board, with its Chair being in place since 2003.
The charity maintained low reserves, prioritising expenditure on service delivery. Cash-flow difficulties led, among other things, to problems at times paying staff and contractors and a failure to make some PAYE payments to HMRC on time.
The charity had been seeking to restructure in 2015, with a view to putting itself on a more sustainable financial footing, when it became subject to negative reports in the media. After a number of crisis meetings with funders and the Charity Commission, the charity ceased operations and then went into compulsory liquidation in August 2015 after unfounded allegations of serious criminal conduct were made against the charity, causing would-be backers to withdraw. The Report notes that the charity’s collapse was ‘a dramatic and significant event’ for the charity, its beneficiaries, supporters, volunteers and employees, and ‘for the wider charitable sector’.
The road to the Commission’s Report
The charity had been very high profile and had received a lot of government funding. In the circumstances, it is not surprising that its sudden collapse led to a number of inquiries and reports.
The Charity Commission opened its statutory inquiry in August 2015, but it was put on hold while other investigations were carried out. The National Audit Office and the Parliamentary Public Administration and Constitutional Affairs Committee both investigated and reported on the government’s funding of the charity. The role of the charity’s management came under the spotlight with the Insolvency Service bringing proceedings to disqualify the charity trustees, as directors of the company, and its chief executive, as a ‘de facto’ director, under the company director disqualification regime.
The Insolvency Service made no claims of dishonesty, breach of duty or wrongful trading in the conduct of the charity trustees or CEO, but alleged they were ‘unfit’ due to incompetence. This claim was based on the trustees having ‘caused and / or allowed Kids Company to operate an unsustainable business model’ and that by November 2014 they ‘knew or ought to have known that failure was inevitable without immediate material change’.
In the High Court decision last year, that allegation was rejected, the judge being ‘wholly satisfied’ that no disqualification order was necessary. She found that, had it not been for the unfounded criminal allegations, it was more likely than not that the restructuring of the charity in 2015 would have succeeded. She acknowledged that there was some validity in the criticism of the lack of liquid reserves, but ‘creating them was much easier said than done’ and the decision to prioritise spending on charitable objects was one that the trustees could reasonably reach – the trustees’ decisions were not ‘outside a range of reasonable decision-making’.
The judge in the High Court decision made clear that the trustees were a ‘group of highly impressive and dedicated individuals who selflessly gave enormous amounts of their time to what was clearly a highly challenging trusteeship’ and that most charities would ‘be delighted to have available to them individuals with the abilities and experience that the Trustees in this case possess’.
Once the High Court process was concluded, the Charity Commission was able to complete its inquiry.
The Charity Commission’s findings
The Commission’s findings differ in a number of respects from those of the High Court. This should not be surprising, in that the Commission’s inquiry is a different process – the Commission’s focus is not on assessing unfitness to be concerned in the management of a company but on the duties and good practice of charity trustees under charity law. This was recognised by the judge in the High Court, who noted that ‘it might be thought that the primary means of regulating trustees’ behaviour, at least in practice, is and should be via the standards set by, and the enforcement powers of, the Charity Commission, being the regulator that has the most appropriate expertise’.
The Commission agreed with the High Court findings in some respects, notably that there was no dishonesty, bad faith or inappropriate personal gain in the operation of the charity. It also determined that the legal test was not met for it to disqualify the trustees and / or the CEO as ‘unfit’ under charity law.
However, the Commission’s conclusions under charity law then take on a different complexion from the High Court’s findings. In particular, the Commission’s conclusions include that:
- The charity ‘operated under a high-risk business model’. This was illustrated by the combination of (i) heavy reliance on grants and donations, (ii) reliance on a key fundraiser (the CEO), (iii) a lack of reserves and (iv) a demand-led service.
- The Commission acknowledged that such a model is ‘not in and of itself unusual’ in a charity, but did consider such a model unusual in a ‘charity of this size’.
- The charity’s repeated failure to pay creditors, including its own workers and HMRC, on time was mismanagement by the trustees in the administration of the charity.
- If the charity had maintained a higher level of reserves, it might have been able to avoid liquidation or to have wound up in an orderly fashion and mitigate the impact of its closure on vulnerable beneficiaries. In maintaining ‘insufficient’ reserves, the trustees risked the charity being ‘more vulnerable to external and variable pressures’.
- While the trustees were skilled professionals and the CEO was an effective fundraiser, greater rotation of the key roles, including the chair of trustees, ‘would have meant that’ longstanding practices ‘were more likely to be challenged constructively’ and ‘regard had to good practice from outside’ the charity.
- Failures in the charity’s record-keeping (where some records were destroyed and in other cases it was not clear if records were actually created) meant that there were insufficient records in some cases for the Commission to determine how some decisions were made. In particular, ‘the destruction of records fell below the standards the Commission would expect from a charity’.
Lessons for the wider sector
While the circumstances of Kids Company were in many respects unique, the Report sets out a number of sensible lessons ‘about running, funding and closing a charity’ which can be useful for trustees across the sector.
- A board which is diverse, refreshed regularly and ready to challenge:
- A board which has a wider range of experience, including experience relevant to the charity’s operations, is more likely to be able to hold the executive team to account and should make better decisions and be more ready to challenge established practice.
- Similarly, regular refreshment of the board, with longer term posts being ‘exceptional’, will encourage new ideas and testing of old ones. ‘Charities (of all sizes) could consider setting an agreed term of office for trustees, to bring in fresh perspectives and to avoid complacency’. The Report suggests that rotating the chair can also be a positive move to support thisS
- The Report notes that ‘Founders of charities … need to be mindful that a permanent leadership role is rarely in the best interests of a charity. … No charity should be defined by a single individual.’ There are other ways for the ‘passion and talent of founders or charismatic individuals’ to be harnessed for the charity.
- Innovation should be balanced with proper risk management:
- The Report is helpful in noting that there ‘is no ‘best’ way for charities to deliver public benefit’ and that ‘diverse and innovative operating models can help keep the sector relevant and dynamic’.
- What charities need to keep in mind is that a charity’s innovative approach needs to be underpinned by management of the commensurate risks that can arise.
- The Report also notes that ‘For all charities, measuring impact should be part of the process of evaluation of whether their approach is effective – particularly where an innovative approach is being adopted’. The approach may be innovative – but is it working?
- A proper approach to financial planning and reserves:
- Importantly, the Report states that ‘There is no single level of reserves that is right for every charity’.
- However, operating with a low level of reserves exposes the charity to ‘limited resilience against challenges’. The Commission recognises how Covid-19 is all too vivid an example of how reserves can be vital to help a charity withstand short-term or unforeseen pressures.
- The Report states, ‘We advise all trustees to make well-rounded and appropriate decisions about their approach to reserves’.
- The Commission has, rightly, not sought to dictate to trustees what their approach should be, but trustees need to be aware of the risks attached to the approach they adopt and be ready to justify that decision.
- The Report also reminds trustees that accounting regulations require ‘all charities’ to describe their approach to reserves in their Annual Report.
- Maintaining proper governance, infrastructure and resource planning as a charity develops:
- The Report recognises the rapid growth of Kids Company as one of the factors in its management problems – ‘Risks arise when expansion is not underpinned by processes and structures that support and sustain growth’.
- The Report recommends that, before expanding, charity trustees should ‘ensure their infrastructure, trustee experience, and staff are well matched to their new size / model’. For example, it recommends that a charity in such a position would benefit from recruiting someone with experience of running a large and complex charity to the board.
- Growth for growth’s sake is not necessarily beneficial. Before embarking on expansion, the trustees need to be satisfied that growth is the best way to further the charitable objects and that the risks do not outweigh the benefits.
- Financial resilience:
- The Report indicates that Kids Company existed for a long time on a ‘hand to mouth’ footing, often obtaining funding on the basis of assertions that it would become insolvent without it. It was consistently reliant on one or a small group of funders.
- Such a strategy exposes a charity to financial risk and inhibits long-term planning for achieving the charity’s objects.
- Trustees need to be ‘fully aware of the charity’s financial position’ and to understand how their fundraising strategy supports their long-term strategy. Trustees need to be alive to the dangers of over-reliance on any source of funding and to have strategies for managing the risks.
- And a message to funders – encourage good governance and support core costs:
- One of the concerns which came out of the Kids Company case was a perception that funders can be reluctant to support core costs, preferring to fund specific projects, and that maintaining reserves can harm fundraising by making potential donors think that a charity with reserves is not ‘in need’.
- The Report encourages ‘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’.
- It also urges funders to ‘recognise their role in encouraging good governance, sustainability of services and helping charity to continue to thrive and inspire trust’.
- Such an approach may include asking charities to demonstrate their contingency plans, including identifying any successor, to ensure beneficiaries will continue to be supported if the charity had to close.
The Report invites ‘all trustees to consider the wider lessons laid out here in the context of their own charity, to discuss the recommendations, and record (and where appropriate, publish) decisions taken as a result’. It would be prudent for trustees to heed that advice, both for the practical suggestions offered in the Report but also because its guidance and recommendations may well become benchmarks against which the Commission may judge the governance and decisions of other charities which fall under its regulatory gaze.
Conclusion – is your governance fit for purpose?
After nearly two years of a pandemic which has created previously unseen financial challenges for charities, the Commission’s Report is well-timed, containing much advice which is both sensible and sensitive to the position in which the trustees of many charities will find themselves.
At heart, however, the real message here is not new – the essential point for trustees is to review your governance to see that it is fit for purpose and to make updates as and when needed. As the Commission’s guidance charity governance, finance and resilience: 15 questions trustees should ask states, ‘…charity trustees need to be able to identify the critical issues – the charity’s purposes and plans, its solvency, its resilience and quality of governance – and to be able to review these at regular intervals’.
Having robust and appropriate governance in place really can help you avert disaster, but also help support you if things don’t go to plan. You can find some governance tips and links in our blog Should our charity have a governance review?.
As the case of Kids Company sadly makes clear, it is also crucial not to leave your plans for better financial resilience until it is too late. Kids Company was looking to restructure, but was forced to close before it could put its plans in place. Contingency planning for periods of financial stress and distress should be an ongoing process for charities where the source of funding is uncertain or unpredictable. The ability to be nimble and flexible in making and executing decisions regarding the costs of the operations of a charity in response to liquidity issues is essential and will protect the trustees and the executive team from criticism and help preserve the charity. This flexibility and speed comes only from proper advance planning.
It can be all too easy to put off a governance health check or longer term planning because there are too many other things requiring our immediate attention. While there may be sympathy for such an approach in, say, the heat of a global pandemic, trustees should be mindful that that will not necessarily prevent a stressful and time-consuming investigation, and possible regulatory action, if their charity fails, particularly if it does so in a way which leaves beneficiaries uncared for and staff and suppliers unpaid. Trustees can protect their charity, but also themselves, if they make time now to reflect and act on the lessons in the Commission’s report.