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Sector 'must wake up to the elephant in the room' on social investment5

Finance | Tania Mason | 13 Apr 2012

The rush to social investment will result in some “heavy falls” among charities before long, long-time charity trustee Chris Zealley has predicted.

Zealley, who chairs five charities and has extensive experience on trustee boards, warns that the sector must acknowledge the “elephant in the room” on social investment: that charitable income is held for the purposes of the trust, not to service borrowings against the trust’s assets.

He told civilsociety.co.uk: “Charities are charitable trusts, and subject to the law of trusts as well as to charity law. A trustee of a non-charitable trust would be very wary of taking out loans against its assets, even when the assets are large and the loan relatively small, because of the risk of breach of trust.

“In the case of high-spending charities, with the exception of grantmaking foundations, they usually have a quite modest asset base except where their buildings are part of their working, and not therefore disposable assets.  Their incomes come from donors and grantmakers. The trustees hold them for the purposes of the trust, not to service borrowings against the trust’s assets. This is the elephant in the room which is being ignored in the present rush to gear up social enterprises.  

“If this trend continues as is likely, there will be some heavy falls before long.”

He added that he knew of charities which were forced into administration by injudicious borrowing. In the process, they lost valuable assets that they held in trust.

Insufficient trustee oversight

Zealley said the lack of appropriate skills on trustee boards should not be underestimated: “A major factor in this is that many charities, though they are limited companies as well, have no appropriate business or financial trustee members. Even today the default position of many trustees is to leave it all to their CEO - who tends to like it that way.  

“Despite all efforts to improve trusteeship standards, too many trustees rely on the CEO or chairman, in effect taking the position ‘If it’s OK by them, it’s OK by me’. The responsibilities of being a trustee has no equivalent in their own lives.”

He concluded that the significant risk of “well-intentioned but imprudent borrowing” is currently being sidelined, and added: “In the present state of our national economy will we never learn?”  

Zealley is currently chair of five charities, including the Public Interest Research Centre which he helped to establish 40 years ago, and the European Community Chamber Orchestra. He is also vice-president of Which?.