Sam Rouse: Good governance in a challenging context

27 Feb 2024 Expert insight

Trustees cannot just stick their heads in the sand during a bleak midwinter and beyond, warns Sam Rouse.

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The winter months are going to get even tougher for a lot of charities this year. In November 2023, NCVO forecast that around one in five charities may have to close some of their services. If this happens, it is going to have a huge impact, which will be felt across the country.

Recent news of the closure of the Cares Family Group, a collection of six charities operating across three sites in London plus Liverpool and Manchester, and championed by Theresa May when she was PM, will have surprised many, along with the closure of the 81-year-old charity infrastructure body Children England.

Many charities are facing very challenging times for a number of reasons, including funding cuts, increasing costs, greater need for their services, and a reduction in fundraising income. Many people and businesses that normally donate to charities are also struggling, especially with the cost-of-living crisis.

Some charities such as food banks are particularly struggling as they have not only an unprecedented demand for their services, but it is harder to source free, surplus food and a volunteer network to collect and distribute it. Unsurprisingly, some have decided to close their food distribution operations and focus instead on trying to transform people’s lives through different programmes.

It is therefore more important than ever for charities to demonstrate good governance, and to make well-informed, but difficult decisions. Good governance will reduce the risk of trustees being personally held to account as a result of not fulfilling their trustee responsibilities properly.

Trustees, when faced with these challenging times, need to think strategically, and utilise board skills in the right areas, which should have been identified through a board skills audit. In some cases, they will need to make tough decisions, with their beneficiaries at the forefront of their minds. Trustees need to demonstrate a duty of care to those beneficiaries.

For a well-established charity, where trustees have diligently followed guidance on how to operate and run a charity, it should now be in a position to clearly understand the needs of beneficiaries. It will be benefitting from previously adopting good governance models by having a detailed risk register to identify risks, combined with factors to mitigate their impact, and formulating a strong reserves policy, which has been regularly reviewed and updated for that rainy day.

Financial modelling should also have been prepared to identify the core costs of providing the charities’ charitable aims, and also run-off costs such as redundancy costs, the cost to exit leases or end contracts together with any reimbursement that would fall due on payment by results contracts that cannot now be delivered. Designated reserves, eg a redundancy reserve, may in fact have been set up by trustees to enable an orderly closure.

All of the above, however, may not be enough to be able to weather the storm and stark decisions and choices will now have to be made. Consideration should be given by the trustees as to whether a dialogue needs to be opened with Charity Commission and whether there is a need to make a report in accordance with the serious incident reporting requirements.

This will undoubtedly be a tough time for all involved and decisions that need to be made will not be easy. Some long-standing members of staff could either be facing the possibility of redundancy, being offered reduced hours or a change in role during this time. None of these decisions will be being taken lightly by the trustees but should not be unduly delayed. The question many will face is: can we continue providing our charitable objectives without any deterioration in the quality of service to beneficiaries?

In order to ensure that beneficiaries continue to receive the help they need, trustees will need to be open to the possibility of a merger with a similar charity with similar aims, proving the governing document allows the trustees these powers. If a merger is not feasible then an orderly closure should be possible through prior actions.

For a closure to take place the board of trustees is typically required to pass a number of resolutions at a full board meeting, and these may require more than 50% of the trustees to support them. Where a charity is also a membership organisation the power to wind up the charity may rest with the members as opposed to the trustees. Members will certainly need to be notified that a decision is being taken.

There is a lot to consider with the closure of a charity, in particular where it can allocate any remaining funds. Funds raised through appeals, for example, may need to be returned to donors where the appeal has not reached its target or where the purposes fundraised for cannot go ahead. It might be possible for remaining funds to be transferred to another charity with a similar purpose but only when the trustees are absolutely satisfied that the outstanding financial obligations of the charity have been met. The final accounts should be prepared to show a zero balance and outstanding bank accounts closed.

Where a charity does not have sufficient funds to meet all the charity’s liabilities then the trustees need to take great care and comply with the current company law regime for insolvent companies. The trustees of an unincorporated charity need to understand that if the charity does not have sufficient funds to meet all its financial liabilities, then they will personally have to meet the shortfall.

Trustees should also check that there are no other restrictions which may prevent the charity from closing. For example, where property or land may have been sold and there is a permanent endowment that was meant to be held by the charity forever. Approval from the Charity Commission might be needed to allow it to be transferred to another charity.

It is paramount that trustees act responsibly by taking action at these times, and do not bury their heads in the sand and hope the problem will go away. Always take both legal and financial advice before embarking on any of these courses of action, to make sure that the right decisions are made at the right time.

Sam Rouse is a charities and not-for-profit partner at Kreston Reeves

Charity Finance wishes to thank Kreston Reeves for its support with this article 

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